<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1998
REGISTRATION NO. 1-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
NEWCO/UWS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
WISCONSIN 39-1931212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
401 WEST MICHIGAN STREET
MILWAUKEE, WISCONSIN 53203-2896
(414) 226-6900
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
------------------------
Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
- -------------------------------------- --------------------------------------
<S> <C>
Common Stock, no par value New York Stock Exchange
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act: None
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<PAGE>
EXPLANATORY NOTE
This Form 10 Registration Statement has been prepared on a prospective basis
on the assumption that, among other things, the Distribution (as hereinafter
defined) and the related transactions contemplated to occur prior to or
contemporaneously with the Distribution will be consummated as contemplated by
the Information Statement which is a part of this Registration Statement. There
can be no assurance, however, that any or all of such transactions will occur or
will occur as so contemplated. Any significant modifications or variations in
the transactions contemplated will be reflected in an amendment or supplement to
this Registration Statement.
NEWCO/UWS, INC.
INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED BY REFERENCE INTO FORM 10
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
Certain information required to be included herein is incorporated by
reference to specifically identified portions of the body of the Information
Statement filed herewith as Exhibit 99 (the "INFORMATION STATEMENT"). None of
the information contained in the Information Statement shall be incorporated by
reference herein or deemed to be part hereof unless such information is
specifically incorporated by reference.
ITEM 1. BUSINESS
The information required by this Item is contained in the body of the
Information Statement under the captions "Summary," "The Distribution," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business of Newco," and such information is
incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION
The information required by this Item is contained in the body of the
Information Statement under the captions "Summary Combined Financial Data for
Newco," "Pro Forma Combined Condensed Financial Information of Newco," "Selected
Combined Financial Information of Newco," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Newco/UWS, Inc. Index to
Combined Financial Statements" and the Combined Financial Statements appearing
on pages F-1 to F-20, and such information is incorporated herein by reference.
ITEM 3. PROPERTIES
The information required by this Item is contained in the body of the
Information Statement under the caption "Business of Newco--Properties," and
such information is incorporated herein by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is contained in the body of the
Information Statement under the captions "Management of Newco" and "Security
Ownership of Certain Beneficial Owners and Management," and such information is
incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item is contained in the body of the
Information Statement under the caption "Management of Newco," and such
information is incorporated herein by reference.
1
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The information required by this Item is contained in the body of the
Information Statement under the captions "Management of Newco," "Executive
Compensation" and "Newco Benefit Plans Following the Distribution," and such
information is incorporated herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is contained in the body of the
Information Statement under the captions "Agreements Between UWS and Newco,"
"Certain Relationships and Related Transactions" and in Note 6 of the Notes to
Combined Financial Statements, and such information is incorporated herein by
reference.
ITEM 8. LEGAL PROCEEDINGS
The information required by this Item is contained in the body of the
Information Statement under the caption "Business of Newco--Legal Proceedings,"
and such information is incorporated herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
The information required by this Item is contained in the body of the
Information Statement under the captions "Summary," "The Distribution," "Risk
Factors" and "Dividend Policy," and such information is incorporated herein by
reference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On May 28, 1998, as part of its original incorporation, the Registrant
issued 100 shares of its Common Stock to UWS for $100 in a transaction exempt
from the registration requirements of the Securities Act of 1933, as amended, by
reason of the provisions of Section 4(2) thereof relating to sales by an issuer
not involving any public offering.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this Item is contained in the body of the
Information Statement under the caption "Description of Capital Stock of Newco,"
and such information is incorporated herein by reference. Reference also is made
to the Articles of Incorporation and By-Laws of Newco which are set forth as
Exhibits 3.1 and 3.2 hereto.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this Item is contained in the body of the
Information Statement under the caption "Liability and Indemnification of
Directors and Officers of Newco," and such information is incorporated herein by
reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in the body of the
Information Statement under the captions "Summary Combined Financial Data for
Newco," "Pro Forma Combined Condensed Financial Information of Newco," "Selected
Combined Financial Information of Newco," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Newco/UWS, Inc. Index to
Combined Financial Statements" and the Combined Financial Statements appearing
on pages F-1 to F-20, and such information is incorporated herein by reference.
2
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) The information required by this Item is contained in "Newco/UWS, Inc.
Index to Combined Financial Statements" on page F-1 of the Information Statement
and the Combined Financial Statement appearing on pages F-1 to F-20, and such
information is incorporated herein by reference.
(b) Exhibits:
The following documents are filed as Exhibits hereto:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
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<C> <S>
2.1 Form of Distribution and Indemnity Agreement.
3.1 Articles of Incorporation of Registrant.
3.2 By-Laws of Registrant.
4.1 Specimen Common Stock Certificate (1).
4.2 Registrant's Dividend Reinvestment and Direct Stock Purchase Plan (1).
10.1 Form of Employee Benefits Agreement.
10.2 Form of Tax Allocation Agreement.
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.
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.
10.5 Comprehensive Tax Allocation Agreement dated July 1, 1994 among BCBSUW, UWS and various subsidiaries
thereof.
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.
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. ("HTWH") commencing October 1,
1994.
10.8 Consolidated Federal Income Tax Allocation Agreement among UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley,
UWCC, YHP, HMOW, HMO-W, Inc., HTWH, United Heartland, Inc. ("UHI") and Meridian Marketing Services,
Inc. ("MMS") commencing January 1, 1995.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.9 Consolidated Federal Income Tax Allocation Agreement among UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley,
AMS HMO Holdings, Inc. (f/k/a UWCC), Unity Health Plans Insurance Corporation ("UNITY") (f/k/a HMOW),
HMO-W, Inc., HTWN, UHI and MMS for the period commencing January 1, 1996, and American Medical
Security Holdings, Inc., American Medical Security, Inc., American Medical Insurance Company,
Continental Plan Services, Inc., Nurse Healthline, Inc., Accountable Health Plans, Inc., AMS Provider
Partnerships, Inc., Unity HMO of Illinois, Inc., American Medical Security Insurance Company of Ohio
and American Medical Security Insurance Company of Georgia for the period commencing December 3, 1996.
10.10 Amended and Restated Joint Venture Agreement by and among BCBSUW, UWS (to be assigned to the
Registrant), Valley and Midelfort Clinic, Ltd., effective January 1, 1997.
10.11 Intercompany Service Agreement between BCBSUW, UWS (to be assigned to the Registrant) and UWIC,
effective January 1, 1998(1).
10.12 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and UWIC, effective
January 1, 1998(1).
10.13 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and UHI, effective
January 1, 1998.
10.14 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MMC, effective
January 1, 1998.
10.15 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant), MMC and Compcare on
behalf of its Pharmacy Services department, effective January 1, 1998.
10.16 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant), MMC and Compcare on
behalf of its RxCel department, effective January 1, 1998.
10.17 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant), MMC and Compcare,
effective January 1, 1998.
10.18 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MRC on behalf of
its Investigation and Recovery Services department, effective January 1, 1998.
10.19 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MRC on behalf of
its Consulting Services department, effective January 1, 1998.
10.20 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant) and MRC on behalf of
its Audit Services department, effective January 1, 1998.
10.21 Intercompany Service Agreement among BCBSUW, UWS (subsequently assigned to the Registrant) and UWPS,
effective January 1, 1998.
10.22 Service Agreement between BCBSUW and Valley, effective January 1, 1993.
10.23 Service Agreement between UWS (to be assigned to the Registrant) and Community Health Systems, LLC,
dated November 1, 1994.
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.).
10.25 Amended and Restated Joint Venture Agreement among BCBSUW, UWS (to be assigned to the Registrant),
University Health Care, Inc. ("UHC" ), U-Care HMO, Inc. ("U-CARE") and Health Professionals, Inc.
("HPI") dated October 31, 1994.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.26 Agreement of Merger and Joint Venture by and among UWS (to be assigned to the Registrant), UWS
Acquisition Corporation, BCBSUW, HMO-W, Inc. and HMOW dated October 11, 1994(1).
10.27 Service Agreement between UWS (to be assigned to the Registrant) and HPI dated November 1, 1994.
10.28 License Agreement between UWS (to be assigned to the Registrant) and U-Care dated November 1, 1994.
10.29 Joint Venture Agreement among UWS (to be assigned to the Registrant), BCBSUW, Compcare and Northwoods
Health Care, LLC dated July 1, 1996, as amended October 24, 1996.
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.
10.31 Form of Trademark Assignment Agreement by and among UWS, the Registrant and UWLIC.
10.32 Registrant's Equity Incentive Plan(1).
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.
(subsequently to be assumed by and assigned to the Registrant).
11 Statement regarding computation of per share earnings. (See Note 2 of Notes to Combined Financial
Statements).
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99 Information Statement of the Registrant dated , 1998.
</TABLE>
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(1) To be filed by amendment.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
NEWCO/UWS, INC.
Date: May 29, 1998 By: /s/ THOMAS R. HEFTY
-----------------------------------------
Thomas R. Hefty, CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
6
<PAGE>
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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
------------------------
NEWCO/UWS, INC.
(Exact name of registrant as specified in its charter)
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- --------------------------------------------------------------------------------
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGES
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<C> <S> <C>
2.1 Form of Distribution and Indemnity Agreement.
3.1 Articles of Incorporation of Registrant.
3.2 By-Laws of Registrant.
4.1 Specimen Common Stock Certificate (1).
4.2 Registrant's Dividend Reinvestment and Direct Stock Purchase Plan (1).
10.1 Form of Employee Benefits Agreement.
10.2 Form of Tax Allocation Agreement.
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.
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.
10.5 Comprehensive Tax Allocation Agreement dated July 1, 1994 among BCBSUW, UWS and
various subsidiaries thereof.
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.
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. ("HTWH") commencing October 1, 1994.
10.8 Consolidated Federal Income Tax Allocation Agreement among UWS, UWIC, UWPS, Compcare,
MMC, MRC, Valley, UWCC, YHP, HMOW, HMO-W, Inc., HTWH, United Heartland, Inc.
("UHI") and Meridian Marketing Services, Inc. ("MMS") commencing January 1, 1995.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGES
- ------------- ------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
10.10 Amended and Restated Joint Venture Agreement by and among BCBSUW, UWS (to be assigned
to the Registrant), Valley and Midelfort Clinic, Ltd., effective January 1, 1997.
10.11 Intercompany Service Agreement between BCBSUW, UWS (to be assigned to the Registrant)
and UWIC, effective January 1, 1998(1).
10.12 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant)
and UWIC, effective January 1, 1998(1).
10.13 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant)
and UHI, effective January 1, 1998.
10.14 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant)
and MMC, effective January 1, 1998.
10.15 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant),
MMC and Compcare on behalf of its Pharmacy Services department, effective January
1, 1998.
10.16 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant),
MMC and Compcare on behalf of its RxCel department, effective January 1, 1998.
10.17 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant),
MMC and Compcare, effective January 1, 1998.
10.18 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant)
and MRC on behalf of its Investigation and Recovery Services department, effective
January 1, 1998.
10.19 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant)
and MRC on behalf of its Consulting Services department, effective January 1, 1998.
10.20 Intercompany Service Agreement among BCBSUW, UWS (to be assigned to the Registrant)
and MRC on behalf of its Audit Services department, effective January 1, 1998.
10.21 Intercompany Service Agreement among BCBSUW, UWS (subsequently assigned to the
Registrant) and UWPS, effective January 1, 1998.
10.22 Service Agreement between BCBSUW and Valley, effective January 1, 1993.
10.23 Service Agreement between UWS (to be assigned to the Registrant) and Community Health
Systems, LLC, dated November 1, 1994.
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.).
10.25 Amended and Restated Joint Venture Agreement among BCBSUW, UWS (to be assigned to the
Registrant), University Health Care Inc. ("UHC"), U-Care HMO, Inc. ("U-CARE") and
Health Professionals, Inc. ("HPI") dated October 31, 1994.
10.26 Agreement of Merger and Joint Venture by and among UWS (to be assigned to the
Registrant), UWS Acquisition Corporation, BCBSUW, HMO-W, Inc. and HMOW dated
October 11, 1994(1).
10.27 Service Agreement between UWS (to be assigned to the Registrant) and HPI dated
November 1, 1994.
10.28 License Agreement between UWS (to be assigned to the Registrant) and U-Care dated
November 1, 1994.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGES
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<C> <S> <C>
10.29 Joint Venture Agreement among UWS (to be assigned to the Registrant), BCBSUW,
Compcare and Northwoods Health Care, LLC dated July 1, 1996, as amended October 24,
1996.
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.
10.31 Form of Trademark Assignment Agreement by and among UWS, the Registrant and UWLIC.
10.32 Registrant's Equity Incentive Plan(1).
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. (subsequently to be assumed by and assigned to the Registrant).
11 Statement regarding computation of per share earnings. (See Note 2 of Notes to
Combined Financial Statements).
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99 Information Statement of the Registrant dated , 1998.
</TABLE>
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(1) To be filed by amendment.
<PAGE>
DISTRIBUTION AND INDEMNITY AGREEMENT
BETWEEN
UNITED WISCONSIN SERVICES, INC.
AND
NEWCO/UWS, INC.
DATED AS OF ____________, 1998.
<PAGE>
DISTRIBUTION AND INDEMNITY AGREEMENT
TABLE OF CONTENTS
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.01 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.02 REFERENCES; INTERPRETATION. . . . . . . . . . . . . . . . . 5
ARTICLE II
TRANSFER OF ASSETS; ASSUMPTION OF LIABILIT. . . . . . . . . . . . . . . . 6
Section 2.03 NO REPRESENTATIONS OR WARRANTIES. . . . . . . . . . . . . . 6
Section 2.04 MUTUAL RELEASE. . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.05 ANCILLARY AGREEMENTS. . . . . . . . . . . . . . . . . . . . 7
Section 2.06 RESIGNATIONS. . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE III
THE DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE IV
INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.01 NEWCO INDEMNIFICATION OF THE UWS GROUP. . . . . . . . . . . 8
Section 4.02 UWS INDEMNIFICATION OF NEWCO GROUP. . . . . . . . . . . . . 8
Section 4.03 LIMITATIONS ON INDEMNIFICATION OBLIGATIONS . . . . . . . . . 8
Section 4.04 INSURANCE AND THIRD PARTY OBLIGATIONS . . . . . . . . . . . 9
ARTICLE V
INDEMNIFICATION PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5.01 NOTICE AND PAYMENT OF NON-THIRD PARTY CLAIMS. . . . . . . . 9
Section 5.02 NOTICE AND DEFENSE OF THIRD PARTY CLAIMS. . . . . . . . . . 9
Section 5.03 OTHER ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . .11
ARTICLE VI
INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
<PAGE>
Section 6.01 GENERAL LIABILITY INSURANCE . . . . . . . . . . . . . . . .12
Section 6.02 DIRECTORS' AND OFFICERS' INSURANCE. . . . . . . . . . . . .13
Section 6.03 INSURED LITIGATION. . . . . . . . . . . . . . . . . . . . .13
ARTICLE VII
ADDITIONAL COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . .13
Section 7.01 GUARANTEED NEWCO AND UWS LIABILITIES. . . . . . . . . . . .13
Section 7.02 PRIVILEGED MATTERS. . . . . . . . . . . . . . . . . . . . .14
Section 7.03 LIMITATION ON SOLICITATION OF EMPLOYEES . . . . . . . . . .16
Section 7.04 PRODUCTION OF WITNESSES . . . . . . . . . . . . . . . . . .16
Section 7.05 RETENTION OF RECORDS. . . . . . . . . . . . . . . . . . . .16
Section 7.06 ACCESS TO INFORMATION.. . . . . . . . . . . . . . . . . . .17
Section 7.07 PROVISION OF CORPORATE RECORDS. . . . . . . . . . . . . . .17
Section 7.08 LITIGATION COOPERATION. . . . . . . . . . . . . . . . . . .17
Section 7.09 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . .17
ARTICLE VIII
ACCOUNTING MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Section 8.01 ALLOCATION OF PREPAID ITEMS AND RESERVES. . . . . . . . . .18
Section 8.02 ACCOUNTING TREATMENT OF ASSETS TRANSFERRED AND
LIABILITIES ASSUMED. . . . . . . . . . . . . . . . . . . . . . .18
Section 8.03 INTERCOMPANY ACCOUNTS . . . . . . . . . . . . . . . . . . .18
ARTICLE IX
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Section 9.01 INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . .18
Section 9.02 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . .19
Section 9.03 AMENDMENT AND WAIVER. . . . . . . . . . . . . . . . . . . .19
Section 9.04 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . .19
Section 9.05 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . .19
Section 9.06 SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . .20
Section 9.07 THIRD PARTY BENEFICIARIES . . . . . . . . . . . . . . . . .20
Section 9.08 FURTHER ASSURANCES AND CONSENTS . . . . . . . . . . . . . .20
Section 9.09 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . .20
Section 9.10 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . .20
Section 9.11 TITLES AND HEADINGS . . . . . . . . . . . . . . . . . . . .20
Section 9.12 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . .20
Section 9.13 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . .20
Section 9.14 DISPUTES. . . . . . . . . . . . . . . . . . . . . . . . . .20
<PAGE>
SCHEDULE A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
SCHEDULE B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
SCHEDULE C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
SCHEDULE D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
SCHEDULE E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
<PAGE>
DRAFT 5/28/98
DISTRIBUTION AND INDEMNITY AGREEMENT
DISTRIBUTION AND INDEMNITY AGREEMENT ("Agreement"), dated as
of__________________, 1998 by and between UNITED WISCONSIN SERVICES, INC., a
Wisconsin corporation ("UWS"), and NEWCO/UWS, INC., a Wisconsin corporation
("Newco").
RECITALS
1. Newco is a wholly owned subsidiary of UWS formed for the purpose of
effecting the Distribution (as defined and described herein);
2. The UWS Board of Directors ("UWS Board") has determined that it is in
the best interests of UWS and its shareholders to transfer and assign to Newco
the Management Business (as defined herein) of UWS;
3. The UWS Board has further determined that it is in the best interests
of UWS and its shareholders to transfer and assign to Newco the Newco Assets (as
defined herein)
4. The UWS Board has further determined that it is in the best interests
of UWS and its shareholders to contribute working capital to Newco and to assign
to Newco the Newco Liabilities (as defined herein);
5. The UWS Board has further determined that it is in the best interests
of UWS and its shareholders to distribute Newco to the holders of UWS Common
Stock by distributing all outstanding shares of Newco Common Stock at the rate
of one share of Newco Common Stock for every one share of UWS Common Stock
outstanding as of the Record Date (as defined herein);
6. UWS has formed and incorporated Newco under the laws of the State of
Wisconsin. Newco has 50,000,000 authorized shares of Newco Common Stock which
are identical to UWS Common Stock, including with respect to voting rights,
dividend and liquidation preferences. Newco has 1,000,000 authorized shares of
Preferred Stock. UWS currently owns one share of Newco Common Stock and is and
shall remain the sole shareholder of Newco until the Distribution.
7. UWS and Newco have determined that it is appropriate and desirable to
set forth the principal corporate transactions required to effect the
Distribution and to set forth other agreements that will govern certain other
matters following the Distribution;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, and the benefits to be derived from the
Distribution, the parties hereby agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
Section 1.01 DEFINITIONS. Terms defined in the first paragraph of this
Agreement shall have the meanings assigned thereto. As used herein, the
following terms have the following meaning:
ACCRUED LIABILITIES: those liabilities set forth on Schedule A.
ACTION: any claim, action, suit, arbitration, inquiry, proceeding or
investigation by or before any court, governmental or other regulatory or
administrative agency or commission or any other tribunal.
ANCILLARY AGREEMENTS: all of the written agreements, instruments,
documents, certificates, understandings, assignments and other arrangements
entered into in connection with the transactions contemplated hereby, including,
without limitation, the Employee Benefits Agreement, the Service Agreement, the
Intellectual Property Agreement, and the Tax Allocation Agreement.
ASSETS: all properties, rights, contracts, leases and claims, of every
kind and description, wherever located, whether tangible or intangible, and
whether real, personal or mixed.
BALANCE SHEET: means the consolidated balance sheet of UWS as of the time
immediately prior to the Effective Time, which balance sheet shall be prepared
by UWS on a basis consistent with UWS's historical practices for the preparation
of unaudited monthly divisional balance sheets.
BCBSUW NOTE: a $70 million principal amount note of UWS in favor of Blue
Cross Blue & Shield United of Wisconsin that matures on October 30, 1999,
evidenced by a promissory note and pledge agreement, both dated October 30,
1996.
CODE: The Internal Revenue Code of 1986, as amended.
DISPUTES: shall have the meaning ascribed thereto in Section 11.14.
DISTRIBUTION: the distribution to holders of UWS Common Stock of the
shares of Newco Common Stock owned by UWS on the Distribution Date.
DISTRIBUTION AGENT: Firstar Trust Company, in its capacity as agent for
UWS in connection with the Distribution.
DISTRIBUTION DATE: the date on which the Distribution shall be made as
<PAGE>
determined by the UWS Board.
EFFECTIVE TIME: _____ [a./p.]m. Milwaukee time on _____________, 1998.
[DATE THIS AGREEMENT SIGNED]
EMPLOYEE BENEFITS AGREEMENT: the Employee Benefits Agreement entered into
at or prior to the Effective Time between UWS and Newco, as amended from time to
time.
GROUP: the UWS Group or the Newco Group, as the context so requires.
GUARANTEED NEWCO LIABILITIES: the Newco Liabilities on which any member of
the UWS Group is an obligor by reason of any guarantee or contractual
commitment.
GUARANTEED UWS LIABILITIES: the UWS Liabilities on which any member of the
Newco Group is an obligor by reason of any guarantee or contractual commitment.
INDEMNIFIABLE LOSS: any and all damage, loss, liability and expense
(including, without limitation, reasonable expenses of investigation and
reasonable attorneys' fees and expenses) in connection with any and all Actions
or threatened Actions.
INDEMNIFIED PARTY: shall have the meaning ascribed thereto in Section
4.03(a).
INDEMNIFYING PARTY: shall have the meaning ascribed thereto in Section
4.03(a).
INTELLECTUAL PROPERTY AGREEMENT: the Intellectual Property Agreement
entered into at or prior to the Effective Time between UWS and Newco, as amended
from time to time.
SERVICE AGREEMENT: Agreement relating to the provision of interim
administrative services entered into at or prior to the Effective Time between
Newco and UWS, as amended from time to time.
LIABILITIES: any and all claims, debts, liabilities and obligations,
absolute or contingent, matured or not matured, liquidated or unliquidated,
accrued or unaccrued, known or unknown, whenever arising, including all costs
and expenses relating thereto, and including, without limitation, those debts,
liabilities and obligations arising under this Agreement or any Ancillary
Agreement, any law, rule, regulation, action, order or consent decree of any
governmental entity or any award of any arbitrator of any kind, and those
arising under any contract, commitment or undertaking.
MANAGED CARE COMPANIES: the following companies and their subsidiaries:
Compcare Health Services Insurance Corporation, a Wisconsin corporation; Valley
Health
<PAGE>
Plan, Inc., a Wisconsin corporation; HMO-W, Inc., a Wisconsin corporation;
Hometown Insurance Service, Inc., a Wisconsin corporation; United Wisconsin
Insurance Company, a Wisconsin corporation; United Heartland Life Insurance
Company, a Wisconsin corporation; Meridian Resource Corporation, a Wisconsin
corporation; Meridian Managed Care, Inc., a Wisconsin corporation; Meridian
Marketing Services, Inc., a Wisconsin corporation; United Wisconsin Proservices,
Inc., a Wisconsin corporation; United Heartland, Inc., a Wisconsin corporation;
CNR Health, Inc., a Wisconsin corporation; Unity Health Plans Insurance
Corporation, a Wisconsin corporation and Heartland Dental Plan, Inc., a
Wisconsin corporation.
NEWCO ARTICLES: the articles of incorporation of Newco in the form filed
with the Wisconsin Department of Financial Institutions.
NEWCO ASSETS: (a) the capital stock of the Managed Care Companies; (b) all
assets of UWS used in connection with the management and operational services
performed by UWS for the operations of the Managed Care Companies including all
trademarks and tradenames related solely to products sold by the Managed Care
Companies; and (c) working capital as set forth on Schedule A.
NEWCO BUSINESS: all businesses conducted by the Newco Group.
NEWCO BYLAWS: the bylaws of Newco as adopted by the Newco Board of
Directors on ____________, 1998.
NEWCO COMMON STOCK: the shares of common stock, no par value, of Newco.
NEWCO GROUP: Newco, any of its subsidiaries and any subsidiary or division
of any member of the UWS Group that is included in the operations of the Newco
Business and is included in the results of the Newco Business for internal
financial reporting purposes.
NEWCO INDEMNITEES: shall have the meaning ascribed thereto in Section
4.02.
NEWCO LIABILITIES: The Post Retirement Liability, the Accrued Liabilities
and the BCBSUW Note.
PERSON: any natural person, corporation, limited liability company,
business trust, joint venture, association, company, partnership or government,
or any agency or tribunal or political subdivision thereof.
POST RETIREMENT LIABILITY: unfunded employee post-retirement health
benefit liabilities of approximately $____ million.
PRIME RATE: the prime rate of interest as determined from time to time by
M&I Marshal & Ilsley Bank, _______________.
<PAGE>
REINSURANCE AGREEMENT: the Reinsurance Agreement between Newco and UWS,
dated _______________, 1998.
REVOLVING CREDIT AGREEMENT: the Revolving Credit Agreement among various
lenders and Newco, which provides for up to ______ million of availability.
SUBORDINATED NOTES: shall mean UWS's $45 million principal amount 7.75%
Subordinated Notes due 2000.
TAX: shall have the meaning given to such term in the Tax Sharing and
Indemnification Agreement.
TAX ALLOCATION AGREEMENT: the Tax Allocation Agreement entered into at or
before the Effective Time between UWS and Newco, as amended from time to time.
THIRD-PARTY CLAIM: shall have the meaning ascribed thereto in Section
5.02(c).
TRANSITION INSURANCE PROGRAM: shall have the meaning ascribed thereto in
Section 6.01(a).
UWS BUSINESS: the business now or formerly conducted by UWS and its
present and former subsidiaries, joint ventures and partnerships, other than the
Newco Business.
UWS COMMON STOCK: the outstanding shares of common stock, no par value, of
UWS.
UWS DISTRIBUTION EXPENSES: _______ percent (__%) of all costs and
expenses, including transfer taxes and the fees and expenses of the Distribution
Agent, attorneys, accountants and financial advisors, incurred in connection
with the transactions described in Section 2.01 and the Distribution.
UWS GROUP: UWS and its subsidiaries, joint ventures and partnerships,
excluding any member of the Newco Group.
UWS INDEMNITEES: shall have the meaning ascribed thereto in Section 4.01.
UWS LIABILITIES: means (i) Liabilities of any member of the UWS Group
under this Agreement or any Ancillary Agreement, and (ii) Liabilities, other
than Newco Liabilities, incurred in connection with the operation of the UWS
Business, whether arising before, at or after the Effective Time.
Section 1.02 REFERENCES; INTERPRETATION. References to an "Exhibit" or to
a "Schedule" are, unless otherwise specified, to one of the Exhibits or
Schedules attached to this Agreement. References to a "Section" or to an
"Article" are, unless otherwise specified, to one of the Sections or Articles of
this Agreement.
<PAGE>
ARTICLE II
TRANSFER OF ASSETS; ASSUMPTION OF LIABILIT
Section 2.01 CONVEYANCE OF ASSETS; DISCHARGE OF LIABILITIES. Except as
otherwise expressly provided herein or in any of the Ancillary Agreements:
(a) UWS hereby assigns and transfers to Newco and Newco hereby accepts and
acknowledges receipt of the Newco Assets.
(b) UWS hereby assigns and tranfers to Newco and Newco hereby acknowledges
receipt of and assumes the Newco Liabilities.
(c) In exchange for the transfers listed above, Newco shall issue
concurrently with the execution of this Agreement ____________ shares of Newco
Common Stock to UWS so that UWS's total holdings of Newco Common Stock, when
combined with the one share already owned, will equal the number of shares of
UWS Common Stock outstanding on the Record Date.
(d) Those employees of UWS or its subsidiaries (other than American
Medical Security Holdings, Inc. or its subsidiaries) shall become employees of
Newco and UWS shall have no further responsibility or liability with respect to
such employees from and after the date hereof, other than with respect to the
final settlement of obligations with respect to such employees except as may be
set forth in the Employee Benefits Agreement.
(e) If any Newco Asset may not be transferred by reason of the requirement
to obtain the consent of any third party and such consent has not been obtained
by the date hereof, then such Asset shall not be transferred until such consent
has been obtained, and UWS and Newco, as the case may be, shall cause the owner
of such Newco Asset to use all reasonable efforts to provide to the appropriate
member of the other Group all the rights and benefits under such Asset and cause
such owner to enforce such Asset for the benefit of such member.
Section 2.03 NO REPRESENTATIONS OR WARRANTIES. Except as expressly set
forth in this Agreement or any Ancillary Agreement, instrument or document
contemplated by this Agreement or any Ancillary Agreement, neither any member of
the UWS Group nor any member of the Newco Group has made or shall be deemed to
have made any representation or warranty as to (i) the Assets, business or
Liabilities retained, transferred or assumed as contemplated hereby or thereby,
(ii) any consents or approvals required in connection with the transfer or
assumption by such party of any Asset or Liability contemplated by this
Agreement, (iii) the value or freedom from any lien, claim, equity or other
encumbrance of, or any other matter concerning, any Assets of such party or (iv)
the absence of any defenses or right of setoff or freedom from counterclaim with
respect to any claim or other Asset of such party. EXCEPT AS MAY BE EXPRESSLY
SET FORTH IN
<PAGE>
THIS AGREEMENT OR ANY ANCILLARY AGREEMENT, ALL ASSETS WERE, OR ARE BEING,
TRANSFERRED, OR ARE BEING RETAINED ON A "AS IS," "WHERE IS" BASIS WITHOUT
REPRESENTATION OR WARRANTY OF ANY KIND AND THE RESPECTIVE TRANSFEREES WILL BEAR
THE ECONOMIC AND LEGAL RISKS THAT ANY CONVEYANCE SHALL PROVE TO BE INSUFFICIENT
TO VEST IN THE TRANSFEREE A TITLE THAT IS FREE AND CLEAR OF ANY LIEN, CLAIM,
EQUITY OR OTHER ENCUMBRANCE.
Section 2.04 MUTUAL RELEASE. Effective as of the Distribution Date and
except as otherwise specifically set forth in this Agreement or any of the
Ancillary Agreements, UWS, on the one hand, and Newco, on the other hand, on its
own behalf and on behalf of each of its respective Subsidiaries, releases and
forever discharges the other and its Subsidiaries, and its and their respective
officers, directors, agents, Affiliates, record and beneficial security holders
(including, without limitation, trustees and beneficiaries of trusts holding
such securities), advisors and Representatives (in their respective capacities
as such) and their respective heirs, executors, administrators, successors and
assigns, of and from all debts, demands, actions, causes of action, suits,
accounts, covenants, contracts, agreements, damages, claims and Liabilities
whatsoever of every name and nature, both in law and in equity, which the
releasing party has or ever had, which arise out of or relate to events,
circumstances or actions taken by such other party, occurring or failing to
occur, or any conditions existing, on or prior to the Distribution Date;
provided, however, that the foregoing general release shall not apply to (i) any
Liabilities (including Liabilities with respect to indemnification) assumed,
transferred, assigned, allocated or arising under this Agreement or any of the
Ancillary Agreements and shall not affect any party's right to enforce this
Agreement or any Ancillary Agreement in accordance with its terms or (ii) any
Liability the release of which would result in the release of any Person other
than a Person released pursuant to this Section 2.04.
Section 2.05 ANCILLARY AGREEMENTS. Concurrently with the execution of
this Agreement UWS and Newco shall execute and deliver:
(a) The Employee Benefits Agreement;
(b) The Tax Allocation Agreement;
(c) The Service Agreement;
(d) The Reinsurance Agreements;
(e) The Intellectual Property Agreement; and
(f) Such other agreements, leases, documents or instruments as the parties
may agree are necessary or desirable in order to achieve the purposes hereof.
Section 2.06 RESIGNATIONS. Concurrently with the execution of this
Agreement,
<PAGE>
Newco has delivered to UWS resignations of those persons designated who will be
employees of Newco from and after the Distribution Date and who are officers or
directors of UWS or any of its subsidiaries or affiliates not constituting a
member of the Newco Group.
ARTICLE III
THE DISTRIBUTION
On or before the Distribution Date, UWS shall deliver to the Distribution
Agent a certificate or certificates representing all of the then outstanding
shares of Newco Common Stock held by UWS, endorsed by UWS in blank, and shall
instruct the Distribution Agent to distribute to each holder of record of UWS
Common Stock on the Record Date one share of Newco Common Stock for each share
of UWS Common Stock so held either by crediting the holder's brokerage account
or by delivering a certificate or certificates representing such shares. Newco
agrees to provide all certificates for shares of Newco Common Stock that the
Distribution Agent shall require in order to effect the Distribution.
ARTICLE IV
INDEMNIFICATION
Section 4.01 NEWCO INDEMNIFICATION OF THE UWS GROUP. On and after the
Distribution Date, Newco shall indemnify, defend and hold harmless each member
of the UWS Group, and each of their respective directors, officers, employees
and agents (the "UWS Indemnitees") from and against any and all Indemnifiable
Losses incurred or suffered by any of the UWS Indemnitees and arising out of, or
due to the failure of Newco or any member of the Newco Group to pay, perform or
otherwise discharge in due course any item set forth on Schedule B.
Section 4.02 UWS INDEMNIFICATION OF NEWCO GROUP. On and after the
Distribution Date, UWS shall indemnify, defend and hold harmless each member
of the Newco Group and each of their respective directors, officers,
employees and agents (the "Newco Indemnitees") from and against any and all
Indemnifiable Losses incurred or suffered by any of the Newco Indemnitees and
arising out of, or due to the failure of UWS or any member of the UWS Group
to pay, perform or otherwise discharge in due course any item set forth on
Schedule C.
Section 4.03 LIMITATIONS ON INDEMNIFICATION OBLIGATIONS.
(a) The amount that any party (an "Indemnifying Party") is or may be
required to pay to any other party (an "Indemnified Party") pursuant to Section
4.01 or Section 4.02 shall be
<PAGE>
reduced (including, without limitation, retroactively) by any Insurance Proceeds
or other amounts actually recovered by or on behalf of such Indemnified Party,
in reduction of the related Loss. If an Indemnified Party shall have received
the payment required by this Agreement from an Indemnifying Party in respect of
any Loss and the Indemnified Party shall subsequently actually receive Insurance
Proceeds or other amounts in respect of such Loss, then such Indemnified Party
shall pay to such Indemnifying Party a sum equal to the amount of such Insurance
Proceeds or other amounts actually received (up to but not in excess of the
amount of any indemnity payment made hereunder).
Section 4.04 INSURANCE AND THIRD PARTY OBLIGATIONS. No insurer or any
other third party shall be, by virtue of the foregoing indemnification
provisions, (a) entitled to a benefit it would not be entitled to receive in the
absence of such provisions, (b) relieved of the responsibility to pay any claims
to which it is obligated, or (c) entitled to any subrogation rights with respect
to any obligation hereunder.
ARTICLE V
INDEMNIFICATION PROCEDURES
Section 5.01 NOTICE AND PAYMENT OF NON-THIRD PARTY CLAIMS. If the
Indemnified Party determines that it is or may be entitled to indemnification by
the Indemnifying Party pursuant to this Agreement (other than in connection with
any Action or claim subject to Section 5.02), the Indemnified Party shall
deliver to the Indemnifying Party a written notice specifying, to the extent
reasonably practicable, the basis for its claim for indemnification and the
amount for which the Indemnified Party reasonably believes it is entitled to be
indemnified. After the Indemnifying Party shall have been notified of the
amount for which the Indemnified Party seeks indemnification, the Indemnifying
Party shall, within 30 days after receipt of such notice, pay the Indemnified
Party such amount in cash or other immediately available funds (or reach
agreement with the Indemnified Party as to a mutually agreeable alternative
payment schedule) or send a written notice to the Indemnified Party objecting to
the claim for indemnification or the amount thereof. If the Indemnifying Party
does not give the Indemnified Party written notice objecting to such claim and
setting forth the grounds therefor within the same 30 day period, the
Indemnifying Party shall be deemed to have acknowledged its liability for such
claim and the Indemnified Party may exercise any and all of its rights under
applicable law to collect such amount.
Section 5.02 NOTICE AND DEFENSE OF THIRD PARTY CLAIMS.
(a) If the Indemnified Party shall receive notice or otherwise learn of
the assertion or probable assertion by a Person (including, without limitation,
any governmental entity) who is not a party to this Agreement or to any of the
Ancillary Agreements of any claim or of the commencement by any such Person of
any Action (a "Third-Party Claim") against or otherwise involving the
Indemnified Party with respect to which indemnification may be
<PAGE>
sought pursuant to this Agreement or any Ancillary Agreement, such Indemnified
Party shall give such Indemnifying Party written notice thereof promptly after
becoming aware of such Third-Party Claim; PROVIDED that the failure of the
Indemnified Party to give notice as provided in this Section 5.02(a) shall not
relieve the Indemnifying Party of its obligations under this Article V, unless
such Indemnifying Party is prejudiced by such failure to give notice (except
that the Indemnifying Party shall not be liable for any expenses incurred during
the period in which the Indemnified Party failed to give such notice). Such
notice shall describe the Third-Party Claim in reasonable detail and, if
reasonably ascertainable, shall indicate the amount (estimated if necessary) of
the Loss that has been or may be sustained by such Indemnified Party. After
such notice, the Indemnified Party shall deliver to the Indemnifying Party,
promptly after the Indemnified Party's receipt thereof, copies of all notices
and documents (including court papers) received by the Indemnified Party
relating to the Third Party Claim.
(b) Within 30 days after receipt of such notice, the Indemnifying Party
shall by giving written response thereof to the Indemnified Party, (a)
acknowledge, as between the parties hereto, liability for, and at its option
assumption of the defense of such Third Party Claim at its sole cost and expense
or (b) object to the claim of indemnification set forth in the notice delivered
by the Indemnified Party pursuant to the first sentence of Section 5.02(a)
setting forth the grounds therefor; provided that if the Indemnifying Party does
not within the same 30 day period give the Indemnified Party written notice
acknowledging liability and electing to assume the defense or objecting to such
claim and setting forth the grounds therefor, the Indemnifying Party shall be
deemed to have acknowledged, as between the parties hereto, its liability to the
Indemnified Party for such Third Party Claim.
(c) Any contest of a Third Party Claim as to which the Indemnifying Party
has elected to assume the defense shall be conducted by attorneys employed by
the Indemnifying Party and reasonably satisfactory to the Indemnified Party;
provided that the Indemnified Party shall have the right to participate in such
proceedings and to be represented by attorneys of its own choosing at the
Indemnified Party's sole cost and expense. If the Indemnifying Party assumes
the defense of a Third Party Claim, the Indemnifying Party may settle or
compromise the claim without the prior written consent of the Indemnified Party;
provided that the Indemnifying Party may not agree to any such settlement
pursuant to which any remedy or relief, other than monetary damages for which
the Indemnifying Party shall be responsible hereunder, shall be applied to or
against the Indemnified Party, without the prior written consent of the
Indemnified Party, which consent shall not be unreasonably withheld.
(d) If the Indemnifying Party does not assume the defense of a Third Party
Claim for which it has acknowledged liability for indemnification under Article
IV, the Indemnified Party may require the Indemnifying Party to reimburse it on
a current basis for its reasonable expenses of investigation, reasonable
attorney's fees and reasonable out-of-pocket expenses incurred in defending
against such Third Party Claim and the Indemnifying Party shall be bound by the
result obtained with respect thereto by the Indemnified Party; provided that the
Indemnifying Party shall not be liable for any settlement effected without its
consent, which consent shall not be unreasonably withheld.
<PAGE>
(e) The Indemnifying Party shall pay to the Indemnified Party in cash the
amount for which the Indemnified Party is entitled to be indemnified (if any)
within 15 days after the final resolution of such Third Party Claim (whether by
the final nonappealable judgment of a court of competent jurisdiction or
otherwise), or, in the case of any Third Party Claim as to which the
Indemnifying Party has not acknowledged liability, within 15 days after such
Indemnifying Party's objection has been resolved by settlement, compromise or
the final nonappealable judgment of a court of competent jurisdiction.
(f) If the Indemnifying Party chooses to defend or to seek to compromise or
settle any Third-Party Claim, the Indemnified Party shall make available to such
Indemnifying Party any personnel or any books, records or other documents within
its control or which it otherwise has the ability to make available that are
necessary or appropriate for such defense, settlement or compromise, and shall
otherwise cooperate in the defense, settlement or compromise of such Third-Party
Claims. The Indemnifying Party shall promptly reimburse the Indemnified Party
its reasonable out-of-pocket costs incurred in providing assistance pursuant to
the foregoing sentence and for the Indemnified Party's reasonable personnel
costs on any occasion on which personnel of the Indemnified Party spend one full
day or more in providing such assistance.
(g) In the event of payment by the Indemnifying Party to the Indemnified
Party in connection with any Third-Party Claim, such Indemnifying Party shall be
subrogated to and shall stand in the place of such Indemnified Party as to any
events or circumstances in respect of which such Indemnified Party may have any
right or claim relating to such Third-Party Claim against any claimant or
plaintiff asserting such Third-Party Claim or against any other person. Such
Indemnified Party shall cooperate with such Indemnifying Party in a reasonable
manner, and at the cost and expense of such Indemnifying Party, in prosecuting
any subrogated right or claim.
Section 5.03 OTHER ADJUSTMENTS.
(a) The amount of any Indemnifiable Loss shall be (x) increased to take
into account any net Tax cost actually incurred by the Indemnified Party arising
from any payments received from the Indemnifying Party (grossed up for such
increase) and (y) reduced to take account of any net Tax benefit actually
realized by the Indemnified Party arising from the incurrence or payment of any
such Indemnifiable Loss. In computing the amount of such Tax cost or Tax
benefit, the Indemnified Party shall be deemed to recognize all other items of
income, gain, loss, deduction or credit before recognizing any item arising from
the receipt of any payment with respect to an Indemnifiable Loss or the
incurrence or payment of any Indemnifiable Loss.
(b) If the amount of any Indemnifiable Loss shall, at any time subsequent
to the payment required by this Agreement, be reduced by recovery, settlement or
otherwise, the amount of such reduction, less any expenses incurred in
connection therewith, shall promptly be repaid by the Indemnified Party to the
Indemnifying Party, up to the aggregate amount of
<PAGE>
any payments received from such Indemnifying Party pursuant to this Agreement in
respect of such Indemnifiable Loss.
(c) If the amount of any Indemnifiable Loss shall, at any time subsequent
to the payment required by this Agreement, be reduced by recovery, settlement or
otherwise, the amount of such reduction that has been received by the
Indemnified Party, less any expenses incurred in connection therewith, shall
promptly be repaid by the Indemnified Party to the Indemnifying Party.
ARTICLE VI
INSURANCE
Section 6.01 GENERAL LIABILITY INSURANCE.
(a) UWS shall continue to maintain coverage for workers' compensation,
general liability, automobile liability, other liability, property and other
insurable business risks and exposures to Newco and the Newco Group in the same
manner and to the same extent as in effect on the date of this Agreement (the
"Transition Insurance Program") for incidents, acts, omissions or occurrences
occurring from the date such coverage first commenced until 12:00 midnight on
the Distribution Date or such later date as may be agreed to by UWS and Newco,
and Newco and the Newco Group shall pay UWS the costs, fees and expenses for
such coverage in accordance with the past and current practices established
between UWS, Newco and the Newco Group. Such costs include, but are not limited
to, premiums, deductibles, retrospective rating adjustments, assessments paid
and audit adjustments completed.
(b) UWS shall cooperate and, if requested, shall assist Newco and the
Newco Group in obtaining their own separate insurance coverage for Newco and the
Newco Group, effective with respect to incidents, acts, omissions or occurrences
occurring from and after the Distribution Date. Following the Distribution
Date, each of the parties shall cooperate with and assist the other party in the
prevention of conflicts or gaps in insurance coverage and/or collection of any
insurance proceeds.
(c) UWS and Newco agree that Newco and the Newco Group shall have the right
to present claims directly to UWS's insurers under the Transition Insurance
Program for insured incidents, acts, omissions or occurrences occurring from the
date said coverage first commenced until the Distribution Date.
(d) With respect to any insured losses or retrospective premium adjustments
relating to assets and/or operations of Newco and/or the Newco Group prior to
the Distribution Date: (i) UWS shall pay over to Newco within 60 days of receipt
any insurance proceeds it receives on account of such losses and any such
retrospective premium reductions (all subject to support documentation); and
(ii) Newco and the Newco Group shall reimburse UWS within 60 days
<PAGE>
of UWS's request for all costs, expenses or payments (all subject to support
documentation) made by UWS after the Distribution Date to insurers or incurred
by UWS with respect to such Losses and any such retrospective premium increases.
The defense of and the responsibility for any litigation or claims pending at
the Distribution Date, or commenced after the Distribution Date (as respects
losses which occurred prior to the Distribution Date), relating to Newco or the
Newco Group and covered by the Transition Insurance Program shall continue to be
managed by Newco and the Newco Group. Newco shall advise UWS when there is a
reasonable expectation that any such litigation will exceed the policy limits of
the current Transition Insurance Program or result in a loss not covered by such
program.
Section 6.02 DIRECTORS' AND OFFICERS' INSURANCE.
UWS will maintain directors' and officers' liability insurance coverage at
least equal to the amount of UWS's current directors' and officers' liability
insurance coverage for a period of five years from the Distribution Date with
respect to the directors and officers of UWS for acts as directors and officers
of members of the UWS Group during periods prior to the Distribution Date.
Section 6.03 INSURED LITIGATION. In recognition that premiums, premium
adjustments, retrospective rating adjustments,assessments and audit adjustments
have been paid or charged to Newco and the Newco Group prior to the Distribution
Date, and that similar such payments and charges will be made by and to Newco
and the Newco Group after the Distribution Date, UWS agrees to cooperate with
Newco and the Newco Group in insured litigation. Furthermore, in insured
litigation in which the reasonable expectation is that Newco and/or Newco Group
will be financially responsible for the entire result in the litigation (a
"Newco Responsibility Case"), Newco shall have the right to participate and
control at its cost the defense of such litigation, to the extent that UWS would
be able to do so. In such event, UWS shall cooperate with Newco in all
reasonable respects in the defense and resolution of such Newco Responsibility
Case.
ARTICLE VII
ADDITIONAL COVENANTS
Section 7.01 GUARANTEED NEWCO AND UWS LIABILITIES.
(a) Newco shall use all reasonable efforts (excluding payment of money) to
obtain as promptly as practicable after the Distribution Date the release of UWS
from its obligations with respect to Guaranteed Newco Liabilities. In no event
shall any member of the Newco Group extend the term of any Guaranteed Newco
Liabilities (such as by exercising an option to renew a lease) or modify any
such Guaranteed Newco Liability, in either instance in any way that would
increase the liability guaranteed thereunder unless the guarantee of UWS is
released as to any extended or modified liability obligations under such
Guaranteed Newco Liabilities or UWS otherwise consents in writing.
<PAGE>
(b) UWS shall use all reasonable efforts (excluding payment of money) to
obtain as promptly as practicable after the Distribution Date the release of
members of Newco Group from their respective obligations with respect to
Guaranteed UWS Liabilities. In no event shall any member of the UWS Group
extend the term of any Guaranteed UWS Liabilities (such as by exercising an
option to renew a lease) or modify any such Guaranteed UWS Liability, in either
instance in any way that would increase the liability guaranteed thereunder
unless the guarantee of Newco is released as to any extended or modified
liability obligations under such Guaranteed UWS Liabilities or Newco otherwise
consents in writing.
(c) In the event that UWS is required to pay any Guaranteed Newco
Liabilities, without limiting any of UWS's rights and remedies against Newco
under this Agreement or otherwise, in order to secure Newco's indemnity
obligations to UWS hereunder in respect of such Guaranteed Newco Liabilities,
UWS shall be entitled to all the rights of the payee in any property of any
member of the Newco Group pledged as security for such Guaranteed Newco
Liabilities.
(d) In the event that Newco is required to pay any Guaranteed UWS
Liabilities, without limiting any of Newco's rights and remedies against UWS
under this Agreement or otherwise, in order to secure UWS's indemnity
obligations to Newco hereunder in respect of such Guaranteed UWS Liabilities,
Newco shall be entitled to all the rights of the payee in any property of any
member of the UWS Group pledged as security for such Guaranteed UWS Liabilities.
Section 7.02 PRIVILEGED MATTERS. The parties hereto recognize that legal
and other professional services that have been and will be provided on or prior
to the Distribution Date have been and will be rendered for the benefit of UWS
and Newco and their subsidiaries, and that each of the foregoing should be
deemed to be the client for the purposes of asserting all privileges which may
be asserted under applicable law. To allocate the interests of each party in
the information as to which any party or any its subsidiaries is entitled to
assert a privilege, the parties agree as follows:
(a) UWS shall be entitled, in perpetuity, to control the assertion or
waiver of all privileges in connection with privileged information which relates
solely to UWS or any UWS Subsidiary or the business of UWS or any UWS
Subsidiary, whether or not the privileged information is in the possession of or
under the control of UWS or Newco or any of their subsidiaries. UWS shall also
be entitled, in perpetuity, to control the assertion or waiver of all privileges
in connection with privileged Information that relates solely to the subject
matter of any claims arising out of any item set forth on Schedule D or any
claims which may be asserted in the future in any lawsuits or other proceedings
(not involving Newco or any Newco Subsidiary) initiated against or by UWS or any
UWS Subsidiary, whether or not the privileged Information is in the possession
of or under the control of UWS or Newco or any of their subsidiaries.
(b) Newco shall be entitled, in perpetuity, to control the assertion or
waiver of all
<PAGE>
privileges in connection with privileged Information which relates solely to
Newco or any Newco Subsidiary or the business of Newco or any Newco Subsidiary,
whether or not the privileged Information is in the possession of or under the
control of UWS or Newco or any of their subsidiaries. Newco shall also be
entitled, in perpetuity, to control the assertion or waiver of all privileges in
connection with privileged Information which relates solely to the subject
matter of any claims arising out of any item set forth in Schedule E or any
claims which may be asserted in the future in any lawsuits or other proceedings
(not involving UWS or any UWS Subsidiary) initiated against or by Newco or any
Newco Subsidiary, whether or not the privileged Information is in the possession
of or under the control of UWS or Newco or any of their subsidiaries.
(c) The parties hereto agree that they shall have a shared privilege, with
equal right to assert or waive, subject to the restrictions in this Section
7.03(a) and (b); that no party shall have a shared privilege in connection with
privileged information that does not relate to such party, any of its
subsidiaries or their respective businesses. All privileges relating to any
claims, proceedings, litigation, disputes, or other matters which involve UWS or
any UWS Subsidiary and/or Newco or any Newco Subsidiary in respect of which each
party retains any responsibility or liability under this Agreement, shall be
subject to a shared privilege among them.
(d) No party hereto may waive any privilege which could be asserted under
any applicable law, and in which any other party hereto has a shared privilege,
without the consent of the other party, except to the extent reasonably required
in connection with any litigation as provided in Subsection (e) below. Consent
shall be in writing, or shall be deemed to be granted unless written objection
is made within 20 calendar days after written notice from the party requesting
such consent.
(e) In the event of any litigation or dispute between or among the parties
hereto, any party and a subsidiary of another party hereto, or a subsidiary of
one party hereto and a subsidiary of another party hereto, either such party may
waive a privilege in which the other party has a shared privilege, without
obtaining the consent of the other party; that such waiver of a shared privilege
shall be effective only as to the use of information with respect to the
litigation or dispute between the relevant parties and/or their subsidiaries,
and shall not operate as a waiver of the shared privilege with respect to third
parties.
(f) If a dispute arises between or among the parties hereto or their
respective subsidiaries regarding whether a privilege should be waived to
protect or advance the interest of any party, each party agrees that it shall
negotiate in good faith, shall endeavor to minimize any prejudice to the rights
of the other parties, and shall not unreasonably withhold consent to any request
for waiver by another party. Each party hereto specifically agrees that it will
not withhold consent to waiver for any purpose except to protect its own
legitimate interests.
(g) Upon receipt by any party hereto or by any subsidiary thereof of any
subpoena, discovery or other request which arguably calls for the production or
disclosure of
<PAGE>
information subject to a shared privilege or as to which another party has the
sole right hereunder to assert a privilege, or if any party obtains knowledge
that any of its or any of its subsidiaries' current or former directors,
officers, agents or employees has received any subpoena, discovery or other
requests which arguably calls for the production or disclosure of such
privileged information, such party shall promptly notify the other party or
parties of the existence of the request and shall provide the other party or
parties a reasonable opportunity to review the information and to assert any
rights it or they may have under this Section 7.02 or otherwise to prevent the
production or disclosure of such privileged information.
(h) The furnishing and delivery of information pursuant to this Agreement
is made in reliance on the agreement of the parties, as set forth in Section
7.10, to maintain the confidentiality of confidential or privileged Information
and to assert and maintain all applicable privileges. The access to Information
being granted pursuant to Section 7.07 and the agreement to provide witnesses
pursuant to Section 7.05, shall not be deemed a waiver of any privilege that has
been or may be asserted under this Agreement or otherwise.
Section 7.03 LIMITATION ON SOLICITATION OF EMPLOYEES.
(a) UWS agrees on behalf of itself, its subsidiaries and Affiliates which
it controls, without any separate bargained for consideration, but rather as an
integral part of the Distribution provided for in this Agreement, that it shall
not directly or indirectly, through a subsidiary or otherwise, until one year
after the Distribution Date, employ or attempt to employ any Newco employee or
induce or attempt to induce any Newco employee to leave his or her employment.
(b) Newco agrees on behalf of itself, its subsidiaries and Affiliates which
it controls, without any separate bargained for consideration, but rather as an
integral part of the Distribution provided for in this Agreement, that it shall
not directly or indirectly, through a subsidiary or otherwise, until one year
after the Distribution Date, employ or attempt to employ any employee of UWS or
any UWS Subsidiary or induce or attempt to induce any employee of UWS or any UWS
Subsidiary to leave his or her employment.
(c) The parties agree and acknowledge that the restrictions contained in
this Section 7.04 are reasonable in scope and duration and are necessary to
protect the other party hereto.
Section 7.04 PRODUCTION OF WITNESSES. After the Distribution Date, each of
UWS and Newco and its respective subsidiaries shall use reasonable efforts to
make available to the other party and its subsidiaries, upon written request,
its directors, officers, employees and agents as witnesses to the extent that
any such person may reasonably be required (giving consideration to business
demands of such Representatives) in connection with any legal, administrative or
other proceedings in which the requesting party may from time to time be
involved, without cost to the requesting party.
Section 7.05 RETENTION OF RECORDS. Except as otherwise required by law or
agreed to in writing, each party shall, and shall cause the members of its Group
to, retain all
<PAGE>
information relating to the other's business in accordance with the past
practice of such party. Notwithstanding the foregoing, either party may destroy
or otherwise dispose of any information at any time in accordance with the
corporate record retention policy maintained by such party with respect to its
own records.
Section 7.06 ACCESS TO INFORMATION. From and after the Effective Time,
UWS and Newco shall each afford the other and its accountants, counsel and other
designated representatives reasonable access (including using reasonable efforts
to give access to persons or firms possessing information) and duplicating
rights during normal business hours to all records, books, contracts,
instruments, computer data and other data and information in its possession
relating to the business and affairs of the other or a member of its Group
(other than data and information subject to an attorney/client or other
privilege), insofar as such access is reasonably required by the other
including, without limitation, for audit, accounting and litigation purposes.
Section 7.07 PROVISION OF CORPORATE RECORDS. As soon as practicable
following the Effective Time, UWS and Newco shall each arrange for the provision
to the other of existing corporate documents (e.g. minute books, stock
registers, stock certificates, documents of title, contracts, etc.) in its
possession relating to the other or its business and affairs or to any other
entity that is part of such other's respective Group or to the business and
affairs of such other entity.
Section 7.08 LITIGATION COOPERATION. UWS and Newco shall each use
reasonable efforts to make available to the other, upon written request, its
officers, directors, employees and agents, and the officers, directors,
employees and agents of its subsidiaries, as witnesses to the extent that such
persons may reasonably be required in connection with any legal, administrative
or other proceedings arising out of the business of the other, or of any entity
that is part of the others' respective Group, prior to the Effective Time in
which the requesting party or one of its subsidiaries may from time to time be
involved.
Section 7.09 CONFIDENTIALITY. Each party shall, and shall cause each
member of its Group to, hold and cause its directors, officers, employees,
agents, consultants and advisors to hold, in strict confidence, unless compelled
to disclose by judicial or administrative process or, in the opinion of its
counsel, by other requirements of law, all information concerning the other
party (except to the extent that such information can be shown to have been (a)
in the public domain through no fault of such disclosing party or (b) later
lawfully acquired after the Effective Time on a non-confidential basis from
other sources by the disclosing party), and neither party shall release or
disclose such information to any other person, except its auditors, attorneys,
financial advisors, bankers and other consultants and advisors who shall be
advised of the provisions of this Section 7.10 and be bound by them. Each party
shall be deemed to have satisfied its obligation to hold confidential
information concerning or supplied by the other party if it exercises the same
care as it takes to preserve confidentiality for its own similar information.
<PAGE>
ARTICLE VIII
ACCOUNTING MATTERS
Section 8.01 ALLOCATION OF PREPAID ITEMS AND RESERVES. All prepaid items
and reserves that have been maintained by UWS on a consolidated basis but that
relate in part to assets or liabilities of the Newco Group shall be allocated
between UWS and Newco as determined by UWS and Newco.
Section 8.02 ACCOUNTING TREATMENT OF ASSETS TRANSFERRED AND LIABILITIES
ASSUMED.
The transfer by UWS of the Newco Assets and Newco Liability shall be
treated as a capital contribution to Newco.
Section 8.03 INTERCOMPANY ACCOUNTS. On or before the Distribution Date,
UWS shall prepare and deliver to Newco a preliminary Balance Sheet which shall
set forth good faith estimates of all intercompany account balances between
members of the UWS Group and members of the Newco Group as of the Effective
Time. On the Distribution Date, all estimated account balances set forth on the
preliminary Balance Sheet shall be paid in full by Newco to UWS or UWS to Newco,
as the case may be. Within 30 business days after the Effective Time, UWS shall
prepare and deliver to Newco a final Balance Sheet which shall set forth all
intercompany account balances between members of the UWS Group and members of
the Newco Group as of the Effective Time. Within ten business day after the
delivery of the final Balance Sheet, UWS shall pay to Newco or Newco shall pay
to UWS, as the case may be, the difference between the estimated account
balances set forth on the preliminary Balance Sheet and the final account
balances set forth on the final Balance Sheet.
ARTICLE IX
MISCELLANEOUS
Section 9.01 INTEREST. Except as otherwise expressly provided in this
Agreement or an Ancillary Agreement, all payments by one party to the other
under this Agreement or any Ancillary Agreement shall be paid, by check or wire
transfer of immediately available funds to an account in the United States
designated by the recipient, within 30 days after receipt of an invoice or other
written request for payment setting forth the specific amount due and a
description of the basis therefor in reasonable detail. Any amount remaining
unpaid beyond its due date, including disputed amounts that are ultimately
determined to be payable, shall bear interest at a rate of simple interest per
annum equal to the Prime Rate plus 2%.
Section 9.02 NOTICES. All notices and communications under this Agreement
shall
<PAGE>
be deemed to have been given (a) when received, if such notice or communication
is delivered by facsimile, hand delivery or overnight courier, and, (b) three
(3) business days after mailing if such notice or communication is sent by
United States registered or certified mail, return receipt requested, first
class postage prepaid. All notices and communications, to be effective, must be
properly addressed to the party to whom the same is directed at its address as
follows:
If to UWS, to: American Medical Security Group, Inc.
3100 AMS Boulevard
Green Bay, Wisconsin 54313
Attention: General Counsel
If to Newco, to: United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
Attention: General Counsel
Either party may, by written notice delivered to the other party in
accordance with this Section 9.02, change the address to which delivery of any
notice shall thereafter be made.
Section 9.03 AMENDMENT AND WAIVER. This Agreement may not be altered or
amended, nor may any rights hereunder be waived, except by an instrument in
writing executed by the party or parties to be charged with such amendment or
waiver. No waiver of any terms, provision or condition of or failure to
exercise or delay in exercising any rights or remedies under this Agreement, in
any one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such term, provision, condition, right or remedy or as
a waiver of any other term, provision or condition of this Agreement.
Section 9.04 ENTIRE AGREEMENT. This Agreement, together with the
Ancillary Agreements, constitutes the entire understanding of the parties hereto
with respect to the subject matter hereof, superseding all negotiations, prior
discussions and prior agreements and understandings relating to such subject
matter. To the extent that the provisions of this Agreement are inconsistent
with the provisions of any Ancillary Agreement, the provisions of such Ancillary
Agreement shall prevail with respect to the subject matter hereof.
Section 9.05 ASSIGNMENT. This Agreement shall be assignable in whole in
connection with a merger or consolidation or the sale of all or substantially
all the assets of a party hereto so long as the resulting, surviving or
transferee entity assumes all the obligations of the relevant party hereto by
operation of law or pursuant to an agreement in form and substance reasonably
satisfactory to the other party to this Agreement. Otherwise this Agreement
shall not be assignable, in whole or in part, directly or indirectly, by any
party hereto without the prior written consent of the others and any attempt to
assign any rights or
<PAGE>
obligations arising under this Agreement without such consent shall be void.
Section 9.06 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns.
Section 9.07 THIRD PARTY BENEFICIARIES. Nothing contained in this
Agreement, express or implied, is intended to confer any benefits, rights or
remedies upon any person or entity other than members of the UWS Group and the
Newco Group and the UWS Indemnitees and Newco Indemnitees under Articles IV and
V hereof.
Section 9.08 FURTHER ASSURANCES AND CONSENTS.
From time to time after the Distribution Date, each party shall do, execute
and deliver, or cause to be done, executed and delivered, to another party
hereto, or its successors and assigns, all such further acts, deeds,
assignments, powers of attorney and other instruments of conveyance and transfer
as such party may reasonably request as may be necessary to consummate the
Distribution and the transactions contemplated hereby, including filings with,
and obtaining the approval of, any governmental body.
Section 9.09 SEVERABILITY. The provisions of this Agreement are severable
and should any provision hereof be void, voidable or unenforceable under any
applicable law, such provision shall not affect or invalidate any other
provision of this Agreement, which shall continue to govern the relative rights
and duties of the parties as though such void, voidable or unenforceable
provision were not a part hereof.
Section 9.10 GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of Wisconsin, without
regard to the conflicts of law rules of such state.
Section 9.11 TITLES AND HEADINGS. Titles and headings to sections herein
are inserted for the convenience of reference only and are not intended to be
part of or to affect the meaning or interpretation of this Agreement.
Section 9.12 TERMINATION. This Agreement may be terminated and the
Distribution abandoned at any time prior to the Distribution Date by and in the
sole discretion of the UWS Board without the approval of the Newco or UWS
shareholders.
Section 9.13 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same Agreement.
Section 9.14 DISPUTES.
(a) All disputes arising from or in connection with this Agreement, whether
based on
<PAGE>
contract, tort, statute or otherwise, including, but not limited to, disputes in
connection with claims by third parties (collectively, "Disputes"), shall be
resolved only in accordance with the provisions of this Section 9.14; provided,
however, that nothing contained herein shall preclude either party from seeking
or obtaining (i) injunctive relief to prevent an actual or threatened breach of
any of the provisions of this Agreement, or (ii) equitable or other judicial
relief to enforce the provisions of this Section 9.14 hereof or to preserve the
status quo pending resolution of Disputes hereunder.
(b) Either party may give the other party written notice of any Dispute not
resolved in the normal course of business. Within ten days after delivery of
the notice of a Dispute, the receiving party shall submit to the other a written
response. The notice and the response shall include a statement of such party's
position and a summary of arguments supporting that position and the name and
title of the executive who will represent that party and of any other person who
will accompany such executive in resolving the Dispute. Within 20 days after
delivery of the first notice, the executives of both parties shall meet at a
mutually acceptable time and place, and thereafter as often as they reasonably
deem necessary, and shall negotiate in good faith to attempt to resolve the
Dispute. All reasonable requests for information made by one party to the other
will be honored.
(c) If the Dispute has not been resolved by negotiation within sixty days
of the first party's notice, the Dispute shall be submitted, upon application of
either party, for resolution by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association (the
"Rules").
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
UNITED WISCONSIN SERVICES, INC.
By:_________________________________
NEWCO/UWS, INC.
By:_________________________________
<PAGE>
SCHEDULE A
Acrrued Liabilities [to come]
Working Capital [to come]
<PAGE>
SCHEDULE B
(Section 4.01)
1. Newco Liabilities.
2. Breach by Newco or its subsidiaries of the Distribution Agreement or any
Ancillary Agreement.
3. Operation of the business conducted by Newco and its subsidiaries or the
ownership of its assets, except as provided in the Distribution Agreement or any
Ancillary Agreement.
4. Failure of Newco to comply with applicable provisions of ERISA or the Code
with respect to Newco's employee benefit plans.
5. Violations of the Code or federal or state securities laws in connection
with the Distribution or with any filings made with governmental agencies, to
the extent such violations result from or are related to disclosure, or failure
to disclose, information to UWS's corporate staff by officers, directors,
employees, agents, consultants and representatives of Newco.
<PAGE>
SCHEDULE C
(Section 4.02)
1. UWS Liabilities.
2. Any breach by UWS or any of its subsidiaries of the Distribution Agreement
or any Ancillary Agreement.
3. The operation of the business conducted or to be conducted by UWS and its
subsidiaries or the ownership of its assets (other than businesses and assets to
be contributed to Newco) both prior to and following the Effective Time, except
as otherwise provided in the Distribution Agreement or any Ancillary Agreement.
4. Failure by UWS to comply with provisions of ERISA or the Code with respect
to its employee benefit plans.
5. Violations of the Code or federal or state securities laws in connection
with the Distribution or with any filings made with governmental agencies in
connection with the operation of Newco's businesses prior to the Effective Time,
except to the extent that such violations result from or are related to the
disclosure or failure to disclose information to UWS's corporate staff by
officers, directors, employees, agents, consultants or representatives of Newco.
<PAGE>
SCHEDULE D
(Section 7.03(a))
[List any other items for which UWS may retain assertion of privilege]
<PAGE>
SCHEDULE E
(Section 7.03(b))
[List any other items for which Newco may retain assertion of privilege]
<PAGE>
ARTICLES OF INCORPORATION
OF
NEWCO/UWS, INC.
The undersigned, being a natural person of the age of eighteen (18)
years or more, acting as incorporator of the corporation under Chapter 180 of
the Wisconsin Business Corporation Law, adopts the following Articles of
Incorporation for such corporation:
ARTICLE I. NAME
The name of the corporation (the "Corporation") is Newco/UWS, Inc.
ARTICLE II. REGISTERED OFFICE AND REGISTERED AGENT
The address of the Corporation's registered office in the State of
Wisconsin is 401 West Michigan Street, Milwaukee, Wisconsin 53203, and the
name of the registered agent at such address is Thomas R. Hefty.
ARTICLE III. PURPOSES
The purposes of the Corporation are to engage in any lawful activity
within the purposes for which corporations may be organized under the
Wisconsin Business Corporation Law, Chapter 180 of the Wisconsin Statutes.
ARTICLE IV. CAPITAL STOCK
A. COMMON STOCK. The aggregate number of authorized shares of common
stock of the Corporation shall be Fifty Million (50,000,000) shares,
designated as "Common Stock" and having no par value per share.
B. PREFERRED STOCK. The aggregate number of authorized shares of
preferred stock of the Corporation shall be One Million (1,000,000) shares,
designated as "Preferred Stock" and having no par value per share. Authority
is hereby vested in the Board of Directors from time to time to issue the
Preferred Stock in one or more series of any number of shares and, in
connection with the creation of each such series, to fix, by resolution
providing for the issue of shares thereof: (i) the voting rights, if any;
(ii) the designations, preferences, limitations and relative rights of such
series in respect to the rate of dividend, the price, the terms and
conditions of redemption; (iii) the amounts payable upon such series in the
event of voluntary or involuntary liquidation; (iv) sinking fund provisions
for the redemption or purchase of such series of shares; and, (v) if the
shares of any series are issued with the privilege of conversion, the terms
and conditions on which such series of shares may be converted. In addition
to the foregoing, to the full extent now or hereafter permitted by Wisconsin
law, in connection with each issue thereof, the Board of Directors may at its
discretion assign to any series of the Preferred Stock such other terms,
conditions, restrictions, limitations, rights and privileges as it may deem
appropriate. The aggregate number of preferred shares issued and not
canceled of any and all preferred series shall not exceed the total number of
shares of Preferred Stock
<PAGE>
hereinabove authorized. Each series of Preferred Stock shall be
distinctively designated by letter or descriptive words or both.
ARTICLE V. DIRECTORS
The number of directors constituting the Board of Directors of the
Corporation shall be fixed by or in the manner provided by the bylaws. The
general powers, number, classification, and requirements for nomination of
directors shall be as set forth in Articles II and III of the bylaws of the
Corporation (and as such sections shall exist or be amended from time to
time).
A. CLASSIFICATION AND TERM. The Board of Directors, other than those
who may be elected by the holders of any series of Preferred Stock, shall be
divided into three classes, as nearly equal in number as possible, with one
class to be elected annually. The term of office of the initial Board of
Directors shall be as follows: (i) the term of office of directors of the
first class shall expire at the first annual meeting of shareholders after
the effective date of these Articles of Incorporation; (ii) the term of
office of the directors of the second class shall expire at the second annual
meeting of shareholders after the effective date of these Articles of
Incorporation; and (iii) the term of office of directors of the third class
shall expire at the third annual meeting of shareholders after the effective
date of these Articles of Incorporation. Directors of each class shall hold
office until the successors are elected and qualified. At each succeeding
annual meeting of shareholders of the Corporation, the successors of the
class of directors whose term expires at that meeting shall be elected at
such meeting to hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of their election.
Shareholders of the Corporation shall not be permitted to cumulate their
votes for the election of directors.
B. PREFERRED STOCK RIGHTS. Notwithstanding the foregoing and
provisions in the bylaws of the Corporation, whenever the holders of any one
or more series of Preferred Stock issued by the Corporation pursuant to
Article IV hereof have the rights, voting separately as a class or by series,
to elect directors at an annual or special meeting of shareholders, the
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of the series of preferred stock
applicable thereto, and such directors so elected shall not be divided into
classes unless expressly provided by the terms of the applicable series.
ARTICLE VI. SHAREHOLDER CONSENT
Any action required or permitted to be taken at a meeting of the
Corporation's shareholders may be taken without a meeting by shareholders who
would be entitled to vote at a meeting those shares with voting power to cast
no less than the minimum number or, in the case of voting by voting groups,
numbers of votes that would be necessary to authorize or take the action at a
meeting at which all shares entitled to vote were present and voted. Any
action so taken must be evidenced by one or more written consents describing
the action taken, signed by the number of shareholders necessary to take the
action and delivered to the Corporation for inclusion in the corporate
records. Within ten days after such action is effective, the Corporation
shall give notice of such action to the shareholders of the Corporation who,
as of the date that the first shareholder signed such written consent, were
entitled to vote on such action and whose shares were not represented on the
written consent.
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ARTICLE VII. CONTROL SHARE VOTING RESTRICTIONS
The restrictions contained in Wisconsin Statutes Section 180.1150 shall
not apply to Blue Cross & Blue Shield United of Wisconsin.
ARTICLE VIII. INCORPORATOR
The name and address of the incorporator is Geoffrey R. Morgan, Michael
Best & Friedrich LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
ARTICLE IX. AMENDMENT
The Corporation reserves the right to supplement, amend or repeal any
provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by the laws of the State of Wisconsin, and all rights
conferred on shareholders herein are granted subject to this reservation.
Dated at Milwaukee, Wisconsin this 20th day of May, 1998.
/s/ Geoffrey R. Morgan
-----------------------------------------
Incorporator
This instrument was drafted by and is returnable to:
Geoffrey R. Morgan
Michael Best & Friedrich LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
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BYLAWS OF
NEWCO/UWS
AS OF MAY 27, 1998
ARTICLE I. OFFICES
SECTION 1. PRINCIPAL AND BUSINESS OFFICES. The Corporation may have
such principal and other business offices, either within or without the State of
Wisconsin, as the Board of Directors may designate or as the business of the
Corporation may require from time to time.
SECTION 2. REGISTERED OFFICE. The registered office of the
Corporation required by the Wisconsin Business Corporation Law to be maintained
in the State of Wisconsin may be, but need not be, identical to the principal
office in the state of Wisconsin; and the address of the registered office may
be changed from time to time by the Board of Directors or by the registered
agent. The business office of the registered agent of the Corporation shall be
identical to the registered office.
ARTICLE II. SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The Annual Meeting of the Shareholders
shall be held at the principal office of the Corporation in the City of
Milwaukee, Milwaukee County, Wisconsin, unless the Board of Directors shall
designate another location either within or without the State of Wisconsin. The
Annual Meeting shall take place on the last Tuesday of May each year or at such
other time and date as may be fixed by or under the authority of the Board of
Directors. If the day fixed for the Annual Meeting shall be a legal holiday in
the State of Wisconsin, such meeting shall be held on the next succeeding
business day. At such meeting the Shareholders shall elect Directors and
transact such other business as shall lawfully come before them.
A. NOMINATIONS AND PROPOSALS. Nominations of persons for election to
the Board of Directors of the Corporation and the proposal of
business to be considered by the Shareholders may be made at the
Annual Meeting:
1. Pursuant to the Corporation's notice of the Annual Meeting;
2. By or at the direction of the Board of Directors; or
3. By any Shareholder of the Corporation who is a Shareholder
of record at the time of giving notice as provided in the
Bylaws, who is entitled to vote at the Annual Meeting and
who complies with the notice procedures set forth in
Paragraph B of this Section 1.
<PAGE>
B. SHAREHOLDER NOMINATIONS AND PROPOSALS. For nominations or other
business to be properly before an Annual Meeting by a Shareholder,
the Shareholder must have given adequate notice thereof in writing
to the Secretary. Adequate notice is that notice which is
received by the Secretary at the Corporation's principal office
not less than 90 days nor more than 120 days prior to the last
Tuesday in May, provided, however, that in the event the date of
the Annual Meeting is advanced by more than 30 days or postponed
by more than 30 days from the last Tuesday in May, notice by the
Shareholder, to be adequate, must be received as provided above
not earlier than the 120th day prior to the date of such Annual
Meeting and not later than the close of business on the later of
(x) the 90th day prior to such Annual Meeting, or (y) the tenth
day following the day on which public announcement of the date of
such Annual Meeting is first made. In no event shall public
announcement of an adjournment of an Annual Meeting commence a new
time period for the giving of a Shareholder notice as described
above. Such Shareholder's notice shall be signed by the
Shareholder of record who intends to make the nomination or
introduce the other business (or his or her duly authorized proxy
or other representative), shall bear the date of signature of such
Shareholder or representative, and shall set forth:
1. The name and address, as they appear on the Corporation's
books, of such Shareholder and the beneficial owner(s), if
any, on whose behalf the nomination or proposal is made;
2. The class and number of shares of the Corporation which are
beneficially owned by such Shareholder or beneficial
owner(s);
3. A representation that such Shareholder is a holder of
record of shares of the Corporation entitled to vote at
such meeting and intends to appear in person or by proxy at
the meeting to make the nomination or introduce the other
business specified in the notice;
4. In the case of any proposed nomination for election or
re-election as a Director:
(a) the name and residence address of the person(s) to
be nominated,
(b) a description of all arrangements or understandings
between such Shareholder or beneficial owner(s) and
each nominee and any other person(s) (naming such
person(s)) pursuant to which the nomination is to be
made by the Shareholder,
(c) such other information regarding each nominee
proposed by such Shareholder as would be required to
be disclosed in solicitations of proxies for
elections of Directors, or would be otherwise
required
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to be disclosed, in each case pursuant to Regulation
14A under the Securities Exchange Act of 1934, as
amended, including any information that would be
required to be included in a proxy statement filed
pursuant to Regulation 14A had the nominee been
nominated by the Board of Directors, and
(d) the written consent of each nominee to be named in a
proxy statement and to serve as a Director if so
elected, and
5. In the case of any other business that such Shareholder
proposes to bring before the meeting:
(a) a brief description of the business desired to be
brought before the meeting, and, if the business
includes a proposal to amend the Bylaws, the
language of the proposed amendment,
(b) such Shareholder's and beneficial owner's(s')
reasons for conducting such business at such time,
and
(c) any material interest in such business of such
Shareholder or beneficial owners(s).
SECTION 2. SPECIAL MEETINGS. Special Meetings of the Shareholders may
be called by the Chairman of the Board, the Secretary upon written request of a
majority of members of the Board of Directors then in office or the holders of
at least ten percent of all the votes entitled to be cast on any issue proposed
to be considered at the proposed Special Meeting if such holders sign, date and
deliver to the Secretary one or more written demands for the meeting describing
one or more purposes for which the Special Meeting is to be held. The Board of
Directors shall set the place, date and time of the Special Meeting. If no
location is designated, the place of the Special Meeting shall be the principal
business office of the Corporation in the State of Wisconsin, but any Special
Meeting may be adjourned to reconvene at any place designated by a vote of a
majority of the shares represented thereat. Only business described in the
notice of a Special Meeting may be conducted at the Special Meeting.
A. NOMINATIONS. Nominations of persons for election to the Board of
Directors may be made at a Special Meeting at which Directors are
to be elected:
1. Pursuant to the Corporation's notice of a Special Meeting;
2. By or at the direction of the Board of Directors; or
3. By any Shareholder of the Corporation who is a Shareholder
of record at the time of giving notice as provided in the
Bylaws, who is entitled to vote
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at the Special Meeting and who complies with the notice
procedures set forth in Paragraph B of this Section 2.
B. NOMINATIONS BY SHAREHOLDERS. Any Shareholder desiring to nominate
persons for election to the Board of Directors at a Special
Meeting shall cause written notice to be received by the Secretary
at its principal office not earlier than 90 days prior to such
Special Meeting and not later than the close of business on the
later of (x) the 60th day prior to such Special Meeting or (y) the
10th day following the day on which public announcement is first
made of the date of such Special Meeting and of the nominees
proposed by the Board of Directors to be elected at such meeting.
Such written notice shall be signed by the Shareholder of record
who intends to make the nomination (or his or her duly authorized
proxy or other representative), shall bear the date of signature
of such Shareholder or other representative, and shall set forth:
1. The name and address, as they appear on the Corporation's
books, of such Shareholder and the beneficial owner(s), if
any, on whose behalf the nomination is made;
2. The class and number of shares of the Corporation which are
beneficially owned by such Shareholder or beneficial
owner(s);
3. A representation that such Shareholder is a holder of
record of shares of the Corporation entitled to vote at
such meeting and intends to appear in person or by proxy at
the meeting to make the nomination specified in the notice;
4. The name and residence address of the person(s) to be
nominated;
5. A description of all arrangements or understandings between
such Shareholder or beneficial owner(s) and each nominee
and any other person(s) (naming such person(s)) pursuant to
which the nomination is to be made by such Shareholder;
6. Such other information regarding each nominee proposed by
such Shareholder as would be required to be disclosed in
solicitations of proxies for elections of Directors or
would be otherwise required to be disclosed, in each case
pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended, including any infirmation that
would required to be included in a proxy statement filed
pursuant to Regulation 14A had the nominee been nominated
by the Board of Directors; and
7. The written consent of each nominee to be named in a proxy
statement and to serve as a Director of the Corporation if
so elected.
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SECTION 3. NOTICE OF ANNUAL OR SPECIAL MEETING. Notice may be
communicated by telegraph, teletype, facsimile or other form of wire or wireless
communication, or by mail or private carrier, and, if these forms of personal
notice are impracticable, notice may be communicated by public announcement.
Such notice stating the place, day and hour of the meeting and, in case of a
Special Meeting, a description of each purpose for which the Special Meeting is
called, shall be communicated or sent not less than ten days nor more than 60
days before the date of the meeting, by or at the direction of the Chairman of
the Board or the Secretary, or other Officer or persons calling the meeting, to
each Shareholder of record entitled to vote at such meeting. Written notice by
the Corporation to its Shareholders is effective when mailed and may be
addressed to the Shareholder's address shown in the Corporation's current record
of Shareholders. Unless otherwise required by the Wisconsin Business
Corporation Law, notice of an Annual Meeting need not include a description of
the purpose for which the meeting is called.
SECTION 4. UNANIMOUS CONSENT WITHOUT MEETING. Any action that may be
taken at a meeting of the Shareholders may be taken without a meeting if: (a) a
consent in writing setting forth the action so taken shall be signed by all of
the Shareholders entitled to vote with respect to the subject matter thereof; or
(b) if the Articles of Incorporation so provide, by Shareholders who would be
entitled to vote at a meeting of those shares with voting power to cast not less
than the minimum number or, in the case of voting by voting groups, numbers of
votes that would be necessary to authorize or take the action at a meeting at
which all shares entitled to vote were present and voted.
SECTION 5. CLOSING OF STOCK TRANSFER BOOKS OR FIXING OF RECORD DATE.
A Shareholder shall mean the person in whose name shares are registered in the
stock transfer books of the Corporation or the beneficial owner of shares to the
extent of the rights granted by a nominee certificate on file with the
Corporation. Such nominee certificates, if any, shall be reflected in the stock
transfer books of the Corporation. For the purpose of determining Shareholders
entitled to notice of or to vote at any meeting of Shareholders or any
adjournment or postponement thereof, Shareholders entitled to demand a Special
Meeting, Shareholders entitled to receive payment of any dividend or in order to
make a determination of Shareholders for any other proper purpose, the Board of
Directors may provide that the stock transfer books shall be closed for a stated
period but not to exceed, in any case, 70 days. If the stock transfer books
shall be closed for the purpose of determining Shareholders entitled to the
notice of or to vote at a meeting of Shareholders, such books shall be closed
for at least ten days immediately preceding such meeting. In lieu of closing
the stock transfer books, the Board of Directors may fix in advance a date as
the record date for any such determination of Shareholders, such date in any
case to be not more than 70 days and, in case of a meeting of Shareholders, not
less than ten days prior to the date on which the particular action requiring
such determination of Shareholders is to be taken. If the stock transfer books
are not closed and no record date is fixed for the determination of Shareholders
entitled to notice of or to vote at a meeting of Shareholders or Shareholders
entitled to receive payment of a dividend, the close of business on the date on
which notice of the meeting is mailed or on the date on which the resolution of
the Board of Directors declaring such dividend is adopted, as the case may be,
shall be the record date for such
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<PAGE>
determination of Shareholders. When a determination of Shareholders entitled to
vote at any meeting of Shareholders has been made as provided in this Section,
such determination shall be applied to any adjournment or postponement thereof
except when the Board of Directors fixes a new record date or date for the
closing of the stock transfer books, which it shall do if the meeting is
adjourned or postponed to a date more than 120 days after the date fixed for the
original meeting, or the determination has been made through the closing of the
stock transfer books and the stated period of closing has expired.
SECTION 6. VOTING RECORD. The Secretary shall, before each meeting of
Shareholders, make a complete list of the Shareholders entitled to vote at such
meeting, or any adjournment thereof, with the address of and the number of
shares held by each Shareholder. Such record shall be produced and kept open at
the time and place of the meeting and shall be subject to the inspection of any
Shareholder during the whole time of the meeting or any adjournment thereof for
the purposes of the meeting. The original stock transfer books shall be prima
facie evidence as to who are the Shareholders entitled to examine such record or
transfer books or to vote at any meeting of Shareholders. Failure to comply
with the requirements of this section shall not affect the validity of any
action taken at such meeting.
SECTION 7. QUORUM. Shares entitled to vote as a separate voting group
as defined in the Wisconsin Business Corporation Law may take action on a matter
at a meeting only if a quorum of those shares exists with respect to that
matter. Unless the Articles of Incorporation or the Wisconsin Business
Corporation Law provide otherwise, a majority of the votes entitled to be cast
on the matter by a voting group constitutes a quorum of that voting group for
action on that matter. Once a share is represented for any purposes at a
meeting, other than for the purpose of objecting to holding the meeting or
transacting business at the meeting, it is considered present for purposes of
determining whether a quorum exists, for the remainder of the meeting and for
any adjournment of that meeting unless a new record date is or must be set for
that adjourned or postponed meeting. If a quorum exists, action on a matter by
a voting group is approved if the votes cast within the voting group favoring
the action exceed the votes cast opposing the action, unless the Articles of
Incorporation or the Wisconsin Business Corporation Law require a greater number
of affirmative votes. "Voting group" means: (a) All shares of one or more
classes or series that under the Articles of Incorporation or the Wisconsin
Business Corporation Law are entitled to vote and be counted together
collectively on a matter at a meeting of Shareholders; or (b) All shares that
under the Articles of Incorporation or the Wisconsin Business Corporation Law
are entitled to vote generally on a matter. Though less than a quorum of the
outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified.
SECTION 8. PROXIES. At all meetings of Shareholders, a Shareholder
entitled to vote may vote in person or by proxy. A Shareholder may appoint a
proxy to vote or otherwise act for the Shareholder by signing an appointment
form, either personally or by his or her attorney-in-fact. Such proxy
appointment is effective when received by the Secretary before or
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at the time of the meeting. Unless otherwise provided in the appointment form
of proxy, a proxy appointment may be revoked by the Shareholder at any time
before it is voted, either by written notice filed with the Secretary or the
acting Secretary of the meeting or by oral notice given by the Shareholder to
the presiding officer during the meeting. The presence of a Shareholder who has
filed his or her proxy appointment shall not of itself constitute a revocation.
No proxy appointment shall be valid after eleven months from the date of its
execution, unless otherwise provided in the appointment form of proxy. The
Board of Directors shall have the power and authority to make rules establishing
presumptions as to the validity and sufficiency of proxy appointments.
SECTION 9. VOTING OF SHARES. Each outstanding share shall be entitled
to one vote upon each matter submitted to a vote at a meeting of Shareholders,
except to the extent that the voting rights of the shares of any voting group or
groups are enlarged, limited or denied by the Articles of Incorporation.
SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS.
A. OTHER CORPORATIONS. Shares standing in the name of another
corporation may be voted either in person or by proxy, by the
president of such corporation or any other officer appointed by
such president. An appointment form of proxy executed by any
principal officer of such other corporation or assistant thereto
shall be conclusive evidence of the signer's authority to act, in
the absence of express notice to the Corporation, given in writing
to the Secretary, or the designation of some other person by the
board of directors or by the bylaws of such other corporation.
B. LEGAL REPRESENTATIVES AND FIDUCIARIES. Shares held by an
administrator, executor, guardian, conservator, trustee in
bankruptcy, receiver or assignee for creditors may be voted by
him, her or it either in person or by proxy, without a transfer of
such shares into his, her or its name, provided that there is
filed with the Secretary before or at the time of meeting proper
evidence of his, her or its incumbency and the number of shares
held by him, her or it either in person or by proxy. An
appointment form of proxy executed by a fiduciary shall be
conclusive evidence of the signer's authority to act, in the
absence of express notice to the Corporation, given in writing to
the Secretary, that such manner of voting is expressly prohibited
or otherwise directed by the document creating the fiduciary
relationship.
C. PLEDGEES. A Shareholder whose shares are pledged shall be
entitled to vote such shares until the shares have been
transferred into the name of the pledgee, and thereafter the
pledgee shall be entitled to vote the shares so transferred;
provided, however, a pledgee shall be entitled to vote shares held
of record by the pledgor if the Corporation receives acceptable
evidence of the pledgee's authority to sign.
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D. TREASURY STOCK AND SUBSIDIARIES. Neither treasury shares, nor
shares held by another corporation if a majority of the shares
entitled to vote for the election of directors of such other
corporation is held by the Corporation, shall be voted at any
meeting or counted in determining the total number of outstanding
shares entitled to vote, but shares of its own issue held by the
Corporation in a fiduciary capacity, or held by such other
corporation in a fiduciary capacity, may be voted and shall be
counted in determining the total number of outstanding shares
entitled to vote.
E. MINORS. Shares held by a minor may be voted by such minor in
person or by proxy and no such vote shall be subject to
disaffirmance or avoidance, unless prior to such vote the
Secretary has received written notice or has actual knowledge that
such Shareholder is a minor. Shares held by a minor may be voted
by a personal representative, administrator, executor, guardian or
conservator representing the minor if evidence of such fiduciary
status, acceptable to the Corporation, is presented.
F. INCOMPETENTS AND SPENDTHRIFTS. Shares held by an incompetent or
spendthrift may be voted by such incompetent or spendthrift in
person or by proxy and no such vote shall be subject to
disaffirmance or avoidance, unless prior to such vote the
Secretary has actual knowledge that such Shareholder has been
adjudicated an incompetent or spendthrift or actual knowledge of
judicial proceedings for appointment of a guardian. Shares held
by an incompetent or spendthrift may be voted by a personal
representative, administrator, executor, guardian or conservator
representing the minor if evidence of such fiduciary status,
acceptable to the Corporation, is presented.
G. JOINT TENANTS. Share registered in the names of two or more
individuals who are named in the registration as joint tenants may
be voted in person or by proxy signed by any one or more of such
individuals if either (i) no other such individual or his or her
legal representative is present and claims the right to
participate in the voting of such shares or prior to the vote
files with the Secretary a contrary written voting authorization
or direction or written denial of authority of the individual
present or signing the appointment form of proxy proposed to be
voted, or (ii) all such other individuals are deceased and the
Secretary has no actual knowledge that the survivor has been
adjudicated not to be the successor to the interests of those
deceased.
SECTION 11. CONDUCT OF MEETINGS. The Chairman of the Board, or in the
Chairman's absence, the President, or, in their absence such Vice President as
is designated by the Board of Directors, shall call the meeting to order and act
as Chairperson of the meeting. Only persons nominated in accordance with the
procedures set forth in Sections 1 and 2 of this Article II, shall be eligible
to serve as Directors. Only such business as shall have been brought before a
meeting in accordance with the procedures set forth in Article II, Sections 1
and 2, shall be eligible to be
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conducted. The Chairperson of the meeting shall have the power and duty to
determine whether any nomination or any business proposed to be brought before
the meeting was made in accordance with the procedures set forth in Article II,
Sections I and 2, and, if any proposed nomination or business is not in
compliance therewith, to declare that such defective proposal shall be
disregarded.
SECTION 12. PUBLIC ANNOUNCEMENT. For purposes of this Article II,
"public announcement" shall mean disclosure in a press release reported by the
Dow Jones News Service, Associated Press, or comparable national news service or
in a document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of
1934, as amended.
SECTION 13. INVALIDITY. The Chairperson, upon recommendation of the
Secretary, may reject a vote, consent, waiver or proxy appointment, if the
Secretary or other Officer or agent of the Corporation who is authorized to
tabulate votes, acting in good faith, has reasonable doubt about the validity of
the signature on it or about the signatory's authority to sign for the
Shareholder. The Corporation and its Officer or agent who accepts or rejects a
vote, consent, waiver or proxy appointment in good faith and in accordance with
the Wisconsin Business Corporation Law shall not be liable for damages to the
Shareholders for consequences of the acceptance or rejection.
SECTION 14. WAIVER OF NOTICE. A Shareholder may waive any notice
required by the Wisconsin Business Corporation Law, the Articles of
Incorporation, or these Bylaws before or after the date and time stated in the
notice. The waiver shall be in writing and signed by the Shareholder entitled
to the notice, contain the same information that would have been required in the
notice under the Wisconsin Business Corporation Law (except that the time and
place of meeting need not be stated), and be delivered to the Corporation for
inclusion in the corporate records. A Shareholder's attendance at any Annual
Meeting or Special Meeting, in person or by proxy, waives objection to all of
the following: (a) lack of notice or defective notice of the meeting, unless the
Shareholder promptly upon arrival or at the beginning of the meeting objects to
holding or transacting business at the meeting; and (b) consideration of a
particular matter at the meeting that is not within the purpose described in the
meeting notice, unless the Shareholder objects to considering the matter when it
is presented.
ARTICLE III. BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. All corporate powers shall be exercised by
or under the authority of, and the business and affairs of the Corporation shall
be managed under the direction of, the Board of Directors, subject to any
limitation set forth in the Bylaws or the Articles of Incorporation.
SECTION 2. NUMBER OF DIRECTORS. The number of Directors shall be
nine, all of whom shall be nominated and elected by the Shareholders as provided
herein.
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SECTION 3. TERM OF OFFICE. Elected Directors shall hold office for a
term of three years and until their successors are elected and qualified, except
as otherwise provided in this Section, or until their death, resignation or
removal. The Board of Directors shall be divided into three classes of not less
than three nor more than five Directors each. The term of office of the first
class of Directors shall expire at the first annual meeting after their initial
election and when their successors are elected and qualified, the term of office
of the second class shall expire at the second annual meeting after their
initial election and when their successors are elected and qualified and the
terms of office of the third class shall expire at the third annual meeting
after their initial election and when their successors are elected and
qualified. At each annual meeting after the initial election and
classification, the class of Directors whose term expires at the time of such
election shall be elected to hold office until the third succeeding annual
meeting and until their successors are elected and qualified.
SECTION 4. NOMINATIONS. Nominations for the election of directors
shall be made in accordance with the provisions of Sections 1 and 2 of Article
II hereof, which requirements are hereby incorporated by reference in this
Section 4.
SECTION 5. REGULAR MEETINGS. A Regular Meeting of the Board of
Directors shall be held without other notice than this Section 5 immediately
after, and at the same place as, the Annual Meeting of Shareholders, for
election of corporate officers and transaction of other business. The Board of
Directors may provide by resolution the time and place for holding additional
meetings without other notice than such resolution.
SECTION 6. SPECIAL MEETINGS. Special Meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board or the
Secretary upon written request of any three Directors. The Secretary shall give
sufficient notice of such meeting, to be not less than 48 hours, in person or by
mail, telephone, telegraph, teletype, facsimile or other form of wire or
wireless communication as to enable the Directors so notified to attend such
meeting. The Chairman or Secretary who calls the meeting may fix any place,
within or without the State of Wisconsin, as the place for holding any Special
Meeting of the Board of Directors.
SECTION 7. WAIVER OF NOTICE. Whenever any notice is required to be
given to any Director under the Articles of Incorporation or Bylaws or any
provisions of law, a waiver thereof in writing, signed at any time, whether
before or after the time of meeting, by the Director entitled to such notice,
shall be deemed equivalent to the giving of such notice, and the Corporation
shall retain copies of such waivers in its corporate records. A Director's
attendance at or participation in a meeting waives any required notice to him or
her of the meeting unless the Director at the beginning of the meeting or
promptly upon his or her arrival objects to holding the meeting or transacting
business at the meeting and does not thereafter vote for or assent to action
taken at the meeting. Neither the business to be transacted at, nor the purpose
of, any Regular or Special Meeting of the Board of Directors need be specified
in the notice or waiver of notice of such meeting.
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SECTION 8. QUORUM. A majority of the Directors then in office, at a
meeting convened according to the Bylaws, shall constitute a quorum for the
transaction of business; but a majority of the Directors present or
participating (though less than a quorum) may adjourn the meeting from time to
time without further notice.
SECTION 9. VACANCIES. Vacancies, including those created by an
increase in the number of Directors on the Board of Directors, may be filled by
the remaining Directors. A Director elected to fill a vacancy shall serve for
the unexpired term of his or her predecessor. In the absence of action by the
remaining Directors, the Shareholders may fill such vacancy at a Special Meeting
or an Annual Meeting in accordance with the Articles of Incorporation or the
Bylaws.
SECTION 10. REMOVAL. The Shareholders may remove one or more
Directors, with or without cause, at a meeting called for that purpose, the
notice of which reflects that purpose, in accordance with the Wisconsin Business
Corporation Law.
SECTION 11. COMPENSATION. A Director may receive such compensation for
services as is determined by resolution of the Board irrespective of any
personal interest of its members. A Director also may serve the Corporation in
any other capacity and receive compensation therefor. The Board of Directors
also shall have authority to provide for or to delegate authority to an
appropriate committee to provide for reasonable pensions, disability or death
benefits and other benefits or payments, to Directors, Officers and employees
and to their estates, families, dependents or beneficiaries on account of prior
services rendered to the Corporation by such Directors, Officers and employees.
SECTION 12. CONDUCT OF MEETINGS. The Chairman of the Board or, in the
Chairman's absence, the President, or in their absence such Vice President as is
designated by the Board of Directors, shall call meetings of the Board of
Directors to order and shall act as Chairperson of the meeting. The Secretary
shall act as Secretary of all meetings of the Board of Directors but, in the
absence of the Secretary, the presiding Officer may appoint an Assistant
Secretary or any Director or other person present or participating to act as
Secretary of the meeting.
SECTION 13. MANNER OF ACTING. If a quorum is present or participating
when a vote is taken, the affirmative vote of a majority of Directors present or
participating is the act of the Board of Directors or a committee of the Board
of Directors, unless the Wisconsin Business Corporation Law or the Articles of
Incorporation or Bylaws require the vote of a greater number of Directors.
SECTION 14. PRESUMPTION OF ASSENT. A Director who is present at or
participates in a meeting of the Board of Directors or a committee thereof of
which he or she is a member, at which action on any corporate matter is taken,
shall be presumed to have assented to the action taken unless his or her dissent
shall be entered in the minutes of the meeting or unless he or she shall file
his or her written dissent to such action with the person acting as the
Secretary of the
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meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary immediately after the adjournment of the
meeting. Such right to dissent shall not apply to a Director who voted in favor
of such action.
SECTION 15. UNANIMOUS CONSENT WITHOUT MEETING. Any action required or
permitted by the Articles of Incorporation or Bylaws or any provision of law to
be taken by the Board of Directors at a meeting or by resolution may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the Directors then in office.
SECTION 16. MEETING BY TELEPHONE OR BY OTHER COMMUNICATION TECHNOLOGY.
Meetings of the Board of Directors or committees may be conducted by telephone
or by other communication technology in accordance with Section 180.0820 of the
Wisconsin Business Corporation Law or any successor statute.
SECTION 17. COMMITTEES.
A. REGULAR COMMITTEES.
1. GENERAL DESCRIPTION. In order to facilitate the work of
the Board of Directors, the following Regular Committees
shall be elected from the membership of the Board of
Directors at the Regular Meeting held each year (or at such
other time as the Board of Directors may determine):
Executive Committee
Finance Committee
Management Review Committee
Audit Committee
Each Regular Committee shall have three to six members.
The Chairman of the Board of Directors, and in the
Chairman's absence the President, and in their absence,
such Vice President as is designated by the Board of
Directors, shall submit nominations for such Regular
Committee memberships. Regular Committee members shall
hold office until the next Board meeting at which Regular
Committee elections are conducted in accordance with the
Bylaws, and until their successors are elected and
qualified. Each Regular Committee of the Board of
Directors may exercise the authority of the full Board when
the Board is not in session and solely with regard to and
within the scope of the duties and powers delegated to it
in the Bylaws, except that no committee of the Board shall
do any of the following:
(a) Authorize distributions;
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(b) Approve or propose to Shareholders action that the
Wisconsin Business Corporation Law requires be
approved by Shareholders;
(c) Fill vacancies on the Board of Directors or, except
as provided herein, on any of its committees;
(d) Amend the Articles of Incorporation;
(e) Adopt, amend or repeal the Bylaws;
(f) Approve a plan of merger not requiring Shareholder
approval;
(g) Authorize or approve reacquisition of shares, except
according to a formula or method prescribed by the
Board; or
(h) Authorize or approve the issuance or sale or
contract for sale of shares or determine the
designation and relative rights, preferences and
limitations of a class or series of shares, except
that the Board of Directors may authorize a
committee or a senior executive Officer to do so
within limits prescribed by the Board of Directors.
2. THE EXECUTIVE COMMITTEE. The Executive Committee shall:
(a) Approve long range corporate and strategic plans,
including plans for any major borrowing or capital
raising programs;
(b) Advise and consult with management on corporate
policies regarding reserving, reinsurance and other
liabilities;
(c) Approve the annual operating plan;
(d) Approve major changes in policy affecting new
services and programs; and
(e) Carry out such special assignments as the Board of
Directors may, from time to time, give to the
Executive Committee.
3. THE FINANCE COMMITTEE. The Finance Committee shall:
(a) Approve investment policies and plans;
(b) Authorize and approve the investment of funds of the
Corporation;
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(c) Consult with management regarding real estate,
accounts receivable and other assets;
(d) Determine the amount and types of all insurance that
should be carried by the Corporation and authorize
the purchase thereof;
(e) Advise and consult with the management in the
selection of the carriers of such insurance;
(f) Advise and consult with management on corporate tax
policy; and
(g) Carry out such special assignments as the Board of
Directors may, from time to time, give to the
Finance Committee.
4. THE MANAGEMENT REVIEW COMMITTEE. The Management Review
Committee shall:
(a) Evaluate Senior Management (corporate officers)
performance against objectives;
(b) Approve Senior Management development programs;
(c) Approve the Corporation's compensation policy,
including making recommendations and decisions on
any bonuses or incentive plans, and establish the
annual compensation for the Chairman of the Board;
(d) Act as the Nominating Committee for Officers and
Directors and make recommendations to the Board for
types, methods and levels of Directors'
compensation;
(e) Administer the compensation plans for the Officers,
Directors and key employees; and
(f) Carry out such special assignments as the Board of
Directors may, from time to time, give to the
Management Review Committee.
5. THE AUDIT COMMITTEE. The Audit Committee shall:
(a) Select and engage independent certified public
accountants to audit the books, records and
financial transactions of the Corporation;
(b) Review with the independent accountants the scope of
their examination, with particular emphasis on the
areas to which either
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the Audit Committee or the independent accountants
believe special attention should be directed. The
Audit Committee may have the independent accountants
perform such additional procedures as the Audit
Committee or the auditors deem necessary;
(c) Review and approve an annual plan for the financial
audit (internal audit) department;
(d) Review with the independent accountants the
financial statements and auditors' reports thereon;
(e) Review the management letter of the independent
accountants and audit reports by the Corporation's
internal auditors to assure that appropriate action
has been taken by Senior Management as to each item
recommended;
(f) Encourage the independent accountants and the
internal auditors to communicate directly with the
Chairman of the Board and President or, if
necessary, the Chairman of the Audit Committee
whenever any significant recommendation has not been
satisfactorily resolved at the Senior Management
level;
(g) Review conflict of interest statements to assure the
Board of Directors that any conflict of interest has
been duly reported to and reviewed by the Audit
Committee;
(h) Review and approve all related party transactions;
and
(i) Carry out such special assignments as the Board of
Directors may, from time to time, give to the Audit
Committee.
B. SPECIAL COMMITTEES. In addition to the Regular Committees, the
Board of Directors may, from time to time, establish Special Committees and
specify the composition, functions and authority of any Special Committee.
C. VACANCIES: TEMPORARY APPOINTMENTS. When, for any cause, a vacancy
occurs in a Regular Committee, the remaining committee members, by majority
vote, may fill such vacancy by a temporary appointment of a Director not on the
subject committee to fill the vacancy until the next meeting of the Board, at
which time the Board may fill the vacancy.
D. COMMITTEE MINUTES AND REPORTS. All of the foregoing committees
shall keep minutes and records of all of their meetings and activities and shall
report the same to the Board of Directors at its next regular meeting. Such
minutes and records shall be available for inspection by the Directors at all
times.
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ARTICLE IV. OFFICERS
SECTION 1. GENERALLY. The principal Officers of the Corporation shall
be a Chairman of the Board (Chief Executive Officer), a President, one or more
Vice Presidents, a Secretary and a Treasurer. The Board of Directors shall
elect the principal Officers annually at the Regular Meeting. All Officers
shall hold office for a period of one year and until their successors are duly
elected and qualified, or until their prior death, resignation or removal. Each
Officer has the authority and shall perform the duties set forth in the Bylaws
or, to the extent not inconsistent with the Bylaws, the duties prescribed by the
Board of Directors or by direction of an Officer authorized by the Bylaws or by
the Board of Directors to prescribe the duties of other Officers.
SECTION 2. REMOVAL. Any Officer or agent may be removed by the Board
of Directors with or without cause whenever, in its judgment, the best interests
of the Corporation would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Election or
appointment shall not of itself create contract rights.
SECTION 3. VACANCIES. A vacancy in any principal office because of
death, resignation, removal or otherwise, shall be filled by the Board of
Directors for the unexpired portion of the term. The Board of Directors may,
from time to time, omit to elect one or more Officers, or may omit to fill a
vacancy, and in such case, the designated duties of such Officer, unless
otherwise provided in the Bylaws, shall be discharged by the Chairman of the
Board or such other Officer as he or she may designate.
SECTION 4. CHAIRMAN OF THE BOARD. The Chairman of the Board, who
shall also be the Chief Executive Officer, shall preside at all meetings of the
Shareholders and of the Director.
SECTION 5. PRESIDENT. The President shall have general supervision of
the business and affairs of the Corporation. The President may sign and execute
all authorized bonds, notes, checks, contracts, deeds, mortgages, instruments of
assignment or pledge or other obligations of the Corporation in the name of the
Corporation.
SECTION 6. VICE PRESIDENTS. Should the Chairman of the Board or the
President be absent or unable to act, the Board of Directors shall designate one
or more Vice Presidents or other Officer to discharge the duties of the vacant
office with the same power and authority as is vested in that office. The Vice
Presidents shall perform such other duties as from time to time may be assigned
to them by the President or the Board of Directors.
SECTION 7. SECRETARY. The Secretary shall keep a record of the
minutes of the meetings of the Shareholders and of the Board of Directors. He
or she shall countersign all instruments and documents executed by the
Corporation, affix to instruments and documents the seal of the Corporation when
necessary or required keep in books therefor the transactions of the
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Corporation, see that all notices are duly given in accordance with the
provisions of the Bylaws or as required by law and perform such other duties as
usually are incident to such office or may be assigned by the Chairman of the
Board, the President or the Board of Directors.
SECTION 8. TREASURER. The Treasurer, subject to the control of the
Board of Directors, shall collect, receive, and safely keep all monies, funds
and securities of the Corporation and attend to all its pecuniary affairs. He
or she shall keep full and complete accounts and records of all its
transactions, of sums owing to or by the Corporation and all rents and profits
in its behalf.
SECTION 9. ASSISTANTS AND ACTING OFFICERS. The Chairman of the Board,
the President and the Board of Directors shall have the power to appoint any
person to act as assistant to any Officer, or as agent for the Corporation in
the Officer's stead, or to perform the duties of such Officer whenever for any
reason it is impracticable for the Officer to act personally, and the assistant
or acting Officer or other agent so appointed by the Chairman of the Board, the
President or the Board of Directors shall have the power to perform all the
duties of the office to which he or she is so appointed to be assistant, or as
to which he or she is so appointed to act, except as such power otherwise may be
defined or restricted by the Chairman of the Board, the President or the Board
of Directors.
SECTION 10. SALARIES. The salaries of the principal Officers shall be
fixed from time to time by the Board of Directors or by a duly authorized
committee thereof and no Officer shall be prevented from receiving such salary
by reason of the fact that he or she is also a Director of the Corporation.
ARTICLE V. FUNDS OF THE CORPORATION
SECTION 1. FUNDS. All funds of the Corporation shall be deposited or
invested as may be authorized from time to time by the Board of Directors or
appropriate committee under authorization of the Board of Directors.
SECTION 2. NAME. All investments and deposits of funds of the
Corporation shall be made and held in its corporate name, except that securities
kept under a custodial agreement or trust arrangement with a bank or banking and
trust company may be issued in the name of a nominee of such bank or banking and
trust company and except that securities may be acquired and held in bearer
form.
SECTION 3. LOANS. All loans contracted on behalf of the Corporation
and all evidences of indebtedness that are issued in the name of the Corporation
shall be under the authority of a resolution of the Board of Directors. Such
authorization may be general or specific.
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SECTION 4. DISBURSEMENTS. All monies of the Corporation shall be
disbursed by check, draft or written order only, and all checks and orders for
the payment of money shall be signed by such Officer or Officers as may be
designated by the Board of Directors. The Officers and employees of the
Corporation handling funds and securities of the Corporation shall give surety
bonds in such sums as the Board of Directors or appropriate committee may
require.
SECTION 5. PROHIBITED TRANSACTIONS. No Director or Officer of the
Corporation shall borrow money from the Corporation or receive any compensation
for selling, aiding in the sale, negotiating for the sale of any property
belonging to the Corporation or for negotiating any loan for or by the
Corporation.
SECTION 6. VOTING OF SECURITIES OWNED BY THE CORPORATION. Subject
always to the directions of the Board of Directors:
A. Any shares or other securities issued by any other corporation and
owned or controlled by the Corporation may be voted at any meeting
of security holders of such other corporation by the Chairman of
the Board, the President or, in their absence, any Vice President
of the Corporation who may be present and designated by the Board
of Directors; and
B. Whenever, in the judgment of the Chairman of the Board, the
President or, in their absence, a designated Vice President, it is
desirable for the Corporation to execute a proxy or written
consent in respect to any shares or other securities issued by any
other corporation and owned by the Corporation, such proxy or
consent shall be executed in the name of the Corporation by the
Chairman of the Board, the President or a designated Vice
President of the Corporation in the order as provided in Paragraph
A of this Section 6, without necessity of any authorization by the
Board of Directors, affixation of corporate seal or
countersignature or attestation by another Officer. Any person or
persons designated in the manner above stated as the proxy or
proxies of the Corporation shall have full right, power and
authority to vote the shares or other securities issued by such
other corporation and owned by the Corporation the same as such
shares or other securities might be voted by the Corporation.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares
of the Corporation shall be in such form, consistent with law, as shall be
determined by the Board of Directors. Such Certificates shall be signed by the
Chairman of the Board, the President or a Vice President and the Secretary or by
another Officer designed by the Chairman of the Board, the President or the
Board of Directors. All Certificates shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be entered on the stock transfer
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books of the Corporation. All Certificates surrendered to the Corporation for
transfer shall be canceled and no new Certificate shall be issued until the
former Certificate for a like number of shares shall have been surrendered and
canceled, except as provided in Section 6 of this Article VI.
SECTION 2. FACSIMILE SIGNATURES AND SEAL. The seal of the
Corporation, if any, on any Certificates may be a facsimile. The signature of
the Chairman of the Board, the President or other authorized Officer upon a
Certificate may be a facsimile if the Certificate is manually signed on behalf
of a transfer agent or a registrar, other than the Corporation itself or an
employee of the Corporation.
SECTION 3. SIGNATURE BY FORMER OFFICER. If any Officer who has signed
or whose facsimile signature has been placed upon any Certificate shall have
ceased to be an Officer before such Certificate is issued, it may be issued by
the Corporation with the same effect as if he or she were an Officer at the date
of its issue.
SECTION 4. TRANSFER OF SHARES. Prior to due presentment of a
Certificate for registration of transfer, the Corporation may treat the
Shareholder of such shares as the person exclusively entitled to vote, to
receive notifications and otherwise to have and exercise all the rights and
powers of an owner. Where a Certificate is presented to the Corporation with a
request to register for transfer, the Corporation shall not be liable to the
owner or any other person suffering loss as a result of such registration of
transfer if:
A. There were on or with the Certificate the necessary endorsements;
and
B. The Corporation had no duty to inquire into adverse claims or has
discharged any such duty.
The Corporation may require reasonable assurance that said endorsements are
genuine and effective and in compliance with such other regulations as may be
prescribed by or under the authority of the Board of Directors.
SECTION 5. RESTRICTIONS ON TRANSFER. The face or reverse side of each
Certificate shall bear a conspicuous notation of any restriction imposed by the
Corporation upon the transfer of such shares represented by a Certificate.
SECTION 6. LOST, DESTROYED OR STOLEN CERTIFICATES. Where the owner
claims that his or her Certificate has been lost, destroyed or wrongfully taken,
no Certificate shall be issued in place thereof unless the owner:
A. Files with the Corporation an affidavit stating that such
Certificate was lost, destroyed or stolen before the Corporation
has notice that such shares have been acquired by a bona fide
purchaser;
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B. Files with the Corporation a sufficient indemnity bond; and
C. Satisfies such other reasonable requirements as may be prescribed
by or under the authority of the Board of Directors.
SECTION 7. CONSIDERATION FOR SHARES. The shares of the Corporation
may be issued for such consideration as shall be fixed from time to time by the
Board of Directors, provided that any shares having a par value shall not be
issued for a consideration less than the par value thereof. The consideration
to be received for shares may consist of any tangible or intangible property or
benefit to the Corporation, including cash, promissory notes, services
performed, contracts for services to be performed or other securities of the
Corporation. When the Corporation receives the consideration for which the
Board of Directors authorized the issuance of shares, the shares issued for that
consideration are fully paid and nonassessable, except as provided by Section
180.0622(2)(b) of the Wisconsin Business Corporation Law, or any successor
statute, which may require further assessment for unpaid wages to employees
under certain circumstances. The Corporation may place in escrow shares issued
for a contract for future services or benefits or a promissory note, or make
other arrangements to restrict the transfer of the shares, and may credit
distributions in respect of the shares against their purchase price, until the
services are performed, the benefits are received or the note is paid. If the
services are not performed, the benefits are not received or the note is not
paid, the Corporation may cancel, in whole or in part, the shares escrowed or
restricted and the distributions credited.
SECTION 8. UNCERTIFICATED SHARES. In accordance with Section 180.0626
of the Wisconsin Business Corporation Law, or any successor statute, the Board
of Directors may issue any shares of any of its classes or series without
Certificates. The authorization does not affect shares already represented by
Certificates unless the Certificates are surrendered to the Corporation. Within
a reasonable time after the issuance or transfer of shares without Certificates,
the Corporation shall send the Shareholder a written statement of the
information required on share certificates by Sections 180.0625 and 180.0627, or
any successor statutes, if applicable, of the Wisconsin Business Corporation
Law, and by the Bylaws. The Corporation shall maintain at its offices or at the
office of its transfer agent, an original or duplicate stock transfer book
containing the names and addresses of all Shareholders and the number of shares
held by each Shareholder. If the shares are uncertificated, the Corporation
shall be entitled to recognize the exclusive right of a person registered on its
books as the owner of shares for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such shares on the part
of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of the State of Wisconsin.
SECTION 9. TRANSFER AGENT AND REGISTRAR. The Corporation may maintain
one or more transfer offices or agencies, each in charge of a transfer agent
designated by the Board of Directors, where the shares of stock of the
Corporation shall be transferable. The Corporation also may maintain one or
more registry offices, each in charge of a registrar designated by the Board of
Directors, where such shares of stock be registered. The same person or entity
may be both a transfer agent and registrar.
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SECTION 10. STOCK REGULATIONS. The Board of Directors shall have the
power and authority to make all such further rules and regulations not
inconsistent with the laws of the State of Wisconsin as it may deem expedient
concerning the issue, transfer and registration of certificates representing
shares of the Corporation.
ARTICLE VII.
INDEMNIFICATION AND LIABILITY OF OFFICERS AND DIRECTORS
SECTION 1. INDEMNIFICATION.
A. Any person, or such person's estate or personal representative,
made or threatened with being made a party to any action, suit,
arbitration, or proceeding (civil, criminal, administrative, or
investigative, whether formal or informal), which involves
foreign, federal, state or local law, by reason of the fact that
such person is or was a Director or Officer of the Corporation or
of any corporation or other enterprise for which he or she served
at the Corporation's request as a director, officer, partner,
trustee, member of any decision-making committee, employee, or
agent, shall be indemnified by the Corporation for all reasonable
expenses incurred in the proceeding to the extent he or she has
been successful on the merits or otherwise.
B. In cases where a person described in Paragraph A of this Section 1
is not successful on the merits or otherwise, the Corporation
shall indemnify such person against liability and reasonable
expenses incurred by him or her in any such proceeding, unless
liability was incurred because the person breached or failed to
perform a duty he or she owed to the Corporation and the breach or
failure to perform constituted any of the following:
1. A wilful failure to deal fairly with the Corporation or its
Shareholders in connection with a matter in which the
Director or Officer had a material conflict of interest;
2. 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;
3. A transaction from which the Director or Officer derived an
improper personal profit; or
4. Wilful misconduct.
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C. The determination whether indemnification shall be required under
Paragraph B of this Section 1 shall be made according to one of
the following methods selected by the Director or Officer:
1. By a majority vote of a quorum of the Board of Directors
consisting of Directors who are not at the time parties to
the same or related proceedings. If a quorum of such
disinterested Directors cannot be obtained, by majority
vote of a committee duly appointed by the Board of
Directors and consisting solely of two or more Directors
who are not at the time parties to the same or related
proceedings. Directors who are parties to the same or
related proceedings may participate in the designation of
members of the committee;
2. By independent legal counsel selected by a quorum of the
Board of Directors or its committee in the manner
prescribed in Paragraph 1 of this Section 1 or, if unable
to obtain such a quorum or committee, by a majority vote of
the Board of Directors, including Directors who are parties
to the same or related proceedings; or
3. By the court conducting the proceedings or another court of
competent jurisdiction, either on application by the
Director or Officer for an initial determination or on
application for review of an adverse determination under
Clause 1 or 2 of this Paragraph C.
D. The termination of a proceeding by judgment, order, settlement or
conviction, or upon a plea of no contest or an equivalent plea,
does not, by itself, create a presumption that indemnification of
the Director or Officer is not required.
E. A Director or Officer who seeks indemnification under this Section
1 shall make a written request to the Corporation.
F. Upon written request by a Director or Officer who is a party to a
proceeding described in Paragraph A of this Section 1, the
Corporation may pay or reimburse his or her reasonable expenses as
incurred if the Director or Officer provides the Corporation with
all of the following:
1. A written affirmation of his or her good faith belief that
he or she has not breached or failed to perform his or her
duties to the Corporation; and
2. A written undertaking, executed personally or on his or her
behalf, to repay the allowance and reasonable interest
thereon, to the extent that it is ultimately determined
under Clause 1 or 2 of Paragraph C of this Section 1, that
indemnification is not required or to the extent that
indemnification is not ordered by a court under Clause 3 of
Paragraph C of this Section 1.
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The undertaking under this Clause 2 shall be an unlimited
general obligation of the Director or Officer, may be
accepted without reference to his or her ability to repay
the allowance and may be secured or unsecured.
G. Paragraphs A through F of this Section 1 shall also apply where a
person or such person's estate or personal representative is made
or threatened with being made a party to any proceeding described
in Paragraph A of this by reason of the fact that such person is
or was an employee of the Corporation, except that in addition to
the categories of conduct set forth in Paragraph B of this Section
1 in relation to which the Corporation has no duty to indemnify,
the Corporation also shall have no duty to indemnify the employee
against liability and reasonable expenses incurred by him or her
in any such proceeding if liability was incurred because the
person breached or failed to perform a duty he or she owed to the
Corporation and the breach or failure to perform constituted
material negligence or material misconduct in performance of the
employee's duties to the Corporation.
H. Unless a Director or Officer of the Corporation has knowledge that
makes reliance unwarranted, a Director or Officer, in discharging
his or her duties to the Corporation, may rely on information,
opinions, reports or statements, any of which may be written or
oral, formal or informal, including financial statements and other
financial data, if prepared or presented by any of the following:
1. An Officer or employee of the Corporation whom the Director
or Officer believes in good faith to be reliable and
competent in the matters presented;
2. Legal counsel, public accountants or other persons as to
matters the Director or Officer believes in good faith are
within the person's professional or expert competence; or
3. In the case of reliance by a Director, a committee of the
Board of Directors of which the Director is not a member if
the Director believes in good faith that the committee
merits confidence.
This Paragraph H does not apply to the liability of a Director for
improper declaration of dividends, distribution of assets,
corporate purchase of its own shares, distribution of assets to
Shareholders during liquidation, corporate loans made to an
Officer or Director under Wisconsin Business Corporation Law
Section 180.0832(1) or the reliance of a Director on financial
information represented as correct by Officers or independent or
certified public accountants under Wisconsin Business Corporation
Law Section 180.0826.
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I. In discharging his or her duties to the Corporation and in
determining what he or she believes to be in the best interest of
the Corporation, a Director or Officer may, in addition to
considering the effects of any action on Shareholders, consider
the following:
1. The effects of the action on employees, suppliers and
customers of the Corporation;
2. The effects of the action on communities in which the
Corporation operates; or
3. Any other factor the Director or Officer considers
pertinent.
SECTION 2. LIMITED LIABILITY OF DIRECTORS AND OFFICERS TO THE
CORPORATION AND SHAREHOLDERS.
A. Except as provided in Paragraph B of this Section 2, a Director or
Officer is not liable to the Corporation, its Shareholders or any
person asserting rights on behalf of the Corporation or
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 following:
1. A wilful failure to deal with the Corporation or
Shareholders in connection with a matter in which the
Director or Officer had a material conflict of interest;
2. 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;
3. A transaction from which the Director or Officer derived an
improper personal profit; or
4. Wilful misconduct.
B. This Section 2 does not apply to the liability of a Director or
Officer for improper declaration of dividends, distribution of
assets, corporate purchase of its own shares, or distribution of
assets to Shareholders during liquidation, or for corporate loans
made to an Officer or Director under Wisconsin Business
Corporation Law Section 180.0832(1).
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ARTICLE VIII. CORPORATE DIVIDENDS
The Board of Directors may from time to time declare dividends on its
outstanding shares in the manner and upon the terms and conditions provided by
law and its Articles of Incorporation.
ARTICLE IX. CORPORATE SEAL
The Board of Directors may provide a corporate seal which may be circular
in form and may have inscribed thereon the name of the Corporation and the state
of incorporation and the words "Corporate Seal."
ARTICLE X. FISCAL YEAR
The fiscal year shall be set by the Board of Directors.
ARTICLE XI. AMENDMENTS
Section 1. BY SHAREHOLDERS. The Bylaws may be altered, amended or
repealed and new bylaws may be adopted by the Shareholders by affirmative vote
of not less than a majority of the shares present or represented at an Annual or
Special Meeting of the Shareholders at which a quorum is in attendance.
SECTION 2. BY DIRECTORS. The Bylaws also may be altered, amended or
repealed and new bylaws may be adopted by the Board of Directors by affirmative
vote of a majority of the number of Directors present at or participating in any
meeting at which a quorum is in attendance; but no bylaw adopted by the
Shareholders shall be amended or repealed by the Board of Directors if such
bylaw so provides.
SECTION 3. IMPLIED AMENDMENTS. Any action taken or authorized by the
Shareholders or by the Board of Directors, which would be inconsistent with the
Bylaws then in effect but is taken or authorized by affirmative vote of not less
than the number of shares or the number of Directors required to amend the
Bylaws so that the Bylaws would be consistent with such action, shall be given
the same effect as though the Bylaws had been temporarily amended or suspended
so far, but only so far, as is necessary to permit the specific action so taken
or authorized.
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EMPLOYEE BENEFITS AGREEMENT
This EMPLOYEE BENEFITS AGREEMENT (the "Agreement") is dated as of
_________________ ___, 1998 by and between United Wisconsin Services, Inc.,
("UWS") a Wisconsin corporation, and Newco/UWS, Inc. ("Newco/UWS"), a Wisconsin
corporation, which is a newly created corporation.
WHEREAS, the Board of Directors of UWS has decided to transfer certain
business and subsidiaries to Newco/UWS, distribute all of the stock of Newco/UWS
to the shareholders of UWS in a transaction intended to qualify under Section
355 of the Code (the "Distribution") and change the name of UWS to American
Medical Security Group, Inc. ("AMSG");
WHEREAS, in connection with the Distribution, UWS, and Newco/UWS desire to
provide for the allocation of assets and liabilities and other matters relating
to employee benefit plans and compensation arrangements;
WHEREAS, in connection with the Distribution, all of the employees
currently employed by UWS will become employees of Newco/UWS and it is therefore
appropriate to transfer sponsorship of substantially all benefit plans sponsored
by UWS to Newco/UWS;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, UWS and Newco/UWS agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the term defined):
1. AMSG DIRECTOR: any director of AMSG immediately after the Distribution
Date.
2. AMSG EMPLOYEE: any individual who immediately after the Distribution Date
is an employee of a member of the AMSG Group.
3. AMSG FORMER EMPLOYEE: any terminated employee of an employer in the AMSG
Group or any predecessor of such employer other than a Newco/UWS Former
Employee.
4. AMSG GROUP: AMSG and the Subsidiaries of AMSG after the Distribution Date.
5. AMSG INDEMNITEE: each member of the AMSG Group and each of their
respective directors, officers, employees and agents (but only in their
capacities as such) and each of the heirs, executors, successors and assigns of
any of the foregoing.
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6. AMSG SUBSIDIARY: any subsidiary of AMSG after the Distribution Date.
7. BCBSUW: Blue Cross & Blue Shield United of Wisconsin.
8. BENEFIT PLAN: any Plan, existing on or prior to the Distribution Date
which was established by UWS or any member of the AMSG Group or the Newco/UWS
Group, or any predecessor or affiliate of any of the foregoing, to which UWS or
any member of the AMSG Group or the Newco/UWS Group contributes, has
contributed, is required to contribute or has been required to contribute, or
under which any employee, former employee, director or former director of any
member of the AMSG Group or the Newco/UWS Group or any predecessor or affiliate
of the foregoing, or any beneficiary thereof is covered, is eligible for
coverage or has benefits rights.
9. CODE: the Internal Revenue Code of 1986, as amended.
10. CURRENT PLAN YEAR: the plan year during which the Distribution Date
occurs.
11. DEFERRED COMPENSATION PLANS: the United Wisconsin Services, Inc. Voluntary
Deferred Compensation Plan, the UWSI Deferred Compensation Plan for Directors,
the Thomas R. Hefty Supplemental Compensation Agreement, the Samuel V. Miller
Employment and Noncompetition Agreement and any other deferred compensation
plans funded through the Deferred Compensation Trust.
12. DEFERRED COMPENSATION TRUST: the United Wisconsin Services, Inc. Deferred
Compensation Trust.
13. DISTRIBUTION DATE: the date on which the Distribution is effected.
14. ERISA: the Employee Retirement Income Security Act of 1974, as amended.
15. GROUP: the AMSG Group or the Newco/UWS Group.
16. LIABILITY: any debt, liability or obligation, whether absolute or
contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising, and whether or not the same would
properly be reflected on a balance sheet, and all costs and expenses related
thereto.
17. NEWCO/UWS COMMON STOCK: the common stock, no par value per share, of
Newco/UWS.
18. NEWCO/UWS DIRECTOR: any director of UWS prior to the Distribution Date or
of Newco/UWS after the Distribution Date.
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19. NEWCO/UWS EMPLOYEE: any individual who immediately after the Distribution
Date is an employee of Newco/UWS.
20. NEWCO/UWS FORMER EMPLOYEE: any former employee of UWS or any Newco/UWS
Subsidiary or any predecessor of the foregoing who was terminated on or prior to
the Distribution Date.
21. NEWCO/UWS GROUP: Newco/UWS and the corporations which are Newco/UWS
Subsidiaries after the Distribution Date.
22. NEWCO/UWS INDEMNITEE: Each member of the Newco/UWS Group and each of
their respective directors, officers, employees and agents (but only in their
capacities as such) and each of the heirs, executors, successors and assigns of
any of the foregoing.
23. NEWCO/UWS SUBSIDIARY: any Subsidiary of Newco/UWS after the Distribution.
24. OTHER BENEFIT PLAN: any Benefit Plan sponsored or maintained by UWS prior
to the Distribution Date other than a Transferred Retirement Plan, a Welfare
Plan, the UWS Nonqualified Compensation Plans, the UWS SAR Plan, the UWS Stock
Option Plans, the Supplemental Retirement Plan and the Deferred Compensation
Plan.
25. PERSON: an individual, a partnership, a joint venture, a corporation, a
limited liability company, a trust, an unincorporated organization or a
government or any department or agency thereof.
26. PLAN: any bonus, incentive compensation, deferred compensation, pension,
profit sharing, retirement, stock option, stock purchase, stock ownership, stock
appreciation rights, phantom stock, leave of absence, layoff, vacation, day or
dependent care, legal services, cafeteria, life, health (including medical,
dental and vision care), accident, disability, severance pay, separation,
workers' compensation, travel, accident or other employee benefit plan,
practice, policy or arrangement of any kind (including, but not limited to, any
"employee benefit plan" (within the meaning of Section 3(3) of ERISA)).
27. SUBSIDIARY: a corporation more than 50% of the voting power of whose
outstanding voting securities are beneficially owned directly or indirectly by
another specified corporation.
28. SUPPLEMENTAL RETIREMENT PLAN: the UWSI/BCBSUW Supplemental Executive
Retirement Plan.
29. TRANSFERRED RETIREMENT PLANS: the UWSI/BCBSUW Salaried Pension Plan, the
UWSI/BCBSUW Hourly Pension Plan, the UWSI/BCBSUW 401(k) Plan and the UWSI/BCBSUW
Union Employees 401(k) Plan.
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30. UWS COMMON STOCK: the Common Stock, no par value per share, of UWS.
31. UWS NONQUALIFIED COMPENSATION PLANS: the nonqualified profit sharing plan
and management incentive plan currently maintained by UWS for its employees.
32. UWS SAR PLAN: the United Wisconsin Services, Inc. 1992 Stock-Appreciation
Rights Plan.
33. UWS STOCK OPTION PLANS: the United Wisconsin Services, Inc. Equity
Incentive Plan and the 1995 Directors Stock Option Plan of United Wisconsin
Services, Inc.
34. WELFARE PLAN: any Plan which provides medical, health, disability,
accident, life insurance, death, dental or other welfare benefits, including any
post-employment benefits or retiree medical, life insurance or other such
benefits.
SECTION 2. OFFERS OF EMPLOYMENT; ASSUMPTION OF EMPLOYMENT AND
SEVERANCE
(a) On or prior to the Distribution Date, Newco/UWS shall offer to employ
each employee employed by UWS immediately prior to the Distribution Date. The
employees to be offered employment by Newco/UWS shall include all active and
inactive employees, including all employees laid-off, disabled or on leave of
absence, unless their employment with UWS has been terminated prior to the
Distribution Date. Newco/UWS is not obligated to employ any such employees of
UWS who decline employment with Newco/UWS, and AMSG shall not be obligated to
continue the employment of such employees. The Distribution shall not affect
the employment of any employee of a UWS subsidiary or a Newco/UWS Subsidiary.
(b) Newco/UWS and UWS agree that with respect to individuals who, in
connection with the Distribution, cease to be employees of UWS and become
employees of Newco/UWS, such cessation shall not be deemed a severance of
employment from either Group for purposes of any agreement that provides for the
payment of severance, salary continuation or similar benefits or stock
repurchase rights in connection with the Distribution, if and to the extent
appropriate.
(c) Newco/UWS shall have no responsibility or Liability whatsoever with
respect to the April 7, 1998 Employment Agreement between Samuel V. Miller, UWS
and American Medical Security Holdings, Inc.
(d) Newco/UWS shall assume and be solely responsible for, and shall
indemnify AMSG against, all Liabilities and obligations whatsoever in connection
with claims made by or on behalf of Newco/UWS Employees or Newco/UWS Former
Employees relating
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to the termination or alleged termination of any such person's employment either
before, on or after the Distribution Date.
(e) Newco/UWS shall assume and be solely responsible for any collective
bargaining agreements covering any Newco/UWS Employee and shall indemnify AMSG
against all Liabilities and obligations whatsoever in connection with such
collective bargaining agreements.
SECTION 3. GENERAL PRINCIPLES
Except as otherwise provided in this Employee Benefits Agreement, as of the
Distribution Date:
(a) Newco/UWS will assume sponsorship of, and all liability under
(either singly or jointly with BCBSUW), all Benefit Plans and all other
plans, programs, policies and arrangements sponsored by UWS (or sponsored
jointly by UWS and BCBSUW) prior to the Distribution Date (including all
funding vehicles). All UWS Subsidiaries will retain sponsorship of all
Benefit Plans sponsored by them prior to the Distribution Date. All
Newco/UWS Subsidiaries will retain sponsorship of all Benefit Plans sponsored
by them prior to the Distribution Date.
(b) Newco/UWS will assume liability for employment-related claims
(including, but not limited to, harassment and discrimination) regardless of
when filed with respect to all Newco/UWS Employees, regardless of whether the
claimant was, prior to the Distribution Date, a UWS employee.
(c) Except as otherwise provided herein, as of the Distribution Date,
all benefit Liabilities relating to Newco/UWS Former Employees will be assumed
by Newco/UWS.
(d) Except as otherwise provided herein, the AMSG Group shall be solely
responsible for the payment of all Liabilities whatsoever arising with respect
to any AMSG Employee or AMSG Former Employee and attributable to any period on
and subsequent to the Distribution Date and the Newco/UWS Group shall be solely
responsible for the payment of all Liabilities whatsoever arising with respect
to any Newco/UWS Employee or Newco/UWS Former Employee and attributable to any
period on and subsequent to the Distribution Date.
(e) Unless otherwise provided herein, no provision of this Agreement
will be construed as requiring any member of the Newco/UWS Group or AMSG Group
to continue any plan, program, policy or arrangement for any period of time on
or after the Distribution.
(f) Prior to the Distribution Date, both UWS and Newco/UWS will amend
its respective plans, programs, policies and
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arrangements (whether newly established, assumed or retained) to the extent
necessary to reflect the provisions of this Agreement. Prior to the
Distribution Date, UWS and Newco/US shall cooperate with each other and shall
take such actions as are necessary to effect Newco/UWS's assumption of the
Benefit Plans, including, but not limited to, actions necessary to assign to
Newco/UWS insurance contract service agreements and any other contracts relating
to such Benefit Plans.
SECTION 4. UWS NONQUALIFIED COMPENSATION PLANS
(a) Newco/UWS shall assume sponsorship of the UWS Nonqualified
Compensation Plans and shall be responsible for the payment of all Liabilities
under such plans and shall indemnify the AMSG Indemnitees in connection with
such Liabilities.
(b) Newco/UWS shall determine awards for Newco/UWS Employees (and
Newco/UWS Former Employees if applicable) under the UWS Nonqualified
Compensation Plans and shall make such payments to such Newco/UWS Employees (and
Newco Former Employees if applicable).
(c) For purposes of the UWS Nonqualified Compensation Plans,
individuals who, on the Distribution Date, cease to be employees of UWS and
become Newco/UWS Employees shall not be deemed to have terminated employment
under such plans as a result of becoming Newco/UWS Employees.
SECTION 5. STOCK OPTIONS AND SARS
(a) AMSG shall take all action necessary to amend (if necessary), or
otherwise provide for adjustments of outstanding awards under the UWS Stock
Option Plans, so that each outstanding UWS option awarded to an AMSG Employee,
an AMSG Former Employee or an AMSG Director other than Samuel V. Miller
("Miller"), Ronald A. Weyers ("Weyers") and Wallace J. Hilliard ("Hilliard"),
will be adjusted effective as of the Distribution Date by multiplying the number
of shares of UWS Common Stock subject to the option by the AMSG Adjustment
Factor and dividing the exercise price per share of the option by the AMSG
Adjustment Factor. For these purposes, the "AMSG Adjustment Factor" is defined
as the quotient obtained by dividing (x) the closing market price of UWS Common
Stock on the Distribution Date by (y) the closing market price of AMSG Common
Stock on the day immediately following the Distribution Date. Each outstanding
UWS option granted to a Newco/UWS Employee, a UWS Former Employee or a Newco/UWS
Director other than Thomas R. Hefty ("Hefty"), Gail L. Hanson ("Hanson") and C.
Edward Mordy ("Mordy"), shall be assumed by Newco/UWS under newly established
Newco/UWS Stock Option Plans and converted into options to purchase Newco/UWS
Stock. Except as provided in this Section 5, the Newco/UWS Stock Option Plans
will be substantially similar to the UWS Stock Option Plans and shall not
provide any additional benefits. Outstanding UWS Options awarded to Newco/UWS
Employees, Newco/UWS Former
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Employees and Newco/UWS Directors shall be converted into Newco/UWS Options by
multiplying the number of shares of UWS Stock subject to the Option by the
Newco/UWS Adjustment Factor and dividing the exercise price by the Newco/UWS
Adjustment Factor. For these purposes the "Newco/UWS Adjustment Factor" is
defined as the quotient obtained by dividing (x) the closing market price of UWS
Common Stock on the Distribution Date by (y) the closing market price of
Newco/UWS Common Stock on the day immediately following the Distribution Date.
Newco/UWS shall establish a new stock option plan covering both officers and
directors. All options issued with respect to Newco/UWS Common Stock shall be
issued pursuant to this plan.
(b) Effective as of the Distribution Date, UWS shall take all action
necessary to amend (if necessary) or otherwise provide for adjustments of
outstanding awards under the UWS SAR Plan, so that each outstanding UWS SAR
awarded to an AMSG Employee, an AMSG Former Employee or an AMSG Director will be
adjusted by multiplying the number of shares of UWS Common Stock subject to the
SAR by the AMSG Adjustment Factor and dividing the grant price per share of the
option by the AMSG Adjustment Factor. Each outstanding UWS SAR granted to a
Newco/UWS Employee, a Newco/UWS Former Employee or a Newco/UWS Director shall be
assumed, effective as of the Distribution Date, by Newco/UWS under a newly
established Newco/UWS SAR Plan and converted into SARS with respect to Newco/UWS
Common Stock. The Newco/UWS SAR Plan will be substantially similar to the UWS
SAR Plan and shall not provide any additional benefits. Outstanding UWS SARS
awarded to Newco/UWS Employees, Newco/UWS Former Employees and Newco/UWS
Directors shall be converted to Newco/UWS SARS by multiplying the number of SARS
by the Newco/UWS Adjustment Factor and dividing the grant price by the Newco/UWS
Adjustment Factor.
(c) (i) HILLIARD, WEYERS, HEFTY, MORDY & HANSON As of the Distribution,
Hilliard, Weyers, Hefty, Mordy & Hanson shall receive, for each option each
currently holds with respect to one share of UWS Common Stock, an option with
respect to one share of AMSG Common Stock and an option with respect to one
share of Newco/UWS Common Stock. The exercise price of each option received
with respect to each share of AMSG Common Stock shall be the exercise price of
the option prior to the Distribution divided by the AMSG Adjustment Factor.
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The exercise price of each option received with respect to Newco/UWS Common
Stock shall be the exercise price of the Option prior to the Distribution
divided by the Newco/UWS Adjustment Factor. (ii) MILLER As of the Distribution,
Miller shall receive, for each option granted to him with respect to one share
of UWS Common Stock on December 6, 1995 an option with respect to one share of
AMSG Common Stock and an option with respect to one share of Newco/UWS Common
Stock. The exercise price of each option received with respect to each share of
AMSG Common Stock shall be the exercise price of the option prior to the
Distribution divided by the AMSG Adjustment Factor. The exercise price of each
option received with respect to Newco/UWS Common Stock shall be the exercise
price of the options prior to the Distribution divided by the Newco/UWS
Adjustment Factor. All other options Miller has received with respect to UWS
Stock shall be adjusted effective as of the Distribution Date by multiplying the
number of shares of UWS Common Stock subject to the option by the AMSG
Adjustment Factor and dividing the exercise price by the AMSG Adjustment Factor.
(iii) The termination of employment provisions are applicable to any option
received by an individual pursuant to this subsection which is not granted by
the individual's actual employer (or a member of such employer's Group) shall be
based on the individual's termination of employment with his actual employer.
(d) Newco/UWS shall indemnify the AMSG Indemnitees in connection with
any Liabilities assumed by Newco/UWS relating to the UWS Stock Option Plan
and the UWS SAR Plan.
SECTION 6. TRANSFERRED RETIREMENT PLANS
(a) Effective on the Distribution Date, Newco/UWS shall assume
sponsorship (with BCBSUW) of the Transferred Retirement Plans and the related
trusts. Each Transferred Retirement Plan shall continue to provide benefits for
all individuals who, immediately prior to the Distribution Date, were
participants in such Plan. To the extent the benefits were provided prior to
the Distribution Date, Newco/UWS agrees that each such participant shall
continue to be, to the extent applicable, entitled, for all purposes under the
Transferred Retirement Plans (including, without limitation, eligibility,
vesting and benefit accrual), to be credited with the compensation and term of
service credited to such participant as of the Distribution Date under the terms
of the Transferred Retirement Plan as if such service had been rendered to
Newco/UWS and had originally been credited to such participant under the
Transferred Retirement Plan and shall have the same accrued benefit under the
Transferred Retirement Plan immediately following the Distribution Date as was
accrued under the Transferred Retirement Plan as of the Distribution Date. AMSG
shall, as soon as practicable after the Distribution Date, provide Newco/UWS
with such additional information (in the possession of AMSG and not already in
the possession of Newco/UWS) as may be requested by Newco/UWS and necessary in
order for the Newco/UWS Group to assume and administer the Transferred
Retirement Plans. The UWSI/BCBSUW 401(k) Plan shall continue to permit
participants to invest in AMSG Common Stock, as an investment option, through
the 1999 Plan Year.
(b) From and after the Distribution Date, the AMSG Group shall cease to
have any Liability whatsoever with respect to participants under the Transferred
Retirement Plans. The Newco/UWS Group shall assume or retain sole
responsibility for, and shall indemnify the AMSG Indemnitees with respect to,
all Liabilities under the Transferred Retirement Plans.
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SECTION 7. SUPPLEMENTAL RETIREMENT PLANS
Effective as of the Distribution Date, Newco/UWS shall assume the
Supplemental Retirement Plan (with BCBSUW). Newco/UWS represents that each
participant for whom Newco/UWS has assumed liabilities will be credited with the
compensation and term of service credited to such participant as of the
Distribution Date under the Supplemental Retirement Plan, as if such service had
been rendered to Newco/UWS.
SECTION 8. DEFERRED COMPENSATION.
Effective as of the Distribution Date, Newco/UWS shall create new deferred
compensation plans which shall assume all Liabilities with respect to the
Deferred Compensation Plans, except that all Liabilities relating to Samuel V.
Miller thereunder shall be retained by the existing Deferred Compensation Plans.
Newco/UWS's new deferred compensation plan shall assume liability for the Hefty
Supplemental Compensation Agreement and any other Deferred Compensation Plans
benefiting Newco/UWS Employees or Newco/UWS Directors. All of the assets in the
Deferred Compensation Trust other than the assets attributable to Samuel V.
Miller's deferred compensation shall be transferred to a new trust established
by Newco/UWS. Newco/UWS will indemnify the AMSG Indemnitees from and against
all Liabilities in connection with the Deferred Compensation Plans except for
Liabilities with respect to Samuel V. Miller. AMSG will indemnify the Newco/UWS
Indemnitees from and against all Liabilities with respect to Samuel V. Miller in
connection with the Deferred Compensation Plans.
SECTION 9. WELFARE PLANS
Effective on or prior to the Distribution Date, Newco/UWS shall assume
sponsorship of and assume all Liabilities in connection with the Welfare
Plans maintained by UWS in which Newco/UWS Employees and Newco/UWS Former
Employees participate including, but not limited to, liability for claims
which are incurred but not reported as of the Distribution Date. In
connection with the foregoing, UWS agrees to provide Newco/UWS with such
information (in the possession of UWS and not already in the possession of
Newco/UWS) as may be requested by Newco/UWS and necessary for the Newco/UWS
Group to assume or establish any such Welfare Plan. Effective as of the
Distribution Date, Newco/UWS shall be responsible for and shall indemnify the
AMSG Indemnitees from and against all Liabilities arising under any Welfare
Plan with respect to claims by Newco/UWS Participants or Newco/UWS Former
Employees for benefits incurred prior to or after the Distribution Date
pursuant to the terms of the applicable Welfare Plan.
SECTION 10. OTHER BENEFIT PLANS
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Newco/UWS shall assume all Other Benefit Plans as of the Distribution
Date. Newco/UWS shall assume and be solely responsible for the payment of all
Liabilities with respect to any Newco/UWS Participant or Newco/UWS Former
Employee unpaid as of and through the Distribution Date under any Other
Benefit Plan. Newco/UWS shall indemnify the AMSG Indemnitees in connection
with all Liabilities assumed by Newco/UWS relating to the Other Benefit Plans.
SECTION 11. TRANSFER OF RESERVES
To the extent that any Liability assumed by any member of the Newco/UWS
Group hereunder is secured by a reserve on the books of UWS, such reserve shall
be transferred to Newco/UWS as soon as practicable on or following the
Distribution Date.
SECTION 12. COMPLETE AGREEMENT
This Agreement, together with the Distribution and Indemnity Agreement, and
the Exhibits hereto, shall constitute the entire agreement between the parties
hereto with respect to the subject matter hereof and shall supersede all
previous negotiations, commitments and writings with respect to such subject
matter.
SECTION 13. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Wisconsin (other than the laws regarding choice of laws and
conflicts of laws) as to all matters, including matters of validity,
construction, effect, performance and remedies.
SECTION 14. NOTICES
All notices, requests, claims, demands and other communications hereunder
(collectively, "Notices") shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telegram, telex, telecopy or other standard form of telecommunications, or by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
If to UWS:
3100 AMS Blvd.
Green Bay, WI 54313
Attn: General Counsel
If to Newco/UWS:
401 W. Michigan
-----------------------
Milwaukee, WI 53202
-----------------------
Attn:
-----------------------
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or to such other address as any party hereto may have furnished to the other
parties by a notice in writing in accordance with this Section 15.
SECTION 15. AMENDMENT AND MODIFICATION
This Agreement may be amended, modified or supplemented only by a written
agreement signed by UWS and Newco/UWS.
SECTION 16. SUCCESSORS AND ASSIGNS; NO THIRD-PARTY BENEFICIARIES
This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their successors and permitted
assigns, but neither this Agreement nor any of the rights, interests and
obligations hereunder shall be assigned by any party hereto without the prior
written consent of each of the other parties (which consent shall not be
unreasonably withheld). This Agreement is solely for the benefit of the parties
hereto and their Subsidiaries and is not intended to confer upon any other
Persons any rights or remedies hereunder.
SECTION 17. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
SECTION 18. INTERPRETATION
The Section headings contained in this Agreement are solely for the purpose
of reference, are not part of the agreement of the parties hereto and shall not
in any way affect the meaning or interpretation of this Agreement.
SECTION 19. TERMINATION
Notwithstanding any provision hereof, this Agreement may be terminated at
any time prior to the Distribution Date. In the event of such termination, no
party hereto shall have any Liability to any Person by reason of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
NEWCO/UWS, INC.
By:
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UNITED WISCONSIN SERVICES, INC.
By:
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TAX ALLOCATION AGREEMENT
THIS TAX ALLOCATION AGREEMENT ("Agreement") is entered into as of
___________, 1998, by and between United Wisconsin Services, Inc., a Wisconsin
corporation ("UWS") and Newco/UWS, Inc., a Wisconsin corporation ("Newco").
WHEREAS, UWS is the common parent of an "affiliated group," as that term is
defined in Section 1504 of the Code, which currently files consolidated federal
income tax returns; and
WHEREAS, Newco is a wholly-owned subsidiary of UWS that owns or will own
prior to the Distribution the Management Business and 100% of the stock of the
Managed Care Companies; and
WHEREAS, that certain Distribution and Indemnity Agreement, dated
_______________, 1998, by and between UWS and Newco, and any exhibits thereto
(the "Distribution Agreement"), provides for the distribution to the holders of
UWS Common Stock all of the outstanding shares of the Newco Common Stock; and
WHEREAS, as a consequence of the Contribution and Distribution, the
Management Business will be owned by Newco and Newco and the Managed Care
Companies will no longer be subsidiaries of UWS and will no longer be members of
UWS's affiliated group; and
WHEREAS, pursuant to Treas. Reg. Section 1.1502-6, UWS and each subsidiary
which was a member of UWS's affiliated group during any part of a consolidated
return year is severally liable for the consolidated federal income tax
liability of that group for such year; and
WHEREAS, the UWS Group and the Newco Group desire to set forth their rights
and obligations with respect to Taxes due for periods both before and after the
Distribution and with respect to certain tax and other liabilities that may be
asserted in connection with the Distribution;
NOW THEREFORE, UWS, on behalf of itself and members of the UWS Group and
Newco, on behalf of itself and members of the Newco Group, in consideration of
the mutual covenants contained herein, agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following definitions shall apply:
"Accrued Liabilities" means certain accrued expenses of UWS relating to the
Management Business (such as vacation pay, profit
<PAGE>
sharing, contributions and management bonuses) totalling $___________ million).
"Actually Realized" means, for purposes of determining the timing of any
Taxes relating to any payment, transaction, occurrence or event, the time at
which the amount of Taxes payable by any person is increased above or reduced
below, as the case may be, the amount of Taxes that such person would be
required to pay but for the transaction, occurrence or event.
"Affiliated Group" means an affiliated group of corporations within the
meaning of Section 1504(a) (determined without regard to the exceptions
contained in Section 1504(b)) of the Code for the taxable period in question.
"AMSG Group" means the Affiliated Group of which American Medical Security
Group, Inc. (or any predecessor) ("AMSG") was the common parent for all periods
prior to the merger of AMSG into UWS on December 3, 1996.
"BCBSUW" means Blue Cross & Blue Shield United of Wisconsin, Inc.
"BCBSUW Group" means the Affiliated Group of corporations of which BCBSUW
was the common parent for all periods prior to July 1, 1994.
"BCBSUW Note" means the $70 million principal amount note of UWS in favor
of BCBSUW that matures on October 30, 1999, evidenced by a promissory note and
pledge agreement, both dated October 30, 1996.
"BCBSUW Stock Purchase" means the purchase by BCBSUW of Newco Common Stock
from Newco after the Distribution in an amount or amounts sufficient to increase
BCBSUW's ownership percentage of Newco Common Stock to 51%.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Consolidated Returns" means the consolidated United States federal income
tax returns of the affiliated group of which UWS is the common parent for
consolidated return years beginning before the Date of Distribution and any
consolidated, combined or similar state income tax returns of any members of the
UWS Group for taxable years beginning before the Date of Distribution
(including, in each case, any amendments thereto).
"Contribution" means the transfer by UWS to Newco of the Management
Business, together with $21 million in working capital, the stock of the Managed
Care Companies, and the Managed Care Service Marks in exchange for all of the
issued and outstanding Newco Common Stock and assumption by Newco of the
Post-Retirement and Accrued Liabilities and the BCBSUW Loan.
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"Date of Distribution" or "Distribution Date" means the date UWS ceases to
own 80% of the vote and value of the stock of Newco within the meaning of
Section 1504 of the Code.
"Distribution" means the distribution by UWS of all of the stock of Newco
to UWS's shareholders pursuant to the Distribution Agreement.
"Distribution Agreement" is defined in the recitals to this Agreement.
"Effective Time" means ____________________________.
"Expenses" means out-of-pocket expenses and shall not include any overhead
or indirect costs.
"Fifty Percent Acquisition" or "50% Acquisition" means an acquisition
described in Section 355(e)(2) of the Code.
"Final Determination" means the final resolution of liability for any Tax
for a taxable period (i) by IRS Form 870 or 870-AD (or any successor forms
thereto), on the date of acceptance by or on behalf of the IRS, or by a
comparable form under the laws of other jurisdictions, except that a Form 870 or
870-AD, successor form, or comparable form that reserves the right of the
taxpayer to file a claim for refund and/or the right of the Taxing Authority to
assert a further deficiency shall not constitute a Final Determination; (ii) by
a decision, judgment, decree, or other order by a court of competent
jurisdiction which has become final and unappealable; (iii) by a closing
agreement or offer in compromise under Section 7121 or 7122 of the Code or any
subsequently enacted corresponding provisions of the Code, or comparable
agreements under the laws of other jurisdictions; (iv) by an allowance of a
refund or credit in respect of an overpayment of Tax, but only after the
expiration of all periods during which such refund may be recovered (including
by way of offset) by the Tax imposing jurisdiction; or (v) by any other final
disposition by reason of the expiration of the applicable statute of
limitations.
"IRS" means the Internal Revenue Service.
"Managed Care Business" means the businesses conducted by the Managed Care
Companies; provided, however, that such business does not include any operations
relating to the Small Group Business.
"Managed Care Companies" means Compcare Health Services Insurance
Corporation, a Wisconsin corporation (together with its wholly-owned subsidiary,
Heartland Dental Plan, Inc,. a Wisconsin corporation); Valley Health Plan, Inc.,
a Wisconsin corporation; HMO-W, Inc., a Wisconsin corporation (together with its
two wholly-owned subsidiaries, Hometown Insurance Service, Inc., a Wisconsin
corporation and Unity Health Plans Insurance Corporation, a Wisconsin
corporation); United Wisconsin Insurance
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Company, a Wisconsin corporation; United Heartland Life Insurance Company, a
Wisconsin corporation; Meridian Resource Corporation, a Wisconsin corporation;
Meridian Managed Care, Inc., a Wisconsin corporation; Meridian Marketing
Services, Inc., a Wisconsin corporation; United Wisconsin Proservices, Inc., a
Wisconsin corporation; United Heartland, Inc., a Wisconsin corporation; and CNR
Health, Inc., a Wisconsin corporation.
"Managed Care Service Marks" means _________________.
"Management Business" means the management and operational services
performed by UWS for corporations (primarily wholly-owned subsidiaries), which
services include product development, actuarial, legal, marketing, finance,
accounting, tax, public relations, executive management, and human resources.
"Newco Group" means, with respect to any period prior to the Date of
Distribution, the Managed Care Companies, Newco and the Management Business;
with respect to any period on or after the Date of Distribution, the Affiliated
Group of which Newco or any successor of Newco is the common parent.
"Party" means either of the parties to this Agreement.
"Restructuring Taxes" means any Taxes incurred in connection with the
Contribution or Distribution, including, without limitation, any transfer Taxes
or any Tax imposed pursuant to or as a result of Section 311 of the Code. If
the Distribution otherwise qualifies under Section 355 of the Code and,
following the Distribution, a 50% Acquisition occurs, then any Taxes imposed as
a result thereof shall also constitute "Restructuring Taxes."
"Small Group Business" means the insurance and other products produced and
administered by American Medical Security, Inc. and any predecessor thereto.
"Tainting Act" means any breach, caused by one or more members of the Newco
Group (or their less than wholly-owned subsidiaries), of any written
representation or other statement given in connection with an IRS letter ruling
or legal opinion obtained by UWS (relating to the Contribution or Distribution)
or contained in Section 2.6.
"Tax" or "Taxes" means all forms of taxation, whenever created or imposed,
and whether imposed by a nation, locality, municipality, government, state,
federation, or other body (a "Taxing Authority"), and without limiting the
generality of the foregoing shall include net income, alternative or add-on
minimum tax, gross income, sales, use, franchise, gross receipts, value added,
ad valorem, profits, license, payroll, withholding, social security,
unemployment insurance, employment, property, transfer, recording, excise,
severance, stamp, occupation, premium, windfall profit, custom duty, or other
tax, governmental fee or other like assessment or charge of any kind whatsoever,
together
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with any related interest, penalties or other additions to tax, or additional
amounts imposed by any such Taxing Authority. For purposes of this Agreement,
Taxes are "attributable" to a member of the Newco Group or the UWS Group if such
Taxes are imposed as a result of, or in connection with, the income, assets,
employees, or business operations of such member; provided, however, that (1)
"Taxes" are "attributable to" the UWS Group (and not the Newco Group or any
member thereof) to the extent that such Taxes arise as a result, or in
connection with, the income, assets, employees or operations of the Small Group
Business conducted at any time by a member of the Newco Group, including United
Wisconsin Insurance Company ("UWIC"); and (ii) Taxes are "attributable to" the
Newco Group (and not the UWS Group) to the extent that such Taxes arise as a
result of, or in connection with, the income, assets or employees or operations
of United Wisconsin Life Insurance Company ("UWLIC") that are unrelated to the
Small Group Business. The fact that a member of the Newco Group or the UWS
Group prepared or filed a return with respect to any Taxes is not relevant in
determining whether such Taxes are "attributable" to such member.
"Taxing Authority" means any governmental authority (domestic or foreign),
including, without limitation, any state, municipality, political subdivision or
governmental agency, responsible for the imposition of any Tax.
"Tax Benefit" means any Tax Item which decreases Taxes paid or payable.
"Tax Controversy" means any audit, examination, dispute, suit, action,
litigation or other judicial or administrative proceeding by or against the IRS
or any other Taxing Authority.
"Tax Item" means any item of income, gain, loss, deduction, credit,
recapture of credit or any other item, including, but not limited to, an
adjustment under Code Section 481 resulting from a change in accounting method,
which increases or decreases Taxes paid or payable.
"Tax Returns" means all reports, estimates, declarations of estimated tax,
information statements, returns or other documents required or permitted to be
filed with a Taxing Authority in connection with any Taxes, including but not
limited to requests for extensions of time, information statements and reports,
claims for refund, and amended returns.
"UWS Group" means, for each taxable period, the Affiliated Group of which
UWS or any successor of UWS is the common parent, provided, however, the UWS
Group shall not include the Newco Group.
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ARTICLE II
PRE-EFFECTIVE TIME, POST-EFFECTIVE TIME,
AND OTHER TAX LIABILITIES
2.1 UWS Group Payment Responsibilities.
(a) AMSG Group. UWS shall pay all Taxes of the AMSG Group. UWS
hereby assumes all such liability and shall indemnify and hold harmless Newco
and any member of the Newco Group from and against any and all Taxes
attributable to the AMSG Group.
(b) UWS Group -- Current and Prior Periods. Except as otherwise
provided in this Agreement, UWS shall pay, on a timely basis, all Taxes
attributable to the UWS Group that are imposed for the portion of the taxable
year 1998 that includes and precedes the Effective Time (the "1998 UWS Taxes")
and for all periods ending prior to the Effective Time. UWS hereby assumes all
such liability and shall indemnify and hold harmless Newco and any member of the
Newco Group from and against any share or amount of the 1998 UWS Taxes and all
Taxes attributable to the UWS Group that are imposed for periods ending on or
prior to the Effective Time.
(c) UWS Group -- Future Periods. Except as otherwise provided in
this Agreement, UWS shall pay, on a timely basis, all Taxes attributable to the
UWS Group that are imposed for any period beginning after the Effective Time
(and, to the extent not already included in this sentence, all Taxes
attributable to the UWS Group that are imposed for the portion of the taxable
year 1998 following the Effective Time), and shall indemnify and hold harmless
Newco and any member of the Newco Group from and against all such Taxes.
2.2 Newco Group Payment Responsibilities.
(a) Current and Prior Periods. Except as otherwise provided in this
Agreement, Newco shall pay, on a timely basis, all Taxes attributable to the
Newco Group that are imposed for the portion of the taxable year 1998 that
includes and precedes the Effective Time (the "1998 Newco Taxes") and for all
periods ending on or prior to the Effective Time. Newco hereby assumes all such
liability and shall indemnify and hold harmless UWS and any member of the UWS
Group from and against any share or amount of the 1998 Newco Taxes and all Taxes
attributable to the Newco Group that are imposed for periods ending on or prior
to the Effective Time.
(b) Future Periods. Newco shall pay, on a timely basis, all Taxes
attributable to the Newco Group that are imposed for any period beginning on or
after the Effective Time (and, to the extent not already included in this
sentence, all Taxes attributable to the Newco Group that are imposed for the
portion of the taxable year 1998 following the Effective Time), and shall
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indemnify and hold harmless UWS and any member of the UWS Group from and against
all such Taxes.
2.3 Restructuring Taxes.
(a) Generally. Except as otherwise provided in subsections (b), (c),
or (d) hereof, UWS shall pay, and shall indemnify and hold harmless Newco and
any member of the Newco Group from and against, any and all Restructuring Taxes.
(b) Payment/Indemnification for Tainting Acts. Anything in this
Article II to the contrary notwithstanding, Newco shall pay, and shall indemnify
and hold UWS harmless from and against, (i) any Restructuring Taxes, (ii) any
liability resulting from a decision that UWS is liable to UWS's or Newco's
shareholders because of a Final Determination that the Distribution is taxable
and related Expenses payable by UWS by reason of the receipt of a payment from
(or the payment by) Newco described in this subsection 2.3(b), but in any case
only to the extent such Restructuring Taxes or liability to shareholders is due
exclusively to a Tainting Act.
(c) Payment/Indemnification for Combined Breach. Anything in this
Article II to the contrary notwithstanding, in the event of a Final
Determination that Restructuring Taxes are due to a Taxing Authority and such
Restructuring Taxes are caused by both a Tainting Act, and a breach, caused
solely by any member of the UWS Group, of any written representation or
statement given in connection with an IRS letter ruling or legal opinion
obtained by UWS or contained in Section 2.6 of this Agreement, or,
alternatively, such Restructuring Taxes are caused in part by one or more
members of the UWS Group and in part by one or more members of the Newco Group
(or their less than wholly-owned subsidiaries), then the liability of UWS and
Newco for any Restructuring Taxes arising from such Final Determination and any
liability to shareholders arising from such Final Determination shall be borne
fifty percent (50%) by UWS and fifty percent (50%) by Newco. Each Party,
jointly and severally with its Affiliated Group, agrees to pay and to indemnify
and hold the other Party harmless from and against the amount of Restructuring
Taxes and liability to shareholders allocated to such first Party under this
subsection 2.3(c).
(d) Payment/Indemnification Absence of Any Breach. Anything in this
Article II to the contrary notwithstanding, in the event of a Final
Determination that Restructuring Taxes are due to a Taxing Authority and such
Restructuring Taxes are not caused by (i) a Tainting Act, (ii) a breach, caused
by any member of the UWS Group, of any representation given in connection with
an IRS letter ruling obtained by UWS or contained in Section 2.6 of this
Agreement, or (iii) a combined breach described in subsection 2.3(c), then the
liability of UWS and Newco for any Restructuring Taxes arising from such Final
Determination and any liability to shareholders arising from such Final
Determination shall be borne fifty percent (50%) by UWS and fifty percent (50%)
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by Newco. Each Party, jointly and severally with its Affiliated Group, agrees
to pay and hold the other Party harmless from and against the amount of
Restructuring Taxes and liability to shareholders allocated to such first Party
under this subsection 2.3(d).
2.4 Payment of 1998 Newco Estimated Tax Liabilities. Newco shall pay to
UWS an amount equal to the estimated aggregate amount of Taxes that are
attributable and would be owed by the Newco Group for taxable year 1998 where
such Taxes must be paid by UWS as part of a Consolidated Return (the "1998 Newco
Estimated Tax Liabilities"). Such estimated amount shall be computed in a
manner consistent with the intercompany allocation of consolidated federal and
state tax liabilities applied in prior periods.
2.5 Adjustment of 1998 Newco Estimated Tax Liabilities. Upon the filing
of the UWS Group's 1998 Consolidated Returns, the 1998 Newco Estimated Tax
Liabilities as of the Distribution Date shall be restated and adjusted by UWS
based upon information then available. An adjusting payment shall be made by
UWS or Newco as is required by any restatement or adjustment of the 1998 Newco
Estimated Tax Liabilities.
2.6 Representations and Covenants. Each of UWS and Newco represents to
the other that it has not knowingly misstated or omitted a material fact in
connection with UWS obtaining an IRS letter ruling or a legal opinion relating
to the Distribution or Contribution. In addition, each of UWS and Newco
represents to the other that (i) it is not currently engaged in any negotiations
involving a transaction that, if consummated, would constitute a 50%
Acquisition, and (ii) it will neither engage in negotiations nor consummate a
business combination that constitutes a 50% Acquisition. Each of UWS and Newco
represents to the other that it has not and will not do anything that would
cause the Distribution or the Contribution to be taxable under federal or state
income tax laws. Further, Newco agrees that, for two years following the
Distribution, it will not issue any Newco stock (other than pursuant to the
BCBSUW Stock Purchase(s)), options to acquire Newco stock or any other equity
instrument until it has received an opinion of counsel to the effect that such
issuance will not adversely affect the ruling or opinion regarding the
Distribution or Contribution obtained by UWS and the board of directors of Newco
has approved of such issuance. In approving of such an issuance, the board of
directors of Newco will consider relevant factors, including representations
made to the IRS to obtain the ruling.
ARTICLE III
REFUNDS OF TAXES
Each Party shall be entitled to retain or be paid all refunds of Tax
received, whether in the form of payment, credit
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or otherwise, from any Taxing Authority with respect to any Tax Returns filed or
to be filed by such Party in accordance with Article V of this Agreement,
provided, however, Newco shall be entitled to retain or be paid all such refunds
with respect to any Taxes to the extent such Taxes are attributable to property
or operations of the Newco Group. Notwithstanding anything contained in this
Article III to the contrary, UWS shall be entitled to be paid and to retain, and
Newco shall not be entitled to retain and shall be required to pay over to UWS,
any refunds of Tax received to the extent (i) UWS indemnified Newco for the
Taxes attributable to such refunds, or (ii) UWS paid to the Taxing Authority the
Taxes attributable to such refunds and UWS has not been indemnified by Newco.
ARTICLE IV
CARRYBACKS FROM SEPARATE RETURN YEARS
4.1 General. Anything herein to the contrary notwithstanding, the Newco
Group may elect to carry back to any taxable period beginning before the Date of
Distribution any tax attribute, including without limitation, any net operating
or other loss or credit, arising in any taxable period beginning after the Date
of Distribution which the Newco Group may properly elect to carry back for
federal income tax purposes or combined state tax purposes to a Consolidated
Return. With respect to any such carryback, UWS consents to the filing of such
claims for refund and other returns as may be required to claim the tax refunds
attributable to such carryback items and to pay promptly after receipt to Newco
the cash amount of any refunds of Taxes, including the cash amount of any
interest resulting from the utilization of such attributes, after taking into
consideration any resulting increase or decrease in the Tax liability of any
member of the UWS Group. To the extent authorized by law, UWS shall act as
collection agent for the Newco Group with respect to any such refund.
4.2 Subsequent Disallowance. In the event that any tax attribute for
which UWS has made a payment pursuant to Section 4.1 is subsequently reduced or
disallowed, Newco shall indemnify UWS and hold it harmless from any Tax
liability, including interest and penalties, incurred by reason of such
reduction or disallowance.
ARTICLE V
TAX RETURN PREPARATION
5.1 Consolidated Returns.
(a) Newco shall prepare and timely file all Consolidated Returns.
UWS shall have a reasonable period to review the 1997 and 1998 Consolidated
Returns. The Consolidated Returns shall be prepared and filed by Newco in
compliance with
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applicable tax laws and on a basis that is consistent with any IRS letter ruling
or legal opinion obtained by UWS in connection with the Distribution or
Contribution and, subject to the foregoing, consistent with UWS's prior
Consolidated Returns. UWS hereby expressly appoints Newco as its agent for
these purposes and will take such steps requested by Newco (including executing
such Power of Attorney(s) that may be requested by Newco) in order for Newco to
perform its duties hereunder. UWS shall reimburse Newco for Newco's reasonable
expenses incurred in preparing such returns, to the extent that such preparation
relates to the operations and income of the Small Group Business.
(b) UWS shall be responsible for preparing all information relating
to the UWS Group necessary for Newco to prepare and file the Consolidated
Returns. Such information shall include the annual federal and state, if any,
tax work preparation package, necessary to enable Newco to prepare the
Consolidated Returns, completed and delivered to Newco on or before the same
deadline imposed upon other Newco business units. Such information shall be
used as the basis for Newco's preparation of the Consolidated Returns.
(c) UWS and the UWS Group shall agree to any election or consent
reasonably requested by Newco in connection with such Consolidated Returns and
further agree not to elect to be excluded from any such return.
(d) UWS and the UWS Group agree to cooperate with Newco in the
preparation of any valuation studies or other reports which are appropriate or
necessary for the preparation of the Consolidated Returns.
5.2 Other Pre-Distribution Returns. All other Tax Returns of any member
of the UWS Group or the Newco Group for periods beginning before the
Distribution Date shall be filed by Newco, except that any such Tax Returns
pertaining exclusively to property or operations of the UWS Group shall be filed
by UWS. Notwithstanding anything contained in this Section 5.2, UWS shall
continue to file all Tax Returns of the members of the Newco Group for periods
beginning before the Distribution Date if the Tax Return for such period is
required to be filed on or prior to the Date of Distribution.
5.3 Post-Distribution Returns. All Tax Returns of any member of the Newco
Group for periods beginning on or after the Distribution Date shall be filed by
Newco, and all Tax Returns of any member of the UWS Group for periods beginning
on or after the Distribution Date shall be filed by UWS.
5.4 Cooperation; Exchange of Information. Each Party shall be responsible
for the timely submission to the other Party of information of which it has
knowledge regarding any Tax Item which may properly be included in any Tax
Return to be filed by the other Party, and shall provide any and all other
information and documentation (including, but not by way of limitation,
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working papers and schedules) reasonably requested by the other Party for use in
connection with the preparation and filing of any Tax Returns.
ARTICLE VI
STOCK OPTIONS
6.1 Tax Deductions. Except as provided in Section 6.3 and 6.4, (i) the
UWS Group (and not the Newco Group) shall claim the post-Distribution Date Tax
deductions in respect to UWS Common Stock Options held by Tom Hefty, C. Edward
Mordy and Gail Hanson (for purposes of this Article VI the "Newco Employees")
(ii) the Newco Group (and not the UWS Group) shall claim the post-Distribution
Date Tax deductions in respect to Newco Common Stock Options held by Samuel V.
Miller, Wallace Hilliard and Ronald Weyers (for purposes of this Article VI, the
"UWS Employees").
6.2 Notices, Withholding, Reporting.
(a) UWS shall promptly notify Newco of any post-Distribution Date
event giving rise to income to any Newco Employees in connection with the UWS
Common Stock Options and, if required by law, UWS shall withhold applicable
Taxes and satisfy applicable Tax reporting obligations in connection therewith.
UWS shall within ten days of demand thereof reimburse Newco for all reasonable
out-of-pocket expenses incurred in connection with the UWS Common Stock Options,
including with respect to incremental Tax reporting obligations and incremental
employment Tax obligations; provided that Newco shall use reasonable efforts to
collect any such amounts required to be paid by the Newco Employees from such
Newco Employees.
(b) Newco shall promptly notify UWS of any post-Distribution Date
event giving rise to income to any UWS Employees in connection with the Newco
Common Stock Options and, if required by law, Newco shall withhold applicable
Taxes and satisfy applicable Tax reporting obligations in connection therewith.
Newco shall within ten days of demand thereof reimburse UWS for all reasonable
out-of-pocket expenses incurred in connection with the Newco Common Stock
Options, including with respect to incremental Tax reporting obligations and
incremental employment Tax obligations; provided that UWS shall use reasonable
efforts to collect any such amounts required to be paid by UWS Employees from
such UWS Employees.
6.3 Tax Audit Adjustments. Notwithstanding the provisions of Section 6.1,
in the event a Tax audit proceeding shall determine (by settlement or
otherwise), or the parties otherwise determine pursuant to subsection 6.4, that
(i) all or a portion of the Tax deductions in respect of UWS Common Stock
Options held by Newco Employees should have been claimed by the Newco Group,
Newco shall claim such deductions (by an amended Return or otherwise) and shall
pay to UWS the amount of any Tax refund or
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credit arising in respect of such Tax deduction within ten days after such
Tax refund or credit is Actually Realized by the Newco Tax Group and/or (ii)
all or a portion of the Tax deductions in respect of Newco Common Stock
Options held by UWS Employees should have been claimed by the UWS Group, UWS
shall claim such deductions (by an amended Return or otherwise) and shall pay
to Newco the amount of any Tax refund or credit arising in respect of such
Tax deduction within ten days after such Tax refund or credit is Actually
Realized by the UWS Group.
6.4 Change in Law. Notwithstanding the agreement with respect to
reporting of Tax items attributable to options set forth in subsection 6.1
above, neither the UWS Group nor the Newco Group shall have any obligation to
report any such Tax items as set forth in such Sections in the event that either
such Party determines, based on an opinion of tax counsel, which opinion shall
be satisfactory to the other party, that there is no substantial authority to
support reporting such Tax items on a return filed by such party as a result of
a change in or amendment to any law or regulation, or any change in the official
interpretation thereof, effective or occurring after the date of this Agreement,
and such Group provides prompt notice to the other Group of any such
determination.
ARTICLE VII
TAX CONTROVERSIES AND RECORDS
7.1 Tax Controversies.
(a) Except as otherwise provided in this Article VII, UWS shall have
full responsibility in handling, settling or contesting any Tax Controversy
involving a Tax Return for which it has filing responsibility hereunder
(including any and all Returns of the AMSG Group) and, except as provided in
this subsection 7.1(a), Newco shall have full responsibility in handling,
settling or contesting any Tax Controversy involving a Tax Return for which it
has filing responsibility (including, for this purpose, any Tax Controversy
involving Restructuring Taxes), and any costs incurred in handling, settling or
contesting any Tax Controversy IRS shall be borne in proportion to the Tax
originally proposed by the IRS or other Taxing Authority in a "30-day letter" or
similar document.
(b) The Party responsible for any Tax Controversy shall use all
reasonable efforts (taking into consideration all relevant facts and
circumstances known to the Party) to resist any deficiency assertions by any
Taxing Authority regardless of which Party is ultimately responsible for any
such Tax under this Agreement.
(c) Each Party shall give prompt notice to the other of any
communication with the IRS or other Taxing Authority which may affect any Tax
Item attributable to the other Party. Each
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Party shall give prompt notice to the other of any communication with the IRS or
other Taxing Authority which relates to a Tax Controversy for which the other
Party is responsible hereunder. UWS shall notify Newco promptly of any
communication with the IRS or other Taxing Authority relating in whole or in
part to (i) Restructuring Taxes for which Newco could be liable pursuant to
Section 2.3 hereof, or (ii) Taxes for which Newco could be liable pursuant to
Section 2.2 hereof (any proposed adjustment described in subsection 6.1(c)(i)
and (ii) referred to as a "Newco Indemnity Issue"). Newco shall notify UWS
promptly of any communication with the IRS or other Taxing Authority relating in
whole or in part to (iii) Taxes described in subsection 2.2(c) hereof (whether
or not the amount of such Taxes exceeds the Basket Amount), (iv) any
Restructuring Taxes (whether or not it is alleged that a member of the UWS Group
is at fault or is partially at fault), or (v) any Taxes for which UWS could be
liable pursuant to subsections 2.1(a) and 2.1(b) (each item described in
subsection 7.1(c)(iii) through (v) referred to as an "UWS Indemnity Issue").
(d) UWS shall have 30 days after receipt of such notice from Newco
within which to object to the proposed adjustment relating to a UWS Indemnity
Issue (that is not a Newco Issue). If UWS does not notify Newco within such 30
day period that it objects to the proposed adjustment, then Newco shall have
exclusive control over all stages of the Tax Controversy, including full
authority to determine whether and in what manner to contest or compromise the
issue, unless and until Newco so notifies UWS.
(e) If UWS notifies Newco that it objects to the proposed adjustment
relating to a UWS Indemnity Issue (that is not a Newco Issue), then Newco shall
not thereafter consent to the adjustment or compromise of such UWS Indemnity
Issue without the consent of UWS, but shall cooperate with UWS to resolve the
UWS Indemnity Issue on a basis acceptable to UWS. Prior to the issuance of a
notice of proposed adjustment or similar stage in the proceedings, however,
Newco shall be responsible for the conduct of the audit, including matters
pertaining to such UWS Indemnity Issue. Newco shall notify UWS in advance of
any conferences, meetings, and proceedings pertaining to the audit and, at its
own expense, UWS shall have the right to attend all such proceedings with any
Taxing Authority, the subject matter of which is or includes such UWS Indemnity
Issue.
(f) Upon the issuance of a notice of proposed adjustment or similar
stage in the proceedings, Newco shall assume the conduct of all further
proceedings, with counsel selected by it, at Newco's sole expense, insofar as
the proceedings relate to a Newco Indemnity Issue (that is not an UWS Issue),
and thereafter Newco and UWS shall jointly be responsible for the conduct of
proceedings to contest such Newco Indemnity Issue.
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(g) In the event that Newco receives a notice of deficiency from the
IRS, or a similar notice from any other Taxing Authority, and such notice
relates exclusively to one or more UWS Indemnity Issues (none of which are Newco
Issues) and does not relate to a Newco Issue then:
(i) Upon receiving a written request from UWS, given no later
than a date reasonably necessary to permit preparation and timely
filing of a petition in the United States Tax Court for
redetermination of the deficiency, or a court of similar jurisdiction
with respect to Taxes imposed by any other Taxing Authority, Newco
shall timely file such petition (at UWS's sole expense); or
(ii) If (1) UWS does not request Newco to file a petition for
redetermination of the deficiency pursuant to subsection
7.1(g)(i)hereof, (2) UWS requests that Newco file a claim for refund,
and (3) UWS provides Newco with sufficient funds to pay the deficiency
relating to the UWS Indemnity Issue, then Newco (at UWS's sole
expense) shall file a claim for refund thereof and, if the claim is
denied, bring an action in a court of competent jurisdiction seeking
such refund.
(iii) In the event that a judgment of the United States Tax Court
or other court of competent jurisdiction results in an adverse
determination with respect to the UWS Indemnity Issue, then UWS shall
have the right to cause Newco to appeal from such adverse
determination at UWS's sole expense.
(iv) UWS and its representatives, at UWS's sole expense, shall be
entitled to participate in (1) all conferences, meetings, or
proceedings with any Taxing Authority, the subject matter of which is
a UWS Indemnity Issue (that is not a Newco Issue), and (2) all
appearances before any court, the subject matter of which is a UWS
Indemnity Issue (that is not a Newco Issue).
(h) The right to participate referred to in subsection 7.1(g)(iv)
hereof shall include the submission and content of documentation, memoranda of
fact and law and briefs, the conduct of oral arguments or presentations, the
selection of witnesses, and the negotiation of stipulations of fact with respect
to a UWS Indemnity Issue (that is not a Newco Issue).
(i) If the proposed adjustment relating to a UWS Indemnity Issue
is also a Newco Issue (or if the proposed adjustment relates solely to
a Newco Issue that is not a UWS Indemnity Issue), then Newco shall be
fully responsible for the conduct of the Tax Controversy, including
matters pertaining to any UWS Indemnity Issue, but Newco shall use
reasonable efforts
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<PAGE>
to involve UWS in the conduct of the Tax Controversy insofar as it
relates to any UWS Indemnity Issue. Newco shall notify UWS in advance
of any such proceedings and, at its own expense, UWS shall attend all
conferences, meetings, or proceedings with any Taxing Authority, the
subject matter of which is or includes any UWS Indemnity Issue. UWS
shall use all reasonable efforts to assist Newco in resisting any
deficiency assertions by any Taxing Authority relating to any such
Newco Indemnity Issue.
7.2 Cooperation. UWS and Newco agree to afford full cooperation to one
another and to their respective representatives, if any, in any Tax Controversy
involving:
(a) any Tax Return filed or required to be filed by or for any member
of the UWS Group or the Newco Group for any pre-Distribution period, or
(b) any item or issue affecting UWS or Newco's potential liability
hereunder. Such cooperation shall include, but not by way of limitation:
(i) preparing responses to information requests by any Taxing
Authority;
(ii) making available books, records and other documentation
(including, but not by way of limitation, working papers and
schedules) relevant to such proceeding, and systems support for
documentation furnished in electronic form;
(iii) making directors, officers or employees available to appear
in person for interview or for testimony;
(iv) making employees available on a mutually convenient basis to
provide additional information and explanation of materials provided
hereunder;
(v) executing powers of attorney, tax information authorizations
and any other necessary or appropriate authorizations;
(vi) executing agreements with the Taxing Authority or other
documents reasonably necessary or appropriate for the settlement or
pursuit of the contest of such issue; and
(vii) doing whatever is reasonable in the circumstances to assist
the other Party in proving that an acquisition does not constitute a
50% Acquisition.
7.3 Record Retention. The Parties, on behalf of themselves and the members
of their respective Affiliated Groups, agree to
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<PAGE>
retain all books, records, returns, schedules, documents and all material papers
or relevant items of information for periods prior to the Date of Distribution
for the later of (i) seven (7) years; (ii) the full period of the applicable
statute of limitations, including any extensions thereof; or (iii) in the case
of a Tax year which is the subject of an audit, until a Final Determination of
Tax with respect to such year occurs. If, under legislation enacted after the
date of this Agreement, the statute of limitations with respect to a transaction
does not begin to run until the IRS or other Taxing Authority is notified of the
transaction, then the statute of limitations for purposes of subsection 7.3(ii)
shall also not begin to run until such notification is given.
ARTICLE VIII
PAYMENTS
8.1 Payments in General. Any amount required to be paid by one Party to
the other pursuant to this Agreement (other than the payments described in
Sections 2.4 and 2.5 and subsections 2.2(c) and 7.1(g)(ii)) shall be paid in
immediately available funds within thirty (30) days after written demand
therefor from the other Party given after a Final Determination of the amount
thereof.
8.2 Interest on Late Payments. Any amount payable under this Agreement by
one Party to another Party shall, if not paid within ten (10) business days
after the due date specified in this Agreement, bear interest from such due date
until the date paid at the applicable Federal short term rate as defined in
Section 6621 of the Code in effect on the due date.
8.3 Notice. UWS and Newco shall give each other prompt notice of any
payment that may be due under this Agreement.
8.4 Tax Items. Except to the extent already provided for in this
Agreement, the amount of any indemnification payment required hereunder shall
take into account the Tax Benefit, if any, allowable to the indemnified Party
resulting from the event giving rise to such indemnification payment and
additional Taxes, if any, incurred by the indemnified Party resulting from such
indemnification and any additional indemnification payment required by this
section. The Parties will cooperate with each other to determine the amounts
described in this section. This Section 8.4 shall not apply to subsection
2.2(c).
ARTICLE IX
ADMINISTRATIVE PROVISIONS
9.1 Interest. Except as expressly provided herein, no obligation to pay
or right to collect interest or other amounts shall arise by virtue of this
Agreement.
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<PAGE>
9.2 Expenses. Each party to this Agreement hereby agrees to be
responsible for all of the Expenses which it may incur in carrying out its
duties hereunder.
ARTICLE X
DISPUTE RESOLUTION
Either Party may give the other written notice of any controversy or claim
between the Parties arising out of or relating to this Agreement, or the breach
hereof ("Claim") not resolved in the normal course of business. Within 10 days
after delivery of the notice of a Claim, the receiving Party shall submit to the
other a written response. The notice and response shall include a statement of
such Party's position and a summary of arguments supporting that position and
the name and title of the executive who will represent that Party and of any
other person who will accompany such executive in resolving the Claim. Within
twenty (20) days after delivery of the first notice, the executives of both
Parties shall meet at a mutually acceptable time and place, and thereafter as
often as they reasonably deem necessary, and shall negotiate in good faith to
attempt to resolve the Claim. All reasonable requests for information made by
one Party to the other will be honored.
Claims not resolved through negotiation between executives within sixty
(60) days after the delivery of the first notice described above shall be
submitted, upon application of either Party, for resolution by binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association (the "Rules"). Arbitration shall be by a single
arbitrator experienced in the matters that are at issue with respect to the
Claim, which arbitrator shall be selected by the Parties in accordance with the
Rules. The arbitration shall be conducted in Milwaukee, Wisconsin (or at any
other place agreed upon by the Parties and the arbitrator). The decision of the
arbitrator shall be final and binding as to all matters at issue with respect to
the Claim; provided, however, if necessary such decision may be enforced by
either Party in any court of law having jurisdiction over the Parties or the
subject matter of the Claim. Unless the arbitrator shall assess the costs and
expenses of the arbitration proceeding and of the Parties differently, each
Party shall pay its costs and expenses incurred in connection with the
arbitration proceeding, and the costs and expenses of the arbitrator shall be
shared equally by the Parties.
All Claims shall be resolved only in accordance with the provisions of this
Article IX; provided, however, that nothing contained herein shall preclude
either Party from seeking or obtaining (i) injunctive relief to prevent an
actual or threatened breach of any of the provisions of this Agreement, or (ii)
equitable or other judicial relief to enforce the provisions
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<PAGE>
of this Article IX hereof or to preserve the status quo pending resolution of
Claims hereunder.
ARTICLE XI
MISCELLANEOUS
11.1 Enforceability. In case any one or more of the provisions contained
in this Agreement should be invalid, illegal or unenforceable, the
enforceability of the remaining provisions contained herein shall not in anyway
be affected or impaired thereby.
11.2 Modification of Agreement. No modification, amendment or waiver of
any provision of this Agreement shall be effective unless the same shall be in
writing, and signed by each of the Parties hereto, and then such modification,
amendment or waiver shall be effective only in the specific instance and for the
purpose for which given.
11.3 Successors and Assigns. Except to the extent provided by operation of
law or as provided herein, neither this Agreement nor any rights hereunder shall
be assignable or transferable by either Party hereto, without the prior written
consent of the other Party hereto. Each Party hereby guarantees the performance
of all actions, covenants, agreements and obligations provided under this
Agreement of each of its subsidiaries. Each Party shall, upon the written
request of the other Party, cause any of its subsidiaries to formally execute
this Agreement. This Agreement shall be binding upon, and shall inure to the
benefit of, the successors and assigns of each Party. If one or more persons
acquires all or substantially all of the assets of UWS or Newco, UWS and Newco
each agree that, as a condition to the closing of such acquisition, such person
or persons must agree to indemnify the nonacquired Party for any Restructuring
Taxes incurred by that Party as a result of such acquisition.
11.4 Term. This Agreement shall commence on the date of execution
indicated above and shall continue in effect until otherwise agreed to in
writing by the Parties or their successors and assigns.
11.5 Rights Confined to Parties. Nothing expressed or implied herein is
intended or shall be constructed to confer upon or to give to any person,
firm or corporation (other than the Parties hereto, members of their
Affiliated Groups, and their successors and assigns) any right, remedy or
claim under or by reason of this Agreement or of any term, covenant or
condition hereof. All terms, covenants, conditions, promises and agreements
contained herein shall be for the sole and exclusive benefit of the Parties
hereto, the members of their Affiliated Groups, and their successors and
assigns.
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<PAGE>
11.6 Notices. All demands, notices and communications under this Agreement
shall be in writing and shall be deemed to have been duly given if personally
delivered or sent by certified or registered United States Mail, postage
prepaid, to:
(a) in the case of UWS:
(b) in the case of Newco:
11.7 Effect of Headings. The paragraph headings herein are for convenience
only and shall not affect the construction hereof.
11.8 Governing Law. The provisions of this Agreement, and all rights and
obligations of the Parties hereunder shall be governed by the laws of the State
of Wisconsin.
11.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall, when so executed, be considered an original
and all of which, taken together, shall be considered one document.
11.10 Prior Tax Sharing Agreements. This Agreement shall supersede any
and all tax sharing and indemnification (or similar) agreements between any of
the members of the UWS Group, on the one hand, and any of the members of the
Newco Group, on the other hand.
UNITED WISCONSIN SERVICES, INC.
By:
------------------------------------
Title:
--------------------------------------
NEWCO/UWS, INC.
By:
------------------------------------
Title:
--------------------------------------
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<PAGE>
SETTLEMENT AGREEMENT
This Agreement, entered into this 1st day of April, 1998 by and between
United Wisconsin Services, Inc., a Wisconsin corporation ("UWS"), on behalf of
itself and on behalf of UWS Acquisition Co., a Wisconsin corporation to be
formed which initially will be a wholly owned subsidiary of UWS ("UWS
Acquisition"), Wallace J. Hilliard ("Hilliard") and Ronald A. Weyers ("Weyers").
RECITALS
1. UWS, Hilliard and Weyers are parties to an Agreement and Plan of
Merger dated July 31, 1996 between UWS, Blue Cross & Blue Shield
United of Wisconsin, American Medical Security Group, Inc. (the
"Company"), Hilliard and Weyers (the "Merger Agreement").
2. Pursuant to Article VIII of the Merger Agreement, UWS has asserted
claims against the Shareholders (as defined in the Merger Agreement).
3. Hilliard, in his capacity as a Shareholder and as Agent (both as
defined in the Merger Agreement) and UWS desire to settle any and all
claims under the Merger Agreement.
4. UWS has submitted a Private Letter Ruling Request ("PLR") to the
Internal Revenue Service ("IRS") regarding a possible distribution to
existing shareholders of UWS of all of the stock of UWS Acquisition by
means of a tax-free spinoff (the "Spinoff").
5. In processing the PLR, the IRS has requested that certain shareholders
of UWS, including Hilliard and Weyers, make certain representations
regarding their plan or intention to sell or otherwise transfer either
Common Stock of UWS ("UWS Common Stock") or Common Stock of UWS
Acquisition ("UWS Acquisition Common Stock") received by them in the
Spinoff.
6. Hilliard and Weyers are willing to make the representations referred
to in Recital 5 above, along with certain additional covenants
relating to their UWS Common Stock and UWS Acquisition Common Stock to
be received in the Spinoff.
7. In connection with the Merger Agreement, each of Hilliard and Weyers
entered into the Registration Rights Agreement (as defined in the
Merger Agreement).
8. In connection with the Spinoff, the parties desire that the terms of
the Registration Rights Agreement be extended to cover UWS Acquisition
Common Stock to be received by Hilliard and Weyers in the Spinoff.
<PAGE>
9. In connection with their respective Employment and Noncompetition
Agreements (as defined in the Merger Agreement) (the "Employment
Agreement"), each of Hilliard and Weyers received Options (as defined
in the Employment Agreements).
10. The parties desire to set forth herein the manner in which the Options
will be treated in the Spinoff.
NOW, THEREFORE, the parties agree as follows:
1. RELEASE AND DISCHARGE OF INDEMNIFICATION CLAIMS. Concurrently with
the execution of this Agreement, Hilliard, as Agent, and UWS shall
(a) execute and deliver the Mutual Release and Termination Agreement
attached hereto as Exhibit A, and (b) execute and deliver the written
instructions to the Escrow Agent attached hereto as Exhibit B
providing for the payment to UWS of $500,000.
2. CERTIFICATION. Concurrently with the execution of this Agreement,
each of Hilliard and Weyers shall execute a Certification in the form
attached hereto as Exhibit C.
3. AMENDMENT TO EMPLOYMENT AGREEMENT. Concurrently with the execution of
this Agreement, each of Hilliard and Weyers and American Medical
Security Holdings, Inc. shall enter into an Amendment to Employment
and Noncompetition Agreement in the form attached hereto as Exhibit D
(the "Amendment"). The parties agree that, upon execution of the
Amendment, neither Hilliard nor Weyers will be subject to the terms of
any insider trading policies of UWS or any of its current
subsidiaries, except for any general trading limitations or
restrictions under federal or state securities laws.
4. OPTION. If the Spinoff is completed, each of Hilliard and Weyers will
receive in exchange for or as a result of their holding Options (as
defined in the Employment Agreement) "stapled options" consisting of
an equal number of options to purchase stock of UWS and UWS
Acquisition, in each case with an exercise price proportionally
adjusted or set to take into account the economic value of the Options
immediately prior to the Spinoff. Any such adjustment shall be made
such that (a) the aggregate exercise price of the stapled options
shall not be greater than the aggregate exercise price of the original
Option, (b) the other terms of the stapled options shall not be less
favorable to the option holder than the original Options, and (c) the
securities to be issued to the option holder pursuant to the stapled
options shall be registered under the Securities Act of 1933, as
amended, on Form S-8 or other appropriate form.
2
<PAGE>
5. REGISTRATION RIGHTS. On or before the Spinoff is completed, UWS
Acquisition and Hilliard and Weyers shall enter into a Registration
Rights and Stock Restriction Agreement in the form attached hereto as
Exhibit E concerning certain matters relating to their ownership of
UWS Acquisition Common Stock.
6. ARBITRATION. Any controversy or dispute arising out of or relating to
this Agreement shall be settled by a single arbitrator in arbitration
conducted in Chicago, Illinois in accordance with the Commercial
Arbitration Rules of the American Arbitration Associate, and judgment
upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. The arbitrator's decision shall be in
writing and shall be final and nonappealable. The arbitrator also
shall make a determination regarding which party's legal position in
any such controversy or claim is the more substantially correct (the
"Prevailing Party") and the arbitrator may require the other party to
pay the reasonable legal and other professional fees and costs
incurred by the Prevailing Party in connection with such arbitration
proceeding and any necessary court action.
7. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given (i) when delivered personally; (ii)
the second business day after being deposited in the United States
mail registered or certified (return receipt requested); (iii) the
first business day after being deposited with Federal Express or any
other recognized national overnight courier service or (iv) on the
business day on which it is sent and received by facsimile, in each
case to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) If to UWS:
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, WI 53203
Attention: Thomas R. Hefty, President
With a copy to:
Michael Best & Friedrich LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
Attention: Geoffrey R. Morgan.
3
<PAGE>
(b) If to Hilliard or Weyers:
Wallace J. Hilliard
4443 Indian Trails
Green Bay, WI 54313
Ronald A. Weyers
2643 Good Sheperd Lane
Green Bay, WI 54313
With a copy to:
Godfrey & Kahn, S.C.
333 Main Street, Suite 600
Green Bay, WI 54307-3067
Attention: Benjamin W. Laird
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
Attention: Randall J. Erickson
8. MISCELLANEOUS. This Agreement (including the exhibits, documents and
instruments referred to herein or therein):
(a) constitutes the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, among the
parties, or any of them with respect to the subject matter
hereof;
(b) is not intended to confer upon any person which is not a party
hereto any rights or remedies hereunder;
(c) shall not be assigned by operation of law or otherwise except
that UWS may assign all or any portion of its rights hereunder to
UWS Acquisition or any other subsidiary of UWS; and
(d) may be executed in two or more counterparts which together shall
constitute a single agreement.
9. WAIVER; REMEDIES. No delay or failure on the part of any party hereto
to exercise any right, power, or privilege hereunder shall operate as a waiver
hereof, nor shall any waiver on the part of any party hereto of any right,
power, or privilege hereunder
4
<PAGE>
operate as a waiver of any other right, power, or privilege hereunder, nor shall
any single or partial exercise of any right, power, or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power, or privilege hereunder.
10. SEVERABILITY. If any provision of this Agreement shall be held by any
court of competent jurisdiction to be illegal, invalid or unenforceable, such
provision shall be construed and enforced as if it had been more narrowly drawn
so as not to be illegal, invalid or unenforceable, and such illegality,
invalidity or unenforceability shall have no effect upon and shall not impair
the enforceability of any other provision of this Agreement.
11. GOVERNING LAW. This Agreement shall be construed in accordance with
the law of the State of Wisconsin (without regard to principles of conflicts of
laws) applicable to contracts made and to be performed within such State.
UNITED WISCONSIN SERVICES, INC.
By: /s/ Thomas R. Hefty
-------------------------------------
Its: President
------------------------------------
/s/ Wallace J. Hilliard
----------------------------------------
Wallace J. Hilliard
/s/ Ronald A. Weyers
----------------------------------------
Ronald A. Weyers
<PAGE>
EXHIBIT A
MUTUAL RELEASE AND TERMINATION AGREEMENT
This Agreement ("Agreement") is made and entered into as of this 1st day of
April, 1998 by and among United Wisconsin Services, Inc., a Wisconsin
corporation (the "Company"), Wallace J. Hilliard ("Hilliard"), individually and
as Agent under the Escrow Agreement (hereinafter defined), and Ronald A. Weyers,
individually (collectively the "Principal Shareholders").
RECITALS
WHEREAS, the Principal Shareholders, individually, and the Company are
parties to an Agreement and Plan of Merger dated July 31, 1996 (the "Merger
Agreement") between the Company, Blue Cross & Blue Shield United of Wisconsin,
American Medical Security Group, Inc. and the Principal Shareholders;
WHEREAS, Hilliard, as Agent, is a party to the Escrow Agreement dated
December 3, 1996 (the "Escrow Agreement"), between the Company, Wallace J.
Hilliard as Agent, and Bank One Wisconsin Trust Company, N.A; and
WHEREAS, the parties hereto each desired to release all claims under the
Merger Agreement and Escrow Agreement and to terminate the Escrow Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
agree as follows:
ARTICLE I
MUTUAL RELEASE AND TERMINATION OF ESCROW AGREEMENT
SECTION 1.1 MUTUAL RELEASE. Effective as of the execution hereof:
(a) Each Principal Shareholder, individually and on behalf of
the Shareholders (as defined in the Merger Agreement) forever and irrevocably
releases and discharges the Company, its subsidiaries, and their respective
directors, officers, employees, agents and representatives, and each of them,
past and present, from any and all actions, suits, obligations, damages, losses,
claims, liabilities and demands of whatever character (collectively, "Claims")
relating to, arising from or in any way connected with (i) the Merger Agreement
(including, but not limited to, any claims for indemnification thereunder), and
(ii) the Escrow Agreement. This release is limited to a release of Claims in
connection with the Merger Agreement and the Escrow Agreement and does not
extend to any Claims arising or resulting from a breach or violation by the
Company of its obligations under this Agreement or any other agreement between
Principal Shareholders and the Company, including but not limited to the
Registration Rights Agreement and the Employment Agreements, as each such term
is defined in the Merger Agreement.
1
<PAGE>
(b) The Company forever and irrevocably releases and discharges
the Principal Shareholders and the Shareholders from any and all Claims relating
to, or arising from or in any way connected with (i) the Merger Agreement
(including, but not limited to, any claims for indemnification thereunder), and
(ii) the Escrow Agreement. This release is limited to a release of Claims in
connection with the Merger Agreement and the Escrow Agreement and does not
extend to any Claims arising or resulting from a breach or violation by the
Principal Shareholders of their respective obligations under this Agreement or
any other agreement between either Principal Shareholder and the Company,
including but not limited to the Registration Rights Agreement and their
respective Employment Agreements.
(c) It is understood and agreed that this release extends to all
Claims arising pursuant to the Merger Agreement and Escrow Agreement, whether
known or unknown, suspected or unsuspected, and that the facts in respect of
which these releases are given hereafter may prove to be different than the
facts now known or believed. Each of the releasing parties hereto represents and
warrants that such party has not heretofore assigned or transferred to any firm,
corporation or person whatsoever, any Claim of the types hereby released.
SECTION 1.2 TERMINATION OF ESCROW AGREEMENT. Effective upon the
execution hereof, the Escrow Agreement (hereinafter defined) is hereby
terminated in its entirety and shall be of no further force or effect.
Concurrently with the execution hereof, the Company and Wallace J. Hilliard
shall each execute and deliver to the Escrow Agent (as such term is defined in
the Escrow Agreement) the letter of direction attached as Exhibit B to the
Settlement Agreement of even date herewith which letter directs the Escrow Agent
to disburse all remaining escrowed funds in accordance with the instructions set
forth therein.
ARTICLE II
MISCELLANEOUS
SECTION 2.1 BENEFIT AND ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto, their heirs,
successors, assignees, and beneficiaries in interest, provided, however, that
neither party shall assign this Agreement.
SECTION 2.2 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Wisconsin
(regardless of such State's conflict of laws principles), and without reference
to any rules of construction regarding the party responsible for the drafting
hereof.
SECTION 2.3 COUNTERPARTS. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument, provided that all such counterparts, in the aggregate, shall contain
the signatures of all parties hereto.
SECTION 2.4 HEADINGS. All Section headings herein are inserted for
convenience only and shall not modify or affect the construction or
interpretation of any provision of this Agreement.
2
<PAGE>
SECTION 2.5 AMENDMENT, MODIFICATION AND WAIVER. This Agreement may
not be modified, amended or supplemented except by mutual written agreement of
all the parties hereto. Any party may waive in writing any term or condition
contained in this Agreement and intended to be for its benefit; provided,
however, that no waiver by any party, whether by conduct or otherwise, in any
one or more instances, shall be deemed or construed as a further or continuing
waiver of any such term or condition. Each amendment, modification, supplement
or waiver shall be in writing signed by the party or the parties to be charged.
SECTION 2.6 ENTIRE AGREEMENT. This Agreement (and its appendix)
represents the full and complete agreement of the parties with respect to the
subject matter hereof and supersede and replace any prior understandings and
agreements among the parties with respect to the subject matter hereof and no
provision or document of any kind shall be included in or form a part of such
agreement unless signed and delivered to the other party by the parties to be
charged.
SECTION 2.7 THIRD-PARTY BENEFICIARIES. No third parties are
intended to benefit from this Agreement, and no third-party beneficiary rights
shall be implied from anything contained in this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
UNITED WISCONSIN SERVICES, INC.
By:/s/ Thomas R. Hefty
-------------------------------------
Thomas R. Hefty, President
/s/ Wallace J. Hilliard
----------------------------------------
Wallace J. Hilliard, individually, on
behalf of the Shareholders and as Agent
/s/ Ronald A. Weyers
----------------------------------------
Ronald A. Weyers, individually and on
behalf of the Shareholders
3
<PAGE>
EXHIBIT B
April 1, 1998
VIA MESSENGER
Bank One Trust Company, N.A.
111 East Wisconsin Avenue
5th Floor
Milwaukee, WI 53202
ATTN: Francine Olstinske
RE: Escrow Agreement dated December 3, 1996 ("Escrow Agreement") by and
among United Wisconsin Services, Inc., a Wisconsin Corporation
("UWS"), Wallace J. Hilliard ("Agent"), and Bank One Wisconsin Trust
Company, N.A. (the "Escrow Agent")
----------------------------------------------------------------------
Ladies and Gentlemen:
You are hereby directed and instructed as Escrow Agent to immediately
distribute the Escrowed Funds (as defined in the Escrow Agreement) as follows:
1. $500,000 to United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, WI 53203
2. The entire remaining balance of the Escrowed Funds in accordance
with the written instructions of the Agent.
This letter shall constitute "written instructions" to you in accordance
with Section 4(c) of the Escrow Agreement.
UNITED WISCONSIN
SERVICES, INC.
By: /s/ Wallace J. Hilliard
-------------------------------- ----------------------------------------
Title: Wallace J. Hilliard, as Agent
------------------------------
4
<PAGE>
EXHIBIT C
REPRESENTATION OF
WALLACE J. HILLIARD
The undersigned hereby represents as follows:
He has no plan or intention to sell, exchange, transfer by gift
or otherwise dispose of any of his stock in either the
distributing or controlled corporation subsequent to the proposed
transaction.
April _____, 1998 ----------------------------------------
Wallace J. Hilliard
<PAGE>
EXHIBIT C
REPRESENTATION OF
RONALD A. WEYERS
The undersigned hereby represents as follows:
He has no plan or intention to sell, exchange, transfer by gift
or otherwise dispose of any of his stock in either the
distributing or controlled corporation subsequent to the proposed
transaction.
April _____, 1998 ----------------------------------------
Ronald A. Weyers
<PAGE>
EXHIBIT D
AMENDMENT TO EMPLOYMENT
AND NONCOMPETITION AGREEMENT
This Amendment is entered into as of April ____, 1998, by and between
American Medical Security Holdings, Inc., a Wisconsin corporation (the
"Company") and a wholly owned subsidiary of United Wisconsin Services, Inc., a
Wisconsin corporation ("UWSI"), and Wallace J. Hilliard, an individual
("Employee").
RECITALS
WHEREAS, the parties and UWSI have entered into an Employment and
Noncompetition Agreement executed as of December 3, 1996; and
WHEREAS, the parties desire to amend Section 1.2 of the Employment
Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual agreements and
covenants contained herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged by the Company and
Employee, it is hereby agreed as follows:
1. The first sentence of Section 1.2 of the Employment Agreement is
hereby amended to read in its entirety as follows:
Employee shall be employed by the Company and shall have
such duties as may be set forth by the President from time
to time.
2. All other terms and conditions of the Employment Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year written above.
AMERICAN MEDICAL SECURITY
HOLDINGS, INC.
By:
-------------------------------------
----------------------------------------
Wallace J. Hilliard
<PAGE>
EXHIBIT D
AMENDMENT TO EMPLOYMENT
AND NONCOMPETITION AGREEMENT
This Amendment is entered into as of April ____, 1998, by and between
American Medical Security Holdings, Inc., a Wisconsin corporation (the
"Company") and a wholly owned subsidiary of United Wisconsin Services, Inc., a
Wisconsin corporation ("UWSI"), and Ronald A. Weyers, an individual
("Employee").
RECITALS
WHEREAS, the parties and UWSI have entered into an Employment and
Noncompetition Agreement executed as of December 3, 1996; and
WHEREAS, the parties desire to amend Section 1.2 of the Employment
Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual agreements and
covenants contained herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged by the Company and
Employee, it is hereby agreed as follows:
1. The first sentence of Section 1.2 of the Employment Agreement is
hereby amended to read in its entirety as follows:
Employee shall be employed by the Company and shall have
such duties as may be set forth by the President from time
to time.
2. All other terms and conditions of the Employment Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year written above.
AMERICAN MEDICAL SECURITY
HOLDINGS, INC.
By:
-------------------------------------
----------------------------------------
Ronald A. Weyers
<PAGE>
EXHIBIT E
REGISTRATION RIGHTS AND STOCK
RESTRICTION AGREEMENT
This Agreement ("Agreement") is made and entered into as of this 1st day of
April, 1998 by and among United Wisconsin Services Acquisition, Inc., a
Wisconsin corporation (the "Company"), Wallace J. Hilliard and Ronald A. Weyers
(individually a "Holder" and collectively the "Holders").
RECITALS
WHEREAS, the Holders and United Wisconsin Services, Inc. ("UWS") are
parties to a Registration Rights and Stock Restriction Agreement dated December
3, 1996, pursuant to which, among other things, the Holders obtained
registration rights with respect to shares of common stock, no par value, of UWS
("UWSI Common Stock") and options to purchase shares of UWSI Common Stock ("UWSI
Options") owned by the Holders.
WHEREAS, on the date hereof UWS is distributing all of the issued and
outstanding shares of the Company's no par value common stock ("Company Common
Stock") to the holders of the UWSI Common Stock on a one-for-one basis (the
"Spinoff"), and pursuant to the Spinoff the holders of UWSI Options will receive
options to purchase shares of Company Common Stock ("Company Options").
WHEREAS, in connection with the transactions contemplated by the Spinoff,
the Holders desire to obtain certain registration rights with respect to Company
Common Stock to be received in the Spinoff and the Company Options, and the
Company desires to enter into the agreements with the Holders as set forth
below.
NOW THEREFORE, the parties agree as follows:
ARTICLE I
REGISTRATION RIGHTS
Section 1.01 GENERAL. For purposes of Article I: (i) the terms
"register", "registered" and "registration" refer to a registration effected by
preparing and filing a registration statement (a "registration statement") in
compliance with the Securities Act of 1933, as amended (the "1933 Act"), and the
declaration or ordering of effectiveness of such registration statement; and
(ii) the term "Registrable Securities" means the shares of Company Common Stock
to be received by the Holders in the Spinoff and any shares of Company common
stock acquired by the Holders through the exercise of Company Options or any
securities issued in exchange therefor in the event of a recapitalization, stock
split, merger, consolidation or other combination or exchange of shares.
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<PAGE>
Section 1.02 REQUEST FOR REGISTRATION. Subject to Section 1.07(a)
hereof, at any time on or after the date hereof if the Company shall receive a
written request (specifying that it is being made pursuant to this Section 1.02)
from both Holders that the Company register at least fifty percent (50%) of the
then outstanding Registrable Securities, then the Company shall use its best
efforts to cause to be registered all Registrable Securities that the Holders
have requested be registered. Notwithstanding the foregoing, the Company shall
not be obligated to effect a registration pursuant to this Section 1.02 during
the period starting with the date forty-five (45) days prior to the Company's
estimated date of filing of, and ending on a date one-hundred-eighty (180) days
following the effective date of, a registration statement pertaining to an
underwritten public offering of Company Common Stock for the account of the
Company. The Company shall be obligated to effect not more than two (2)
registrations pursuant to this Section 1.02. Any request for registration under
this Section must be for a firmly underwritten public offering in accordance
with terms agreed upon between the underwriter or underwriters and the Holders
to be managed by an underwriter or underwriters designated by the Holders and
reasonably acceptable to the Company. Notwithstanding anything else in this
Agreement to the contrary, all of the Company's obligations under this Section
shall expire on the earlier of December 3, 2001 or the date on which the Holders
own in the aggregate less than three percent of the outstanding Company Common
Stock. Subject to the provisions of Section 1.07(a) hereof, the Company shall
be permitted to cause to be registered additional shares of Company Common Stock
(whether previously unissued or owned by a person or entity designated by the
Company) in connection with any registration effected pursuant to this Section
1.02. If, while a registration request is pending pursuant to this Section
1.02, the Company has determined in good faith that (A) the filing of a
registration statement could jeopardize or delay any contemplated material
transaction other than a financing plan involving the Company or would require
the disclosure of material information that the Company had a bona fide business
purpose for preserving as confidential; or (B) the Company then is unable to
comply with requirements of the Securities and Exchange Commission ("SEC")
applicable to the requested registration (notwithstanding its best efforts to so
comply), the Company shall not be required to effect a registration pursuant to
this Section 1.02 until the earlier of (1) the date upon which such contemplated
transaction is completed or abandoned or such material information is otherwise
disclosed to the public or ceases to be material or the Company is able to so
comply with applicable SEC requirements, as the case may be, and (2) 45 days
after the Company makes such good-faith determination.
Section 1.03 COMPANY REGISTRATION. Subject to Section 1.07(b)
hereof, if at any time the Company determines to register any Company Common
Stock under the 1933 Act in connection with the public offering of such
securities solely for cash on a form that would also permit the registration of
any of the Registrable Securities, the Company shall promptly give the Holders
written notice of such determination. Upon the written request of any Holder
received by the Company within thirty (30) days after the giving of any such
notice by the Company, the Company shall use its best efforts to cause to be
registered all of the Registrable Securities that the Holders have requested be
registered together with the registration of the Company Common Stock otherwise
being registered by the Company. Notwithstanding anything else in this
Agreement to the contrary, all of the Company's obligations under this Section
shall expire on the earlier of the fifth anniversary of the date hereof or the
date on which the Holders own in the aggregate less than three percent of the
outstanding Company Common Stock. The Company shall be obligated to include
Registerable Securities in not more than two (2)
2
<PAGE>
registrations pursuant to this Section 1.03. The Company may, for any reason or
for no reason, elect to either not file or withdraw the filing of any
registration statement relating to a registration described in this Section 1.03
at any time prior to the effectiveness thereof and in such case the request by
the Holders to be included in such registration will not be deemed to have been
the exercise of one registration right under this Section 1.03.
Section 1.04 OBLIGATIONS OF THE COMPANY. Whenever the Company shall
be required under Sections 1.02 or 1.03 hereof to use its best efforts to effect
the registration of any Registrable Securities, the Company shall:
(a) as expeditiously as reasonable possible, prepare and file with
the Securities and Exchange Commission ("SEC," which term includes any successor
agency) a registration statement with respect to such Registrable Securities and
use its reasonable efforts to cause such registration statement to become and
remain effective under the 1933 Act, except that the Company shall in no event
be obligated to cause any such registration to remain effective for more than
three months;
(b) as expeditiously as reasonably possible, prepare and file with
the SEC such amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the 1933 Act with respect to the
disposition of all securities covered by such registration statement;
(c) as expeditiously as reasonably possible, furnish to the Holders
such numbers of copies of a prospectus, including a preliminary prospectus, and
such other documents as they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them;
(d) as expeditiously as reasonably possible, use its reasonable
efforts to register and qualify the securities covered by such registration
statement under such securities or Blue Sky laws of such jurisdictions as shall
be reasonably appropriate or requested by the Holders, except that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such jurisdiction;
(e) advise each Holder, promptly after it shall receive notice or
obtain knowledge thereof, of (i) the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose, and (ii) any similar action by
any regulatory agency of competent jurisdiction under the securities or Blue Sky
laws of any jurisdiction, and in any such case promptly use its reasonable best
efforts to prevent the issuance of any stop order or the taking of any such
similar action or to obtain its withdrawal if such stop order should be issued
or any such similar action shall be taken; and
(f) furnish to each Holder of Registrable Securities covered by such
registration statement copies of all documents proposed to be filed with respect
to any amendment or supplement to such registration statement or prospectus at a
reasonable time prior to such filing.
3
<PAGE>
Section 1.05 FURNISH INFORMATION. It shall be a condition precedent
to the obligations of the Company to take any action pursuant to this Article I
that the Holders shall furnish to the Company such information regarding them,
the Registrable Securities held by them, and the intended method of disposition
of such securities and such other matters as may be required by the 1933 Act and
other applicable law and regulation as the Company shall request and as shall be
required in connection with the action to be taken by the Company.
Section 1.06 EXPENSES OF REGISTRATION. In connection with a
registration pursuant to Section 1.02, all underwriter's discounts and
commissions, all registration and qualification fees, printers' and any
extraordinary accounting fees, required as a result of the Holders'
registration, shall be borne by the Holders and, all such expenses incurred in
connection with a registration pursuant to Section 1.03 shall be borne by the
Company, the Holders and any other sellers pro rata in relation to the number of
shares of Company Common Stock being registered by each such party. For any
registrations pursuant to Sections 1.02 or Section 1.03, all parties shall pay
all of their own respective attorneys' fees.
Section 1.07 UNDERWRITING REQUIREMENTS.
(a) In connection with any registration requested by Holders under
Section 1.02, the Company shall not be required under Section 1.02 to register
any Registrable Securities of any Holder unless such Holder accepts the terms of
the underwriting required by Section 1.02, and then only in such quantity as
will not, in the written opinion of the managing underwriters, exceed the
maximum number of shares that can be marketed at a price reasonably related to
the then current market price for such shares, or otherwise materially and
adversely affect such offering or the trading market for such shares (the
"Maximum Feasible Quantity"). All securities sold to cover any over-allotment
shall be apportioned among the Holders and the Company in proportion to the
total number of shares being sold by each, provided, however, that any such
over-allotment shall first be allocated to the Holders to the extent any of the
Registrable Securities of the Holders were not included in such registration
because the total number of Registrable Securities requested to be registered by
the Holders exceeded the Maximum Feasible Quantity for such registration, and
shall thereafter be allocated to the Company to the extent that the shares
requested to be registered by the Company were not included in such registration
because such shares, when added to the shares being registered by the Holders,
exceeded the Maximum Feasible Quantity for such registration.
(b) In connection with any registration in which Registerable
Securities are included pursuant to Section 1.03 hereof, the Company shall not
be required to include any of the Holders' Registrable Securities in such
registration unless the Holders accept the terms of the underwriting as agreed
upon between the Company and the underwriters selected by it, and then only in
such quantity as will not, when added to the shares otherwise being registered
by the Company, in the written opinion of the managing underwriters, exceed the
Maximum Feasible Quantity for such registration. All securities sold to cover
any over-allotment shall be apportioned among the Holders and the Company in
proportion to the total number of shares being sold by each; provided, however,
that any such over-allotment shall first be allocated to the Company to the
extent any of the securities of the Company were not included in such
registration because the total number of Registrable Securities included in such
registration by the Holders, when added to the shares otherwise being registered
by the Company, exceeded the
4
<PAGE>
Maximum Feasible Quantity for such registration, and shall thereafter be
allocated to the Holders to the extent that the Registrable Securities requested
to be registered by the Holders were not included in such registration because
such shares when added to the shares being requested by the Company, included
the Maximum Feasible Quantity for such registration.
ARTICLE II
STANDSTILL
Section 2.01 PURCHASES OF VOTING SECURITIES. Hilliard and Weyers
each agrees that, until December 3, 2006, without the prior written consent of
the Company, he will not acquire, offer or propose to acquire, directly or
indirectly, by purchase or otherwise, any securities of the Company, other than
pursuant to the Company Options, with the power to vote with respect to the
election of directors generally ("Voting Securities"), or direct or indirect
rights or options to acquire (through purchase, exchange, conversion or
otherwise) any Voting Securities, if any such acquisitions would require any
regulatory approval, application or notification other than as required by the
1934 Act.
Section 2.02. OTHER STANDSTILL PROVISIONS. Hilliard and Weyers each
agrees that until December 3, 1999, without the prior written consent of the
Company, he will not:
(a) make, or in any way participate, directly or indirectly, in any
"solicitation" of "proxies" (as such terms are defined in Rule 14a-1 under
the 1934 Act) to vote any Voting Securities, initiate or propose any
shareholder proposal or induce or attempt to induce any other person to
initiate any shareholder proposal;
(b) make any proposal, whether written or oral, to the Board of
Directors of the Company, or to any director or officer of the Company, or
otherwise make any public announcement or proposal whatsoever with respect
to a merger or other business combination, sale or transfer of assets,
liquidation or other extraordinary corporate transaction with the Company;
(c) form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the 1934 Act) with respect to any securities
of the Company or otherwise act, alone or in concert with others, to seek
to exercise any control or influence over the management, Board of
Directors or policies of the Company other than pursuant to his employment
with the Company or any of its subsidiaries.
Section 2.03. NO PUBLIC REQUESTS. Hilliard and Weyers each agrees that he
will not make a public request to the Company (or its directors, officers,
shareholders, employees or agents) to amend or waive any provisions of this
Article III, including without limitation any public request to permit him or
any other person to take any other action referred to in Sections 3.01 and 3.02
hereof.
5
<PAGE>
ARTICLE III
VOTING AGREEMENT
Hilliard and Weyers each agree that until December 3, 2006, to vote
all shares of Company Common Stock owned or held by them respectively, (or over
which they have or share voting power) in accordance with the directions of Blue
Cross & Blue Shield United of Wisconsin ("BCBSUW") on any matters relating to or
affecting the Blue Cross Blue Shield Association market conditions or rules and
regulations, as may be determined in good faith by the BCBSUW Board of
Directors.
ARTICLE IV
GENERAL PROVISIONS
Section 4.01 NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed given (i) when delivered
personally; (ii) the second business day after being deposited in the United
States mail registered or certified (return receipt requested); (iii) the first
business day after being deposited with Federal Express or any other recognized
national overnight courier service or (iv) on the business day on which it is
sent and received by facsimile, in each case to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) If to the Company:
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, WI 53203
Attention: Thomas R. Hefty, President
With a copy to:
Michael Best & Friedrich
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Geoffrey R. Morgan, Esq.
6
<PAGE>
(b) If to the Holders:
Wallace J. Hilliard
4443 Indian Trails
Green Bay, WI 54313
Ronald A. Weyers
2643 Good Sheperd Lane
Green Bay, WI 54313
With a copy to:
Godfrey & Kahn, S.C.
333 Main Street, Suite 600
Green Bay, WI 54307-3067
Attention: Benjamin W. Laird, Esq.
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
Attention: Randall J. Erickson, Esq.
Section 4.02 MISCELLANEOUS. This Agreement (including the exhibits,
documents and instruments referred to herein or therein):
(a) constitutes the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof;
(b) is not intended to confer upon any person which is not a party
hereto any rights or remedies hereunder;
(c) shall not be assigned by operation of law or otherwise; and
(d) may be executed in two or more counterparts which together shall
constitute a single agreement.
Section 4.03 WAIVER: REMEDIES. No delay or failure on the part of
any party hereto to exercise any right, power, or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part of any party
hereto of any right, power, or privilege hereunder operate as a waiver of any
other right, power, or privilege hereunder, nor shall any single or partial
exercise of any right, power, or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power, or privilege
hereunder.
7
<PAGE>
Section 4.04 SEVERABILITY. If any provision of this Agreement shall
be held by any court of competent jurisdiction to be illegal, invalid or
unenforceable, such provision shall be construed and enforced as if it had been
more narrowly drawn so as not to be illegal, invalid or unenforceable, and such
illegality, invalidity or unenforceability shall have no effect upon and shall
not impair the enforceability of any other provision of this Agreement.
Section 4.05 GOVERNING LAW. This Agreement shall be construed in
accordance with the law of the State of Wisconsin (without regard to principles
of conflicts of laws) applicable to contracts made and to be performed within
such State.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
UNITED WISCONSIN SERVICES ACQUISITION, INC.
By:/s/ Thomas R. Hefty
------------------------------------------
Thomas R. Hefty, President
/s/ Wallace J. Hilliard
---------------------------------------------
Wallace J. Hilliard
/s/ Ronald A. Weyers
---------------------------------------------
Ronald A. Weyers
8
<PAGE>
CONSOLIDATED FEDERAL INCOME TAX AGREEMENT
This Agreement is entered into this 10th day of June, 1988 to be effective
January 1, 1988 between Blue Cross & Blue Shield United of Wisconsin (BCBSU),
United Wisconsin Insurance Company, United Wisconsin Services, Inc., United
Wisconsin Proservices, Inc., Leasing Unlimited, Inc., United Wisconsin Life
Insurance Company, Compcare Health Services Insurance Corporation, ProHealth,
Inc. and Take Control, Inc. ("Subsidiaries"). BCBSU and Subsidiaries are
referred to herein as the "Consolidated Group." The corporations which comprise
the "Consolidated Group" are individually referred to herein as "Members".
Whereas, BCBSU and Subsidiaries are part of an affiliated group of
corporations within the meaning of Section 1504(a) of the Internal Revenue Code
of 1954, as amended (the "Code"); and
Whereas, the Consolidated Group intends to file a consolidated federal
income tax return and consolidated financial statements with the parent
corporation of BCBSU for the taxable year ending December 31, 1988 and
subsequent years; and
Whereas, it is anticipated that the consolidated tax return liability
for any tax year may be greater or less than the aggregate of the separate
tax return liabilities of all the Members; and
<PAGE>
Whereas, it is intended by this Agreement to establish obligations between
Members for the payment or refund of amounts in lieu of federal income taxes
with the effect that (1) each Member will benefit from those tax attributes
which that Member would be able to utilize if filing a separate return with the
Internal Revenue Service.
Now, therefore, in consideration of their mutual promises and of other good
and valuable consideration, BCBSU and each of the Subsidiaries on its own behalf
agree to allocate tax liability and benefit among Members of the Group as
follows:
I. When the consolidated group is in an alternative minimum tax position for
Federal tax purposes, the allocation shall be made in accordance with the
"Alternative Tax method" as shown in Exhibit I.
II. When the consolidated group is not in an alternative minimum tax position
for Federal tax purposes, the allocation shall be made in accordance with
the "Regular Tax Method" as shown in Exhibit II.
This allocation is not intended to be used for allocation of Federal tax
liability among members for purposes of determining the "Earnings &
Profits" of members for Federal tax purposes.
<PAGE>
In witness whereof, the parties hereto have executed this Agreement as of
the day and year first above written.
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
By:
------------------------------------------------------------
Thomas R. Hefty
President
By:
------------------------------------------------------------
Laurel Barnes
Secretary
UNITED WISCONSIN INSURANCE COMPANY
UNITED WISCONSIN LIFE INSURANCE COMPANY
UNITED WISCONSIN PROSERVICES, INC.
UNITED WISCONSIN SERVICES, INC.
By:
------------------------------------------------------------
Thomas R. Hefty
President
By:
------------------------------------------------------------
Laurel Barnes
Secretary
COMPCARE HEALTH SERVICES INSURANCE CORPORATION
By:
------------------------------------------------------------
Thomas R. Hefty
President
By:
------------------------------------------------------------
Mary Traver
Secretary
<PAGE>
LEASING UNLIMITED, INC.
By:
------------------------------------------------------------
Thomas R. Hefty
President
By:
------------------------------------------------------------
Laurel Barnes
Secretary
TAKE CONTROL, INC.
By:
------------------------------------------------------------
Thomas Gazzana
President
By:
------------------------------------------------------------
K. Brian Jacobson
Secretary
<PAGE>
EXHIBIT I
"Alternative Tax Method"
This allocation is used when the affiliated group of corporations is in a
consolidated alternative minimum tax position.
The steps required in the calculation are as follow:
1. Determine the ordinary income and NET capital gain of each member of the
group. Charge the member 20% in tax for both the ordinary income and net
capital gain.
2. Determine each member's current year ordinary and capital losses. to the
extent its losses can be utilized in the consolidated tax return, the
member receives a 20% tad benefit for the use of its losses.
3. Determine each member's capital loss carryovers that can be utilized in the
consolidated tax return.
These carryforwards are utilized in the order of the taxable year in which
such losses are sustained beginning with the taxable year which ends
earliest and applying all losses from taxable years ending on the same date
on a pro rata basis.
4. Determine the tax preferences and alternative minimum tax adjustments
(other than the book income/taxable income adjustment) attributable to each
member.
If the sum of the preferences and adjustments increases alternative minimum
taxable income, the member is charged 20% in tax. If the sum of the
preferences and adjustments reduces alternative minimum taxable income, the
member receives a 20% tax benefit.
5. For each member, determine a book/tax adjustment by using the following
formula:
(Book income of member - alternative minimum taxable income of that member)
x .50 =
Book/tax adjustment for that member.
This amount can be either a positive or negative number, for purposes of this
allocation.
<PAGE>
If the absolute of the aggregate of the negative book/tax adjustments exceeds
the aggregate of the positive book/tax adjustments, then each member who has a
negative book/tax adjustment must reduce this adjustment TO the following
amount.
Negative book/tax adjustments Aggregate of book/tax
of a member adjustments of all
members with positive
- --------------- x book/tax adjustment
Aggregate book/tax adjustment
of all members with negative
book/tax adjustments
Each member with a negative book/tax adjustment receives a 20% tax benefit for
the use of this adjustment. Each member with a positive book/tax adjustment is
charged 20% in tax.
6. Determine each member's alternative minimum tax NOL carryforwards that can
be utilized in the consolidated tax return. The earliest NOL's are
utilized first. If the NOL's are from the same year, they're applied on a
pro rata basis.
Each member receivers a 20% benefit for the use of its NOL carryforward.
7. Each member is allocated a portion of the alternative minimum tax exemption
amount that's allowed in the consolidated tax return. This allocation is
one in accordance with the following formula.
Exemption amount Exemption amount
allocated per allowed in the
member = consolidated tax
return
---------------------
# of members in
the group
A member receives a 20% tax benefit for the exemption amount allocated to
it.
8. A member gets a 100% benefit for its investment tax credit utilized during
the year.
9. A member is charged 100% of its ITC recapture for the year attributable to
that member.
<PAGE>
10. A member will receive 100% of the alternative minimum tax credit utilized
that's attributable to that member. The amount attributable to that member
is determined by first going back to the year the credit was generated.
The amount of the credit attributed to a member is equal to the following:
Members deferral
preference in Credit utilized in
year in which the current year's
credit arose x return
--------------------
Total deferral
preferences of
all members in year
the credit arose
<PAGE>
EXHIBIT II
"Regular Tax Method"
The steps required in determining the tax allocation under the "regular tax
method" are as follows:
1. Determine each member's ordinary income and net capital gains for the year
(before capital loss or NOL carryforwards).
The member with ordinary income is charged 40% of its ordinary income in
tax (34% in 1988) and the member with capital gain is charged 34%.
2. Determine each member's current year capital losses and current year
ordinary losses. If a members' losses are used in the consolidated return,
the member receives a 34% tax benefit for the use of its capital losses and
a 40% benefit for the use of its ordinary losses (34% in 1988 and
thereafter)
3. Determine each member's NOL and capital loss carryforwards that can be
utilized in the consolidated tax return. Carryforwards can be utilized in
the order of taxable years in which such losses are sustained beginning
with the taxable year which ends earliest and applying all losses from
taxable years ending on the same date as a pro rata basis.
Each member receives a 40% tax benefit (34% in 1988 and thereafter) if its
NOL carryover is used to offset ordinary income. If a capital loss or NOL
carryover are used to offset capital gain, the member receives a 34% tax
benefit.
4. If a member's ITC credit carryover is utilized in the consolidated tax
return, it receives a tax benefit of 100% of the ITC utilized.
5. A member is charged 100% of its ITC recapture for the year.
6. Each member's tax charges and tax benefits are totalled resulting in the
tax allocation for the period.
<PAGE>
7. A member will receive 100% of the alternative minimum tax credit utilized
that's attributable to that member. The amount attributable to that member
is determined by first going back to the year the credit was generated.
The amount of the credit attributed to a member is equal to the following:
Members deferral
preference in Credit utilized in
year in which the current year's
credit arose x return
--------------------
Total deferral
preferences of
all members in year
the credit arose
<PAGE>
Amendment to Consolidated Federal Income Tax
Allocation Agreement Dated June 10, 1988
This amendment to the Consolidated Federal Income Tax Allocation Agreement dated
June 10, 1988 is entered into this 6th day of August, 1993 to be effective for
the period January 1, 1990 through December 31, 1992 between Blue Cross & Blue
Shield United of Wisconsin (BCBSU), United Wisconsin Insurance Company (UWIC),
United Wisconsin Services, Inc. (UWSI), United Wisconsin Proservices, Inc.
(UWPS), Leasing Unlimited, Inc. (LUI), United Wisconsin Life Insurance Company
(UWLIC), Compcare Health Services Insurance Corporation (CHSIC), ProHealth, Inc.
(PH), Take Control, Inc. (TC), Meridian Resource, Inc. (MR), United Wisconsin
Capital Corporation (UWCC) and Valley Health Plan, Inc. (Valley) formerly
Midelfort Health Plan.
This amendment is made part of the Consolidated Federal Income Tax Allocation
Agreement dated June 10, 1988. Under this amendment, Exhibit 1 "Alternative Tax
Method" is revised to read as per the attached.
Now, therefore, in consideration of their mutual promises and other good and
valuable consideration, BCBSU and each of the subsidiaries on its own behalf
agrees to this amendment to the Federal Tax Allocation Agreement dated June 10,
1988.
In witness whereof, the parties hereto have executed this amendment as of the
day and year first above written.
<PAGE>
Amendment to Consolidated Federal Income Tax
Allocation Agreement Dated June 10, 1988
"Alternative Tax Method"
This allocation is used when the affiliated group of corporations is in a
consolidated alternative minimum tax position before considering the limitations
on NOL usage with respect to United Wisconsin Insurance Company preferred stock
and United Wisconsin Life Insurance Company's life insurance company taxable
income.
The steps required in the calculation are as follows:
1. Determine the ordinary income and NET capital gain of each member of the
group. Charge the member 20% in tax for both the ordinary income and net
capital gain.
2. Determine each member's current year ordinary and capital losses. To the
extent its losses can be utilized in the consolidated tax return, the
member receives a 20% tax benefit for the use of its losses.
3. Determine each member's capital loss carryovers that can be utilized in the
consolidated tax return.
These carryforwards are utilized in the order of the taxable year in which
such losses are sustained beginning with the taxable year which ends
earliest and applying all losses from taxable years ending on the same date
on a pro rata basis.
<PAGE>
4. Determine the tax preferences and alternative minimum tax adjustments
(other than the book income/taxable income adjustment) attributable to each
member.
If the sum of the preferences and adjustments increases alternative minimum
taxable income, the member is charged 20% in tax. If the sum of the
preferences and adjustments reduces alternative minimum taxable income, the
member receives a 20% tax benefit.
5. For each member, determine a book/tax adjustment by using the following
formula:
(Book income of member - alternative minimum taxable income of that member)
x .50 = Book/tax adjustment for that member.
This amount can be either a positive or negative number, for purposes of
this allocation.
If the absolute of the aggregate of the negative book/tax adjustments
exceeds the aggregate of the positive book/tax adjustments, then each
member who has a negative book/tax adjustment must reduce this adjustment
TO the following amount:
<PAGE>
Negative book/tax Aggregate of book/tax
adjustment of a adjustment of all
member members with positive
-------------------- x book/tax adjustments
Aggregate book/tax
adjustment of all
members with negative
book/tax adjustments
Each member with a negative book/tax adjustment receives a 20% tax benefit
for the use of this adjustment. Each member with a positive book/tax
adjustment is charges 20% in tax.
6. For each member, determine the adjusted current earnings adjustment (ACE
adjustment) by using the following formula:
Adjusted Current Earnings (as defined in IRC Section 56(g)(3)) of
Member minus Alternative Minimum Taxable Income (AMTI) determined
without regard to the ACE adjustment and the AMTI NOL (see IRC Section
56(g)(1)(B)) x .75 = ACE Adjustment of a member.
This amount can be either a positive or negative number for purposes
of this allocation.
If the absolute of the aggregate of the current year negative ACE
adjustments exceed the aggregate of the positive ACE adjustments, then it
must be determined how much of this excess negative adjustment can be
recognized for tax purposes. To the extent that this aggregate excess
negative ACE
<PAGE>
adjustment cannot be used for tax purposes each member who has a negative
ACE adjustment must reduce this adjustment by the following amount:
Negative ACE adjustment
of a member Negative ACE adjustment
------------------------- x that cannot be utilized
Aggregate ACE adjustments for tax purposes
of all members with negative
ACE adjustments
Each member with a negative ACE adjustment receives a 20% tax benefit for
the negative ACE adjustment that can be utilized. Each member with a
positive ACE adjustment is charged 20% in tax.
7. Determine each member's alternative minimum tax (alt min) NOL carryforwards
that can be utilized in the consolidated tax return. The earliest NOL's
are utilized first. If the NOL's are from the same year, they're applied
on a pro rata basis.
Each member receives a 20% benefit for the use of its alt min NOL
carryforward.
8. Each member is allocated a portion of the alternative minimum tax exemption
amount that's allowed in the consolidated tax return. This allocation is
done in accordance with the following formula:
Exemption amount Exemption amount
allocated per allowed in the
member = consolidated tax
return
--------------------
# of members in
the group
<PAGE>
A member receives a 20% tax benefit for the exemption amount allocated to
it.
9. A member gets a 100% benefit for its investment tax credit (ITC) utilized
during the year.
10. A member is charged 100% of its ITC recapture for the year attributable to
that member.
11. A member will receive a benefit for 100% of the alternative minimum tax
credit attributable to that member that's utilized in the consolidated
return. The amount of alternative minimum tax credit of a member utilized
in any year is determined in accordance with the rules provided in Proposed
Treasury Regulation 1.1502-55(h).
The amount of the credit attributed to a member for any year is determined
in accordance with the rules provided in Proposed Treasury Regulation
1.1502-55(h).
12. The consolidated environmental tax is allocated to a member in accordance
with the following formula:
Member's modified alternative minimum taxable income (1)
Less: $2,000,000 divided by the number of members with group
- -----------------------------------
(1) As defined in Section 59A(b) of the IRC
<PAGE>
x .0012 =
Member's portion of consolidated environmental tax
Note that a member with negative modified alternative minimum taxable
income will be allocated a tax benefit with respect to the environmental
tax.
13. An exception to the allocation under steps 1 through 11 occurs when the
affiliated group files a life non-life consolidated return and the group
has non-life NOL's which cannot shelter 65% of life insurance company
taxable income because of the life non-life consolidation rules. In this
case, the tax allocated to the life insurance company will be the sum of
the following amounts:
A. 35% x the life company's taxable income x 20%
B. 65% x the life company's taxable income x 34%
C. 35% x (the life company's AMT preferences, adjustments and the AMT ACE
adjustment) x 20%
D. Any difference between the amount allocated to the life company under
steps 1 through 11 and the amount allocated to the life company under
steps 1 through 13.C. will be a tax expense or benefit of BCBS.
14. An exception to the tax allocation under steps 1 through 11 occurs in years
in which UWIC pays a preferred stock dividend and has taxable income for
the year. In this case, the tax allocated to UWIC will be determined in
the following manner.
<PAGE>
A. Step 1 will be calculated using UWIC's ordinary income and capital
gains less the portion of the ordinary income and capital gains that
pertains to the preferred stock.
B. Step 6 will be calculated using only UWIC's adjusted current earnings
and pre-adjustment AMTI that does not pertain to the preferred stock.
C. UWIC is also allocated an amount equal to 34% of the greater of the
dividend that it pays on the preferred stock during the year or UWIC's
taxable income for the year.
D. UWIC also receives a tax benefit equal to the tentative minimum tax
for the group as determined in steps 1 through 11 and steps 13A & B.
for the year not to exceed the amount determined in paragraph 14.C.
E. Any difference between the amount allocated to UWIC under steps 1
through 11 and the amount allocated to UWIC under steps 1 through 11
and 14.A. through 14.D. will be a tax expense or benefit of BCBS.
15. An exception to the tax allocation under steps 1 through 11 occurs in years
in which UWS pays a preferred stock dividend and has taxable income for the
year. In this case, the tax allocated to UWS will be determined in the
following manner.
<PAGE>
A. Step 1 will be calculated using UWS's ordinary income and capital
gains less the portion of the ordinary income and capital gains that
pertains to the preferred stock.
B. Step 6 will be calculated using only UWS's adjusted current earnings
and pre-adjustment AMTI that does not pertain to the preferred stock.
C. UWS is also allocated an amount equal to 34% of the greater of the
dividend that it pays on the preferred stock during the year or UWS's
taxable income for the year.
D. Any difference between the amount allocated to UWS under steps 1
through 11 and the amount allocated to UWS under steps 1 through 11
and 14.A. through 14.D. will be a tax expense or benefit of BCBS.
<PAGE>
Blue Cross & Blue Shield United of Wisconsin
By: /s/ C. Edward Mordy
-----------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-----------------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Insurance Company
United Wisconsin Life Insurance Company
United Wisconsin Proservices, Inc.
United Wisconsin Services, Inc.
By: /s/ C. Edward Mordy
-----------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-----------------------------------------------
Gail L. Hanson
Treasurer
Leasing Unlimited, Inc.
By: /s/ C. Edward Mordy
-----------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-----------------------------------------------
Gail L. Hanson
Treasurer
Compcare Health Services Insurance Corporation
By: /s/ C. Edward Mordy
-----------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-----------------------------------------------
Gail L. Hanson
Treasurer
ProHealth, Inc.
By: /s/ C. Edward Mordy
-----------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-----------------------------------------------
Gail L. Hanson
Treasurer
Take Control, Inc.
By: /s/ C. Edward Mordy
-----------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-----------------------------------------------
Gail L. Hanson
Treasurer
Meridian Resource, Inc.
By: /s/ C. Edward Mordy
-----------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-----------------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Capital Corporation
By: /s/ C. Edward Mordy
-----------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-----------------------------------------------
Gail L. Hanson
Treasurer
Valley Health Plan, Inc.
By: /s/ C. Edward Mordy
-----------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-----------------------------------------------
Gail L. Hanson
Treasurer
<PAGE>
Amendment to Consolidated Federal Income Tax
Allocation Agreement
This amendment to the Consolidated Federal Income Tax Allocation Agreement
dated June 10, 1988 is entered into this 9 day of May, 1994 to be effective
for the period January 1, 1990 through December 31, 1992 between Blue Cross &
Blue Shield United of Wisconsin (BCBSU), United Wisconsin Insurance Company
(UWIC), United Wisconsin Services, Inc. (UWSI), United Wisconsin Proservices,
Inc. (UWPS), Leasing Unlimited, Inc. (LUI), United Wisconsin Life Insurance
Company (UWLIC), Compcare Health Services Insurance Corporation (CHSIC),
ProHealth, Inc. (PH), Take Control, Inc. (TC), Meridian Resource, Inc. (MR),
United Wisconsin Capital Corporation (UWCC) and Valley Health Plan, Inc.
(Valley) formerly Midelfort Health Plan.
This amendment is made part of the Consolidated Federal Income Tax Allocation
Agreement dated June 10, 1988.
Under this Agreement, Step 11 of the "Alternative Tax Method" found in the
August 6, 1993 Amendment to the Allocation Agreement dated June 10, 1988, is
revised to read as follows:
A member will receive a benefit for 100% of the alternative minimum tax credit
attributable to that member that's utilized in the consolidated return. The
amount of alternative minimum tax credit of a member utilized in any year is
determined in accordance with the rules provided in Proposed Treasury Regulation
1.1502-55(h).
<PAGE>
The amount of the credit attributed to a member for any year after 1992 is
determined in accordance with the rules provided in Proposed Treasury Regulation
1.1502(h). For years prior to 1992, all of the credit will be attributed to
BCBSU.
Now, therefore, in consideration of their mutual promises and other good and
valuable consideration, BCBSU and each of the subsidiaries on its own behalf
agrees to this amendment to the Federal Tax Allocation Agreement dated June 10,
1988.
In witness whereof, the parties hereto have executed this amendment as of the
day and year first above written.
Blue Cross & Blue Shield United of Wisconsin
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Insurance Company
United Wisconsin Life Insurance Company
United Wisconsin Proservices, Inc.
United Wisconsin Services, Inc.
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
<PAGE>
Leasing Unlimited, Inc.
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
Compare Health Services Insurance Corporation
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
ProHealth, Inc.
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
Take Control, Inc.
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
<PAGE>
Meridian Resource, Inc.
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Capital Corporation
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
Valley Health Plan, Inc.
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
<PAGE>
UNITED WISCONSIN SERVICES, INC.
Comprehensive Tax Allocation Agreement
AN AGREEMENT made as of the 1st day of July, 1994, by and among BLUE
CROSS & BLUE SHIELD UNITED OF WISCONSIN (the "Parent"), UNITED WISCONSIN
SERVICES, INC. ("UWS"), UNITED WISCONSIN INSURANCE COMPANY ("UWIC"), UNITED
WISCONSIN LIFE INSURANCE COMPANY ("UWLIC"), COMPCARE HEALTH SERVICES INSURANCE
CORPORATION ("CHSIC"), UNITED WISCONSIN PROSERVICES, INC. ("UWPS"), UNITED
WISCONSIN CAPITAL CORPORATION ("UWCC"), VALLEY HEALTH PLAN, INC. ("VHP"),
MERIDIAN RESOURCE CORPORATION ("MRC"), TAKE CONTROL, INC. ("TCI") and YOUR
HEALTH CARE PLAN, INC. ("YHCP").
WHEREAS, the Parent was, until June 30, 1994 (the "Closing Date"), the
owner of more than 80% of the issued and outstanding stock of UWS and UWS has
owned and continues to own, directly or indirectly, all of the issued and
outstanding stock of each of UWIC, UWLIC, CHSIC, UWPS, UWCC, VHP, MRC, TCI and
YHCP (collectively, the "Subsidiaries");
WHEREAS, until the Closing Date, the Parent, UWS and the Subsidiaries
constituted an affiliated group of corporations (the "Affiliated Group") within
the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and as such have filed consolidated federal income tax returns for
all calendar years from 1988 through and including the calendar year 1992;
WHEREAS, the parties are obligated to file a consolidated federal
income tax return for the calendar year 1993, which return (taking into account
available extensions of time) is not yet due;
WHEREAS, the members of the Affiliated Group have, from time to time,
entered into agreements with respect to the allocation of their consolidated
federal income tax liability, including a Consolidated Federal Income Tax
Agreement dated June 10, 1988 (as amended from time to time, the "1988
Agreement"), first effective for the calendar year 1988, and Federal Income Tax
Allocation Agreement dated August 6, 1993 (as amended, the "1993 Agreement"),
first effective for the calendar year 1993 (collectively, the "Prior
Agreements");
WHEREAS, the Parent made a capital contribution to UWS under the terms
of a resolution of its directors approved on May 25, 1994 (the "1994
Resolution"), pursuant to which UWS may be obligated to return all or a portion
of such capital contribution to the Parent, depending on the resolution of
certain matters relating to the consolidated federal income tax liability of the
Affiliated Group;
WHEREAS, the Parent has on the Closing Date transferred certain shares
of the common stock of UWS to United Wisconsin Services Foundation, Inc., an
organization described in Section 501(c)(3) of the Code, as the result of which
UWS and the
<PAGE>
Subsidiaries will no longer be members of the Affiliated Group and will not be
eligible to continue to join in the filing of consolidated federal income tax
returns with the Parent;
WHEREAS, the Parent intends to sell a portion of the common stock of
UWS that it owns, and UWS intends to issue additional shares of its common
stock, in each case in a public offering under the Securities Act of 1933 (the
"Offering"); and
WHEREAS, in view of the termination of the Affiliated Group and the
subsequent Offering, the parties hereto desire to establish a process for the
preparation of the final consolidated federal income tax return of the Parent
which UWS and the Subsidiaries will be permitted to join, to acknowledge the
continuing validity (for certain purposes) of the Prior Agreements, to allocate
any additional tax liability arising out of the examination by the Internal
Revenue Service (the "IRS") of the consolidated federal income tax returns filed
or to be filed by the Affiliated Group, and to set forth certain other
agreements of the parties.
NOW, THEREFORE, in consideration of the premises, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. FILING OF TAX RETURNS.
(a) OBLIGATION TO FILE. UWS shall file or cause to be filed
when due all returns in respect of income taxes of UWS and the Subsidiaries
falling due (taking into account all extensions of time) after the Closing Date,
except that the Parent shall file the consolidated federal income tax returns
for the Affiliated Group for the 1993 calendar year (the "1993 Consolidated
Return") and the 1994 calendar year (the "1994 Consolidated Return").
(b) INFORMATION. UWS shall provide, and shall cause the
Subsidiaries to provide, to the Parent all information reasonably necessary for
the preparation of the 1993 Consolidated Return and the 1994 Consolidated
Return.
(c) ALLOCATION OF TAX LIABILITIES.
(1) 1993 LIABILITIES. The consolidated federal income tax
liability of the Parent for the calendar year 1993 shall be allocated to UWS and
the Subsidiaries in accordance with the 1993 Agreement. As soon as practicable
after the 1993 Consolidated Return is filed, the Parent shall determine the
portion of the liability reflected on such return to be allocated to each of UWS
and the Subsidiaries. Each of UWS and the Subsidiaries shall promptly
thereafter settle their liabilities to the Parent in respect of such taxes by
comparing their allocated
-2-
<PAGE>
liabilities with the payments previously made by each of them to the Parent.
(2) 1994 LIABILITIES. The parties acknowledge that the
income, losses, deductions, credits and other items of UWS and the Subsidiaries
may only be included in the 1994 Consolidated Return for the portion of the
taxable year of the Parent that ends on the Closing Date. In order to determine
the amount of the liability reflected on the 1994 Consolidated Return and the
portion thereof to be allocated to each of UWS and the Subsidiaries, such
determination shall, to the extent permitted by the Code and the regulations
thereunder, be made by assuming that each corporation had a taxable year ending
at the close of business on the Closing Date, i.e. by "closing the books" of
each corporation as of the Closing Date, except that exemptions, allowances or
deductions that are calculated on an annual basis, such as the deductions for
depreciation, cost recovery or amortization, shall be apportioned based on the
number of days in each of the two short periods.
(d) PAYMENTS OF ESTIMATED TAX. UWS shall continue, and shall
cause each of the Subsidiaries to continue, to make payments to the Parent at
such time as the Parent is obligated to make estimated payments of its 1994
consolidated federal income tax liability, but in no event shall such payments
exceed the reasonably estimated allocable share of each of UWS and the
Subsidiaries of such tax liability.
2. OTHER POST-CLOSING MATTERS.
(a) CARRYOVERS AND CARRYBACKS. If UWS or any Subsidiary (and
any successor thereof) shall have any net operating loss, capital loss, excess
foreign tax paid, or unused business credit (within the meaning of Section 172,
1212, 904(c), or 39 of the Code, respectively) for a taxable period beginning
after the Closing Date, UWS or the Subsidiary, as the case may be, may, but
shall not be required to, make any election or exercise any option then
available under the Code to forgo any carryback of such item to a period ending
on or before the Closing Date. If the Code requires such an item first to be
carried back to a period ending before the Closing Date (and such item is not,
by the making of an election or otherwise, carried forward without first being
carried back), such item shall be so carried back and, when and to the extent
such carryback shall result in a decrease in the Parent's consolidated federal
income taxes paid, the Parent will pay to UWS or the Subsidiary (or the
successor thereof) the amount of such decrease at the time such decrease is
realized by refund or otherwise, plus any interest that is received on any
decrease realized by refund or that would have been received had such decrease
not resulted in a reduction in a liability for income taxes.
-3-
<PAGE>
(b) ELECTIONS. Subject to the provisions of paragraph (a), the
Parent acknowledges that, for any taxable period beginning on or after the
Closing Date, UWS and the Subsidiaries may make any election, and any affiliated
group of which UWS and the Subsidiaries were or are members may cause such
corporation to make any election permitted to them under the Code.
(c) RETENTION OF RECORDS; ACCESS. In accordance with current
record retention practice of UWS and the Subsidiaries, UWS, the Subsidiaries and
their respective successors shall (1) retain records, documents, accounting
data, and other information (including computer data), necessary to determine
the Parent's tax basis in any shares of UWS stock that it now owns or has owned
previously, and for the preparation and filing of all returns in respect of
income taxes of the Parent, UWS, and the Subsidiaries or for the audit of such
returns and (2) give the Parent reasonable access to such records, documents,
accounting data, and other information (including computer data) and to the
personnel (insuring their cooperation) and premises of UWS and the Subsidiaries,
for the purpose of the review or audit of such returns. Each party shall
provide or cause to be provided to the other such forms and other information as
are necessary to enable the other to meet its obligations under this Agreement
on time and to file accurate and timely income tax returns that another party is
required to file hereunder.
3. IRS AUDITS.
(a) CONDUCT. UWS will have responsibility for all audits or
other proceedings involving an income tax liability of UWS or any Subsidiary,
except that the Parent shall be responsible for any audit or other proceeding
involving a period for which a return was filed on a consolidated basis with the
Parent. The Parent shall be entitled to receive the part of any payment that it
makes in connection with the settlement or other disposition of such proceeding
for which UWS or any Subsidiary (hereafter, the "Other Party" is liable under
this Agreement within a reasonable period of time after the Parent has notified
the Other Party of the amount of any such payment.
(b) NOTIFICATION. The Parent shall give the Other Party prompt
notice of any proposed adjustment and any discussions that are likely to result
in a proposed adjustment to a return that may result in any additional liability
of the Other Party under this Agreement. When there has been such a proposed
adjustment, or discussions likely to result in such a proposed adjustment, the
Parent will make every reasonable effort to involve the Other Party at the
earliest possible stage of discussions. The Parent will not agree, without the
consent of the Other Party, to any proposed adjustment to a return that would
result in any additional liability of the Other Party under this Agreement. The
Other Party shall have thirty days after receipt of notice from the Parent that
-4-
<PAGE>
the tax authority has formally proposed an adjustment within which to consent or
not to consent thereto, and if the other Party, acting reasonably and in good
faith, notifies the Parent within such thirty-day period that it does not
consent to such proposed adjustment, it shall assume the conduct of any such
audit, with counsel satisfactory to it and at its expense, insofar as the audit
relates to items for which the Other Party may incur a liability under this
Agreement, and thereafter the Other Party shall be solely and exclusively
responsible for the conduct of such audit and any further proceedings with
respect to such items. Failure to respond to the Parent within such thirty-day
period or thereafter to assume responsibility for the conduct of the audit or
other proceeding shall entitle the Parent to agree to the proposed adjustment.
(c) SETTLEMENT OF LIABILITIES. Promptly after the completion of
any audit of a consolidated federal income tax return of the Parent in which UWS
or any of the Subsidiaries have joined, the Parent shall allocate the tax
liability as finally determined by the IRS to UWS and each of the Subsidiaries
using the provisions of the Prior Agreement in effect for the year to which such
return relates. To the extent that a final determination of tax reflects an
underpayment, overpayment or allocation of tax liability on a different basis
than the basis upon which such liability was originally allocated, the Parent,
UWS and the Subsidiaries shall cause a final settlement to be made at that time.
(d) COOPERATION. The Parent, UWS and the Subsidiaries shall
cooperate with each other in the conduct of any audit or other proceedings and
each shall execute and deliver such powers of attorney and other documents as
are necessary to carry out the intent of this Section 3.
4. INDEMNIFICATION; OTHER OBLIGATIONS.
(a) SEVERAL LIABILITY. The Parent hereby indemnifies and agrees
to hold each of UWS and the Subsidiaries harmless from and against any loss,
cost, damage and expense arising out of the consolidated federal income tax
liability of the Affiliated Group, whether under the provisions of Treas. Reg.
(26 CFR) Section 1.1502-6 or otherwise, except for any liability of UWS or the
Subsidiaries to the Parent under (1) any of the Prior Agreements, (2) this
Agreement or (3) the 1994 Resolution.
(b) PENALTIES. Each of the Parent, UWS and the Subsidiaries
shall be liable for and shall hold the other parties harmless against any
penalties related to an income tax liability allocated to it pursuant to the
Prior Agreements or this Agreement, or interest on penalties related to such an
income tax liability, for consolidated federal income tax returns filed on or
before the Closing Date, and for the 1993 Consolidated Return and the 1994
Consolidated Return, and UWS shall be liable for and shall hold the
-5-
<PAGE>
Parent harmless against any penalties related to an income tax liability of UWS
or any Subsidiary, or interest on penalties related to such an income tax
liability, for any other tax returns of UWS or any Subsidiary.
(c) 1994 RESOLUTION. UWS acknowledges and affirms its potential
obligations to the Parent under the 1994 Resolution. The Parent acknowledges
that UWS is entitled to the benefits of the 1994 Resolution notwithstanding the
provisions of the Prior Agreements (or either of them) to the contrary.
(d) EFFECT OF PRIOR AGREEMENTS. The Parties agree that, except
to the extent expressly set forth herein, the Prior Agreements terminated on the
Closing Date.
5. RESOLUTION OF DISPUTES. In the event that the Parent and UWS
cannot agree on any calculation required under this Agreement, such calculations
shall be made by Ernst & Young or, if that firm refuses to serve, by any other
independent public accounting firm reasonably acceptable to the Parent and UWS.
The decision of such firm shall be final and binding on the parties. The fees
and expenses incurred by such firm in connection with such calculation shall be
shared equally by the Parent and UWS.
6. MISCELLANEOUS.
(a) NOTICES. All notices required or permitted to be given
hereunder shall be in writing and shall be personally delivered or sent by
regular mail to the address of the principal office of the party to whom notice
is to be given.
(b) AMENDMENT. This Agreement may be amended or modified in a
writing signed by all of the parties hereto.
(c) GOVERNING LAW. This Agreement shall be governed by the
internal laws of the State of Wisconsin as to all matters, including but not
limited to all matters of validity, construction, effect, performance and
remedies.
(d) ENTIRE AGREEMENT. This Agreement, the Prior Agreements and
the 1994 Resolution constitute the entire agreement among the parties hereto
with respect to the matters contemplated herein, and there have been and are no
other agreements among the parties concerning the subject matter of this
Agreement, other than those set forth or provided for herein or therein.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
BLUE CROSS & BLUE SHIELD UNITED
OF WISCONSIN
By /s/ C. Edward Mordy
-------------------------------------
UNITED WISCONSIN INSURANCE COMPANY
By /s/ C. Edward Mordy
-------------------------------------
UNITED WISCONSIN LIFE INSURANCE
COMPANY
By /s/ C. Edward Mordy
-------------------------------------
UNITED WISCONSIN PROSERVICES, INC.
By /s/ C. Edward Mordy
-------------------------------------
UNITED WISCONSIN CAPITAL CORPORATION
By /s/ C. Edward Mordy
-------------------------------------
COMPCARE HEALTH SERVICES INSURANCE
CORPORATION
By /s/ C. Edward Mordy
-------------------------------------
VALLEY HEALTH PLAN, INC.
By /s/ C. Edward Mordy
-------------------------------------
-7-
<PAGE>
MERIDIAN RESOURCE CORPORATION
By /s/ C. Edward Mordy
-------------------------------------
MERIDIAN MANAGED CARE, INC.
(Formerly Take Control, Inc.)
By /s/ C. Edward Mordy
-------------------------------------
YOUR HEALTH CARE PLAN, INC.
By /s/ C. Edward Mordy
-------------------------------------
-8-
<PAGE>
Federal Income Tax Allocation Agreement
For the Period Starting January 1, 1993
This Consolidated Federal Income Tax Allocation Agreement is
entered into this 6th day of August, 1993 to be effective for the period
starting January 1, 1993 between Blue Cross & Blue Shield United of Wisconsin
(BCBSU), United Wisconsin Insurance Company (UWIC), United Wisconsin Services,
Inc. (UWSI), United Wisconsin Proservices, Inc. (UWPS), United Wisconsin Life
Insurance Company (UWLIC), Compcare Health Services Insurance Corporation
(CHSIC), Take Control, Inc. (TC), Meridian Resource, Inc. (MR), Valley Health
Plan, Inc. (MHP) and United Wisconsin Capital Corporation
(UWCC).
Now, therefore, in consideration of their mutual promises and other good and
valuable consideration, BCBSU and each of the subsidiaries on its own behalf
agrees to the attached Federal Tax Allocation Agreement dated August 6, 1993.
In witness whereof, the parties hereto have executed this amendment
as of the day and year first above written.
<PAGE>
Exhibit I
August 6, 1993
Tax Allocation Agreement for the BCBS Group
Effective January 1, 1993
The steps required to determine the tax or benefit allocated to each member are
as follows:
1. Determine each member's ordinary taxable income and net capital gain for
the year (before NOL carryforwards).
A member with ordinary income and/or net capital gain is charged a tax
expense equal to 34% of these amounts.
2. Determine each member's current year net capital loss and current year
ordinary loss. If a member's current year losses are used in the
consolidated return, the member receives a 34% tax benefit for the use of
its current year capital losses and a 34% benefit for the use of its
current year ordinary losses.
3. Determine each member's NOL and capital loss carryforwards that can be
utilized in the consolidated tax return. Carryforwards can be utilized in
the order of taxable years in which such losses are sustained beginning
with the taxable year which ends earliest and applying all losses from
taxable years ending on the same date on a pro rata basis. The
<PAGE>
Separate Return Limitation Year (SRLY) rules also apply in determining
whether a loss carryover can be utilized.
Each member receives a 34% tax benefit if its NOL carryover is used to
offset ordinary income. If a capital loss and/or NOL carryover is used to
offset current year consolidated capital gain, the member also receives a
34% tax benefit.
4. If a member's ITC credit carryover is utilized in the consolidated tax
return, the member receives a tax benefit equal to 100% of the ITC
utilized.
5. A member will receive a benefit for 100% of the alternative minimum tax
credit attributable to that member that's utilized in the consolidated
return. The amount of alternative minimum tax credit of a member utilized
in any year is determined in accordance with the rules provided in Proposed
Treasury Regulation 1.1502-55(h).
The amount of the credit attributed to a member for any year is determined
in accordance with the rules provided in Proposed Treasury Regulation
1.1502-55(h).
6. A member is charged 100% of its ITC recapture for the year.
7. The consolidated environmental tax is allocated to a member in accordance
with the following formula:
<PAGE>
Member's modified alternative minimum taxable income (1)
Less: $2,000,000 divided by the number of members in the group
x .0012 =
Member's portion of consolidated environmental tax
Note that a member with negative modified alternative minimum taxable
income will be allocated a tax benefit with respect to the environmental
tax.
8. A member is allocated alternative minimum tax equal to the alt min credit
that's attributed to that member for the year. (See point 5.)
9. Each member's tax charges and tax benefits are totalled resulting in the
tax allocation to that member for the period.
- --------------------
(1) As defined in Section 59A(b) of the IRC
<PAGE>
Blue Cross & Blue Shield United of Wisconsin
By:/s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Insurance Company
United Wisconsin Life Insurance Company
United Wisconsin Proservices, Inc.
United Wisconsin Services, Inc.
By:/s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
Compcare Health Services Insurance Company
By:/s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
<PAGE>
Take Control, Inc.
By:/s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
Meridian Resource, Inc.
By:/s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
Valley Health Plan, Inc.
By:/s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Capital Corporation
By:/s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
<PAGE>
Amendment to Federal Income Tax Allocation Agreement
for the Period Starting January 1, 1993
This amendment to the consolidated Federal Income Tax Allocation Agreement is
entered into this 9th day of May, 1994 to be effective for the period starting
January 1, 1993 between Blue Cross & Blue Shield United of Wisconsin (BCBSU),
United Wisconsin Insurance Company (UWIC), United Wisconsin Services, Inc.
(UWSI), United Wisconsin Proservices, Inc. (UWPS), United Wisconsin Life
Insurance Company (UWLIC), Compcare Health Services Insurance Corporation
(CHSIC), Take Control, Inc. (TC), Meridian Resource, Inc. (MR), Valley Health
Plan, Inc. (VHP) and United Wisconsin Capital Corporation (UWCC).
This amendment is made part of the Consolidated Federal Income Tax Allocation
Agreement dated August 6, 1993 for the period starting January 1, 1993.
Under this amendment, the tax rate is changed from 34% to 35%.
Now, therefore, in consideration of their mutual promises and other good and
valuable consideration, BCBSU and each of the subsidiaries on its own behalf
agrees to the attached Federal Tax Allocation Agreement dated August 6, 1993.
In witness whereof, the parties hereto have executed this amendment as of the
day and year first above written.
<PAGE>
Blue Cross & Blue Shield United of Wisconsin
By:/s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Insurance Company
United Wisconsin Life Insurance Company
United Wisconsin Proservices, Inc.
United Wisconsin Services, Inc.
By:/s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
Compcare Health Services Insurance Corporation
By:/s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
<PAGE>
Take Control Inc.
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
Meridian Resources, Inc.
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
Valley Health Plan, Inc.
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Capital Corporation
By: /s/ C. Edward Mordy
-------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
-------------------------------------
Gail L. Hanson
Treasurer
<PAGE>
United Wisconsin Services, Inc. & Subsidiaries
Federal Income Tax Allocation Agreement
For the Period Starting October 1, 1994
This Consolidated Federal Income Tax Allocation Agreement is entered into this
3rd day of January, 1995 to be effective for the taxable periods starting
October 1, 1994 between United Wisconsin Services, Inc. (UWSI), United Wisconsin
Insurance Company (UWIC), United Wisconsin Proservices, Inc. (UWPS), Compcare
Health Services Insurance Corporation (CHSIC), Meridian Managed Care, Inc.
(MMC), Meridian Resource Corporation (MR), Valley Health Plan, Inc. (VHP),
United Wisconsin Capital Corporation (UWCC), Your Healthcare Plan, Inc. (YHP),
HMO of Wisconsin Insurance Corporation (HMOW), HMO-W, Inc. (HMOW-W), and
Hometown Insurance Services, Inc. (HTWN).
Now, therefore, in consideration of their mutual promise and other good and
valuable consideration, UWSI and each of the above mentioned corporations on its
own behalf agrees to the attached Federal Tax Allocation Agreement dated January
3, 1995.
<PAGE>
In witness whereof, the parties hereto have executed this amendment as of the
day and year first above written.
United Wisconsin Insurance Company
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Proservices, Inc.
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Services, Inc.
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
<PAGE>
Compcare Health Services Insurance Corporation
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
Meridian Managed Care, Inc.
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
Meridian Resource Corporation
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
Valley Health Plan, Inc.
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
-3-
<PAGE>
United Wisconsin Capital Corporation
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
Your Healthcare Plan, Inc.
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
HMO of Wisconsin Insurance Corporation
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
-4-
<PAGE>
HMOW-W, Inc.
By:/s/ C. Edward Mordy
--------------------------------
C. Edward Mordy
Vice President
By:/s/ Gail L. Hanson
--------------------------------
Gail L. Hanson
Treasurer
Hometown Insurance Services, Inc.
By:/s/ Devon Barrix
--------------------------------
Devon Barrix
CEO
By:/s/ David Beckman
--------------------------------
David Beckman
Treasurer
-5-
<PAGE>
Exhibit I
January 3, 1995
Federal Tax Allocation Agreement for the UWSI Group
Effective October 1, 1994
The steps required to determine the federal tax or benefit allocated to each
member are as follows:
1. Determine each member's ordinary taxable income and net capital gain for
the year (before NOL carryforwards).
A member with ordinary income and/or net capital gain is charged a tax
expense equal to 35% of these amounts.
2. Determine each member's current year net capital loss and current year
ordinary loss. If a member's current year losses are used in the
consolidated return, the member receives a 35% tax benefit for the use of
its current year capital losses and a 35% benefit for the use of its
current year ordinary losses.
3. Determine each member's net operating loss (NOL) and capital loss
carryforwards that can be utilized in the consolidated tax return.
Carryforwards can be utilized in the order of taxable year in which such
losses are sustained beginning with the taxable year which ends earliest
and applying all losses from taxable years ending on the same date on a pro
rata
<PAGE>
basis. The Separate Return Limitation Year (SRLY) rules also apply in
determining whether a loss carryover can be utilized.
Each member receives a 35% tax benefit if its NOL carryover is used to
offset ordinary income. If a capital loss and/or NOL carryover is used to
offset current year consolidated capital gain, the member also receives a
35% tax benefit.
4. If a member's ITC credit carryover is utilized in the consolidated tax
return, the member receives a tax benefit equal to 100% of the ITC
utilized.
5. A member will receive a benefit for 100% of the alternative minimum tax
credit attributable to that member that's utilized in the consolidated
return. the amount of alternative minimum tax credit of a member utilized
in any year is determined in accordance with the rules provided in Proposed
Treasury Regulation 1.1502-55(h).
The amount of the credit attributed to a member for any year is determined
in accordance with the rules provided in Proposed Treasury Regulation
1.1502-55(h).
6. A member is charged 100% of its ITC recapture for the year.
7. The consolidated environmental tax is allocated to a member in accordance
with the following formula:
-7-
<PAGE>
Member's modified alternative minimum taxable income (1)
Less: $2,000,000 divided by the number of members in the group
x .0012 =
Member's portion of consolidated environmental
tax
Note that a member with negative modified alternative minimum taxable
income will be allocated a tax benefit with respect to the environmental
tax.
8. A member is allocated alternative minimum tax equal to the alt min credit
that's attributed to that member for the year. (See point 5.)
9. Each member's tax charges and tax benefits are totalled resulting in the
tax allocation to that member for that period.
- ------------------
(1) As defined in Section 59A(b) of the IRC.
-8-
<PAGE>
United Wisconsin Services, Inc. & Subsidiaries
Federal Income Tax Allocation Agreement
For the Period Starting January 1, 1995
This Consolidated Federal Income Tax Allocation Agreement is entered into this
28th day of February, 1995 to be effective for the taxable periods starting
January 1, 1995 between United Wisconsin Services, Inc. (UWSI), United Wisconsin
Insurance Company (UWIC), United Wisconsin Proservices, Inc. (UWPS), Compcare
Health Services Insurance Corporation (CHSIC), Meridian Managed Care, Inc. (MM),
Meridian Resource Corporation (MRC), Valley Health Plan, Inc. (VHP), United
Wisconsin Capital Corporation (UWCC), Your Healthcare Plan, Inc. (YHP), HMO of
Wisconsin Insurance Corporation (HMOW), HMO-W, Incorporated (HMOW-W), Hometown
Insurance Services, Inc. (HTWN), United Heartland, Inc. (UHI) and Meridian
Marketing Services, Inc. (MMS).
Now, therefore, in consideration of their mutual promise and other good and
valuable consideration, UWSI and each of the above mentioned corporations on its
own behalf agrees to the attached Federal Tax Allocation Agreement dated
February 28, 1995.
In witness whereof, the parties hereto have executed this amendment as of the
day and year first above written.
<PAGE>
Exhibit I
February 28, 1995
Federal Tax Allocation Agreement for the UWSI Group
Effective January 1, 1995
The steps required to determine the federal tax or benefit allocated to each
member are as follows:
1. Determine each member's ordinary taxable income and net capital gain for
the year (before NOL carryforwards).
A member with ordinary income and/or net capital gain is charged a tax
expense equal to 35% of these amounts.
2. Determine each member's current year net capital loss and current year
ordinary loss. If a member's current year losses are used in the
consolidated return, the member receives a 35% tax benefit for the use of
its current year capital losses and a 35% benefit for the use of its
current year ordinary losses.
3. Determine each member's net operating loss (NOL) and capital loss
carryforwards that can be utilized in the consolidated tax return.
Carryforwards can be utilized in the order of taxable year in which such
losses are sustained beginning with the taxable year which ends earliest
and applying all losses from taxable years ending on the same date on a pro
rata
-2-
<PAGE>
basis. The Separate Return Limitation Year (SRLY) rules also apply in
determining whether a loss carryover can be utilized.
Each member receives a 35% tax benefit if its NOL carryover is used to
offset ordinary income. If a capital loss and/or NOL carryover is used to
offset current year consolidated capital gain, the member also receives a
35% tax benefit.
4. If a member's ITC credit carryover is utilized in the consolidated tax
return, the member receives a tax benefit equal to 100% of the ITC
utilized.
5. A member will receive a benefit for 100% of the alterative minimum tax
credit attributable to that member that's utilized in the consolidated
return. The amount of alternative minimum tax credit of a member utilized
in any year is determined in accordance with the rules provided in Proposed
Treasury Regulation 1.1502-55(h).
The amount of the credit attributed to a member for any year is determined in
accordance with the rules provided in Proposed Treasury Regulation 1.1502-55(h).
6. A member is charged 100% of its ITC recapture for the year.
-3-
<PAGE>
7. The consolidated environmental tax is allocated to a member in accordance
with the following formula:
Member's modified alternative minimum taxable income(1)
Less: $2,000,000 divided by the number of members in the group
x .0012 =
Member's portion of consolidated environmental tax
Note that a member with negative modified alternative minimum taxable income
will be allocated a tax benefit with respect to the environmental tax.
8. A member is allocated alternative minimum tax equal to the alt min credit
that's attributed to that member for the year. (See point 5.)
9. Each member's tax charges and tax benefits are totalled resulting in the
tax allocation to that member for that period.
- -----------------------
(1)As defined in Section 59A(b) of the IRC.
-4-
<PAGE>
United Wisconsin Services, Inc.
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Insurance Company
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Proservices, Inc.
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
-5-
<PAGE>
Compcare Health Services Insurance Corporation
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
Meridian Managed Care, Inc.
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
Meridian Resource Corporation
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
Valley Health Plan, Inc.
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
-6-
<PAGE>
United Wisconsin Capital Corporation
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
Your Healthcare Plan, Inc.
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
HMO of Wisconsin Insurance Corporation
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
HMOW-W, Incorporated
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
-7-
<PAGE>
Hometown Insurance Services, Inc.
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
United Heartland, Inc.
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
Meridian Marketing Services, Inc.
By: /s/ C. Edward Mordy
----------------------------------------------------
C. Edward Mordy
Vice President
By: /s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
-8-
<PAGE>
United Wisconsin Services, Inc. & Subsidiaries
Federal Income Tax Allocation Agreement
For the Periods Starting
January 1, 1996 and December 3, 1996
This Consolidated Federal Income Tax Allocation Agreement is entered into this
20th day of December, 1996 to be effective for the taxable periods starting
January 1, 1996 for United Wisconsin Services, Inc. (UWSI), United Wisconsin
Insurance Company (UWIC), United Wisconsin Proservices, Inc. (UWPS), Compcare
Health Services Insurance Corporation (CHSIC), Meridian Managed Care, Inc.
(MMC), Meridian Resource Corporation (MR), Valley Health Plan, Inc. (VHP), AMS
HMO Holdings, Inc. (formerly known as United Wisconsin Capital Corporation
(UWCC)), Unity Health Plans Insurance Corporation (Unity), HMO-W, Inc. (HMO-W),
Hometown Insurance Services, Inc. (HTWN), United Heartland, Inc. (UHI), and
Meridian Marketing Services, Inc. (MMS) and for the taxable period starting
December 3, 1996 for American Medical Security Holdings, Inc., American Medical
Security, Inc., American Medical Security Insurance Company, Continental Plan
Services, Inc., Nurse Healthline, Inc., Accountable Health Plans, Inc. (formerly
known as Accountable Health Plans of Texas, Inc.), AMS Provider Partnerships,
Inc., Unity HMO of Illinois, Inc., American Medical Security Insurance Company
of Ohio, American Medical Security Insurance Company of Georgia.
Now, therefore, in consideration of their mutual promise and other good and
valuable consideration, UWSI and each of the above mentioned corporations on its
behalf agrees to the attached Federal Tax Allocation Agreement dated December
20, 1996.
<PAGE>
In witness whereof, the parties hereto have executed this amendment as of the
day and year first above written.
<PAGE>
Exhibit I
December 20, 1996
Federal Tax Allocation Agreement for the UWSI Group
Effective for the Periods Starting
January 1,1996 and December 3,1996
The steps required to determine the federal tax or benefit allocated to each
member are as follows:
1. Determine each member's ordinary taxable income and net capital gain for
the year (before NOL carryforwards).
A member with ordinary income and/or net capital gain is charged a tax
expense equal to 35% of these amounts.
2. Determine each member's current year net capital loss and current year
ordinary loss. If a member's current year losses are used in the
consolidated return, the member receives a 35% tax benefit for the use of
its current year capital losses and a 35% benefit for the use of its
current year ordinary losses.
3. Determine each member's net operating loss (NOL) and capital loss
carryforwards that can be utilized in the consolidated tax return.
Carryforwards can be utilized in the order of taxable year in which such
losses are sustained beginning with the taxable year which ends earliest
and applying all losses from taxable years ending on the same date on a pro
<PAGE>
rata basis. The Separate Return Limitation Year (SRLY) rules also apply in
determining whether a loss carryover can be utilized.
Each member receives a 35% tax benefit if its NOL carryover is used to
offset ordinary income. If a capital loss and/or NOL carryover is used to
offset current year consolidated capital gain, the member also receives a
35% tax benefit.
4. If a member's ITC credit carryover is utilized in the consolidated tax
return, the member receives a tax benefit equal to 100% of the ITC
utilized.
5. A member will receive a benefit for 100% of the alternative minimum tax
credit attributable to that member that's utilized in the consolidated
return. The amount of alternative minimum tax credit of a member utilized
in any year is determined in accordance with the rules provided in Proposed
Treasury Regulation 1.1502-55(h).
The amount of the credit attributed to a member for any year is determined
in accordance with the rules provided in Proposed Treasury Regulation
1.150255(h).
6. A member is charged 100% of its ITC recapture for the year.
7. The consolidated environmental tax is allocated to a member in accordance
with the following formula:
<PAGE>
Member's modified alternative minimum taxable income(1)
Less: $2,000,000 divided by the number of members in the group
x .0012 =
Member's portion of consolidated environmental tax
Note that a member with negative modified alternative minimum taxable
income will be allocated a tax benefit with respect to the environmental
tax
8. A member is allocated alternative minimum tax equal to the alt min credit
that's attributed to that member for the year. (See point 5.)
9. Each member's tax charges and tax benefits are totaled resulting in the tax
allocation to that member for that period.
_________________________
(1) As defined in Section 59A(b) of the IRC.
<PAGE>
United Wisconsin Services, Inc.
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Vice President & Treasurer
United Wisconsin Insurance Company
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
United Wisconsin Proservices, Inc.
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
Compcare Health Services Insurance Corporation
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
Meridian Managed Care, Inc.
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
<PAGE>
Meridian Resource Corporation
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
Valley Health Plan, Inc.
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
AMS HMO Holdings, Inc.
By:/s/ Timothy L. Day
----------------------------------------------------
Timothy L. Day
Treasurer
Unity Health Plans Insurance Corporation
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
HMO-W, Incorporated
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
<PAGE>
Hometown Insurance Services, Inc.
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
United Heartland, Inc.
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
Meridian Marketing Services, Inc.
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Treasurer
American Medical Security Holdings, Inc.
By:/s/ Gail L. Hanson
----------------------------------------------------
Gail L. Hanson
Vice President & Secretary
American Medical Security, Inc.
By:/s/ Timothy L. Day
----------------------------------------------------
Timothy L. Day
Vice President
<PAGE>
AMS Provider Partnerships, Inc.
By:/s/ Timothy L. Day
----------------------------------------------------
Timothy L. Day
Treasurer
Accountable Health Plans, Inc.
By:/s/ Timothy L. Day
----------------------------------------------------
Timothy L. Day
Treasurer
American Medical Security Insurance Company
By:/s/ Timothy L. Day
----------------------------------------------------
Timothy L. Day
Treasurer
Continental Plan Services, Inc.
By:/s/ Timothy L. Day
----------------------------------------------------
Timothy L. Day
Treasurer
Nurse Healthline, Inc.
By:/s/ Dr. Michael J. Meyer
----------------------------------------------------
Dr. Michael J. Meyer
Vice President & Secretary
<PAGE>
Unity HMO of Illinois, Inc.
By:/s/ Mark R. Minsolff
----------------------------------------------------
Mark R. Minsloff
Vice President & Secretary
American Medical Security Insurance Company of Ohio
By:/s/ Ronald A. Weyers
----------------------------------------------------
Ronald A. Weyers
Secretary & Treasurer
American Medical Security Insurance Company of Georgia
By:/s/ Ronald A. Weyers
----------------------------------------------------
Ronald A. Weyers
Vice President
<PAGE>
AMENDED AND RESTATED
JOINT VENTURE AGREEMENT
THIS AMENDED AND RESTATED JOINT VENTURE AGREEMENT (the "Agreement")
effective as of the 1st day of January, 1997 by and among Blue Cross & Blue
Shield United of Wisconsin, a Wisconsin Chapter 613 insurance corporation
("Blue Cross"), United Wisconsin Services, Inc., a Wisconsin Chapter 180
business corporation ("UWS"), Valley Health Plan, Inc., a Wisconsin Chapter
611 insurance corporation ("VHP"), and Midelfort Clinic, Ltd., Mayo Health
System, a Wisconsin Chapter 181 business corporation (the "Clinic").
PREAMBLE
WHEREAS, Blue Cross and the Clinic entered into a Joint Venture
Agreement dated January 1, 1992 (the "1992 Agreement") for the purpose of
enhancing their respective businesses regarding managed care products which
utilize a provider network;
WHEREAS, the parties to the 1992 Agreement wish to enter into an
amended and restated agreement (the "Amended and Restated Joint Venture
Agreement), effective January 1, 1997, to address changes in product lines
and benefit design that have occurred since the inception of the joint
venture and to amend the 1992 Agreement in other respects as set forth herein;
WHEREAS, the Clinic has sold Midelfort Health Plan, Inc. ("MHP", n/k/a
VHP) to Blue Cross' affiliate, UWS, while retaining
<PAGE>
an option to repurchase, under a Purchase and Sale Agreement dated as of
January 1, 1992 ("Purchase and Sale Agreement"), amended effective January 1,
1997;
WHEREAS, the parties wish to coordinate the design and marketing of
various managed care products which utilize a provider network, including,
without limitation, Preferred Provider Organization ("PPO"), Point of Service
("POS") and Health Maintenance Organization ("HMO") products and programs,
all of which may be fully insured or self-funded;
WHEREAS, the Clinic shall participate in these products not only as the
primary provider but also in the business of designing and marketing these
products;
WHEREAS, the Underwriters shall be liable for losses incurred by the
products, but shall share with the Clinic the collective profits of the
products; and
WHEREAS, Midelfort Clinic, Ltd. has been acquired by Mayo Foundation
for Medical Education and Research and the parties have consented to the
assignment by Midelfort Clinic, Ltd. to Midelfort Clinic, Ltd., Mayo Health
System, all of its right, title and interest in, to and under the 1992
Agreement and the Amended and Restated Joint Venture Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
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1. SCOPE OF AGREEMENT
1.1 Blue Cross shall be defined herein to include all its respective
subsidiaries and affiliates except wherein UWS is referred to
specifically. The Clinic shall be defined herein to include all its
respective subsidiaries and affiliates in which the Clinic has an
ownership interest (but not its sole member).
1.2 The parties to this Agreement have entered into a series of related
contracts with one another in order to produce, market, and administer
managed care products which utilize a provider network. The
relationships between and among the parties are that of independent
contractors working together in a cooperative arrangement. It is not
the intent of the parties to create, nor should this Agreement be
construed to create, a partnership or an employment relationship between
or among the parties.
1.3 This Agreement shall not create any agency relationship between or among
the parties other than those specifically enumerated in provider
agreements and administrative services agreements entered into between
Blue Cross and VHP, as the underwriters, and the Clinic. This Agreement
creates no fiduciary relationship between or among any of the parties.
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2. PRODUCTS
2.1 The parties will design and market various managed care products which
utilize a provider network, including PPO, POS and HMO, all of which may
be fully insured or self-funded. (Fully insured products are referred
to herein collectively as "Insured Products" and self-funded products
are referred to herein collectively as "Self-funded Products").
2.2 Blue Cross shall be the underwriter of the insured PPO plans and the
indemnity segment of POS plans and VHP shall be the underwriter of the
insured HMO plans (Blue Cross and VHP are in this role collectively
referred to as the "Underwriters"). On any self-funded program, Blue
Cross shall be the marketer of the PPO plans and VHP shall be the
marketer of the HMO and POS plans (Blue Cross and VHP are in this role
collectively referred to as the "Marketers").
2.3 The Clinic shall be the primary provider for all products contemplated
by this Agreement. The Clinic shall enter into provider agreements with
the Underwriters and the Marketers.
2.4 It is the intent of Blue Cross and the Clinic to cooperate in the design
and development of a Medicare Risk product and a managed care Workers'
Compensation product at such time that the parties mutually agree that
economic and market conditions are favorable.
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3. GOVERNING BOARD
3.1 The cooperative arrangement contemplated by this Agreement shall be
directed through a Governing Board. Blue Cross and the Clinic shall
each select four members of the Governing Board. The Governing Board
may select a smaller executive committee to manage the joint venture on
a day-to-day basis subject to the control of the Governing Board.
3.2 With respect to both Insured Products and Self-funded Products, all
major policies and decisions regarding the Underwriter's and/or
Marketer's business plan, marketing, benefit design, public relations,
provider contracting (including capitation and fee schedule)
administrative services agreements, and medical underwriting guidelines
shall be subject to approval by the Governing Board. Notwithstanding
the foregoing, the direct Underwriters shall have ultimate authority on
Insured Products in setting rates, medical underwriting functions and
reinsurance. VHP shall arrange for reinsurance for plans it underwrites
through a competitive bid process. Selection of the reinsurer shall be
based on price and cost control services offered by the reinsurer.
Notwithstanding the foregoing, VHP's selection of a reinsurer is subject
to the prior approval of the Governing Board.
3.3 In the event the positions of Director of VHP and/or the primary Medical
Director for VHP become vacant, the
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recommended candidate for either position will require the approval of
the Governing Board.
3.4 The four members of the Governing Board selected by Blue Cross shall be
responsible for selecting, negotiating and terminating contracts with
other independent providers, who are not otherwise affiliates of the
Clinic or members of the Mayo Health System, on behalf of Blue Cross
and/or VHP as Underwriters and/or Marketers subject to the following
conditions and restrictions:
(a) The four members of the Governing Board selected by the Clinic
shall be solicited to offer comments relating to the selection of
and contracting with independent providers or their termination.
Upon receipt of comments offered by the Clinic's Governing Board
members, a majority vote solely of the four Blue Cross members of
the Governing Board shall determine which such providers are
selected, the contract terms offered and afforded them and if and
when their contracts are terminated.
(b) Notwithstanding the foregoing, if any such independent providers
are afforded contract terms which are, in whole or in particular
part, more favorable to such providers than those afforded the
Clinic under its provider agreements with the Underwriters and/or
Marketers, such more favorable terms shall
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automatically and without further action of the parties be
incorporated in such agreements with the Clinic and shall remain in
place so long as such terms are afforded one or more independent
providers.
(c) In selecting independent providers, the Blue Cross members of the
Governing Board shall duly consider: the medical credentials of
such providers; whether the provider's credentials meet standards
set by the National Committee for Quality Assurance or other
accrediting agency acceptable to the Governing Board; whether there
is a need for their participation in order to provide an adequate
and appropriate level of medical services to insureds/enrollees;
whether the addition of such providers and the contract terms to be
afforded them are consistent with and will promote the provision of
managed medical care on a cost-efficient basis; and such other
factors as are reasonably deemed relevant by the Blue Cross members
of the Governing Board.
(d) Each application of an independent provider shall be duly
considered by the Blue Cross members of the Governing Board on a
timely basis and such members' decision on each such application
shall be timely communicated to the applicant.
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4. SERVICE AGREEMENTS AND PAYMENT TERMS
4.1 It is acknowledged that the Clinic and Blue Cross have entered into
administrative services agreements effective January 1, 1992 with the
Underwriters and/or Marketers regarding administration of the Insured
Products and/or Self-funded Products. The Governing Board and executive
committee members shall be compensated for their services to the joint
venture through the administrative services agreements. It is
anticipated that the Clinic, through administrative services agreements,
will provide quality assurance and medical management services to the
Underwriters and/or Marketers. All administrative services agreements
entered into shall receive approval of the Governing Board.
4.2 As to Insured Products, the terms of the administrative services
agreements shall provide that the Clinic and Blue Cross shall be
compensated for their services on an Actual Cost basis such that all
administrative profit will remain with the Underwriters to be shared
through the profit sharing formula outlined in Article 5 below. "Actual
Cost" as used herein, shall be defined as direct costs and indirect cost
allocation as provided for in the administrative services agreements.
4.3 As to Self-funded Products, all other factors being equal, the Marketers
shall treat the Clinic and Blue Cross as
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preferred vendors of administrative services. Terms and conditions of
such administrative services agreements shall be negotiated on an
arms-length basis. Notwithstanding the above, the Clinic and Blue Cross
shall provide such goods and/or services to the Marketers on terms no
less favorable than each one provides similar goods and services to
third parties.
4.4 VHP, as the Underwriter of the insured HMO plans, has entered into a
provider agreement with the Clinic to be the primary provider within the
network for the HMO plans. The terms of the provider agreement shall
provide for:
(a) the Clinic to be reimbursed through capitation. Effective January
1, 1997, the capitation rate shall be the rate in effect on
December 31, 1996, as shown in Attachment B, increased by five
percent (5%). At the Clinic's written request prior to July 1,
1997, the capitation rate shall be increased not less than an
additional two percent (2%) or more than an additional two and
one-half percent (2 1/2%) of the rate in effect on December 31,
1996, with the rate of change becoming effective on July 1, 1997.
Thereafter, annual increases, if any, shall be made on each January
1, with the rate of increase over the prior year's rate not to
exceed the rate of increase of the medical care component of the
Consumer Price Index ("CPI") for all
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urban consumers, United States City Average, during the preceding
twelve month period running from October 1 through September 30.
The Clinic shall provide written notice to VHP of any increase in
the fee schedule by December 1 of each year, any increase to become
effective on the following January 1. The capitation shall be
adjusted to reflect the following factors: age, sex, family status
(e.g., single, two individuals, family), product line and variable
office copayment. The capitation amount paid to the Clinic for
each product line shall be actuarially determined to reflect the
anticipated utilization of services. However, regardless of the
foregoing, the Clinic agrees that it shall offer to the joint
venture its Best Price for all products offered under this
Agreement within the Exclusive Area as defined in Section 6.1.
"Best Price" as used herein shall mean a price that is equal to or
lower than the price the Clinic accepts from any other
non-governmental payor with respect to insured and self-funded HMO,
PPO, and POS products.
(b) annual review of reimbursement to the Clinic to consider the impact
of new technology, which is not reflected in the CPI, and
unexpected changes in applicable community standards of practice,
upon the capitation rate with adjustments negotiated if
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appropriate and, if the parties cannot agree upon an appropriate
adjustment, a provision that the Governing Board shall determine
the appropriate adjustment, if any.
(c) an initial term of three years which may be renewed for an
additional three year term by mutual agreement; otherwise renewal
shall be for one year terms unless written notice of termination is
given at least 180 days prior to the end of the then current term
with a party able to terminate the Agreement at the end of the
initial term if proper notice is given; and
(d) the portion of the premium collected by VHP to be budgeted for the
hospital fund (the "Hospital Fund") to be set at thirty and
one-half percent (30 1/2%) of the premium revenue. (A description
of the manner in which the Hospital Fund is calculated is attached
hereto as Attachment A, which is incorporated herein by this
reference.) At the end of each calendar year, if the Hospital
Fund shows a deficit, each clinic affiliated with VHP (hereafter
"Option Clinic") shall be responsible for a percentage of the
deficit equal to the percentage of VHP members, on average,
serviced by that Option Clinic during such calendar year. If the
Hospital Fund shows an excess at the end of a calendar year, each
Option Clinic shall be entitled to a pro
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rata share of the excess that is equal to the percentage of
membership, on average, serviced by that Option Clinic during such
calendar year compared to the total VHP membership during such
calendar year. Settlement of the Hospital Fund shall be completed
by July 1 of each calendar year for the prior year's operations.
VHP shall provide the Option Clinics with Hospital Fund status
reports on a quarterly basis. The determination of Option Clinics
to be reimbursed from the Hospital Fund, and the percentage level
of reimbursement for each Option Clinic, shall be made upon a
majority vote of the Governing Board.
4.5 As to the insured PPO and POS products, the Clinic shall be the primary
provider to these plans. The Clinic shall provide medical services to
the PPO and POS plan beneficiaries pursuant to separate provider
agreements which shall be entered into as each such plan is established.
The terms of the provider agreements shall provide for: (a) the Clinic
to be reimbursed at the Clinic's then current fee schedule less a ten
percent (10%) discount; (b) the fee schedule shall be the Clinic's 1996
fee schedule with such changes as the Clinic enacts from time to time;
however, for purposes of this Agreement, any increase in a given CPT
code shall not exceed the increase in the medical care component of the
CPI for all urban consumers, United States City
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Average, for the same period of time as that period of time beginning
with the month in which the 1996 fee schedule was put into effect
through the time of the proposed increase in the CPT code, except that
an increase in a given CPT code may exceed the increase in the medical
care component of the CPI if approved by the Governing Board; and (c)
with Governing Board approval, review by the Governing Board of
reimbursement to the Clinic if utilization review illustrates the
Clinic's utilization or resulting cost to be above peer norm for three
consecutive quarters, with adjustments negotiated if appropriate.
5. PROFIT SHARING
5.1 Underwriting losses shall be the liability of the Underwriters, Blue
Cross and/or VHP respectively, on the Insured Products. Notwithstanding
the above, fifty percent of the aggregate net profits (calculated as set
forth below) shall be paid to the Clinic as set forth below.
5.2 Aggregate net profits shall be the sum of the following profits and
losses determined over the entire Initial Term of this Amended and
Restated Agreement as defined in Section 7.1 herein:
(a) Net profit/loss of VHP. Such net profit/loss shall be determined
by applying the same accounting principles applied in preparing
MHP's December 31, 1991 financial statement. As clarification,
calculation of net
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profit/loss shall not take into account any adjustments to the
reconciled purchase price as outlined in Section 4.4 of the
Purchase and Sale Agreement, any profit sharing payments made
pursuant to this Agreement, or any provision for the payment of
taxes. As further clarification, a sample profit-sharing
calculation is attached to this Agreement and incorporated herein
as Attachment C. Notwithstanding actual administrative expenses
incurred, total administrative expenses which may be charged
against income in calculating net profit/loss of VHP shall be the
lesser of: (i) actual costs incurred by VHP; or (ii) eight and
one-half percent (8 1/2%) of the gross premiums received for that
benefit year by VHP.
(b) Net underwriting profit/loss of each insured POS plan underwritten
by Blue Cross and offered by this joint venture. Net underwriting
profit/loss shall be calculated as net earned premiums less the sum
of incurred claims and administrative expenses. Total
administrative expenses used in calculating net underwriting
profit/loss shall not exceed the actual costs incurred by the
Underwriter pursuant to the administrative services agreements
referenced in Section 4.2 of this Agreement.
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<PAGE>
(c) Net profit/loss of excess loss reinsurance provided by an insurer
affiliated with Blue Cross for each insured POS plan underwritten
by Blue Cross and offered by this joint venture. Such net
profit/loss shall be calculated as reinsurance premium paid to the
reinsurer, less: (i) claims paid plus; (ii) a reserve for claims
reported but not yet paid, and claims incurred but not yet
reported; and (iii) administrative expenses or fees related to the
reinsurance policy.
5.3 Aggregate net profits/losses shall be determined over the entire Initial
Term of this Agreement as defined in Section 7.1 herein.
Notwithstanding the above, the Clinic is interested in sharing net
profits with the Underwriters on an interim basis and the Underwriters
are interested in recouping, on an interim basis, from the Clinic any
profits shared for which loss carry backs indicate an overpayment was
made. Interim profit sharing and recoupment shall be as follows:
(a) Within 120 days following the end of the first Benefit Year, UWS
shall determine the aggregate net profits or losses as described in
Section 5.2, above for that Benefit Year alone. "Benefit Year" is
defined as a calendar year beginning on January 1 and ending on
December 31 of the same year for all years falling within the
Initial Term of this Agreement. If
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aggregate net profits are present, UWS shall make available to the
Clinic a line of credit, within 150 days following the end of the
first Benefit Year, equal to the Clinic's fifty percent (50%) share
of the aggregate net profits. The Clinic may draw on the line of
credit. Any monies so drawn on by the Clinic shall herein be
referred to as the "Balance Drawn".
(b) Within 120 days following the end of the second Benefit Year, UWS
shall determine the aggregate net profits or losses as described in
Section 5.2 above, in the aggregate for the first two Benefit
Years, accounting for both loss carry forwards and loss carry backs.
(i) Within 150 days following the end of each such Benefit Year,
the amount of the line of credit shall be adjusted so as to
be equal to the Clinic's fifty percent (50%) share of the
aggregate net profits so calculated. A party's share of
aggregate net profits shall not include any investment
income attributable to the other party's share of aggregate
net profits.
(ii) If after such adjustment to the amount of the line of credit
the Balance Drawn by the Clinic exceeds the adjusted line of
credit ("Overdraft"), the Clinic shall repay to UWS
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the amount of the Overdraft plus accruing interest.
Repayment shall be in twelve equal installments beginning on
the first of the month 150 days following the end of the
last Benefit Year. Interest on the monies owed by the
Clinic shall accrue at the prime rate, plus 100 basis
points, as determined by M & I Marshall & Ilsley Bank,
Milwaukee, Wisconsin, on the close of business on the last
business day of the month preceding when the first
installment is due. Interest shall accrue beginning on the
first of the month 150 days following the end of the last
Benefit Year. The Clinic may repay all or part of the
Overdraft at any time.
(c) Within 180 days following the end of the third Benefit Year of the
Initial Term, UWS shall determine the aggregate net profits or
losses as determined in Section 5.2 above for all Benefit Years
which comprise the Initial Term of this Agreement, accounting for
both loss carry forwards and loss carry backs.
(i) If aggregate net profits are present, UWS shall pay to the
Clinic, within 210 days following the end of the third
Benefit Year of the Initial Term, the Clinic's respective
fifty
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percent (50%) share of the aggregate net profits. The
Clinic's share of such aggregate net profits shall be paid
to it by UWS first canceling the Balance Drawn by the
Clinic, up to the Clinic's share of such aggregate net
profits. If after such cancellation, aggregate net profits
remain to be paid to the Clinic by UWS, an appropriate cash
payment shall be made by UWS to the Clinic. If after such
cancellation an Overdraft remains to be paid by the Clinic
on the line of credit, the Clinic shall repay such Overdraft
as set forth in item (ii) below.
(ii) If aggregate net losses are present, the Clinic shall repay
UWS the Overdraft. Repayment shall be within 210 days
following the end of the third Benefit Year of the Initial
Term. Interest on the monies owed by the Clinic shall
accrue at the prime rate, plus 100 basis points, as
determined by M & I Marshall & Ilsley Bank, Milwaukee,
Wisconsin, on the close of business on the last business day
of the month preceding when repayment is due. Interest
shall accrue beginning on the first of the month 210 days
following the end of the
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final Benefit Year of the Initial Term. The Clinic may
repay all or part of the amount owed at any time.
(d) If, after the Initial Term, this Agreement is renewed for an
additional three-year term or terms in accordance with Section 7.1,
aggregate net profits shall be shared on an interim basis as
described in (a) and (b), above, with final reconciliation
occurring following the third year of each such three-year term as
described in (c) above. If this Agreement is renewed for one or
more one-year terms, final reconciliation shall occur at the end of
each such one-year term.
6. EXCLUSIVITY
6.1 Unless otherwise agreed by the Governing Board, and subject to Section
6.2 below, no party may, during the Initial Term (as defined in Section
7.1) or any subsequent term(s) of this Amended and Restated Joint
Venture Agreement directly or indirectly offer or participate in the
offering, except through this joint venture, of any HMO, PPO, POS or
other managed care products, which utilize a provider network, either
insured, or self-funded, which has a participating provider located in
any of the following Wisconsin geographic areas: the counties of Barron,
Chippewa, Eau Claire and Dunn; and the five-digit zip code area(s)
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comprising the City of Mondovi (this geographic area is hereinafter
referred to as the "Exclusive Area").
6.2 The Clinic may, without the prior approval of the Governing Board,
participate with parties other than Blue Cross, UWS and VHP in the
offering of managed care plans within the Exclusive Area only if:
(a) such managed care plans are offered only to employers having
multiple locations, one or more of which is located within the
Exclusive Area, and with employer headquarters located outside the
Exclusive Area;
6.3 During the term of this Agreement, the Clinic agrees to serve as a
provider for Blue Cross' PPO and POS plans for the following groups and
shall take such steps as are necessary to persuade Luther Hospital to
continue to serve as a provider in the same capacity:
(a) groups with operations and corporate headquarters located within
the Exclusive Area;
(b) groups with operations and/or corporate headquarters located within
Wisconsin but outside the Exclusive Area; and
(c) groups with corporate headquarters outside Wisconsin for which Blue
Cross participates with other Blue Cross
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and/or Blue Shield plans in the administration of the groups' Blue
Cross and/or Blue Shield labelled benefit plans.
6.4 The Clinic agrees to serve as a provider for subsidiaries or affiliates
of Blue Cross as of January 1, 1997, (not to include American Medical
Security Group, Inc.) which offer PPO networks for Insured Products and
third party administrative ("TPA") services for Self-funded Products.
However, the Clinic agrees to serve as a provider for an additional Blue
Cross affiliated TPA that may be formed after January 1, 1997. Clinic
further agrees to take such steps as are necessary to persuade Luther
Hospital to serve as a provider in the same capacity.
6.5 The Clinic may terminate its agreement to serve as a provider for the
products referenced in sections 6.3 and 6.4, above, by providing Blue
Cross or its subsidiary or affiliate, as appropriate, with ninety (90)
days prior written notice, with termination to be effective as of
January 1 of the following calendar year. In the event that the Clinic
exercises this option to terminate, the termination shall have no affect
on the parties' other rights and obligations under this Agreement, nor
shall the Clinic or Blue Cross, or their respective subsidiaries and
affiliates, have any further obligation to the other parties with
respect to the products referenced in sections 6.3 and
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6.4, except that: (i) the Clinic agrees to extend continued provider
services to all groups affected by the termination until the end of each
such group's benefit year; and (ii) during the course of any such
extension, the Clinic agrees to accept the same reimbursement terms and
other Agreement terms that were in effect immediately prior to
termination.
6.6 The parties to this Agreement acknowledge and agree that the provisions
of this Article 6, relating to exclusivity, are binding on those
subsidiaries and affiliates of the Clinic existing on January 1, 1992,
and shall be binding on later acquired or established subsidiaries or
affiliates only if such entities signify in writing their intent to be
bound.
7. TERM AND TERMINATION
7.1 The initial term ("Initial Term") of this Amended and Restated Joint
Venture Agreement shall be for three years, commencing on January 1,
1997 and continuing in effect through December 31, 1999. This Agreement
may be renewed for an additional three year term, commencing on January
1, 2000, by mutual written agreement of the parties; otherwise the joint
venture shall automatically renew for one year terms unless written
notice of termination is given at least 180 days prior to the end of the
then current term. This Agreement may be terminated at the end of the
Initial Term if proper notice is given.
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7.2 Notwithstanding the above, if, in accordance with the Purchase and Sale
Agreement, Clinic exercises its right to repurchase all outstanding
shares of VHP stock from UWS upon the third anniversary of this Amended
and Restated Joint Venture Agreement, or its termination, whichever is
earlier, this Agreement shall terminate unless the parties mutually
agree otherwise in writing. Additionally, in the event that a party
substantially breaches any material term or condition of this Agreement,
notice of the specific breach shall be given to the breaching party.
The breaching party shall have sixty (60) days to cure such breach. In
the event the breaching party fails to cure said breach, the
non-breaching party shall have the right to terminate this Agreement on
thirty (30) days prior written notice.
7.3 Notwithstanding the termination of this Agreement, all provider and
administrative services agreements entered into by the parties shall
continue according to the provisions contained in those provider
agreements.
8. MISCELLANEOUS
8.1 The parties agree that a high quality of service and participation in
this joint venture are to be provided by each party in their respective
duties and obligations.
8.2 In the event of a dispute between the parties relating to this
Agreement, such dispute shall be resolved by arbitration in accordance
with the rules of the American
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Arbitration Association. The inability of the Governing Board to take
action with regard to a particular matter due to an impasse shall not be
treated as a dispute affording either party the right to demand
arbitration to resolve such impasse.
8.3 This Agreement supersedes all prior agreements, proposals, offers or
letters of intent, including the 1992 Agreement, relating to the subject
matter hereof. Any amendment to this Agreement must be in writing,
executed by, and delivered to, each of the parties.
8.4 In the event that a court, regulator, or administrative judge of
competent jurisdiction declares any provision of this Agreement to be
invalid or unenforceable, such declaration shall have no effect on the
validity or enforceability of the remainder of this Agreement; provided,
however, that the basic purposes of this Agreement may be achieved
through the remaining valid provisions.
8.5 The parties acknowledge that all material and information of a given
party which has or will come into the possession of another party in
connection with this Agreement consists of confidential and proprietary
data. Each party agrees to hold such material and information in
strictest confidence, not to make use thereof other than for the
performance of this Agreement, and not to release or disclose it to any
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third party other than for the performance of this Agreement.
8.6 Failure by any party to insist upon compliance with any term or
provision of this Agreement at any time or under any set of
circumstances will not operate to waive or modify that provision or
render it unenforceable at any other time.
8.7 This Agreement shall be construed according to the laws of the State of
Wisconsin.
8.8 All notices required or permitted by this Agreement shall be sent to the
following addresses, or to such other persons or locations indicated in
writing by the parties:
BLUE CROSS:
Penny J. Siewert, Vice President of Regional Services
N17 W24340 Riverwood Drive
Waukesha, WI 53188
UWS:
Thomas R. Hefty, President
401 West Michigan Street
Milwaukee, WI 53203
VHP:
Norman L. Keller, President
Valley Health Plan, Inc.
2270 EastRidge Center
Eau Claire, WI 54701
CLINIC:
Robert Downs, Executive Vice President
Midelfort Clinic, Ltd., Mayo Health System
1400 Bellinger Street
P. O. Box 1510
Eau Claire, WI 54702
8.9 No party may assign its rights or delegate its duties under this
Agreement without the prior written consent of the other parties. Such
approved assignment or delegation shall
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inure to the benefit of the parties, their successors, and their
permitted assigns or delegates.
8.10 Each signatory hereto represents and warrants that his/her execution
of this Agreement on behalf of his/her respective party has been duly
authorized and approved by the parties' Board of Directors and/or
shareholders (if legally required).
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective representatives.
Attest: BLUE CROSS & BLUE SHIELD
UNITED OF WISCONSIN
- --------------------------
By: /s/ [illegible]
-----------------------------
Title:
--------------------------
Attest: UNITED WISCONSIN SERVICES, INC.
- --------------------------
By: /s/ [illegible]
-----------------------------
Title: President & CEO
--------------------------
Attest: VALLEY HEALTH PLAN, INC.
- --------------------------
By: /s/ Norman L. Keller
-----------------------------
Title: President
--------------------------
Attest: MIDELFORT CLINIC, LTD., MAYO
HEALTH SYSTEM
- --------------------------
By: /s/ [illegible]
-----------------------------
Title: President
--------------------------
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ATTACHMENT A
VALLEY HEALTH PLAN HOSPITAL FUND
A. During each calendar year of the Amended and Restated Joint Venture
Agreement ("Agreement"), the Hospital Fund shall be set at thirty and
one-half percent (30 1/2 %) of premium revenue collected in that calendar
year with respect to the following products:
1. VHP HMO products;
2. VHP HMO Partner Plan;
3. Medicare Supplement Plan;
4. AgriHealth Plan; and
5. All products that require VHP members to select the Clinic or an
Option Clinic as a primary care provider.
B. The Hospital Fund covers inpatient care and outpatient care provided
in-network or out-of-network with an approved VHP authorization.
C. In accordance with section 4.4 (d) of the Agreement, the Hospital Fund
shall be calculated as follows:
[Insert sample Hospital Fund Calculation here.]
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VALLEY HEALTH PLAN INC. Attachment B
CAPITATIONS
1997
MIDELFORT MEDICARE CARVEOUTS - OPTION 10
5% INCREASE OVER 1996
1 ON/1 OFF 1 ON/1 OFF
SINGLE 2 SINGLES REGULAR PARTNER
AGE GROUP 05/35/55 06/36/56 7/8/57/58 37/38
- -----------------------------------------------------------------------
60 - 64 55.71 110.87 258.90 190.35
65 + 55.71 110.87 258.90 190.35
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT AGRICARE/AGRIHEALTH (NO COPAY) - OPTION 10
5% INCREASE OVER 1996
ADULT CHILD
AGE GROUP 20/120 29/129
- ------------------------------------
UNDER 30 52.36 22.28
30 - 39 49.43
40 - 49 50.69
50 - 59 56.54
60 - 69 61.99
65 + 68.26
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT MEDICARE SUPPLEMENTS - OPTION 10
5% INCREASE OVER 1996
1 ON/1 OFF 1 ON/1 OFF
SINGLE SINGLE SINGLE SINGLE SINGLE
AGE GROUP 41 42 43 44 45
- ----------------------------------------------------------------------------
65 - 69 50.21
70 - 74 56.27
75 - 79 60.13
80 - 84 60.13
85 + 60.13
<PAGE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION STATE TEMP RATES - OPTION 10
5% INCREASE OVER 1996
SINGLE 2 Tier/Family
61 62 63 64
AGE GROUP MALE FEMALE MALE FEMALE
------------------ ------------------
UNDER 30 21.04 53.35 107.40 98.24
30 - 39 32.17 67.13 138.99 126.21
40 - 49 39.46 65.42 137.63 132.99
50 - 59 64.69 78.08 160.61 155.61
60 - 64 90.19 90.39 183.86 166.66
65+ 104.16 89.63 193.00 181.35
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION REGULAR PLAN (NO COPAY)- OPTION 10
STATE AND FEDERAL EMPLOYEES
5% INCREASE OVER 1996
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
71 75 72 76 74 78 73 77
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 29.83 75.99 131.33 105.28 153.21 140.10 184.25 153.38
30 - 39 45.73 95.66 143.21 138.03 198.32 180.06 216.71 199.36
40 - 49 56.14 93.23 146.38 143.52 196.37 189.74 214.88 204.40
50 - 59 92.19 111.30 201.07 180.90 229.20 222.07 247.10 236.19
60 - 64 128.60 128.90 252.58 222.01 262.44 237.85 284.97 263.59
65+ 148.57 127.81 273.52 252.09 275.47 258.84 289.06 275.66
</TABLE>
<PAGE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION PARTNERPLAN (NO COPAY)- OPTION 10
5% INCREASE OVER 1996
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
81 85 80/82 86/89 84 88 83 87
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 27.18 69.17 119.51 95.81 139.41 127.49 167.64 139.57
30 - 39 41.64 87.06 130.31 125.60 180.45 163.83 197.17 181.39
40 - 49 51.11 84.84 133.47 130.59 178.67 172.64 195.51 185.98
50 - 59 83.90 101.30 182.94 164.60 208.52 202.04 224.81 214.88
60 - 64 117.02 117.29 229.79 202.00 238.76 216.39 259.26 239.81
65+ 135.18 116.31 248.85 229.36 250.62 235.49 262.97 250.79
</TABLE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION PARTNERPLAN ($10 COPAY)- OPTION 10
5% INCREASE OVER 1996
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
181 185 180/182 186/189 184 188 183 187
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 27.18 69.17 119.51 95.81 139.41 127.49 167.64 139.57
30 - 39 41.64 87.06 130.31 125.60 180.45 163.83 197.17 181.39
40 - 49 51.11 84.84 133.47 130.59 178.67 172.64 195.51 185.98
50 - 59 83.90 101.30 182.94 164.60 208.52 202.04 224.81 214.88
60 - 64 117.02 117.29 229.79 202.00 238.76 216.39 259.26 239.81
65+ 135.18 116.31 248.85 229.36 250.62 235.49 262.97 250.79
</TABLE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION PARTNERPLAN ($15 COPAY)- OPTION 10
3.5% LESS THAN 1997 $10 COPAY
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
281 285 280/282 286/289 284 288 283 287
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 26.23 66.75 115.33 92.45 134.53 123.03 161.77 134.68
30 - 39 40.18 84.02 125.75 121.21 174.13 158.10 190.27 175.04
40 - 49 49.32 81.88 128.80 126.02 172.42 166.60 188.67 179.47
50 - 59 80.97 97.75 176.53 158.84 201.22 194.97 216.94 207.36
60 - 64 112.93 113.19 221.75 194.93 230.40 208.82 250.19 231.42
65+ 130.45 112.24 240.14 221.33 241.85 227.25 253.77 242.01
</TABLE>
<PAGE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION PARTNERPLAN ($20 COPAY)- OPTION 10
7.0% LESS THAN 1997 $10 COPAY
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
381 385 380/382 386/389 384 388 383 387
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 25.27 64.33 111.14 89.10 129.65 118.56 155.91 129.80
30 - 39 38.72 80.97 121.19 116.81 167.82 152.37 183.37 168.69
40 - 49 47.53 78.91 124.13 121.45 166.16 160.56 181.83 172.96
50 - 59 78.03 94.21 170.13 153.08 193.92 187.89 209.07 199.84
60 - 64 108.83 109.08 213.70 187.86 222.05 201.24 241.11 223.02
65+ 125.72 108.17 231.43 213.30 233.08 219.01 244.57 233.23
</TABLE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION PARTNERPLAN ($25 COPAY)- OPTION 10
10.0% LESS THAN 1997 $10 COPY
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
481 485 480/282 486/289 484 488 483 487
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 24.46 62.26 107.56 86.23 125.46 114.74 150.88 125.61
30 - 39 37.47 78.36 117.28 113.04 162.40 147.45 117.45 163.25
40 - 49 46.00 76.36 120.13 117.54 160.80 155.38 175.96 167.38
50 - 59 75.51 91.17 164.64 148.14 187.67 181.83 202.33 193.40
60 - 64 105.32 105.56 206.81 181.80 214.88 194.75 233.33 215.83
65+ 121.66 104.68 223.96 206.42 225.56 211.94 236.68 225.71
</TABLE>
<PAGE>
ATTACHMENT C
PROFIT SHARING CALCULATION
The following reference lines on Report #2: Statement of Revenues,
Expenses, and Net Worth which is filed by Valley Health Plan with the Office
of the Commissioner of Insurance as of December 31 annually.
Line 29 Income (Loss)
PLUS
Line 30 Extraordinary Item
MINUS
Line 14 Incentive Pool and Withhold Adjustments
(Only the joint venture profit sharing portion)
EQUALS
TOTAL AMOUNT
TOTAL AMOUNT
DIVIDED BY 2 EQUALS
EACH PARTNERS BEFORETAX PROFIT SHARE
<PAGE>
4 STATEMENT AS OF DECEMBER 31, 1995 OF THE VALLEY HEALTH PLAN, INC.
----------------- ------------------------
(Year Ending) (Name)
<TABLE>
<CAPTION>
REPORT #2: STATEMENT OF REVENUES, EXPENSES AND NET WORTH
- -----------------------------------------------------------------------------------------------------
Previous
Year-to-Date Calendar Year
------------------ --------------
1 2 3
Uncovered Total Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MEMBER MONTHS XXX 328,691 280,177
- ------------------------------------------------------------------------------------------------------
REVENUES:
1. Premium XXX 40,767,194 35,245,665
- ------------------------------------------------------------------------------------------------------
2. Fee-for-Service XXX 0 0
- ------------------------------------------------------------------------------------------------------
3. Title XVIII-Medicare XXX 0 0
- ------------------------------------------------------------------------------------------------------
4. Title XIX-Medicaid XXX 1,101,715 0
- ------------------------------------------------------------------------------------------------------
5. Investment XXX 892,468 520,626
- ------------------------------------------------------------------------------------------------------
6. Aggregate Write-Ins for Other Revenues XXX 0 0
- ------------------------------------------------------------------------------------------------------
7. TOTAL REVENUES (Items 1 to 6) XXX 42,761,377 35,766,311
- ------------------------------------------------------------------------------------------------------
EXPENSES:
MEDICAL AND HOSPITALS:
8. Physician Services 711,506 16,836,218 12,975,546
- ------------------------------------------------------------------------------------------------------
9. Other Professional Services 51,066 1,206,640 1,015,289
- ------------------------------------------------------------------------------------------------------
10. Outside Referrals 17,547 415,202 325,586
- ------------------------------------------------------------------------------------------------------
11. Emergency Room and Out-of-Area 26,107 617,764 823,204
- ------------------------------------------------------------------------------------------------------
12. Occupancy, Depreciation and Amortization 0 0 0
- ------------------------------------------------------------------------------------------------------
13. Inpatient and Outpatient 513,350 12,147,209 10,246,849
- ------------------------------------------------------------------------------------------------------
14. Incentive Pool and Withhold Adjustments 0 1,651,818 1,074,460
- ------------------------------------------------------------------------------------------------------
15. Aggregate Write-Ins for Other Medical
and Hospital Expenses 210,592 4,983,207 3,630,637
- ------------------------------------------------------------------------------------------------------
16. Subtotal (Items 8 to 15) 1,530,188 37,860,348 30,091,571
- ------------------------------------------------------------------------------------------------------
17. Reinsurance Expenses Net of Recoveries 0 (434,985) 105,957
- ------------------------------------------------------------------------------------------------------
LESS:
18. Copayments 0 0 0
- ------------------------------------------------------------------------------------------------------
19. COB and Subrogation 9,558 226,158 176,138
- ------------------------------------------------------------------------------------------------------
20. Subtotal (Items 18 and 19) 9,558 226,158 176,138
- ------------------------------------------------------------------------------------------------------
21. TOTAL MEDICAL AND HOSPITAL (Items 16 and 17 less 20) 1,520,630 37,199,205 30,021,390
- ------------------------------------------------------------------------------------------------------
ADMINISTRATION:
22. Compensation 0 913,022 806,760
- ------------------------------------------------------------------------------------------------------
23. Interest Expense 0 29,485 19,858
- ------------------------------------------------------------------------------------------------------
24. Occupancy, Depreciation and Amortization 0 13,730 13,730
- ------------------------------------------------------------------------------------------------------
25. Marketing 0 497,226 643,306
- ------------------------------------------------------------------------------------------------------
26. Aggregate Write-Ins for Other Administration Expenses 0 1,630,997 1,330,429
- ------------------------------------------------------------------------------------------------------
27. TOTAL ADMINISTRATION (Items 22 to 26) 0 3,084,460 2,816,083
- ------------------------------------------------------------------------------------------------------
28. TOTAL EXPENSES (Items 21 and 27) 1,520,630 40,283,665 32,837,473
- ------------------------------------------------------------------------------------------------------
29. INCOME (LOSS) (Items 7 less Item 26) XXX 2,477,712 2,926,838
- ------------------------------------------------------------------------------------------------------
30. Extraordinary Item 0 0 0
- ------------------------------------------------------------------------------------------------------
31. Provision for Federal Income Taxes and State Income Taxes 0 948,918 1,142,058
- ------------------------------------------------------------------------------------------------------
32. NET INCOME (LOSS) (Items 29, less Items 30 and 31) XXX 1,526,794 1,786,760
- ------------------------------------------------------------------------------------------------------
DETAILS OF WRITE-INS AGGREGATED AT ITEM 6 FOR OTHER REVENUES
- ------------------------------------------------------------------------------------------------------
0601 XXX
- ------------------------------------------------------------------------------------------------------
0602 XXX
- ------------------------------------------------------------------------------------------------------
0603 XXX
- ------------------------------------------------------------------------------------------------------
0604 XXX
- ------------------------------------------------------------------------------------------------------
0605 XXX
- ------------------------------------------------------------------------------------------------------
0698 Summary of remaining write-ins for Item 6
from overflow page XXX
- ------------------------------------------------------------------------------------------------------
0699 TOTALS (Items 0601 thru 0605 plus 0695) (Page 4, Item 6) XXX 0 0
- ------------------------------------------------------------------------------------------------------
DETAILS OF WRITE-INS AGGREGATED AT ITEM 15 FOR MEDICAL AND HOSPITAL EXPENSES
1501 Pharmacy Expenses 178,716 4,226,920 3,147,856
- ------------------------------------------------------------------------------------------------------
1502 Medical Equipment 31,876 754,287 482,781
- ------------------------------------------------------------------------------------------------------
1503
- ------------------------------------------------------------------------------------------------------
1504
- ------------------------------------------------------------------------------------------------------
1505
- ------------------------------------------------------------------------------------------------------
1598 Summary of remaining write-ins for Item 15
from overflow page
- ------------------------------------------------------------------------------------------------------
1599 TOTALS (Items 1501 thru 1505 plus 1598)
(Page 4, Item 15) 210,592 4,983,207 3,630,637
- ------------------------------------------------------------------------------------------------------
DETAILS OF WRITE-INS AGGREGATED AT ITEM 26 FOR OTHER ADMINISTRATIVE EXPENSES
2601 Administrative Expenses 0 1,356,997 1,163,126
- ------------------------------------------------------------------------------------------------------
2602 HIRSP Expenses 0 274,000 167,301
- ------------------------------------------------------------------------------------------------------
2603
- ------------------------------------------------------------------------------------------------------
2604
- ------------------------------------------------------------------------------------------------------
2605
- ------------------------------------------------------------------------------------------------------
2695 Summary of remaining write-ins for Items 26 from
overflow page
- ------------------------------------------------------------------------------------------------------
2699 TOTALS (Items 2601 thru 2605 plus 2696)(Page 4, Item 26) 0 1,630,997 1,330,429
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INTERCOMPANY SERVICE AGREEMENT
This Intercompany Service Agreement ("Agreement") is entered into
as of this 1st day of January, 1998 ("Effective Date"), by and
among Blue Cross & Blue Shield United of Wisconsin, a service insurance
corporation organized pursuant to Ch. 613, Wisconsin Statutes ("BCBSUW"),
United Wisconsin Services, Inc., an insurance holding company organized
pursuant to Ch. 180, Wisconsin Statutes ("UWS"), and United Heartland, Inc.,
a corporation organized pursuant to Ch. 180, Wisconsin Statutes ("UHI").
RECITALS
WHEREAS, BCBSUW, UWS and UHI are affiliated corporations, with UHI
being a wholly owned subsidiary of UWS;
WHEREAS, there is an existing service agreement between BCBSUW and UWS
that extends to subsidiaries of UWS (BCBSUW, UWS and its subsidiaries shall
hereinafter be collectively referred to as "BCBSUW/UWS Group"), and this
Agreement is intended to further specify the services, costs, and allocation
methods contemplated by that service agreement;
WHEREAS, UHI is a managing general agent for the sale and servicing of
workers' compensation business insured by United Wisconsin Insurance Company
("UWIC"), or in states where UWIC is not licensed, insured by other insurers
with whom UHI and UWIC have written agreements;
WHEREAS, BCBSUW and UWS collectively provide business resources and
services necessary for the continued operation of UHI's business; and
WHEREAS, by entering into this Agreement, the parties hereto wish to
establish clearly (i) an officer leasing arrangement; (ii) the services and
resources that BCBSUW and UWS will continue to provide to UHI and the
compensation and cost allocations therefor; and (iii) the respective rights and
responsibilities of the parties.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and of the
mutual covenants hereinafter contained, the parties hereto agree as follows:
1. LEASE OF OFFICERS
a. DEFINITION.
i. "Leased Officers" are those BCBSUW and/or UWS employees that
perform services, as officers of UHI, for UHI. (Leased Officers may also be
referred to herein as "Officers").
-1-
<PAGE>
b. LEASE OF OFFICERS.
i. OBLIGATION TO PROVIDE OFFICERS. BCBSUW and/or UWS shall provide
to UHI, to the extent requested by UHI's Board of Directors (the "UHI Board"),
the entire requirement of Leased Officers as shall be necessary or appropriate
for the conduct of UHI's business.
ii. INDEPENDENT HIRING. Notwithstanding Section 1.b.i. and the
UHI Board's present intent to lease Officers from BCBSUW and/or UWS, the UHI
Board shall have the right to obtain and hire directly any or all Officers
from any other sources and on any terms to perform such duties as the UHI
Board may consider appropriate from time to time. Should the UHI Board hire
officers from other sources, it will not hire any individual who was a BCBSUW
or UWS Employee leased to UHI within three (3) months preceding such hiring,
without the written consent of BCBSUW and/or UWS.
iii. HUMAN RESOURCES DEPARTMENT. UWS's Human Resources Department
("Human Resources") shall be responsible for the implementation, management, and
operation of BCBSUW's and UWS's leasing obligations under this Agreement.
c. EMPLOYMENT RELATIONSHIPS. Employment, termination, and terms of
employment of all Leased Officers shall be reserved to the full Boards of
Directors of BCBSUW and UWS, provided, however, that while any such individual
is leased to UHI to perform services as an officer, UHI will be consulted prior
to all determinations regarding the employment, or terms thereof, of such
individuals; provided, however, that UHI's input shall be of an advisory nature
and will not be binding on BCBSUW or UWS as the common law employers of such
individuals. BCBSUW and UWS shall be, and shall have all the privileges,
rights, and responsibilities of, common law employers of all BCBSUW and UWS
employees, respectively, whether or not the employee actually performs services
for BCBSUW, UWS or another company in the BCBSUW/UWS Group. Officers leased to
UHI pursuant to this Agreement shall remain employees of BCBSUW or UWS, and
shall in no way be treated as or considered employees of UHI.
2. SERVICES AND OTHER RESOURCES PROVIDED TO UHI
a. SERVICES AND RESOURCES PROVIDED BY BCBSUW. BCBSUW shall provide to
UHI, to the extent requested by UHI and subject to Section 5, the following
services and resources (together "BCBSUW Services"). BCBSUW shall supply
BCBSUW Services only if UHI has determined not to have its own employees or
third parties furnish the BCBSUW Services, subject to Section 5.
i. OFFICE SPACE AND FACILITIES. Office space and facilities,
including, but not limited to, furniture and equipment, as shall be necessary or
appropriate for the conduct of UHI's operations.
ii. BUILDING SERVICES. Building services, including, but not limited
to, repair and maintenance of any property and facilities made available
hereunder as shall be
-2-
<PAGE>
necessary to maintain such property and facilities in good working order, and
such other building services as may be necessary or appropriate for the
conduct of UHI's business.
iii. OFFICE SERVICES. Such office services, including, but not
limited to, warehousing, transportation, stockroom, graphics, printing,
duplicating and forms management, as shall be necessary or appropriate for the
conduct of UHI's business.
iv. CENTRAL SYSTEMS. Such central systems, including, but not
limited to, management information systems, corporate network support,
telecommunications, centralized mailing, technology support and central data
base maintenance, as shall be necessary or appropriate for the conduct of UHI's
business.
v. ADMINISTRATIVE SERVICES. Such administrative services,
including, but not limited to, lobbyist activities, as shall be necessary or
appropriate for the conduct of UHI's business.
vi. COMPANY CAR AND TRAVEL. Availability and maintenance of vehicles
for company related travel and such other travel related services as shall be
necessary or appropriate for the conduct of UHI'S business.
b. SERVICES AND RESOURCES PROVIDED BY UWS. UWS shall provide to UHI,
to the extent requested by UHI and subject to Section 5, the following
services and resources (together "UWS Services"). UWS shall supply UWS
Services only if UHI has determined not to have its own employees or third
parties furnish the UWS Services, subject to Section 5.
i. CORPORATE SUPPORT SERVICES. Such corporate support services,
including, but not limited to, corporate compliance, legal, and government
relations, as shall be necessary or appropriate for the conduct of UHI's
business.
ii. EXECUTIVE SERVICES. Such executive services as shall be
necessary or appropriate for the conduct of UHI's business.
iii. CORPORATE MARKETING AND COMMUNICATIONS. Such corporate marketing
and communications services, including, but not limited to, public relations and
employee community events, as shall be necessary or appropriate for the conduct
of UHI's business.
iv. HUMAN RESOURCES. Such human resource services, including, but
not limited to, staffing, labor and employment relations, training and
development, and administration of payroll and employee benefits, as shall be
necessary or appropriate for the conduct of UHI's business.
v. FINANCIAL SERVICES. Such financial services, including, but not
limited to, cash management, tax, treasury, administration of financial systems,
and strategic planning/consulting, as shall be necessary or appropriate for the
conduct of UHI's business.
-3-
<PAGE>
vi. ACTUARIAL AND UNDERWRITING SERVICES. Such actuarial and
underwriting services as shall be necessary or appropriate for the conduct of
UHI's business.
vii. OTHER SERVICES. Such other services as shall be necessary or
appropriate for the conduct of UHI's business.
c. STAFFING. BCBSUW and UWS shall both maintain an adequate source of
qualified employees to ensure the acceptable performance of BCBSUW and UWS
Services.
3. COST ALLOCATION METHODS
a. LEASED OFFICERS.
i. ALLOCATION OF OFFICER COSTS. To the extent that Officers are
leased to UHI, costs associated with the lease of such Officers shall be
indirectly charged to UHI as provided in Section 3.b.ii.
b. BCBSUW AND UWS SERVICES. To the extent that BCBSUW/UWS Services are
rendered on behalf of or for the benefit of UHI, costs therefor shall be
allocated to UHI as follows:
i. DIRECT ALLOCATIONS. Costs associated with those BCBSUW/UWS
Services identified on Schedule 1 shall be directly charged to UHI on a monthly
basis.
ii. INDIRECT ALLOCATIONS. Cost allocations for those BCBSUW/UWS
Services identified on Schedule 2 ("Schedule 2 Services") shall be determined
annually for the next succeeding Fiscal Year ("Fiscal Year" shall mean January 1
through December 31) on the basis of utilization and cost studies performed by
UWS. Through the use of Indirect Allocation Methods, as described in Schedule 3
attached hereto, utilization of Schedule 2 Services shall be reduced to an
allocation percentage for each company in the BCBSUW/UWS Group. Each month all
costs associated with the utilization of Schedule 2 Services shall be multiplied
by the allocation percentage of UHI to determine UHI's allocable share of costs
for Schedule 2 Services. Notwithstanding the preceding, (i) allocation
percentages are subject to interim Fiscal Year adjustments to allocate more
accurately costs based on actual utilization by each company in the BCBSUW/UWS
Group, (ii) costs associated with Schedule 2 Services performed directly for UHI
shall be allocable to UHI only, and (iii) subject to approval by the Vice
President of Finance for the BCBSUW/UWS Group, the Indirect Allocation Method
used to allocate costs for specific Schedule 2 Services shall be subject to
agreement by the parties on an annual basis.(1) Schedule 2, attached hereto,
sets forth UHI's annual allocation percentage for costs and expenses associated
with Schedule 2 Services. Schedule 2 shall be amended annually.
- ---------------------
(1) Before granting approval of any negotiated change to the method of
allocating costs for a particular service, the following factors should be
considered: (i) compliance with FAS rules; (ii) other federal government
contracting implications; and (iii) feasibility.
-4-
<PAGE>
iii. CHARGEBACKS. Costs associated with those BCBSUW/UWS Services
identified on Schedule 4 ("Chargeback Services") either shall be (i) indirectly
allocated to UHI as discussed in Section 3.b.ii. if the cost is a general
expense for providing the Chargeback Service to all users; or (ii) directly
charged to UHI's cost center, if the cost is an expense specific to UHI's cost
center. Thus, costs associated with Chargeback Services shall be either
directly charged or indirectly allocated to UHI on a monthly basis, depending on
the nature of the cost.
c. FEES IN ADDITION TO ALLOCATED COSTS. To the extent that UHI leases or
utilizes the services of Officers from BCBSUW and/or UWS, and to the extent that
UHI utilizes BCBSUW/UWS Services, BCBSUW and/or UWS may charge UHI a reasonable
negotiated fee therefor, as set forth in Schedule 5.
4. SUBSTANTIATION OF AND REIMBURSEMENT FOR ALLOCATED COSTS
a. SUBSTANTIATION OF ALLOCATED COSTS. All costs and expenses shall be
allocated in a fair and reasonable manner. BCBSUW and UWS shall maintain
reasonable and appropriate operating procedures to allocate costs and expenses
so as to enable UHI's independent certified public accounting firm to audit such
costs and the allocation thereof. At the end of each month, BCBSUW and/or UWS
shall provide or make available to UHI appropriate documentation respecting the
costs and expenses that are allocated, either directly or indirectly, to UHI for
that month in sufficient detail to permit UHI to identify the sources of such
charges.
b. REIMBURSEMENT FOR ALLOCATED COSTS. At the end of each month, not
later than the 30th day of the following month, UHI shall promptly reimburse
BCBSUW and/or UWS for all costs and expenses incurred by BCBSUW and/or UWS in
furnishing or obtaining the Officers and Services provided for under Sections I
and II, which amount shall be based on the total of direct charges and indirect
allocations to UHI for the preceding month. Notwithstanding the preceding, UHI
reserves the right to offset any amounts due to BCBSUW and/or UWS under this
Agreement against other obligations of BCBSUW and/or UWS to UHI.
5. MODIFICATIONS TO BCBSUW/UWS SERVICES
a. MID-CONTRACT YEAR MODIFICATIONS. Each Contract Year, UHI shall be
required to utilize BCBSUW/UWS Services budgeted to UHI for that Contract Year,
unless otherwise negotiated by the parties. ("Contract Year" shall mean January
1 through December 31.) If, at any time during the Contract Year, UHI requires
services or other resources in addition to those budgeted to UHI by BCBSUW and
UWS, UHI may obtain such services or resources from a source outside of the
BCBSUW/UWS Group only if UHI's additional needs cannot be accommodated by BCBSUW
or UWS, or if otherwise agreed to by the parties.
b. CONTRACT YEAR RENEWAL MODIFICATIONS. UHI shall provide BCBSUW and/or
UWS with at least three (3) months' written notice prior to the next Contract
Year (unless the parties mutually agree upon a shorter period) of its intent to
do any of the following:
-5-
<PAGE>
i. Increase or decrease the number or utilization of Officers or
BCBSUW/UWS Services with respect to the next Contract Year;
ii. Obtain officers, services or other resources, which are available
either from BCBSUW or UWS, from a party outside the BCBSUW/UWS Group with
respect to the next Contract Year.
c. PROVISION OF SERVICES BY BCBSUW/UWS GROUP. BCBSUW and UWS have the
right to provide BCBSUW/UWS Services to UHI either directly or indirectly,
through any company in the BCBSUW/UWS Group. BCBSUW and UWS may provide
services and other resources to UHI indirectly through purchase from or contract
with a source outside the BCBSUW/UWS Group ("Outside Services") only with UHI's
consent. Costs for Outside Services shall be subject to a cost structure
negotiated by the parties hereto.
6. EXECUTION OF ANCILLARY AGREEMENTS
a. RIGHT TO REQUEST EXECUTION OF ANCILLARY AGREEMENTS. In the event of
the Change of Control (as hereinafter defined in this Section) of any party
hereto and while this Agreement remains in effect, BCBSUW, UWS or UHI may, for
the sole purpose of documenting in more detail the terms and respective rights
and obligations of the parties with respect to Officers and Services provided
hereunder, request that any of the following types of ancillary agreements be
executed by any parties hereto and effected thereby:
1. Officer Lease Agreement;
2. Office and Equipment Lease;
3. Management Information Systems Agreement;
4. Service Agreement(s); or
5. Any other Agreement deemed necessary or expedient by the parties
(together "Ancillary Agreements").
The terms of any executed Ancillary Agreement shall (i) be subject to
negotiation of the respective parties, and (ii) control in case of any
conflict with Sections 1 through 5 of this Agreement. Executed Ancillary
Agreements shall be attached to this Agreement as amendments hereto. "Change
of Control" for purposes of this section shall mean an event whereby a
person, group, or entity that is not affiliated with the BCBSUW/UWS Group
purchases all or substantially all of the assets or acquires the ownership of
50% or more of the voting stock of a party hereto.
b. EFFECT OF A REQUEST TO EXECUTE. If any party hereto requests the
execution of an Ancillary Agreement ("Requesting Party"), the parties shall have
sixty 60 days (unless the parties hereto mutually agree to a different period)
to negotiate and execute the Ancillary Agreement, during which time the parties
hereto shall remain obligated to perform in
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accordance with the terms of this Agreement. If after 60 days (unless a
different period is mutually agreed upon by the parties hereto) the requested
Ancillary Agreement has not been executed, the Requesting Party may terminate
this Agreement in accordance with Section 8.b.ii. The parties hereby agree
that any negotiations subject to this Section 6.b shall be performed in good
faith and every reasonable effort shall be made to effect the execution of a
requested Ancillary Agreement.
7. ADDITIONAL COVENANTS
a. AVAILABILITY OF RECORDS. BCBSUW and UWS shall make available to UHI,
for inspection, examination and copying, all of its books and records pertaining
to the Officers and BCBSUW/UWS Services provided to UHI each Contract Year:
i. At all reasonable times at the principal places of business of
BCBSUW and UWS, or at such other place as the parties hereto may otherwise agree
to and designate;
ii. In a form maintained in accordance with generally accepted
accounting principles and with any other general standards or laws applicable to
such book or record;
iii. For a term of at least five (5) years, from the end of each
Contract Year, irrespective of the termination of this Agreement.
b. CONFIDENTIALITY.
i. The parties acknowledge and agree that they may deliver to each
other information about themselves and their business which is nonpublic,
confidential or proprietary in nature. All such information, regardless of the
manner in which it is delivered, is referred to as "Proprietary Information."
However, Proprietary Information does not include information which 1. is or
becomes generally available to the public other than as a result of a disclosure
by the other party, 2. was available to the other party on a nonconfidential
basis prior to its disclosure by the disclosing party, or 3. becomes available
to the other party on a nonconfidential basis from a person other than by the
disclosing party. Unless otherwise agreed to in writing by the disclosing
party, the other party shall a. except as required by law, keep all Proprietary
Information confidential and not disclose or reveal any Proprietary Information
to any person other than those employed by the other party, or who is actively
and directly participating in the performance under this Agreement on behalf of
the other party ("Involved Persons"); b. cause each Involved Person to keep all
Proprietary Information confidential and not disclose or reveal any Proprietary
Information to any person other than another Involved Person; and c. not use the
Proprietary Information, and ensure that each Involved Person does not use the
Proprietary Information, for any purpose other than in connection with the
performance under this Agreement.
ii. Upon termination of this Agreement for any reason whatsoever,
each party shall promptly surrender and deliver to each other party all records,
materials,
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documents, data and any other Proprietary Information of the other parties and
shall not retain any description containing or pertaining to any Proprietary
Information of the other parties, unless otherwise consented to in writing by
a duly authorized officer of BCBSUW, UWS or UHI as the case may be.
c. COVENANT NOT TO COMPETE. BCBSUW and UWS agree that no company in the
BCBSUW/UWS Group (excluding UHI) will directly compete with the products or
markets of UHI during the term of this Agreement. BCBSUW and UWS further agree
that for a period of two (2) years following the termination of this Agreement
for any reason, no company in the BCBSUW/UWS Group (excluding UHI) will directly
compete with UHI in any market in which UHI operates or does business at the
termination of this Agreement.
d. COOPERATION. The parties hereto will fully cooperate with each other
and their respective counsel, if any, agents and accountants in connection with
any action to be taken in the performance of their obligations under this
Agreement. In the conduct of their affairs and the performance of this
Agreement the parties hereto shall, unless otherwise agreed, maintain the
working relationships of the parties on substantially the same terms as before
the execution of this Agreement. Notwithstanding the preceding, the parties do
not intend, nor should this Agreement be construed, to restrict in any way UHI's
ability to contract with any other person or entity to provide services similar
to or the same as those which are the subject of this Agreement.
8. TERM AND TERMINATION
a. TERM. This Agreement shall commence on the Effective Date and shall
automatically renew annually therefrom until such time as otherwise terminated
pursuant to Section 8.b.
b. TERMINATION.
i. This Agreement may be terminated by any party at any time by
giving one (1) years advance written notice to the nonterminating parties of its
intention to terminate.
ii. This Agreement may be terminated pursuant to Section 6.b by
the Requesting Party giving three (3) months advance written notice to the
nonterminating parties of its intention to terminate.
iii. This Agreement shall terminate immediately at the election of and
upon written notice from the non-defaulting party in the event of any of the
following:
(a) A party hereto becomes incapable of fully performing
its duties and obligations according to the terms of this
Agreement for the following reason(s): insolvency, bankruptcy,
or substantial cessation or interruption of its business
operations for any reason whatsoever;
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(b) A party hereto commits fraud or gross negligence in
performing its obligations under this Agreement;
HOWEVER, if the defaulting party provides the non-defaulting parties with prompt
notice of the event of default, the defaulting party shall have 30 days to cure
the defect, during which time the non-defaulting parties may not exercise the
termination right under this Section 8.b.iii.
iv. Liabilities After Termination. The termination of this Agreement
shall not limit the obligation or liabilities of any party hereto incurred but
not discharged prior to termination.
9. INDEMNIFICATION
a. INDEMNIFICATION BY UHI.
i. Notwithstanding anything to the contrary in this Agreement,
neither BCBSUW, UWS, nor any other company in the BCBSUW/UWS Group (other than
UHI), nor any person who is or was, at the time of any action or inaction
affecting UHI, a director, officer, employee or agent of BCBSUW, UWS or any
other company in the BCBSUW/UWS Group (other than UHI) (collectively
"Indemnitees") shall be liable to UHI for any action or inaction taken or
omitted to be taken by such Indemnitee; PROVIDED, HOWEVER, that such Indemnitee
acted (or failed to act) in good faith and such action or inaction does not
constitute actual fraud, gross negligence or willful or wanton misconduct.
ii. UHI shall, to the fullest extent not prohibited by law, indemnify
and hold harmless each Indemnitee against any liability, damage, cost, expense,
loss, claim or judgment (including, without limitation, reasonable attorneys'
fees and expenses) resulting to, imposed upon or incurred by such Indemnitee a.
in connection with any action, suit, arbitration or proceeding to which such
Indemnitee was or is a party or is threatened to be made a party by reason of
the Officers and BCBSUW/UWS Services provided to UHI hereunder; PROVIDED,
HOWEVER, that such Indemnitee acted (or failed to act) in good faith and such
action or inaction does not constitute actual fraud, gross negligence or willful
or wanton misconduct, or b. by reason of, arising out of or resulting from any
breach or misrepresentation by UHI under this Agreement.
b. INDEMNIFICATION BY BCBSUW AND UWS. BCBSUW and UWS, jointly and
severally, hereby agree to indemnify and hold harmless UHI, and its successors
and assigns, from and against any liability, damage, cost, expense, loss, claim
or judgment (including, without limitation, reasonable attorneys' fees and
expenses) resulting to, imposed upon or incurred by UHI by reason of, arising
out of or resulting from any breach or misrepresentation by BCBSUW or UWS under
this Agreement.
10. MISCELLANEOUS
a. ASSIGNMENT. Neither this Agreement nor any rights or obligations
hereunder may be assigned or transferred by any of the parties hereto without
the prior written
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consent of the other parties. A Change of Control shall be deemed an
assignment requiring the consent of the other parties hereto.
b. AMENDMENT. The parties recognize that it may be desirable to alter
the terms of this Agreement in the future to take into account such events or
conditions as may from time to time occur. Any amendments to this Agreement
shall be in writing and shall be executed by all parties; however, Ancillary
Agreements need only be executed by the parties affected thereby.
c. WAIVER; REMEDIES. No failure or delay of a party in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. In
addition to any rights granted herein, the parties hereto shall have and may
exercise any and all rights and remedies now or hereafter provided by law except
as may be limited by Section 10.d of this Agreement.
d. RESOLUTION OF DISPUTES.
i. INFORMAL RESOLUTION.
(1) Coordinating Committee: Any conflicts or disputes
regarding occupancy, utilization or delivery of BCBSUW/UWS
Services, or scheduling, performance and utilization of
Officers necessary for the conduct of UHI's business shall be
submitted to a coordinating committee for resolution. The
coordinating committee shall consist of three (3) persons,
each of whom shall 1. represent the respective interest of a
party hereto, and 2. be mutually agreed upon by the parties
hereto. If the coordinating committee is unable to
unanimously resolve the dispute, then the parties hereto may
resort to the dispute resolution process provided for in
Section 10.d.ii.
(2) Audit Committee: Any conflicts or disputes
regarding allocation methods, allocated costs, offsets, fees
or any matter related thereto shall be submitted to an audit
committee for resolution. The audit committee shall consist
of three (3) persons, each of whom shall 1. represent the
respective interest of a party hereto, and 2. be mutually
agreed upon by the parties hereto. If the audit committee is
unable to unanimously resolve the dispute, then the parties
hereto may resort to the dispute resolution process provided
for in Section 10.d.ii.
ii. FORMAL RESOLUTION.
(1) Any dispute, controversy or claim between or among
the parties hereto that arises out of or relates to this
Agreement or any Ancillary Agreement entered into pursuant
hereto, and which otherwise
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has been unresolved by a coordinating committee pursuant to
Section 10.d.i(1) or an audit committee pursuant to Section
10.d.i(2) shall be settled by arbitration. In order to
initiate an arbitration, BCBSUW, UWS or UHI (as the case may
be) shall deliver a written notice of demand for arbitration
to the other affected party(ies). Within thirty (30) days of
the giving of such written notice, each party involved shall
appoint an individual as arbitrator (the "Party Arbitrators").
Within thirty (30) days of their appointment, the Party
Arbitrators shall collectively select one (or two if necessary
to constitute an odd total number of arbitrators) additional
arbitrator (together the "Panel Arbitrators") and shall give
the parties involved notice of such choice.
(2) The arbitration hearings shall be held in Milwaukee,
Wisconsin. Each party shall submit its case to the Panel
Arbitrators within sixty (60) days of the selection of the
Panel Arbitrators or within such longer period as may be
agreed by the Panel Arbitrators. The decision rendered by a
majority of the Panel Arbitrators shall be final and binding
on the parties involved. Such decision shall be a condition
precedent to any right of legal action arising out of the
arbitrated dispute. Judgment upon the award rendered may be
entered in any court having jurisdiction thereof.
(3) Each involved party shall a. pay the fees and
expenses of its own Party Arbitrator, and pay its own legal,
accounting, and other professional fees and expenses, b.
jointly share in the payment of the fees and expenses of the
other one (or two) arbitrator(s) selected by the Party
Arbitrators, and c. jointly share in the payment of the other
expenses jointly incurred by the involved parties directly
related to the arbitration proceeding.
(4) Except as provided above, the arbitration shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association.
e. NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally, or if mailed (by registered or certified mail, postage
prepaid, return receipt requested), or if transmitted by facsimile or e-mail, as
follows:
1. If to BCBSUW:
Ms. Essie Whitelaw
Blue Cross & Blue Shield United of Wisconsin
1515 North RiverCenter Drive
Milwaukee, Wisconsin 53212
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Facsimile Telephone Number: (414) 226-6700
With copies to:
Ms. Penny Siewert
Blue Cross & Blue Shield United of Wisconsin
N17W24340 Riverwood Drive
Waukesha, Wisconsin 53188
Facsimile Telephone Number: (414) 523-4920
2. If to UWS:
Mr. C. Edward Mordy
United Wisconsin Services, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
3. If to UHI:
Mr. Emil Pfenninger
United Heartland, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6400
Any notice or other communication given as provided in this Section 10.e,
shall be deemed given upon the first business day after actual delivery to
the party to whom such notice or other communication is sent (as evidenced by
the return receipt or shipping invoice signed by a representative of such
party or by the facsimile confirmation or e-mail return receipt). Any party
from time to time may change its address for purpose of notices to that party
by giving a similar notice specifying a new address.
f. RELATIONSHIP OF THE PARTIES. Negotiations relating to this Agreement
have occurred and shall continue to be carried out on an arm's length basis.
Further, the officers, services and other resources contemplated by this
Agreement shall be provided to UHI on an independent contractor basis. Nothing
in this Agreement shall be construed to create an employer-employee relationship
between UHI and Officers or any of the parties hereto.
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g. ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits referred to herein constitute the entire understanding and agreement of
the parties hereto and supersede all prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or be
construed to prohibit proof of prior understandings and agreements between or
among the parties to the extent necessary to properly construe or interpret this
Agreement. Notwithstanding the preceding, the parties acknowledge that there
are, and/or may be in the future, any number of independent third party
contracts between various companies in the BCBSUW/UWS Group for various services
and/or business arrangements, and any such contracts, whether written or oral,
shall survive the execution of this Agreement and any renewal hereof.
h. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement.
i. NO THIRD PARTY BENEFICIARIES. This Agreement is only for the benefit
of the parties hereto and does not confer any right, benefit, or privilege upon
any person or entity not a party to this Agreement.
j. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving effect to
principles of conflicts of laws) as to all matters, including, without
limitation, matters of validity, construction, effect, performance and remedies.
k. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party under this Agreement will not be materially
and adversely affected thereby, 1. such provision will be fully severable, 2.
this Agreement will be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof, 3. the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid, or unenforceable provision or by its
severance herefrom, and 4. in lieu of such illegal, invalid, or unenforceable
provision, there will be added automatically as part of this Agreement, a legal,
valid, and enforceable provision as similar terms to such illegal, invalid, or
unenforceable provision as may be possible.
l. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the Effective Date.
BLUE CROSS BLUE SHIELD UNITED OF WISCONSIN
By:
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Title:
---------------------------------
By:
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Title:
---------------------------------
UNITED WISCONSIN SERVICES, INC.
By:
------------------------------------
Title:
---------------------------------
UNITED HEARTLAND, INC.
By:
------------------------------------
Title:
---------------------------------
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INTERCOMPANY SERVICE AGREEMENT
This Intercompany Service Agreement ("Agreement") is entered into as
of this 1st day of January, 1998 ("Effective Date"), by and among Blue
Cross & Blue Shield United of Wisconsin, a service insurance corporation
organized pursuant to Ch. 613, Wisconsin Statutes ("BCBSUW"), United Wisconsin
Services, Inc., an insurance holding company organized pursuant to Ch. 180,
Wisconsin Statutes ("UWS"), and Meridian Managed Care, Inc., a corporation
organized pursuant to Ch. 180, Wisconsin Statutes ("MMC").
RECITALS
WHEREAS, BCBSUW, UWS and MMC are affiliated corporations, with MMC
being a wholly owned subsidiary of UWS;
WHEREAS, there is an existing service agreement between BCBSUW and UWS
that extends to subsidiaries of UWS (BCBSUW, UWS and its subsidiaries shall
hereinafter be collectively referred to as "BCBSUW/UWS Group"), and this
Agreement is intended to further specify the services, costs, and allocation
methods contemplated by that service agreement;
WHEREAS, MMC provides care services management and medical director
services to various companies in the BCBSUW/UWS Group, and MMC also contracts
with outside entities to provide care services management;
WHEREAS, BCBSUW provides certain employees and BCBSUW and UWS
collectively provide the other business resources and services necessary for the
continued operation of MMC's business;
WHEREAS, by entering into this Agreement, the parties hereto wish to
establish clearly (i) an employee leasing arrangement; (ii) the services and
resources that BCBSUW and UWS will continue to provide to MMC and that MMC will
continue to provide to various companies in the BCBSUW/UWS Group, and the
compensation and cost allocations therefor; and (iii) the respective rights and
responsibilities of the parties.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and of the
mutual covenants hereinafter contained, the parties hereto agree as follows:
1. LEASE OF EMPLOYEES
a. CLASSIFICATION OF EMPLOYEES.
i. "Direct Employees" are those BCBSUW employees that are assigned
to perform all of their services for MMC with respect only to the information
support
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services provided by MMC to other companies in the BCBSUW/UWS Group. (Direct
Employees may also be referred to herein as "Employees.")
b. LEASE OF EMPLOYEES.
i. OBLIGATION TO PROVIDE EMPLOYEES. BCBSUW shall provide to MMC, to
the extent requested by MMC, the entire requirement of Direct Employees for use
in MMC's business according to such job descriptions, qualifications,
experience, education, or skills (collectively "Employee Specifications") as may
be specified by MMC from time to time.
ii. INDEPENDENT HIRING. Notwithstanding Section 1.b.i. and MMC's
present intent to lease Direct Employees from BCBSUW, MMC shall have the
right, subject to Section 6, to obtain and hire directly any or all employees
from any other sources and on any terms to perform such duties as MMC may
consider appropriate from time to time. Should MMC hire employees from other
sources, it will not hire any individual who was a BCBSUW or UWS Employee
leased to MMC within three (3) months preceding such hiring, without the
written consent of BCBSUW and/or UWS.
iii. HUMAN RESOURCES DEPARTMENT. UWS's Human Resources Department
("Human Resources") shall be responsible for the implementation, management, and
operation of BCBSUW's and UWS's employee leasing obligations under this
Agreement. Employee Specifications shall be retained in the files of Human
Resources, and MMC shall notify Human Resources at any time of its intention to
change such Employee Specifications for Direct Employees, at which time Human
Resources shall promptly make the requested changes to the Employee
Specifications.
c. OFFICERS. Employment, termination, and terms of employment of all
officers shall be reserved to the full Boards of Directors of BCBSUW and UWS,
provided, however, that while any such individual is leased to MMC to perform
services as an officer, MMC will be consulted prior to all determinations
regarding the employment, or terms thereof, of such individuals; provided,
however, that MMC's input shall be of an advisory nature and will not be binding
on BCBSUW or UWS as the common law employers of such individuals.
d. EMPLOYMENT RELATIONSHIPS. Human Resources shall establish
performance criteria or standards, which reflect the Employee Specifications
supplied by MMC, for leased Direct Employees while performing services for
MMC. MMC shall advise Human Resources on the performance of Direct
Employees, and shall have the right to request investigation, disciplinary
action, reassignment, and removal of such employees. If at any time MMC
becomes dissatisfied with the performance of a Direct Employee, MMC shall
have the right to reject the continued lease of that particular employee and
request a replacement therefor. BCBSUW and UWS shall have the exclusive
right, however, to direct all BCBSUW and UWS employees, respectively, as to
the manner in which services are to be rendered and performance goals are to
be achieved. BCBSUW and UWS shall be, and shall have all the privileges,
rights, and responsibilities of, common law employers of all BCBSUW and UWS
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employees, respectively, including, but not limited to, establishing work and
disciplinary rules, setting compensation levels, and directing each BCBSUW or
UWS Employee as to the manner in which daily duties are completed, whether or
not the employee actually performs services for BCBSUW, UWS or another
company in the BCBSUW/UWS Group. Employees leased to MMC pursuant to this
Agreement shall remain employees of BCBSUW or UWS, and shall in no way be
treated as or considered employees of MMC.
e. NOTIFICATION OF PERSONNEL COST CHANGES. With respect to
Direct Employees performing services for MMC, if BCBSUW adopts or implements
any change in compensation, employee benefit plans, or any other fringe
benefit that results in higher Total Personnel Costs (as defined at
Section 4.a.i) than those in existence as of the date of this Agreement,
BCBSUW shall provide MMC with written notice at least 30 days before such
change becomes effective (unless such change is required by law, in which
case MMC will be notified as soon as possible), describing such new benefit
and the projected increase in the Total Personnel Costs.
2. SERVICES AND OTHER RESOURCES PROVIDED TO MMC
a. SERVICES AND RESOURCES PROVIDED BY BCBSUW. BCBSUW shall
provide to MMC, to the extent requested by MMC and subject to Section 6, the
following services and resources (together "BCBSUW Services"). BCBSUW shall
supply BCBSUW Services only if MMC has determined not to have its own
employees or third parties furnish the BCBSUW Services, subject to Section 6.
i. OFFICE SPACE AND FACILITIES. Office space and facilities,
including, but not limited to, furniture and equipment, as shall be necessary or
appropriate for the conduct of MMC's operations.
ii. BUILDING SERVICES. Building services, including, but not limited
to, repair and maintenance of any property and facilities made available
hereunder as shall be necessary to maintain such property and facilities in good
working order, and such other building services as may be necessary or
appropriate for the conduct of MMC's business.
iii. OFFICE SERVICES. Such office services, including, but not
limited to, warehousing, transportation, stockroom, graphics, printing,
duplicating and forms management, as shall be necessary or appropriate for the
conduct of MMC's business.
iv. CENTRAL SYSTEMS. Such central systems, including, but not
limited to, management information systems, telecommunications, centralized
mailing, technology support and central data base maintenance, as shall be
necessary or appropriate for the conduct of MMC's business.
v. ADMINISTRATIVE SERVICES. Such administrative services,
including, but not limited to, lobbyist activities, as shall be necessary or
appropriate for the conduct of MMC's business.
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vi. COMPANY CAR AND TRAVEL. Availability and maintenance of vehicles
for company related travel and such other travel related services as shall be
necessary or appropriate for the conduct of MMC's business.
b. SERVICES AND RESOURCES PROVIDED BY UWS. UWS shall provide to MMC,
to the extent requested by MMC and subject to Section 6, the following
services and resources (together "UWS Services"). UWS shall supply UWS
Services only if MMC has determined not to have its own employees or third
parties furnish the UWS Services, subject to Section 6.
i. CORPORATE SUPPORT SERVICES. Such corporate support services,
including, but not limited to, corporate compliance, legal, and government
relations, as shall be necessary or appropriate for the conduct of MMC's
business.
ii. EXECUTIVE SERVICES. Such executive services as shall be
necessary or appropriate for the conduct of MMC's business.
iii. MARKETING AND COMMUNICATIONS. Such marketing and communications
services, including, but not limited to, public relations and employee community
events, as shall be necessary or appropriate for the conduct of MMC's business.
iv. HUMAN RESOURCES. Such human resource services, including, but
not limited to, staffing, labor and employment relations, training and
development, and administration of payroll and employee benefits, as shall be
necessary or appropriate with respect to Employees utilized by MMC under this
Agreement or otherwise necessary or appropriate for the conduct of MMC's
business.
v. ACCOUNTING SERVICES. Such accounting, audit, bookkeeping and
financial statement preparation services as shall be necessary or appropriate
for the conduct of MMC's business.
vi. FINANCIAL SERVICES. Such financial services, including, but not
limited to, tax, treasury, administration of financial systems, corporate
accounting, and strategic planning/consulting, as shall be necessary or
appropriate for the conduct of MMC's business.
vii. ACTUARIAL SERVICES. Such actuarial services as shall be
necessary or appropriate for the conduct of MMC's business.
viii. OTHER SERVICES. Such other services, including, but not
limited to, those provided by Compcare or Meridian Resource Corporation, as
shall be necessary or appropriate for the conduct of MMC's business.
c. STAFFING. BCBSUW and UWS shall both maintain an adequate source of
qualified employees to ensure the acceptable performance of BCBSUW and UWS
Services.
3. SERVICES PROVIDED BY MMC TO THE BCBSUW/UWS GROUP
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a. SERVICES PROVIDED BY MMC. To the extent that MMC does not have
independent third party pricing contracts with companies in the BCBSUW/UWS
Group, MMC shall provide the following services (together "MMC Services") to
companies in the BCBSUW/UWS Group, to the extent requested by any such
individual company:
i. CARE SERVICES MANAGEMENT. Such care services management,
including, but not limited to, disease and outcomes management, health policy,
data management and reporting, and information support services, as shall be
necessary or appropriate for any company in the BCBSUW/UWS Group.
ii. MEDICAL DIRECTOR. Such medical director services as shall be
necessary or appropriate for any company in the BCBSUW/UWS Group.
4. COST ALLOCATION METHODS
a. LEASED EMPLOYEES.
i. TOTAL PERSONNEL COSTS. The term "Total Personnel Costs" shall
include all costs or expenses of whatever nature and from whatever origin
arising out of or related to the maintenance of an Employee. Such term shall
include, but shall not be limited to, the following costs, expenses, and
obligations:
salaries, wages, and bonuses;
profit sharing;
benefit plans;
payroll taxes;
employee insurance.
ii. ALLOCATION OF PERSONNEL COSTS. To the extent that Direct
Employees are leased to MMC, Total Personnel Costs associated with a Direct
Employee shall be directly charged to MMC on a monthly basis. See Schedule 1.
b. BCBSUW AND UWS SERVICES. To the extent that BCBSUW/UWS Services are
rendered on behalf of or for the benefit of MMC, costs therefor shall be
allocated to MMC as follows:
i. DIRECT CHARGES. Costs associated with those BCBSUW/UWS Services
identified on Schedule 1 shall be directly charged to MMC on a monthly basis.
ii. INDIRECT ALLOCATIONS. Cost allocations for those BCBSUW/UWS
Services identified on Schedule 2 ("Schedule 2 Services") shall be determined
annually for the next succeeding Fiscal Year ("Fiscal Year" shall mean January 1
through December 31) on the basis of utilization and cost studies performed by
UWS. Through the use of Indirect Allocation Methods, as described in Schedule 3
attached hereto, utilization of Schedule 2 Services shall be reduced to an
allocation percentage for each company in the BCBSUW/UWS Group. Each month all
costs associated with the utilization of Schedule 2 Services shall be
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multiplied by the allocation percentage of MMC to determine MMC's allocable
share of costs for Schedule 2 Services. Notwithstanding the preceding, (i)
allocation percentages are subject to interim Fiscal Year adjustments to
allocate more accurately costs based on actual utilization by each company in
the BCBSUW/UWS Group, (ii) costs associated with Schedule 2 Services
performed directly for MMC shall be allocable to MMC only, and (iii) subject
to approval by the Vice President of Finance for the BCBSUW/UWS Group, the
Indirect Allocation Method used to allocate costs to MMC for specific
Schedule 2 Services shall be subject to agreement by the parties on an annual
basis.(1) Schedule 2, attached hereto, sets forth MMC's annual
allocation percentage for costs and expenses associated with Schedule 2
Services. Schedule 2 shall be amended annually.
iii. CHARGEBACKS. Costs associated with those BCBSUW/UWS Services
identified on Schedule 4 ("Chargeback Services") either shall be (i) indirectly
allocated to MMC as discussed in Section 4.b.ii, if the cost is a
general expense for providing the Chargeback Service to all users; or (ii)
directly charged to an MMC cost center, if the cost is an expense specific to an
MMC cost center. Thus, costs associated with Chargeback Services shall be
either directly charged or indirectly allocated to MMC on a monthly basis,
depending on the nature of the cost.
C. MMC SERVICES. To the extent that MMC Services are rendered on behalf
of or for the benefit of a company in the BCBSUW/UWS Group (excluding those
companies that separately enter into third party pricing contracts with MMC for
the provision of such services) costs therefor shall be allocated to the
respective company as follows:
i. INDIRECT ALLOCATIONS. Costs allocations for MMC Services shall
be determined annually for the next succeeding Fiscal Year on the basis of cost
center surveys completed by those companies in the BCBSUW/UWS Group that utilize
MMC Services ("Internal Users"). Based on the survey results, Internal Users
shall be assigned a fixed percentage. Each month all costs associated with the
utilization of MMC Services by Internal Users shall be multiplied by the fixed
allocation percentage of each Internal User to determine the Internal User's
respective allocable share of costs for MMC Services. Notwithstanding the
preceding, (i) allocation percentages are subject to interim Fiscal Year
adjustments to allocate more accurately costs based on actual utilization by
each company in the BCBSUW/UWS Group, and (ii) subject to approval by the Vice
President of Finance for the BCBSUW/UWS Group, the Indirect Allocation Method
used to allocate costs for MMC Services shall be subject to agreement by the
parties on an annual basis.
d. FEES IN ADDITION TO ALLOCATED COSTS. To the extent that MMC
leases or utilizes the services of Employees from BCBSUW and/or UWS, and to
the extent that MMC utilizes BCBSUW/UWS Services, BCBSUW and/or UWS may
charge MMC a reasonable negotiated fee therefor, as set forth in Schedule 5.
To the extent that MMC provides MMC
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(1) Before granting approval of any negotiated change to the method of
allocating costs for a particular service, the following factors should be
considered: (i) compliance with FAS rules; (ii) other federal government
contracting implications; and (iii) feasibility.
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Services to any company in the BCBSUW/UWS Group pursuant to this Agreement,
MMC may charge a reasonable negotiated fee therefor, as set forth in Schedule 6.
5. SUBSTANTIATION OF AND REIMBURSEMENT FOR ALLOCATED COSTS
a. SUBSTANTIATION OF ALLOCATED COSTS. All costs and expenses shall be
allocated in a fair and reasonable manner. BCBSUW, UWS and MMC shall
maintain reasonable and appropriate operating procedures to allocate costs
and expenses so as to enable each party's independent certified public
accounting firm to audit such costs and the allocation thereof. At the end
of each month, (i) BCBSUW and/or UWS shall provide or make available to MMC
appropriate documentation respecting the costs and expenses that are
allocated, either directly or indirectly, to MMC for that month in sufficient
detail to permit MMC to identify the sources of such charges, and (ii) MMC
shall provide or make available to the BCBSUW/UWS Group appropriate
documentation respecting the costs and expenses that are allocated to
individual companies in the BCBSUW/UWS Group for that month for MMC Services
in sufficient detail to permit the identification of the sources of such
charges.
b. REIMBURSEMENT FOR ALLOCATED COSTS. At the end of each month, not
later than the 30th day of the following month, (i) MMC shall promptly reimburse
BCBSUW and/or UWS for all costs and expenses incurred by BCBSUW and/or UWS in
furnishing or obtaining the Employees and Services provided for under Sections I
and II, which amount shall be based on the total of direct charges and indirect
allocations to MMC for the preceding month, and (ii) any company in the
BCBSUW/UWS Group on whose behalf MMC Services have been rendered in the
preceding month shall promptly reimburse MMC for all costs and expenses incurred
by MMC in furnishing MMC Services thereto. Notwithstanding the preceding, the
parties reserve the right to offset amounts due to each other under this
Agreement.
6. MODIFICATIONS TO LEASED EMPLOYEES AND BCBSUW/UWS SERVICES
a. MID-CONTRACT YEAR MODIFICATIONS. Each Contract Year, MMC shall be
required to utilize Direct Employees and BCBSUW/UWS Services budgeted to MMC for
that Contract Year, unless otherwise negotiated by the parties. ("Contract Year"
shall mean January 1 through December 31.) If, at any time during the Contract
Year, MMC requires services or other non-human resources in addition to those
budgeted to MMC by BCBSUW and UWS, MMC may obtain such services or resources
from a source outside of the BCBSUW/UWS Group only if MMC's additional needs
cannot be accommodated by BCBSUW or UWS.
b. CONTRACT YEAR RENEWAL MODIFICATIONS. MMC shall provide BCBSUW and/or
UWS with at least three (3) months' written notice prior to the next Contract
Year (unless the parties mutually agree upon a shorter period) of its intent to
do any of the following:
i. Increase or decrease the number or utilization of Employees or
BCBSUW/UWS Services with respect to the next Contract Year;
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ii. Obtain services or other non-human resources, which are available
either from BCBSUW or UWS, from a party outside the BCBSUW/UWS Group with
respect to the next Contract Year.
c. PROVISION OF SERVICES BY BCBSUW/UWS GROUP. BCBSUW and UWS have the
right to provide Employees and BCBSUW/UWS Services to MMC either directly or
indirectly, through any company in the BCBSUW/UWS Group. BCBSUW and UWS may
provide employees, services and other resources to MMC indirectly through
purchase from or contract with a source outside the BCBSUW/UWS Group ("Outside
Services") only with MMC's consent. Costs for Outside Services shall be
subject to a cost structure negotiated by the parties hereto.
7. EXECUTION OF ANCILLARY AGREEMENTS
a. RIGHT TO REQUEST EXECUTION OF ANCILLARY AGREEMENTS. In the event of
the Change of Control (as hereinafter defined in this Section) of any party
hereto and while this Agreement remains in effect, BCBSUW, UWS or MMC may, for
the sole purpose of documenting in more detail the terms and respective rights
and obligations of the parties with respect to Employees and Services provided
hereunder, request that any of the following types of ancillary agreements be
executed by any parties hereto and effected thereby:
i. Employee Lease Agreement;
ii. Office and Equipment Lease;
iii. Management Information Systems Agreement;
iv. Service Agreement(s); or
v. Any other Agreement deemed necessary or expedient by the parties
(together "Ancillary Agreements").
The terms of any executed Ancillary Agreement shall (i) be subject
to negotiation of the respective parties, and (ii) control in case of any
conflict with Sections 1 through 6 of this Agreement. Executed Ancillary
Agreements shall be attached to this Agreement as amendments hereto. "Change
of Control" for purposes of this section shall mean an event whereby a
person, group, or entity that is not affiliated with the BCBSUW/UWS Group
purchases all or substantially all of the assets or acquires the ownership of
50% or more of the voting stock of a party hereto.
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b. EFFECT OF A REQUEST TO EXECUTE. If any party hereto requests the
execution of an Ancillary Agreement ("Requesting Party"), the parties shall
have sixty 60 days (unless the parties hereto mutually agree to a different
period) to negotiate and execute the Ancillary Agreement, during which time
the parties hereto shall remain obligated to perform in accordance with the
terms of this Agreement. If after 60 days (unless a different period is
mutually agreed upon by the parties hereto) the requested Ancillary Agreement
has not been executed, the Requesting Party may terminate this Agreement in
accordance with Section 9.b.ii. The parties hereby agree that any
negotiations subject to this Section 7.b shall be performed in good faith
and every reasonable effort shall be made to effect the execution of a
requested Ancillary Agreement.
8. ADDITIONAL COVENANTS
a. AVAILABILITY OF RECORDS. BCBSUW, UWS and MMC shall make available to
each other, for inspection, examination and copying, all of its books and
records pertaining to the Employees, BCBSUW/UWS Services, and MMC Services
provided under this Agreement each Contract Year:
i. At all reasonable times at the principal places of business of
BCBSUW, UWS, and MMC, or at such other place as the parties hereto may otherwise
agree to and designate;
ii. In a form maintained in accordance with generally accepted
accounting principles and with any other general standards or laws applicable to
such book or record;
iii. For a term of at least five (5) years, from the end of each
Contract Year, irrespective of the termination of this Agreement.
b. CONFIDENTIALITY.
i. The parties acknowledge and agree that they may deliver to each
other information about themselves and their business which is nonpublic,
confidential or proprietary in nature. All such information, regardless of the
manner in which it is delivered, is referred to as "Proprietary Information."
However, Proprietary Information does not include information which 1. is or
becomes generally available to the public other than as a result of a disclosure
by the other party, 2. was available to the other party on a nonconfidential
basis prior to its disclosure by the disclosing party, or 3. becomes available
to the other party on a nonconfidential basis from a person other than by the
disclosing party. Unless otherwise agreed to in writing by the disclosing
party, the other party shall a. except as required by law, keep all Proprietary
Information confidential and not disclose or reveal any Proprietary Information
to any person other than those employed by the other party, or who is actively
and directly participating in the performance under this Agreement on behalf of
the other party ("Involved Persons"); b. cause each Involved Person to keep all
Proprietary Information confidential and not disclose or reveal any Proprietary
Information to any person other than another Involved Person; and c. not use the
Proprietary Information, and ensure that
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each Involved Person does not use the Proprietary Information, for any
purpose other than in connection with the performance under this Agreement.
ii. Upon termination of this Agreement for any reason whatsoever,
each party shall promptly surrender and deliver to each other party all records,
materials, documents, data and any other Proprietary Information of the other
parties and shall not retain any description containing or pertaining to any
Proprietary Information of the other parties, unless otherwise consented to in
writing by a duly authorized officer of BCBSUW, UWS or MMC as the case may be.
c. COVENANT NOT TO COMPETE. BCBSUW and UWS agree that no company in the
BCBSUW/UWS Group (excluding MMC and CNR Health, Inc.) will directly compete with
the products or markets of MMC during the term of this Agreement. BCBSUW and
UWS further agree that for a period of two (2) years following the termination
of this Agreement for any reason, no company in the BCBSUW/UWS Group (excluding
MMC and CNR Health, Inc.) will directly compete with MMC in any market in which
MMC operates or does business at the termination of this Agreement.
d. COOPERATION. The parties hereto will fully cooperate with each other
and their respective counsel, if any, agents and accountants in connection with
any action to be taken in the performance of their obligations under this
Agreement. In the conduct of their affairs and the performance of this
Agreement the parties hereto shall, unless otherwise agreed, maintain the
working relationships of the parties on substantially the same terms as before
the execution of this Agreement. Notwithstanding the preceding, the parties do
not intend, nor should this Agreement be construed, to restrict any party's
ability to contract with any other person or entity to provide services similar
to or the same as those which are the subject of this Agreement.
9. TERM AND TERMINATION
a. TERM. This Agreement shall commence on the Effective Date and shall
automatically renew annually therefrom until such time as otherwise terminated
pursuant to Section 9.b.
b. TERMINATION.
i. This Agreement may be terminated by any party at any time by
giving one (1) years advance written notice to the nonterminating parties of its
intention to terminate.
ii. This Agreement may be terminated pursuant to Section 7.b by the
Requesting Party giving three (3) months advance written notice to the
nonterminating parties of its intention to terminate.
iii. This Agreement shall terminate immediately at the election of and
upon written notice from the non-defaulting party in the event of any of the
following:
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(1) A party hereto becomes incapable of fully performing
its duties and obligations according to the terms of this
Agreement for the following reason(s): insolvency, bankruptcy, or
substantial cessation or interruption of its business operations
for any reason whatsoever;
(2) A party hereto commits fraud or gross negligence in
performing its obligations under this Agreement;
HOWEVER, if the defaulting party provides the non-defaulting
parties with prompt notice of the event of default, the defaulting party
shall have 30 tdays to cure the defect, during which time the non-defaulting
parties may not exercise the termination right under this section 9.b.iii.
iv. Liabilities After Termination. The termination of this Agreement
shall not limit the obligation or liabilities of any party hereto incurred but
not discharged prior to termination.
10. INDEMNIFICATION
a. INDEMNIFICATION BY MMC.
i. Notwithstanding anything to the contrary in this Agreement,
neither BCBSUW, UWS, nor any other company in the BCBSUW/UWS Group (other than
MMC), nor any person who is or was, at the time of any action or inaction
affecting MMC, a director, officer, employee or agent of BCBSUW, UWS or any
other company in the BCBSUW/UWS Group (other than MMC) (collectively
"Indemnitees") shall be liable to MMC for any action or inaction taken or
omitted to be taken by such Indemnitee; PROVIDED, HOWEVER, that such Indemnitee
acted (or failed to act) in good faith and such action or inaction does not
constitute actual fraud, gross negligence or willful or wanton misconduct.
ii. MMC shall, to the fullest extent not prohibited by law, indemnify
and hold harmless each Indemnitee against any liability, damage, cost, expense,
loss, claim or judgment (including, without limitation, reasonable attorneys'
fees and expenses) resulting to, imposed upon or incurred by such Indemnitee a.
in connection with any action, suit, arbitration or proceeding to which such
Indemnitee was or is a party or is threatened to be made a party by reason of
the Employees and BCBSUW/UWS Services provided to MMC hereunder; PROVIDED,
HOWEVER, that such Indemnitee acted (or failed to act) in good faith and such
action or inaction does not constitute actual fraud, gross negligence or willful
or wanton misconduct, or b. by reason of, arising out of or resulting from any
breach or misrepresentation by MMC under this Agreement.
b. INDEMNIFICATION BY BCBSUW AND UWS.
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i. Notwithstanding anything to the contrary in this Agreement,
neither MMC, nor any person who is or was, at the time of any action or inaction
affecting the BCBSUW/UWS Group (other than MMC), a director, officer, employee
or agent of MMC (collectively "Indemnitees") shall be liable to any company in
the BCBSUW/UWS Group for any action or inaction taken or omitted to be taken by
such Indemnitee; PROVIDED, HOWEVER, that such Indemnitee acted (or failed to
act) in good faith and such action or inaction does not constitute actual fraud,
gross negligence or willful or wanton misconduct.
ii. BCBSUW and UWS, jointly and severally, hereby agree to indemnify
and hold harmless, to the fullest extent not prohibited by law, each Indemnitee
against any liability, damage, cost, expense, loss, claim or judgment
(including, without limitation, reasonable attorneys' fees and expenses)
resulting to, imposed upon or incurred by such Indemnitee a. in connection with
any action, suit, arbitration or proceeding to which such Indemnitee was or is a
party or is threatened to be made a party by reason of the MMC Services provided
to the BCBSUW/UWS Group hereunder; PROVIDED, HOWEVER, that such Indemnitee acted
(or failed to act) in good faith and such action or inaction does not constitute
actual fraud, gross negligence or willful or wanton misconduct, or b. by reason
of, arising out of or resulting from any breach or misrepresentation by BCBSUW
or UWS under this Agreement.
11. MISCELLANEOUS
a. ASSIGNMENT. Neither this Agreement nor any rights or obligations
hereunder may be assigned or transferred by any of the parties hereto without
the prior written consent of the other parties. A Change of Control shall be
deemed an assignment requiring the consent of the other parties hereto.
b. AMENDMENT. The parties recognize that it may be desirable to alter
the terms of this Agreement in the future to take into account such events or
conditions as may from time to time occur. Any amendments to this Agreement
shall be in writing and shall be executed by all parties; however, Ancillary
Agreements need only be executed by the parties affected thereby.
c. WAIVER; REMEDIES. No failure or delay of a party in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. In
addition to any rights granted herein, the parties hereto shall have and may
exercise any and all rights and remedies now or hereafter provided by law except
as may be limited by Section 11.d of this Agreement.
d. RESOLUTION OF DISPUTES.
i. INFORMAL RESOLUTION.
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(1) Coordinating Committee: Any conflicts or disputes
regarding 1. occupancy, utilization or delivery of BCBSUW/UWS
Services, or scheduling, performance and utilization of
Employees necessary for the conduct of MMC's business, or 2.
utilization or delivery of MMC Services, shall be submitted to
a coordinating committee for resolution. The coordinating
committee shall consist of three (3) persons, each of whom
shall 1. represent the respective interest of a party hereto,
and 2. be mutually agreed upon by the parties hereto. If the
coordinating committee is unable to unanimously resolve the
dispute, then the parties hereto may resort to the dispute
resolution process provided for in Section 11.d.ii.
(2) Audit Committee: Any conflicts or disputes
regarding allocation methods, allocated costs, offsets, fees
or any matter related thereto shall be submitted to an audit
committee for resolution. The audit committee shall consist
of three (3) persons, each of whom shall 1. represent the
respective interest of a party hereto, and 2. be mutually
agreed upon by the parties hereto. If the audit committee is
unable to unanimously resolve the dispute, then the parties
hereto may resort to the dispute resolution process provided
for in Section 11.d.ii.
ii. FORMAL RESOLUTION.
(1) Any dispute, controversy or claim between or among
the parties hereto that arises out of or relates to this
Agreement or any Ancillary Agreement entered into pursuant
hereto, and which otherwise has been unresolved by a
coordinating committee pursuant to Section 11.d.i(1) or an
audit committee pursuant to Section 11.d.i(2) shall be settled
by arbitration. In order to initiate an arbitration, BCBSUW,
UWS or MMC (as the case may be) shall deliver a written notice
of demand for arbitration to the other affected party(ies).
Within thirty (30) days of the giving of such written notice,
each party involved shall appoint an individual as arbitrator
(the "Party Arbitrators"). Within thirty (30) days of their
appointment, the Party Arbitrators shall collectively select
one (or two if necessary to constitute an odd total number of
arbitrators) additional arbitrator (together the "Panel
Arbitrators") and shall give the parties involved notice of
such choice.
(2) The arbitration hearings shall be held in Milwaukee,
Wisconsin. Each party shall submit its case to the Panel
Arbitrators within sixty (60) days of the selection of the
Panel Arbitrators or within such longer period as may be
agreed by the Panel Arbitrators. The decision rendered by a
majority of the Panel Arbitrators shall be final and binding
on the parties involved. Such decision shall be a condition
precedent to any right of legal action arising out of the
arbitrated dispute.
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Judgment upon the award rendered may be entered in any court
having jurisdiction thereof.
(3) Each involved party shall a. pay the fees and
expenses of its own Party Arbitrator, and pay its own legal,
accounting, and other professional fees and expenses, b.
jointly share in the payment of the fees and expenses of the
other one (or two) arbitrator(s) selected by the Party
Arbitrators, and c. jointly share in the payment of the other
expenses jointly incurred by the involved parties directly
related to the arbitration proceeding.
(4) Except as provided above, the arbitration shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association.
e. NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally, or if mailed (by registered or certified mail, postage
prepaid, return receipt requested), or if transmitted by facsimile or e-mail,
as follows:
i. If to BCBSUW:
Ms. Essie Whitelaw
Blue Cross & Blue Shield United of Wisconsin
1515 North RiverCenter Drive
Milwaukee, Wisconsin 53212
Facsimile Telephone Number: (414) 226-6700
With copies to:
Ms. Penny Siewert
Blue Cross & Blue Shield United of Wisconsin
N17W24340 Riverwood Drive
Waukesha, Wisconsin 53188
Facsimile Telephone Number: (414) 523-4920
ii. If to UWS:
Mr. C. Edward Mordy
United Wisconsin Services, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
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Facsimile Telephone Number: (414) 226-6229
iii. If to MMC:
Dr. James Hartert
Meridian Managed Care, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
Any notice or other communication given as provided in this Section
11.e, shall be deemed given upon the first business day after actual delivery
to the party to whom such notice or other communication is sent (as evidenced
by the return receipt or shipping invoice signed by a representative of such
party or by the facsimile confirmation or e-mail return receipt). Any party
from time to time may change its address for purpose of notices to that party
by giving a similar notice specifying a new address.
f. RELATIONSHIP OF THE PARTIES. Negotiations relating to this Agreement
have occurred and shall continue to be carried out on an arm's length basis.
Further, the employees, services and other resources contemplated by this
Agreement shall be provided to MMC on an independent contractor basis. Nothing
in this Agreement shall be construed to create an employer-employee relationship
between MMC and Employees or any of the parties hereto.
g. ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits referred to herein constitute the entire understanding and agreement of
the parties hereto and supersede all prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or be
construed to prohibit proof of prior understandings and agreements between or
among the parties to the extent necessary to properly construe or interpret this
Agreement. Notwithstanding the preceding, the parties acknowledge that there
are, and/or may be in the future, any number of independent third party
contracts between various companies in the BCBSUW/UWS Group for various services
and/or business arrangements, and any such contracts, whether written or oral,
shall survive the execution of this Agreement and any renewal hereof.
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h. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement.
i. NO THIRD PARTY BENEFICIARIES. This Agreement is only for the benefit
of the parties hereto and does not confer any right, benefit, or privilege upon
any person or entity not a party to this Agreement.
j. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving effect to
principles of conflicts of laws) as to all matters, including, without
limitation, matters of validity, construction, effect, performance and remedies.
k. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party under this Agreement will not be materially
and adversely affected thereby, 1. such provision will be fully severable, 2.
this Agreement will be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof, 3. the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid, or unenforceable provision or by its
severance herefrom, and 4. in lieu of such illegal, invalid, or unenforceable
provision, there will be added automatically as part of this Agreement, a legal,
valid, and enforceable provision as similar terms to such illegal, invalid, or
unenforceable provision as may be possible.
l. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the Effective Date.
BLUE CROSS BLUE SHIELD UNITED OF WISCONSIN
By:
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Title:
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By:
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Title:
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UNITED WISCONSIN SERVICES, INC.
By:
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Title:
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MERIDIAN MANAGED CARE, INC.
By:
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Title:
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INTERCOMPANY SERVICE AGREEMENT
This Intercompany Service Agreement ("Agreement") is entered into
as of this 1st day of January, 1998 ("Effective Date"), by and
among Blue Cross & Blue Shield United of Wisconsin, a service insurance
corporation organized pursuant to Ch. 613, Wisconsin Statutes ("BCBSUW"),
United Wisconsin Services, Inc., an insurance holding company organized
pursuant to Ch. 180, Wisconsin Statutes ("UWS"), Meridian Managed Care, Inc.,
a corporation organized pursuant to Ch. 180, Wisconsin Statutes ("MMC"), and
Compcare Health Services Insurance Corporation, a stock insurance corporation
organized pursuant to Ch. 611, Wisconsin Statutes ("Compcare") on behalf of
its Pharmacy Services business unit ("Compcare Pharmacy").
RECITALS
WHEREAS, BCBSUW, UWS, MMC, and Compcare are affiliated
corporations, with MMC and Compcare being wholly owned subsidiaries of UWS;
WHEREAS, Compcare Pharmacy is an unincorporated business unit of
Compcare;
WHEREAS, there is an existing service agreement between BCBSUW and
UWS that extends to subsidiaries of UWS (BCBSUW, UWS and its subsidiaries
shall hereinafter be collectively referred to as "BCBSUW/UWS Group"), and
this Agreement is intended to further specify the services, costs, and
allocation methods contemplated by that service agreement;
WHEREAS, Compcare Pharmacy provides pharmacy benefits management
services to various companies in the BCBSUW/UWS Group, and Compcare Pharmacy
also contracts with outside entities to provide pharmacy benefits management
services under the marketing name Right Rx;
WHEREAS, MMC provides the employees and BCBSUW and UWS collectively
provide the other business resources and services necessary for the continued
operation of Compcare Pharmacy's business;
WHEREAS, by entering into this Agreement, the parties hereto wish
to establish clearly (i) an employee leasing arrangement; (ii) the services
and resources that BCBSUW and UWS will continue to provide to Compcare
Pharmacy and that Compcare Pharmacy will continue to provide to various
companies in the BCBSUW/UWS Group, and the compensation and cost allocations
therefor; and (iii) the respective rights and responsibilities of the parties.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and of
the mutual covenants hereinafter contained, the parties hereto agree as
follows:
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1. LEASE OF EMPLOYEES
a. CLASSIFICATION OF EMPLOYEES.
i. "Direct Employees" are those MMC employees that are assigned to
perform all of their services for Compcare Pharmacy. (Direct Employees may also
be referred to herein as "Employees.")
b. LEASE OF EMPLOYEES.
i. OBLIGATION TO PROVIDE EMPLOYEES. MMC shall provide to
Compcare Pharmacy, to the extent requested by Compcare Pharmacy, the entire
requirement of Direct Employees for use in Compcare Pharmacy's business
according to such job descriptions, qualifications, experience, education, or
skills (collectively "Employee Specifications") as may be specified by
Compcare Pharmacy from time to time.
ii. INDEPENDENT HIRING. Notwithstanding Section 1.b.i. and
Compcare Pharmacy's present intent to lease Direct Employees from MMC,
Compcare Pharmacy shall have the right, subject to Section 6, to obtain and
hire directly any or all employees from any other sources and on any terms to
perform such duties as Compcare Pharmacy may consider appropriate from time
to time. Should Compcare Pharmacy hire employees from other sources, it will
not hire any individual who was an MMC, BCBSUW or UWS Employee leased to
Compcare Pharmacy within three (3) months preceding such hiring, without the
written consent of MMC, BCBSUW and/or UWS.
iii. HUMAN RESOURCES DEPARTMENT. UWS's Human Resources Department
("Human Resources") shall be responsible for the implementation, management,
and operation of MMC's, BCBSUW's and UWS's employee leasing obligations under
this Agreement. Employee Specifications shall be retained in the files of
Human Resources, and Compcare Pharmacy shall notify Human Resources at any
time of its intention to change such Employee Specifications for Direct
Employees, at which time Human Resources shall promptly make the requested
changes to the Employee Specifications.
c. OFFICERS. Employment, termination, and terms of employment of all
officers shall be reserved to the full Boards of Directors of BCBSUW and UWS,
provided, however, that while any such individual is leased to Compcare
Pharmacy to perform services as an officer, Compcare Pharmacy will be
consulted prior to all determinations regarding the employment, or terms
thereof, of such individuals; provided, however, that Compcare Pharmacy's
input shall be of an advisory nature and will not be binding on BCBSUW or UWS
as the common law employers of such individuals.
d. EMPLOYMENT RELATIONSHIPS. Human Resources shall establish
performance criteria or standards, which reflect the Employee Specifications
supplied by Compcare Pharmacy, for leased Direct Employees while performing
services for Compcare Pharmacy. Compcare Pharmacy shall advise Human
Resources on the performance of Direct Employees, and shall have the right to
request investigation, disciplinary action, reassignment, and removal
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of such employees. If at any time Compcare Pharmacy becomes dissatisfied with
the performance of a Direct Employee, Compcare Pharmacy shall have the right
to reject the continued lease of that particular employee and request a
replacement therefor. MMC, BCBSUW and UWS shall have the exclusive right,
however, to direct all MMC, BCBSUW and UWS employees, respectively, as to the
manner in which services are to be rendered and performance goals are to be
achieved. MMC, BCBSUW and UWS shall be, and shall have all the privileges,
rights, and responsibilities of, common law employers of all MMC, BCBSUW and
UWS employees, respectively, including, but not limited to, establishing work
and disciplinary rules, setting compensation levels, and directing each MMC,
BCBSUW or UWS Employee as to the manner in which daily duties are completed,
whether or not the employee actually performs services for MMC, BCBSUW, UWS
or another company in the BCBSUW/UWS Group. Employees leased to Compcare
Pharmacy pursuant to this Agreement shall remain employees of MMC, BCBSUW or
UWS, and shall in no way be treated as or considered employees of Compcare
Pharmacy.
e. NOTIFICATION OF PERSONNEL COST CHANGES. With respect to Direct
Employees performing services for Compcare Pharmacy, if MMC adopts or
implements any change in compensation, employee benefit plans, or any other
fringe benefit that results in higher Total Personnel Costs (as defined at
Section 4.a.i.) than those in existence as of the date of this Agreement, MMC
shall provide Compcare Pharmacy with written notice at least 30 days before
such change becomes effective (unless such change is required by law, in
which case Compcare Pharmacy will be notified as soon as possible),
describing such new benefit and the projected increase in the Total Personnel
Costs.
2. SERVICES AND OTHER RESOURCES PROVIDED TO COMPCARE PHARMACY
a. SERVICES AND RESOURCES PROVIDED BY BCBSUW. BCBSUW shall provide to
Compcare Pharmacy, to the extent requested by Compcare Pharmacy and subject
to Section 6, the following services and resources (together "BCBSUW
Services"). BCBSUW shall supply BCBSUW Services only if Compcare Pharmacy
has determined not to have its own employees or third parties furnish the
BCBSUW Services, subject to Section 6.
i. OFFICE SPACE AND FACILITIES. Office space and facilities,
including, but not limited to, furniture and equipment, as shall be necessary
or appropriate for the conduct of Compcare Pharmacy's operations.
ii. CENTRAL SYSTEMS. Such central systems, including, but not
limited to, management information systems, technology support and central
data base maintenance, as shall be necessary or appropriate for the conduct
of Compcare Pharmacy's business.
iii. EXECUTIVE SERVICES. Such executive services, as shall be
necessary or appropriate for the conduct of Compcare Pharmacy's business.
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b. SERVICES AND RESOURCES PROVIDED BY UWS. UWS shall provide to
Compcare Pharmacy, to the extent requested by Compcare Pharmacy and subject
to Section 6, the following services and resources (together "UWS Services").
UWS shall supply UWS Services only if Compcare Pharmacy has determined not
to have its own employees or third parties furnish the UWS Services, subject
to Section 6.
i. CORPORATE SUPPORT SERVICES. Such corporate support services,
as shall be necessary or appropriate for the conduct of Compcare Pharmacy's
business.
ii. FINANCIAL SERVICES. Such financial services, including, but
not limited to, administration of financial systems, corporate accounting,
and strategic planning/consulting, as shall be necessary or appropriate for
the conduct of Compcare Pharmacy's business.
iii. EXECUTIVE SERVICES. Such executive services as shall be
necessary or appropriate for the conduct of Compcare Pharmacy's business.
iv. OTHER SERVICES. Such other services, including, but not
limited to, those provided by MMC and Meridian Resource Corporation, as shall
be necessary or appropriate for the conduct of Compcare Pharmacy's business.
c. STAFFING. BCBSUW and UWS shall both maintain an adequate source of
qualified employees to ensure the acceptable performance of BCBSUW and UWS
Services.
3. SERVICES PROVIDED BY COMPCARE PHARMACY TO BCBSUW/UWS GROUP
a. SERVICES PROVIDED BY COMPCARE PHARMACY. Compcare Pharmacy shall
provide the following services ("Compcare Pharmacy Services") to companies in
the BCBSUW/UWS Group, to the extent requested by any such individual company:
i. PHARMACY BENEFITS MANAGEMENT. Such pharmacy benefits
administration and management services as shall be necessary or appropriate
for any company in the BCBSUW/UWS Group.
4. COST ALLOCATION METHODS
a. LEASED EMPLOYEES.
i. TOTAL PERSONNEL COSTS. The term "Total Personnel Costs" shall
include all costs or expenses of whatever nature and from whatever origin
arising out of or related to the maintenance of an Employee. Such term shall
include, but shall not be limited to, the following costs, expenses, and
obligations:
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salaries, wages, and bonuses;
profit sharing;
benefit plans;
payroll taxes;
employee insurance.
ii. ALLOCATION OF PERSONNEL COSTS. To the extent that Direct
Employees are leased to Compcare Pharmacy, Total Personnel Costs associated
with a Direct Employee shall be directly charged to Compcare Pharmacy on a
monthly basis. See Schedule 1.
b. BCBSUW AND UWS SERVICES. To the extent that BCBSUW/UWS
Services are rendered on behalf of or for the benefit of Compcare Pharmacy,
costs therefor shall be allocated to Compcare Pharmacy as follows:
i. DIRECT CHARGES. Costs associated with those BCBSUW/UWS
Services identified on Schedule 1 shall be directly charged to Compcare
Pharmacy on a monthly basis.
ii. INDIRECT ALLOCATIONS. Cost allocations for those BCBSUW/UWS
Services identified on Schedule 2 ("Schedule 2 Services") shall be determined
annually for the next succeeding Fiscal Year ("Fiscal Year" shall mean
January 1 through December 31) on the basis of utilization and cost studies
performed by UWS. Through the use of Indirect Allocation Methods, as
described in Schedule 3 attached hereto, utilization of Schedule 2 Services
shall be reduced to an allocation percentage for each company, and various
business units, in the BCBSUW/UWS Group. Each month all costs associated
with the utilization of Schedule 2 Services shall be multiplied by the
allocation percentage of Compcare Pharmacy to determine Compcare Pharmacy's
allocable share of costs for Schedule 2 Services. Notwithstanding the
preceding, (i) allocation percentages are subject to interim Fiscal Year
adjustments to allocate more accurately costs based on actual utilization by
companies/units in the BCBSUW/UWS Group, (ii) costs associated with Schedule
2 Services performed directly for Compcare Pharmacy shall be allocable to
Compcare Pharmacy only, and (iii) subject to approval by the Vice President
of Finance for the BCBSUW/UWS Group, the Indirect Allocation Method used to
allocate costs to Compcare Pharmacy for specific Schedule 2 Services shall be
subject to agreement by the parties on an annual basis.(1) Schedule 2,
attached hereto, sets forth Compcare Pharmacy's annual allocation percentage
for costs and expenses associated with Schedule 2 Services. Schedule 2 shall
be amended annually.
iii. CHARGEBACKS. Costs associated with those BCBSUW/UWS Services
identified on Schedule 4 ("Chargeback Services") either shall be (i)
indirectly allocated to Compcare Pharmacy as discussed in Section 4.b.ii, if
the cost is a general expense
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(1) Before granting approval of any negotiated change to the method of
allocating costs for a particular service, the following factors should be
considered: (i) compliance with FAS rules; (ii) other federal government
contracting implications; and (iii) feasibility.
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for providing the Chargeback Service to all users; or (ii) directly charged
to a Compcare Pharmacy cost center, if the cost is an expense specific to a
Compcare Pharmacy cost center. Thus, costs associated with Chargeback
Services shall be either directly charged or indirectly allocated to Compcare
Pharmacy on a monthly basis, depending on the nature of the cost.
c. COMPCARE PHARMACY SERVICES. To the extent that Compcare Pharmacy
Services are rendered on behalf of or for the benefit of a company in the
BCBSUW/UWS Group (excluding those companies, if any, that separately enter
into third party contracts with Compcare Pharmacy for the provision of such
services) costs therefor shall be allocated to the respective company as
follows:
i. INDIRECT ALLOCATIONS. Costs allocations for Compcare Pharmacy
Services shall be determined annually for the next succeeding Fiscal Year on
the basis of cost center surveys completed by those companies in the
BCBSUW/UWS Group that utilize Compcare Pharmacy Services ("Internal Users").
Based on the survey results, Internal Users shall be assigned a fixed
percentage. Each month all costs associated with the utilization of Compcare
Pharmacy Services by Internal Users shall be multiplied by the fixed
allocation percentage of each Internal User to determine the Internal User's
respective allocable share of costs for Compcare Pharmacy Services.
Notwithstanding the preceding, (i) allocation percentages are subject to
interim Fiscal Year adjustments to allocate more accurately costs based on
actual utilization by each company in the BCBSUW/UWS Group, and (ii) subject
to approval by the Vice President of Finance for the BCBSUW/UWS Group, the
Indirect Allocation Method used to allocate costs for Compcare Pharmacy
Services shall be subject to agreement by the parties on an annual basis.
d. FEES IN ADDITION TO ALLOCATED COSTS. To the extent that Compcare
Pharmacy leases or utilizes the services of Employees from MMC, BCBSUW and/or
UWS, and to the extent that Compcare Pharmacy utilizes BCBSUW/UWS Services,
MMC, BCBSUW and/or UWS may charge Compcare Pharmacy a reasonable negotiated
fee therefor, as set forth in Schedule 5. To the extent that Compcare
Pharmacy provides Compcare Pharmacy Services to any company in the BCBSUW/UWS
Group pursuant to this Agreement, Compcare Pharmacy may charge a reasonable
negotiated fee therefor, as set forth in Schedule 6.
5. SUBSTANTIATION OF AND REIMBURSEMENT FOR ALLOCATED COSTS
a. SUBSTANTIATION OF ALLOCATED COSTS. All costs and expenses shall be
allocated in a fair and reasonable manner. MMC, BCBSUW, UWS and Compcare
Pharmacy shall maintain reasonable and appropriate operating procedures to
allocate costs and expenses so as to enable each party's independent
certified public accounting firm to audit such costs and the allocation
thereof. At the end of each month, (i) MMC, BCBSUW and/or UWS shall provide
or make available to Compcare Pharmacy appropriate documentation respecting
the costs and expenses that are allocated, either directly or indirectly, to
Compcare Pharmacy for that month in sufficient detail to permit Compcare
Pharmacy to identify the sources of such charges, and (ii) Compcare Pharmacy
shall provide or make available to the BCBSUW/UWS
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Group appropriate documentation respecting the costs and expenses that are
allocated to individual companies in the BCBSUW/UWS Group for that month for
Compcare Pharmacy Services in sufficient detail to permit the identification
of the sources of such charges.
b. REIMBURSEMENT FOR ALLOCATED COSTS. At the end of each month, not
later than the 30th day of the following month, (i) Compcare Pharmacy shall
promptly reimburse MMC, BCBSUW and/or UWS for all costs and expenses incurred
by MMC, BCBSUW and/or UWS in furnishing or obtaining the Employees and
Services provided for under Sections I and II, which amount shall be based on
the total of direct charges and indirect allocations to Compcare Pharmacy for
the preceding month, and (ii) any company in the BCBSUW/UWS Group on whose
behalf Compcare Pharmacy Services have been rendered in the preceding month
shall promptly reimburse Compcare Pharmacy for all costs and expenses
incurred by Compcare Pharmacy in furnishing Compcare Pharmacy Services
thereto. Notwithstanding the preceding, the parties reserve the right to
offset amounts due to each other under this Agreement.
6. MODIFICATIONS TO LEASED EMPLOYEES AND BCBSUW/UWS SERVICES
a. MID-CONTRACT YEAR MODIFICATIONS. Each Contract Year, Compcare
Pharmacy shall be required to utilize Employees and BCBSUW/UWS Services
budgeted to Compcare Pharmacy for that Contract Year, unless otherwise
negotiated by the parties. ("Contract Year" shall mean January 1 through
December 31.) If, at any time during the Contract Year, Compcare Pharmacy
requires employees, services or other resources in addition to those budgeted
to Compcare Pharmacy by MMC, BCBSUW and UWS, Compcare Pharmacy may obtain
such employees, services or resources from a source outside of the BCBSUW/UWS
Group only if Compcare Pharmacy's additional needs cannot be accommodated by
MMC, BCBSUW or UWS.
b. CONTRACT YEAR RENEWAL MODIFICATIONS. Compcare Pharmacy shall
provide MMC, BCBSUW and/or UWS with at least three (3) months' written notice
prior to the next Contract Year (unless the parties mutually agree upon a
shorter period) of its intent to do any of the following:
i. Increase or decrease the number or utilization of Employees or
BCBSUW/UWS Services with respect to the next Contract Year;
ii. Obtain employees, services or other resources, which are
available either from MMC, BCBSUW or UWS, from a party outside the BCBSUW/UWS
Group with respect to the next Contract Year.
c. PROVISION OF SERVICES BY BCBSUW/UWS GROUP. MMC, BCBSUW and UWS
have the right to provide Employees and BCBSUW/UWS Services to Compcare
Pharmacy either directly or indirectly, through any company in the BCBSUW/UWS
Group. MMC, BCBSUW and UWS may provide employees, services and other
resources to Compcare Pharmacy indirectly through purchase from or contract
with a source outside the
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BCBSUW/UWS Group ("Outside Services") only with Compcare Pharmacy's consent.
Costs for Outside Services shall be subject to a cost structure negotiated by
the parties hereto.
7. EXECUTION OF ANCILLARY AGREEMENTS
a. RIGHT TO REQUEST EXECUTION OF ANCILLARY AGREEMENTS. In the event
of the Change of Control (as hereinafter defined in this Section) of any
party hereto and while this Agreement remains in effect, BCBSUW, UWS, MMC or
Compcare Pharmacy may, for the sole purpose of documenting in more detail the
terms and respective rights and obligations of the parties with respect to
Employees and Services provided hereunder, request that any of the following
types of ancillary agreements be executed by any parties hereto and effected
thereby:
i. Employee Lease Agreement;
ii. Office and Equipment Lease;
iii. Management Information Systems Agreement;
iv. Service Agreement(s); or
v. Any other Agreement deemed necessary or expedient by the parties
(together "Ancillary Agreements").
The terms of any executed Ancillary Agreement shall (i) be subject
to negotiation of the respective parties, and (ii) control in case of any
conflict with Sections 1 through 6 of this Agreement. Executed Ancillary
Agreements shall be attached to this Agreement as amendments hereto. "Change
of Control" for purposes of this section shall mean an event whereby a
person, group, or entity that is not affiliated with the BCBSUW/UWS Group
purchases all or substantially all of the assets or acquires the ownership of
50% or more of the voting stock of a party hereto.
b. EFFECT OF A REQUEST TO EXECUTE. If any party hereto requests the
execution of an Ancillary Agreement ("Requesting Party"), the parties shall
have sixty 60 days (unless the parties hereto mutually agree to a different
period) to negotiate and execute the Ancillary Agreement, during which time
the parties hereto shall remain obligated to perform in accordance with the
terms of this Agreement. If after 60 days (unless a different period is
mutually agreed upon by the parties hereto) the requested Ancillary Agreement
has not been executed, the Requesting Party may terminate this Agreement in
accordance with Section 9.b.ii. The parties hereby agree that any
negotiations subject to this Section 7.b shall be
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performed in good faith and every reasonable effort shall be made to effect
the execution of a requested Ancillary Agreement.
8. ADDITIONAL COVENANTS
a. AVAILABILITY OF RECORDS. MMC, BCBSUW, UWS and Compcare Pharmacy
shall make available to each other, for inspection, examination and copying,
all of its books and records pertaining to the Employees, BCBSUW/UWS
Services, and Compcare Pharmacy Services provided under this Agreement each
Contract Year:
i. At all reasonable times at the principal places of business of
MMC, BCBSUW, UWS, and Compcare Pharmacy, or at such other place as the
parties hereto may otherwise agree to and designate;
ii. In a form maintained in accordance with generally accepted
accounting principles and with any other general standards or laws applicable
to such book or record;
iii. For a term of at least five (5) years, from the end of each
Contract Year, irrespective of the termination of this Agreement.
b. CONFIDENTIALITY.
i. The parties acknowledge and agree that they may deliver to
each other information about themselves and their business which is
nonpublic, confidential or proprietary in nature. All such information,
regardless of the manner in which it is delivered, is referred to as
"Proprietary Information." However, Proprietary Information does not include
information which 1. is or becomes generally available to the public other
than as a result of a disclosure by the other party, 2. was available to the
other party on a nonconfidential basis prior to its disclosure by the
disclosing party, or 3. becomes available to the other party on a
nonconfidential basis from a person other than by the disclosing party.
Unless otherwise agreed to in writing by the disclosing party, the other
party shall a. except as required by law, keep all Proprietary Information
confidential and not disclose or reveal any Proprietary Information to any
person other than those employed by the other party, or who is actively and
directly participating in the performance under this Agreement on behalf of
the other party ("Involved Persons"); b. cause each Involved Person to keep
all Proprietary Information confidential and not disclose or reveal any
Proprietary Information to any person other than another Involved Person; and
c. not use the Proprietary Information, and ensure that each Involved Person
does not use the Proprietary Information, for any purpose other than in
connection with the performance under this Agreement.
ii. Upon termination of this Agreement for any reason whatsoever,
each party shall promptly surrender and deliver to each other party all
records, materials, documents, data and any other Proprietary Information of
the other parties and shall not retain any description containing or
pertaining to any Proprietary Information of the other parties,
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unless otherwise consented to in writing by a duly authorized officer of MMC,
BCBSUW, UWS or Compcare Pharmacy as the case may be.
c. COVENANT NOT TO COMPETE. MMC, BCBSUW and UWS agree that no
company in the BCBSUW/UWS Group (excluding Compcare) will directly compete
with the products or markets of Compcare Pharmacy during the term of this
Agreement. MMC, BCBSUW and UWS further agree that for a period of two (2)
years following the termination of this Agreement for any reason, no company
in the BCBSUW/UWS Group (excluding Compcare) will directly compete with
Compcare Pharmacy in any market in which Compcare Pharmacy operates or does
business at the termination of this Agreement.
d. COOPERATION. The parties hereto will fully cooperate with
each other and their respective counsel, if any, agents and accountants in
connection with any action to be taken in the performance of their
obligations under this Agreement. In the conduct of their affairs and the
performance of this Agreement the parties hereto shall, unless otherwise
agreed, maintain the working relationships of the parties on substantially
the same terms as before the execution of this Agreement. Notwithstanding
the preceding, the parties do not intend, nor should this Agreement be
construed, to restrict any party's ability to contract with any other person
or entity to provide services similar to or the same as those which are the
subject of this Agreement.
9. TERM AND TERMINATION
a. TERM. This Agreement shall commence on the Effective Date and
shall automatically renew annually therefrom until such time as otherwise
terminated pursuant to Section B.
b. TERMINATION.
i. This Agreement may be terminated by any party at any time by
giving one (1) years advance written notice to the nonterminating parties of
its intention to terminate.
ii. This Agreement may be terminated pursuant to Section 7.b by
the Requesting Party giving three (3) months advance written notice to the
nonterminating parties of its intention to terminate.
iii. This Agreement shall terminate immediately at the election of
and upon written notice from the non-defaulting party in the event of any of
the following:
(1) A party hereto becomes incapable of fully performing its
duties and obligations according to the terms of this Agreement for the
following reason(s): insolvency, bankruptcy, or substantial cessation or
interruption of its business operations for any reason whatsoever;
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(2) A party hereto commits fraud or gross negligence in
performing its obligations under this Agreement;
HOWEVER, if the defaulting party provides the
non-defaulting parties with prompt notice of the event of default, the
defaulting party shall have 30 days to cure the defect, during which time the
non-defaulting parties may not exercise the termination right under this
Section 9.b.iii.
iv. Liabilities After Termination. The termination of this Agreement
shall not limit the obligation or liabilities of any party hereto incurred but
not discharged prior to termination.
10. INDEMNIFICATION
a. INDEMNIFICATION BY COMPCARE PHARMACY.
i. Notwithstanding anything to the contrary in this Agreement,
neither MMC, BCBSUW, UWS, nor any other company in the BCBSUW/UWS Group
(other than Compcare), nor any person who is or was, at the time of any
action or inaction affecting Compcare Pharmacy, a director, officer, employee
or agent of MMC, BCBSUW, UWS or any other company in the BCBSUW/UWS Group
(other than Compcare) (collectively "Indemnitees") shall be liable to
Compcare Pharmacy for any action or inaction taken or omitted to be taken by
such Indemnitee; PROVIDED, HOWEVER, that such Indemnitee acted (or failed to
act) in good faith and such action or inaction does not constitute actual
fraud, gross negligence or willful or wanton misconduct.
ii. Compcare Pharmacy shall, to the fullest extent not prohibited
by law, indemnify and hold harmless each Indemnitee against any liability,
damage, cost, expense, loss, claim or judgment (including, without
limitation, reasonable attorneys' fees and expenses) resulting to, imposed
upon or incurred by such Indemnitee a. in connection with any action, suit,
arbitration or proceeding to which such Indemnitee was or is a party or is
threatened to be made a party by reason of the Employees and BCBSUW/UWS
Services provided to Compcare Pharmacy hereunder; PROVIDED, HOWEVER, that
such Indemnitee acted (or failed to act) in good faith and such action or
inaction does not constitute actual fraud, gross negligence or willful or
wanton misconduct, or b. by reason of, arising out of or resulting from any
breach or misrepresentation by Compcare Pharmacy under this Agreement.
b. INDEMNIFICATION BY MMC, BCBSUW AND UWS.
i. Notwithstanding anything to the contrary in this Agreement,
neither Compcare (as used in this Section 10.b., Compcare shall include
Compcare Pharmacy), nor any person who is or was, at the time of any action
or inaction affecting the BCBSUW/UWS Group (other than Compcare), a director,
officer, employee or agent of
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Compcare (collectively "Indemnitees") shall be liable to any company in the
BCBSUW/UWS Group for any action or inaction taken or omitted to be taken by
such Indemnitee; PROVIDED, HOWEVER, that such Indemnitee acted (or failed to
act) in good faith and such action or inaction does not constitute actual
fraud, gross negligence or willful or wanton misconduct.
ii. MMC, BCBSUW and UWS, jointly and severally, hereby agree to
indemnify and hold harmless, to the fullest extent not prohibited by law,
each Indemnitee against any liability, damage, cost, expense, loss, claim or
judgment (including, without limitation, reasonable attorneys' fees and
expenses) resulting to, imposed upon or incurred by such Indemnitee a. in
connection with any action, suit, arbitration or proceeding to which such
Indemnitee was or is a party or is threatened to be made a party by reason of
the Compcare Pharmacy Services provided to the BCBSUW/UWS Group hereunder;
PROVIDED, HOWEVER, that such Indemnitee acted (or failed to act) in good
faith and such action or inaction does not constitute actual fraud, gross
negligence or willful or wanton misconduct, or b. by reason of, arising out
of or resulting from any breach or misrepresentation by MMC, BCBSUW or UWS
under this Agreement.
11. MISCELLANEOUS
a. ASSIGNMENT. Neither this Agreement nor any rights or
obligations hereunder may be assigned or transferred by any of the parties
hereto without the prior written consent of the other parties. A Change of
Control shall be deemed an assignment requiring the consent of the other
parties hereto.
b. AMENDMENT. The parties recognize that it may be desirable to
alter the terms of this Agreement in the future to take into account such
events or conditions as may from time to time occur. Any amendments to this
Agreement shall be in writing and shall be executed by all parties; however,
Ancillary Agreements need only be executed by the parties affected thereby.
c. WAIVER; REMEDIES. No failure or delay of a party in
exercising any power or right hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. In addition to any rights granted herein, the parties hereto
shall have and may exercise any and all rights and remedies now or hereafter
provided by law except as may be limited by Section 11.d of this Agreement.
d. RESOLUTION OF DISPUTES.
i. INFORMAL RESOLUTION.
(1) Coordinating Committee: Any conflicts or disputes regarding
1. occupancy, utilization or delivery of BCBSUW/UWS Services, or scheduling,
performance and utilization of Employees necessary for the conduct of Compcare
Pharmacy's business, or 2. utilization or delivery of Compcare Pharmacy
Services, shall be submitted to a coordinating
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committee for resolution. The coordinating committee shall consist of four
(4) persons, each of whom shall 1. represent the respective interest of a
party hereto, and 2. be mutually agreed upon by the parties hereto. If the
coordinating committee is unable to unanimously resolve the dispute, then the
parties hereto may resort to the dispute resolution process provided for in
Section 11.d.ii
(2) Audit Committee: Any conflicts or disputes regarding
allocation methods, allocated costs, offsets, fees or any matter related
thereto shall be submitted to an audit committee for resolution. The audit
committee shall consist of four (4) persons, each of whom shall 1. represent
the respective interest of a party hereto, and 2. be mutually agreed upon by
the parties hereto. If the audit committee is unable to unanimously resolve
the dispute, then the parties hereto may resort to the dispute resolution
process provided for in Section 11.d.ii.
ii. FORMAL RESOLUTION.
(1) Any dispute, controversy or claim between or among the
parties hereto that arises out of or relates to this Agreement or any
Ancillary Agreement entered into pursuant hereto, and which otherwise has
been unresolved by a coordinating committee pursuant to Section 11.d.i(1) or
an audit committee pursuant to Section 11.d.i(2) shall be settled by
arbitration. In order to initiate an arbitration, MMC, BCBSUW, UWS or
Compcare Pharmacy (as the case may be) shall deliver a written notice of
demand for arbitration to the other affected party(ies). Within thirty (30)
days of the giving of such written notice, each party involved shall appoint
an individual as arbitrator (the "Party Arbitrators"). Within thirty (30)
days of their appointment, the Party Arbitrators shall collectively select
one (or two if necessary to constitute an odd total number of arbitrators)
additional arbitrator (together the "Panel Arbitrators") and shall give the
parties involved notice of such choice.
(2) The arbitration hearings shall be held in Milwaukee,
Wisconsin. Each party shall submit its case to the Panel Arbitrators within
sixty (60) days of the selection of the Panel Arbitrators or within such longer
period as may be agreed by the Panel Arbitrators. The decision rendered by a
majority of the Panel Arbitrators shall be final and binding on the parties
involved. Such decision shall be a condition precedent to any right of legal
action arising out of the arbitrated dispute. Judgment upon the award rendered
may be entered in any court having jurisdiction thereof.
(3) Each involved party shall a. pay the fees and expenses of
its own Party Arbitrator, and pay its own legal, accounting, and other
professional fees and expenses, b. jointly share in the payment of the fees
and expenses of the other one (or two) arbitrator(s) selected by the Party
Arbitrators, and c. jointly share in the payment of the other expenses
jointly incurred by the involved parties directly related to the arbitration
proceeding.
(4) Except as provided above, the arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association.
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e. NOTICES. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally, or if mailed (by registered or certified
mail, postage prepaid, return receipt requested), or if transmitted by
facsimile or e-mail, as follows:
i. If to BCBSUW:
Ms. Essie Whitelaw
Blue Cross & Blue Shield United of Wisconsin
1515 North RiverCenter Drive
Milwaukee, Wisconsin 53212
Facsimile Telephone Number: (414) 226-6700
With copies to:
Ms. Penny Siewert
Blue Cross & Blue Shield United of Wisconsin
N17W24340 Riverwood Drive
Waukesha, Wisconsin 53188
Facsimile Telephone Number: (414) 523-4920
ii. If to UWS:
Mr. C. Edward Mordy
United Wisconsin Services, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
iii. If to MMC:
Dr. James Hartert
Meridian Managed Care, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
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iv. If to Compcare Pharmacy:
Mr. Steve Maike
Compcare Health Services Insurance Corporation
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-5257
Any notice or other communication given as provided in
this Section 11.e, shall be deemed given upon the first business day after
actual delivery to the party to whom such notice or other communication is
sent (as evidenced by the return receipt or shipping invoice signed by a
representative of such party or by the facsimile confirmation or e-mail
return receipt). Any party from time to time may change its address for
purpose of notices to that party by giving a similar notice specifying a new
address.
f. RELATIONSHIP OF THE PARTIES. Negotiations relating to this
Agreement have occurred and shall continue to be carried out on an arm's
length basis. Further, the employees, services and other resources
contemplated by this Agreement shall be provided to Compcare Pharmacy on an
independent contractor basis. Nothing in this Agreement shall be construed
to create an employer-employee relationship between Compcare Pharmacy and
Employees or any of the parties hereto.
g. ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits referred to herein constitute the entire understanding and agreement
of the parties hereto and supersede all prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or
be construed to prohibit proof of prior understandings and agreements between
or among the parties to the extent necessary to properly construe or
interpret this Agreement. Notwithstanding the preceding, the parties
acknowledge that there are, and/or may be in the future, any number of
independent third party contracts between various companies in the BCBSUW/UWS
Group for various services and/or business arrangements, and any such
contracts, whether written or oral, shall survive the execution of this
Agreement and any renewal hereof.
h. HEADINGS. The headings used in this Agreement have been
inserted for convenience and do not constitute matter to be construed or
interpreted in connection with this Agreement.
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i. NO THIRD PARTY BENEFICIARIES. This Agreement is only for the
benefit of the parties hereto and does not confer any right, benefit, or
privilege upon any person or entity not a party to this Agreement.
j. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Wisconsin (without
giving effect to principles of conflicts of laws) as to all matters,
including, without limitation, matters of validity, construction, effect,
performance and remedies.
k. SEVERABILITY. If any provision of this Agreement is held to
be illegal, invalid, or unenforceable under any present or future law, and if
the rights or obligations of any party under this Agreement will not be
materially and adversely affected thereby, 1. such provision will be fully
severable, 2. this Agreement will be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part
hereof, 3. the remaining provisions of this Agreement will remain in full
force and effect and will not be affected by the illegal, invalid, or
unenforceable provision or by its severance herefrom, and 4. in lieu of such
illegal, invalid, or unenforceable provision, there will be added
automatically as part of this Agreement, a legal, valid, and enforceable
provision as similar terms to such illegal, invalid, or unenforceable
provision as may be possible.
l. COUNTERPARTS. This Agreement may be executed simultaneously
in any number of counterparts, each of which will be deemed an original, but
all of which will constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the Effective Date.
BLUE CROSS BLUE SHIELD UNITED OF WISCONSIN
By:
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Title:
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By:
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Title:
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UNITED WISCONSIN SERVICES, INC.
By:
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Title:
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MERIDIAN MANAGED CARE, INC.
By:
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Title:
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ON BEHALF OF COMPCARE PHARMACY, COMPCARE HEALTH SERVICES INSURANCE CORPORATION
By:
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Title:
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INTERCOMPANY SERVICE AGREEMENT
This Intercompany Service Agreement ("Agreement") is entered into as
of this 1st day of January, 1998 ("Effective Date"), by and among Blue
Cross & Blue Shield United of Wisconsin, a service insurance corporation
organized pursuant to Ch. 613, Wisconsin Statutes ("BCBSUW"), United Wisconsin
Services, Inc., an insurance holding company organized pursuant to Ch. 180,
Wisconsin Statutes ("UWS"), Meridian Managed Care, Inc., a corporation organized
pursuant to Ch. 180, Wisconsin Statutes ("MMC"), and Compcare Health Services
Insurance Corporation, a stock insurance corporation organized pursuant to Ch.
611, Wisconsin Statutes ("Compcare") on behalf of its RxCel business unit
("Compcare RxCel").
RECITALS
WHEREAS, BCBSUW, UWS, MMC, and Compcare are affiliated corporations,
with MMC and Compcare being wholly owned subsidiaries of UWS;
WHEREAS, Compcare RxCel is an unincorporated business unit of
Compcare;
WHEREAS, there is an existing service agreement between BCBSUW and UWS
that extends to subsidiaries of UWS (BCBSUW, UWS and its subsidiaries shall
hereinafter be collectively referred to as "BCBSUW/UWS Group"), and this
Agreement is intended to further specify the services, costs, and allocation
methods contemplated by that service agreement;
WHEREAS, Compcare RxCel is a pharmacy operated for the benefit of
various companies in the BCBSUW/UWS Group to provide, on a third party contract
basis, pharmaceutical products to insureds/enrollees thereof;
WHEREAS, MMC provides the employees and BCBSUW and UWS collectively
provide the other business resources and services necessary for the continued
operation of Compcare RxCel's business;
WHEREAS, by entering into this Agreement, the parties hereto wish to
establish clearly (i) an employee leasing arrangement; (ii) the services and
resources that BCBSUW and UWS will continue to provide to Compcare Rxcel and the
compensation and cost allocations therefor; and (iii) the respective rights and
responsibilities of the parties.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and of the
mutual covenants hereinafter contained, the parties hereto agree as follows:
1. LEASE OF EMPLOYEES
a. CLASSIFICATION OF EMPLOYEES.
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i. "Direct Employees" are those MMC employees that are assigned to
perform all of their services for Compcare RxCel. (Direct Employees may also be
referred to herein as "Employees.")
b. LEASE OF EMPLOYEES.
i. OBLIGATION TO PROVIDE EMPLOYEES. MMC shall provide to Compcare
RxCel, to the extent requested by Compcare RxCel, the entire requirement of
Direct Employees for use in Compcare RxCel's business according to such job
descriptions, qualifications, experience, education, or skills (collectively
"Employee Specifications") as may be specified by Compcare RxCel from time to
time.
ii. INDEPENDENT HIRING. Notwithstanding Section 1.b.i and Compcare
RxCel's present intent to lease Direct Employees from MMC, Compcare RxCel shall
have the right, subject to Section 5, to obtain and hire directly any or all
employees from any other sources and on any terms to perform such duties as
Compcare RxCel may consider appropriate from time to time. Should Compcare
RxCel hire employees from other sources, it will not hire any individual who was
an MMC, BCBSUW or UWS Employee leased to Compcare RxCel within three (3) months
preceding such hiring, without the written consent of MMC, BCBSUW and/or UWS.
iii. HUMAN RESOURCES DEPARTMENT. UWS's Human Resources Department
("Human Resources") shall be responsible for the implementation, management, and
operation of MMC's, BCBSUW's and UWS's employee leasing obligations under this
Agreement. Employee Specifications shall be retained in the files of Human
Resources, and Compcare RxCel shall notify Human Resources at any time of its
intention to change such Employee Specifications for Direct Employees, at which
time Human Resources shall promptly make the requested changes to the Employee
Specifications.
c. OFFICERS. Employment, termination, and terms of employment of all
officers shall be reserved to the full Boards of Directors of BCBSUW and UWS,
provided, however, that while any such individual is leased to Compcare RxCel to
perform services as an officer, Compcare RxCel will be consulted prior to all
determinations regarding the employment, or terms thereof, of such individuals;
provided, however, that Compcare RxCel's input shall be of an advisory nature
and will not be binding on BCBSUW or UWS as the common law employers of such
individuals.
d. EMPLOYMENT RELATIONSHIPS. Human Resources shall establish performance
criteria or standards, which reflect the Employee Specifications supplied by
Compcare RxCel, for leased Direct Employees while performing services for
Compcare RxCel. Compcare RxCel shall advise Human Resources on the performance
of Direct Employees, and shall have the right to request investigation,
disciplinary action, reassignment, and removal of such employees. If at any
time Compcare RxCel becomes dissatisfied with the performance of a Direct
Employee, Compcare RxCel shall have the right to reject the continued lease of
that particular employee and request a replacement therefor. MMC, BCBSUW and
UWS shall have the exclusive right, however, to direct all MMC, BCBSUW and UWS
employees,
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respectively, as to the manner in which services are to be rendered and
performance goals are to be achieved. MMC, BCBSUW and UWS shall be, and
shall have all the privileges, rights, and responsibilities of, common law
employers of all MMC, BCBSUW and UWS employees, respectively, including, but
not limited to, establishing work and disciplinary rules, setting
compensation levels, and directing each MMC, BCBSUW or UWS Employee as to the
manner in which daily duties are completed, whether or not the employee
actually performs services for MMC, BCBSUW, UWS or another company in the
BCBSUW/UWS Group. Employees leased to Compcare RxCel pursuant to this
Agreement shall remain employees of MMC, BCBSUW or UWS, and shall in no way
be treated as or considered employees of Compcare RxCel.
e. NOTIFICATION OF PERSONNEL COST CHANGES. With respect to Direct
Employees performing services for Compcare RxCel, if MMC adopts or implements
any change in compensation, employee benefit plans, or any other fringe benefit
that results in higher Total Personnel Costs (as defined at Section 3.a.i)
than those in existence as of the date of this Agreement, MMC shall provide
Compcare RxCel with written notice at least 30 days before such change becomes
effective (unless such change is required by law, in which case Compcare RxCel
will be notified as soon as possible), describing such new benefit and the
projected increase in the Total Personnel Costs.
2. SERVICES AND OTHER RESOURCES PROVIDED TO COMPCARE RXCEL
a. SERVICES AND RESOURCES PROVIDED BY BCBSUW. BCBSUW shall provide to
Compcare RxCel, to the extent requested by Compcare RxCel and subject to Section
V, the following services and resources (together "BCBSUW Services"). BCBSUW
shall supply BCBSUW Services only if Compcare RxCel has determined not to have
its own employees or third parties furnish the BCBSUW Services, subject to
Section 5.
i. TECHNOLOGY SUPPORT. Such technology support as shall be
necessary or appropriate for the conduct of Compcare RxCel's business.
b. SERVICES AND RESOURCES PROVIDED BY UWS. UWS shall provide to Compcare
RxCel, to the extent requested by Compcare RxCel and subject to Section 5, the
following services and resources (together "UWS Services"). UWS shall supply
UWS Services only if Compcare RxCel has determined not to have its own employees
or third parties furnish the UWS Services, subject to Section 5.
i. CORPORATE SUPPORT SERVICES. Such corporate support services,
including, but not limited to, legal and government relations, as shall be
necessary or appropriate for the conduct of Compcare RxCel's business.
ii. FINANCIAL SERVICES. Such financial services, including, but not
limited to, cash management, administration of financial systems, corporate
accounting, and strategic planning/consulting, as shall be necessary or
appropriate for the conduct of Compcare RxCel's business.
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iii. EXECUTIVE SERVICES. Such executive services as shall be
necessary or appropriate for the conduct of Compcare RxCel's business.
iv. OTHER SERVICES. Such other services, including, but not limited
to, those provided by MMC and Meridian Resource Corporation, as shall be
necessary or appropriate for the conduct of Compcare RxCel's business.
c. STAFFING. BCBSUW and UWS shall both maintain an adequate source of
qualified employees to ensure the acceptable performance of BCBSUW and UWS
Services.
3. COST ALLOCATION METHODS
a. Leased Employees.
i. TOTAL PERSONNEL COSTS. The term "Total Personnel Costs" shall
include all costs or expenses of whatever nature and from whatever origin
arising out of or related to the maintenance of an Employee. Such term shall
include, but shall not be limited to, the following costs, expenses, and
obligations:
salaries, wages, and bonuses;
profit sharing;
benefit plans;
payroll taxes;
employee insurance.
ii. ALLOCATION OF PERSONNEL COSTS. To the extent that Direct
Employees are leased to Compcare RxCel, Total Personnel Costs associated with a
Direct Employee shall be directly charged to Compcare RxCel on a monthly basis.
See Schedule 1.
b. BCBSUW AND UWS SERVICES. To the extent that BCBSUW/UWS Services are
rendered on behalf of or for the benefit of Compcare RxCel, costs therefor shall
be allocated to Compcare RxCel as follows:
i. DIRECT CHARGES. Costs associated with those BCBSUW/UWS Services
identified on Schedule 1 shall be directly charged to Compcare RxCel on a
monthly basis.
ii. INDIRECT ALLOCATIONS. Cost allocations for those BCBSUW/UWS
Services identified on Schedule 2 ("Schedule 2 Services") shall be determined
annually for the next succeeding Fiscal Year ("Fiscal Year" shall mean January 1
through December 31) on the basis of utilization and cost studies performed by
UWS. Through the use of Indirect Allocation Methods, as described in Schedule 3
attached hereto, utilization of Schedule 2 Services shall be reduced to an
allocation percentage for each company, and various business units, in the
BCBSUW/UWS Group. Each month all costs associated with the utilization of
Schedule 2 Services shall be multiplied by the allocation percentage of Compcare
RxCel to determine Compcare RxCel's allocable share of costs for Schedule 2
Services.
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Notwithstanding the preceding, (i) allocation percentages are subject
to interim Fiscal Year adjustments to allocate more accurately costs based on
actual utilization by companies/units in the BCBSUW/UWS Group, (ii) costs
associated with Schedule 2 Services performed directly for Compcare RxCel shall
be allocable to Compcare RxCel only, and (iii) subject to approval by the Vice
President of Finance for the BCBSUW/UWS Group, the Indirect Allocation Method
used to allocate costs to Compcare RxCel for specific Schedule 2 Services shall
be subject to agreement by the parties on an annual basis.(1) Schedule 2,
attached hereto, sets forth Compcare RxCel's annual allocation percentage for
costs and expenses associated with Schedule 2 Services. Schedule 2 shall be
amended annually.
iii. CHARGEBACKS. Costs associated with those BCBSUW/UWS Services
identified on Schedule 4 ("Chargeback Services") either shall be (i) indirectly
allocated to Compcare RxCel as discussed in Section 3.b.ii, if the cost is a
general expense for providing the Chargeback Service to all users; or (ii)
directly charged to a Compcare RxCel cost center, if the cost is an expense
specific to a Compcare RxCel cost center. Thus, costs associated with
Chargeback Services shall be either directly charged or indirectly allocated to
Compcare RxCel on a monthly basis, depending on the nature of the cost.
c. FEES IN ADDITION TO ALLOCATED COSTS. To the extent that Compcare
RxCel leases or utilizes the services of Employees from MMC, BCBSUW and/or UWS,
and to the extent that Compcare RxCel utilizes BCBSUW/UWS Services, MMC, BCBSUW
and/or UWS may charge Compcare RxCel a reasonable negotiated fee therefor, as
set forth in Schedule 5.
4. SUBSTANTIATION OF AND REIMBURSEMENT FOR ALLOCATED COSTS
a. SUBSTANTIATION OF ALLOCATED COSTS. All costs and expenses shall be
allocated in a fair and reasonable manner. MMC, BCBSUW, and UWS shall maintain
reasonable and appropriate operating procedures to allocate costs and expenses
so as to enable each party's independent certified public accounting firm to
audit such costs and the allocation thereof. At the end of each month, MMC,
BCBSUW and/or UWS shall provide or make available to Compcare RxCel appropriate
documentation respecting the costs and expenses that are allocated, either
directly or indirectly, to Compcare RxCel for that month in sufficient detail to
permit Compcare RxCel to identify the sources of such charges.
b. REIMBURSEMENT FOR ALLOCATED COSTS. At the end of each month, not
later than the 30th day of the following month, Compcare RxCel shall promptly
reimburse MMC, BCBSUW and/or UWS for all costs and expenses incurred by MMC,
BCBSUW and/or UWS in furnishing or obtaining the Employees and Services provided
for under Sections I and II, which amount shall be based on the total of direct
charges and indirect allocations to Compcare RxCel for the preceding month.
Notwithstanding the preceding, Compcare RxCel reserves the
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(1) Before granting approval of any negotiated change to the method of
allocating costs for a particular service, the following factors should be
considered: (i) compliance with FAS rules; (ii) other federal government
contracting implications; and (iii) feasibility.
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right to offset any amounts due to MMC, BCBSUW and/or UWS under this
Agreement against other obligations of MMC, BCBSUW and/or UWS to Compcare
RxCel.
5. MODIFICATIONS TO LEASED EMPLOYEES AND BCBSUW/UWS SERVICES
a. MID-CONTRACT YEAR MODIFICATIONS. Each Contract Year, Compcare RxCel
shall be required to utilize Employees and BCBSUW/UWS Services budgeted to
Compcare RxCel for that Contract Year, unless otherwise negotiated by the
parties. ("Contract Year" shall mean January 1 through December 31.) If, at any
time during the Contract Year, Compcare RxCel requires employees, services or
other resources in addition to those budgeted to Compcare RxCel by MMC, BCBSUW
and UWS, Compcare RxCel may obtain such employees, services or resources from a
source outside of the BCBSUW/UWS Group only if Compcare RxCel's additional needs
cannot be accommodated by MMC, BCBSUW or UWS.
b. CONTRACT YEAR RENEWAL MODIFICATIONS. Compcare RxCel shall provide
MMC, BCBSUW and/or UWS with at least three (3) months' written notice prior to
the next Contract Year (unless the parties mutually agree upon a shorter period)
of its intent to do any of the following:
i. Increase or decrease the number or utilization of Employees or
BCBSUW/UWS Services with respect to the next Contract Year;
ii. Obtain employees, services or other resources, which are
available either from MMC, BCBSUW or UWS, from a party outside the BCBSUW/UWS
Group with respect to the next Contract Year.
c. PROVISION OF SERVICES BY BCBSUW/UWS GROUP. MMC, BCBSUW and UWS have
the right to provide Employees and BCBSUW/UWS Services to Compcare RxCel either
directly or indirectly, through any company in the BCBSUW/UWS Group. MMC,
BCBSUW and UWS may provide employees, services and other resources to Compcare
RxCel indirectly through purchase from or contract with a source outside the
BCBSUW/UWS Group ("Outside Services") only with Compcare RxCel's consent.
Costs for Outside Services shall be subject to a cost structure negotiated by
the parties hereto.
6. EXECUTION OF ANCILLARY AGREEMENTS
a. RIGHT TO REQUEST EXECUTION OF ANCILLARY AGREEMENTS. In the event of
the Change of Control (as hereinafter defined in this Section) of any party
hereto and while this Agreement remains in effect, BCBSUW, UWS, MMC or Compcare
RxCel may, for the sole purpose of documenting in more detail the terms and
respective rights and obligations of the parties with respect to Employees and
Services provided hereunder, request that any of the following types of
ancillary agreements be executed by any parties hereto and effected thereby:
i. Employee Lease Agreement;
ii. Office and Equipment Lease;
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iii. Management Information Systems Agreement;
iv. Service Agreement(s); or
v. Any other Agreement deemed necessary or expedient by the parties
(together "Ancillary Agreements").
The terms of any executed Ancillary Agreement shall (i) be subject to
negotiation of the respective parties, and (ii) control in case of any conflict
with Sections I through V of this Agreement. Executed Ancillary Agreements
shall be attached to this Agreement as amendments hereto. "Change of Control"
for purposes of this section shall mean an event whereby a person, group, or
entity that is not affiliated with the BCBSUW/UWS Group purchases all or
substantially all of the assets or acquires the ownership of 50% or more of the
voting stock of a party hereto.
b. EFFECT OF A REQUEST TO EXECUTE. If any party hereto requests the
execution of an Ancillary Agreement ("Requesting Party"), the parties shall have
sixty 60 days (unless the parties hereto mutually agree to a different period)
to negotiate and execute the Ancillary Agreement, during which time the parties
hereto shall remain obligated to perform in accordance with the terms of this
Agreement. If after 60 days (unless a different period is mutually agreed upon
by the parties hereto) the requested Ancillary Agreement has not been executed,
the Requesting Party may terminate this Agreement in accordance with Section
8.b.ii. The parties hereby agree that any negotiations subject to this
Section 6.b shall be performed in good faith and every reasonable effort shall
be made to effect the execution of a requested Ancillary Agreement.
7. ADDITIONAL COVENANTS
a. AVAILABILITY OF RECORDS. MMC, BCBSUW, and UWS shall make available to
each other, for inspection, examination and copying, all of its books and
records pertaining to the Employees and BCBSUW/UWS Services provided under this
Agreement each Contract Year:
i. At all reasonable times at the principal places of business of
MMC, BCBSUW, and UWS, or at such other place as the parties hereto may otherwise
agree to and designate;
ii. In a form maintained in accordance with generally accepted
accounting principles and with any other general standards or laws applicable to
such book or record;
iii. For a term of at least five (5) years, from the end of each
Contract Year, irrespective of the termination of this Agreement.
b. CONFIDENTIALITY.
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i. The parties acknowledge and agree that they may deliver to each
other information about themselves and their business which is nonpublic,
confidential or proprietary in nature. All such information, regardless of the
manner in which it is delivered, is referred to as "Proprietary Information."
However, Proprietary Information does not include information which 1. is or
becomes generally available to the public other than as a result of a disclosure
by the other party, 2. was available to the other party on a nonconfidential
basis prior to its disclosure by the disclosing party, or 3. becomes available
to the other party on a nonconfidential basis from a person other than by the
disclosing party. Unless otherwise agreed to in writing by the disclosing
party, the other party shall a. except as required by law, keep all Proprietary
Information confidential and not disclose or reveal any Proprietary Information
to any person other than those employed by the other party, or who is actively
and directly participating in the performance under this Agreement on behalf of
the other party ("Involved Persons"); b. cause each Involved Person to keep all
Proprietary Information confidential and not disclose or reveal any Proprietary
Information to any person other than another Involved Person; and c. not use the
Proprietary Information, and ensure that each Involved Person does not use the
Proprietary Information, for any purpose other than in connection with the
performance under this Agreement.
ii. Upon termination of this Agreement for any reason whatsoever,
each party shall promptly surrender and deliver to each other party all records,
materials, documents, data and any other Proprietary Information of the other
parties and shall not retain any description containing or pertaining to any
Proprietary Information of the other parties, unless otherwise consented to in
writing by a duly authorized officer of MMC, BCBSUW, UWS or Compcare RxCel as
the case may be.
c. COVENANT NOT TO COMPETE. MMC, BCBSUW and UWS agree that no company in
the BCBSUW/UWS Group (excluding Compcare) will directly compete with the
products or markets of Compcare RxCel during the term of this Agreement. MMC,
BCBSUW and UWS further agree that for a period of two (2) years following the
termination of this Agreement for any reason, no company in the BCBSUW/UWS Group
(excluding Compcare) will directly compete with Compcare RxCel in any market in
which Compcare RxCel operates or does business at the termination of this
Agreement.
d. COOPERATION. The parties hereto will fully cooperate with each other
and their respective counsel, if any, agents and accountants in connection with
any action to be taken in the performance of their obligations under this
Agreement. In the conduct of their affairs and the performance of this
Agreement the parties hereto shall, unless otherwise agreed, maintain the
working relationships of the parties on substantially the same terms as before
the execution of this Agreement. Notwithstanding the preceding, the parties do
not intend, nor should this Agreement be construed, to restrict any party's
ability to contract with any other person or entity to provide services similar
to or the same as those which are the subject of this Agreement.
8. TERM AND TERMINATION
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a. TERM. This Agreement shall commence on the Effective Date and shall
automatically renew annually therefrom until such time as otherwise terminated
pursuant to Section 8.b.
b. TERMINATION.
i. This Agreement may be terminated by any party at any time by
giving one (1) years advance written notice to the nonterminating parties of its
intention to terminate.
ii. This Agreement may be terminated pursuant to Section 6.b by the
Requesting Party giving three (3) months advance written notice to the
nonterminating parties of its intention to terminate.
iii. This Agreement shall terminate immediately at the election of and
upon written notice from the non-defaulting party in the event of any of the
following:
(1) A party hereto becomes incapable of fully performing its
duties and obligations according to the terms of this Agreement for the
following reason(s): insolvency, bankruptcy, or substantial cessation or
interruption of its business operations for any reason whatsoever;
(2) A party hereto commits fraud or gross negligence in
performing its obligations under this Agreement;
HOWEVER, if the defaulting party provides the non-defaulting parties with prompt
notice of the event of default, the defaulting party shall have 30 days to cure
the defect, during which time the non-defaulting parties may not exercise the
termination right under this Section 8.b.iii.
iv. Liabilities After Termination. The termination of this Agreement
shall not limit the obligation or liabilities of any party hereto incurred but
not discharged prior to termination.
9. INDEMNIFICATION
a. INDEMNIFICATION BY COMPCARE RXCEL.
i. Notwithstanding anything to the contrary in this Agreement,
neither MMC, BCBSUW, UWS, nor any other company in the BCBSUW/UWS Group (other
than Compcare), nor any person who is or was, at the time of any action or
inaction affecting Compcare RxCel, a director, officer, employee or agent of
MMC, BCBSUW, UWS or any other company in the BCBSUW/UWS Group (other than
Compcare) (collectively "Indemnitees") shall be liable to Compcare RxCel for any
action or inaction taken or omitted to be taken by such Indemnitee; PROVIDED,
HOWEVER, that such Indemnitee acted (or failed to act) in good faith and such
action or inaction does not constitute actual fraud, gross negligence or willful
or wanton misconduct.
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ii. Compcare RxCel shall, to the fullest extent not prohibited by
law, indemnify and hold harmless each Indemnitee against any liability, damage,
cost, expense, loss, claim or judgment (including, without limitation,
reasonable attorneys' fees and expenses) resulting to, imposed upon or incurred
by such Indemnitee a. in connection with any action, suit, arbitration or
proceeding to which such Indemnitee was or is a party or is threatened to be
made a party by reason of the Employees and BCBSUW/UWS Services provided to
Compcare RxCel hereunder; PROVIDED, HOWEVER, that such Indemnitee acted (or
failed to act) in good faith and such action or inaction does not constitute
actual fraud, gross negligence or willful or wanton misconduct, or b. by reason
of, arising out of or resulting from any breach or misrepresentation by Compcare
RxCel under this Agreement.
b. INDEMNIFICATION BY MMC, BCBSUW AND UWS. MMC, BCBSUW and UWS, jointly
and severally, hereby agree to indemnify and hold harmless Compcare RxCel, and
its successors and assigns, from and against any liability, damage, cost,
expense, loss, claim or judgment (including, without limitation, reasonable
attorneys' fees and expenses) resulting to, imposed upon or incurred by Compcare
RxCel by reason of, arising out of or resulting from any breach or
misrepresentation by MMC, BCBSUW or UWS under this Agreement.
10. MISCELLANEOUS
a. ASSIGNMENT. Neither this Agreement nor any rights or obligations
hereunder may be assigned or transferred by any of the parties hereto without
the prior written consent of the other parties. A Change of Control shall be
deemed an assignment requiring the consent of the other parties hereto.
b. AMENDMENT. The parties recognize that it may be desirable to alter
the terms of this Agreement in the future to take into account such events or
conditions as may from time to time occur. Any amendments to this Agreement
shall be in writing and shall be executed by all parties; however, Ancillary
Agreements need only be executed by the parties affected thereby.
c. WAIVER; REMEDIES. No failure or delay of a party in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. In
addition to any rights granted herein, the parties hereto shall have and may
exercise any and all rights and remedies now or hereafter provided by law except
as may be limited by Section X.D of this Agreement.
d. RESOLUTION OF DISPUTES.
i. INFORMAL RESOLUTION.
(1) Coordinating Committee: Any conflicts or disputes regarding
occupancy, utilization or delivery of BCBSUW/UWS Services, or scheduling,
performance
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and utilization of Employees necessary for the conduct of Compcare RxCel's
business, shall be submitted to a coordinating committee for resolution. The
coordinating committee shall consist of four (4) persons, each of whom shall
1. represent the respective interest of a party hereto, and 2. be mutually
agreed upon by the parties hereto. If the coordinating committee is unable
to unanimously resolve the dispute, then the parties hereto may resort to the
dispute resolution process provided for in Section 10.d.ii.
(2) Audit Committee: Any conflicts or disputes regarding
allocation methods, allocated costs, offsets, fees or any matter related thereto
shall be submitted to an audit committee for resolution. The audit committee
shall consist of four (4) persons, each of whom shall 1. represent the
respective interest of a party hereto, and 2. be mutually agreed upon by the
parties hereto. If the audit committee is unable to unanimously resolve the
dispute, then the parties hereto may resort to the dispute resolution process
provided for in Section 10.d.ii.
ii. FORMAL RESOLUTION.
(1) Any dispute, controversy or claim between or among the
parties hereto that arises out of or relates to this Agreement or any Ancillary
Agreement entered into pursuant hereto, and which otherwise has been unresolved
by a coordinating committee pursuant to Section 10.d.i(1) or an audit committee
pursuant to Section 10.d.i(2) shall be settled by arbitration. In order to
initiate an arbitration, MMC, BCBSUW, UWS or Compcare RxCel (as the case may be)
shall deliver a written notice of demand for arbitration to the other affected
party(ies). Within thirty (30) days of the giving of such written notice, each
party involved shall appoint an individual as arbitrator (the "Party
Arbitrators"). Within thirty (30) days of their appointment, the Party
Arbitrators shall collectively select one (or two if necessary to constitute an
odd total number of arbitrators) additional arbitrator (together the "Panel
Arbitrators") and shall give the parties involved notice of such choice.
(2) The arbitration hearings shall be held in Milwaukee,
Wisconsin. Each party shall submit its case to the Panel Arbitrators within
sixty (60) days of the selection of the Panel Arbitrators or within such longer
period as may be agreed by the Panel Arbitrators. The decision rendered by a
majority of the Panel Arbitrators shall be final and binding on the parties
involved. Such decision shall be a condition precedent to any right of legal
action arising out of the arbitrated dispute. Judgment upon the award rendered
may be entered in any court having jurisdiction thereof.
(3) Each involved party shall a. pay the fees and expenses of
its own Party Arbitrator, and pay its own legal, accounting, and other
professional fees and expenses, b. jointly share in the payment of the fees and
expenses of the other one (or two) arbitrator(s) selected by the Party
Arbitrators, and c. jointly share in the payment of the other expenses jointly
incurred by the involved parties directly related to the arbitration proceeding.
(4) Except as provided above, the arbitration shall be conducted
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association.
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e. NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally, or if mailed (by registered or certified mail, postage
prepaid, return receipt requested), or if transmitted by facsimile or e-mail, as
follows:
1. If to BCBSUW:
Ms. Essie Whitelaw
Blue Cross & Blue Shield United of Wisconsin
1515 North RiverCenter Drive
Milwaukee, Wisconsin 53212
Facsimile Telephone Number: (414) 226-6700
With copies to:
Ms. Penny Siewert
Blue Cross & Blue Shield United of Wisconsin
N17W24340 Riverwood Drive
Waukesha, Wisconsin 53188
Facsimile Telephone Number: (414) 523-4920
2. If to UWS:
Mr. C. Edward Mordy
United Wisconsin Services, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
3. If to MMC:
Dr. James Hartert
Meridian Managed Care, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
4. If to Compcare RxCel:
5.
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Ms. Nina Reinero
Compcare Health Services Insurance Corporation
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 769-4931
Any notice or other communication given as provided in this Section 10.e, shall
be deemed given upon the first business day after actual delivery to the party
to whom such notice or other communication is sent (as evidenced by the return
receipt or shipping invoice signed by a representative of such party or by the
facsimile confirmation or e-mail return receipt). Any party from time to time
may change its address for purpose of notices to that party by giving a similar
notice specifying a new address.
f. RELATIONSHIP OF THE PARTIES. Negotiations relating to this Agreement
have occurred and shall continue to be carried out on an arm's length basis.
Further, the employees, services and other resources contemplated by this
Agreement shall be provided to Compcare RxCel on an independent contractor
basis. Nothing in this Agreement shall be construed to create an
employer-employee relationship between Compcare RxCel and Employees or any of
the parties hereto.
g. ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits referred to herein constitute the entire understanding and agreement of
the parties hereto and supersede all prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or be
construed to prohibit proof of prior understandings and agreements between or
among the parties to the extent necessary to properly construe or interpret this
Agreement. Notwithstanding the preceding, the parties acknowledge that there
are, and/or may be in the future, any number of independent third party
contracts between various companies in the BCBSUW/UWS Group for various services
and/or business arrangements, and any such contracts, whether written or oral,
shall survive the execution of this Agreement and any renewal hereof.
h. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement.
i. NO THIRD PARTY BENEFICIARIES. This Agreement is only for the benefit
of the parties hereto and does not confer any right, benefit, or privilege upon
any person or entity not a party to this Agreement.
j. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving effect to
principles of
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conflicts of laws) as to all matters, including, without limitation, matters
of validity, construction, effect, performance and remedies.
k. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party under this Agreement will not be materially
and adversely affected thereby, 1. such provision will be fully severable, 2.
this Agreement will be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof, 3. the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid, or unenforceable provision or by its
severance herefrom, and 4. in lieu of such illegal, invalid, or unenforceable
provision, there will be added automatically as part of this Agreement, a legal,
valid, and enforceable provision as similar terms to such illegal, invalid, or
unenforceable provision as may be possible.
l. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the Effective Date.
BLUE CROSS BLUE SHIELD UNITED OF WISCONSIN
By:
------------------------------------
Title:
---------------------------------
By:
------------------------------------
Title:
---------------------------------
UNITED WISCONSIN SERVICES, INC.
By:
------------------------------------
Title:
---------------------------------
MERIDIAN MANAGED CARE, INC.
By:
------------------------------------
Title:
---------------------------------
ON BEHALF OF COMPCARE RXCEL, COMPCARE HEALTH SERVICES INSURANCE CORPORATION
By:
------------------------------------
Title:
---------------------------------
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INTERCOMPANY SERVICE AGREEMENT
This Intercompany Service Agreement ("Agreement") is entered into as
of this 1st day of January, 1998 ("Effective Date"), by and among Blue
Cross & Blue Shield United of Wisconsin, a service insurance corporation
organized pursuant to Ch. 613, Wisconsin Statutes ("BCBSUW"), United Wisconsin
Services, Inc., an insurance holding company organized pursuant to Ch. 180,
Wisconsin Statutes ("UWS"), Meridian Managed Care, Inc., a corporation organized
pursuant to Ch. 180, Wisconsin Statutes ("MMC"), and Compcare Health Services
Insurance Corporation, a stock insurance corporation organized pursuant to Ch.
611, Wisconsin Statute ("Compcare").
RECITALS
WHEREAS, BCBSUW, UWS, MMC and Compcare are affiliated corporations,
with MMC and Compcare being wholly owned subsidiaries of UWS;
WHEREAS, there is an existing service agreement between BCBSUW and UWS
that extends to subsidiaries of UWS (BCBSUW, UWS and its subsidiaries shall
hereinafter be collectively referred to as "BCBSUW/UWS Group"), and this
Agreement is intended to further specify the services, costs, and allocation
methods contemplated by that service agreement;
WHEREAS, Compcare operates a health maintenance organization ("HMO")
through which Compcare (i) markets, underwrites, and services Compcare Group
Plans, including, but not limited to, Medicaid Plans, (ii) markets and services
the Compcare Point of Service Plans, with Compcare underwriting the HMO portion
and United Wisconsin Insurance Company ("UWIC") underwriting the indemnity
portion, and (iii) markets and services Compcare Out-of-Area Products, which are
underwritten by United Wisconsin Life Insurance Company ("UWLIC") or such other
company as may be agreed upon from time to time;
WHEREAS, Compcare has entered into independent third party contracts
with UWIC and UWLIC to provide administrative services in connection with the
indemnity portion of the Compcare Point of Service Plans and the Compcare
Out-of-Area Products and to document the cost and/or profit sharing associated
therewith, and Compcare has entered into an independent third party contract
with UWIC to reinsure a portion of the loss on the Compcare in-network portion
of the Compcare Point of Service Plans;
WHEREAS, Compcare also provides quality improvement, network
management, accounting, and provider contracting and relations services to
various companies in the BCBSUW/UWS Group;
WHEREAS, MMC provides certain employees and BCBSUW and UWS
collectively provide the other business resources and services necessary for the
continued operation of Compcare's business;
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WHEREAS, by entering into this Agreement, the parties hereto wish to
establish clearly (i) an employee leasing arrangement; (ii) the services and
resources that BCBSUW and UWS will continue to provide to Compcare and that
Compcare will continue to provide to various companies in the BCBSUW/UWS Group,
and the compensation and cost allocations therefor; and (iii) the respective
rights and responsibilities of the parties.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and of the
mutual covenants hereinafter contained, the parties hereto agree as follows:
1. LEASE OF EMPLOYEES
a. CLASSIFICATION OF EMPLOYEES.
i. "Direct Employees" are those MMC employees that are assigned to
perform all of their services for Compcare with respect only to the quality
improvement and network management functions provided by Compcare to other
companies in the BCBSUW/UWS Group. (Direct Employees may also be referred to
herein as "Employees.")
b. LEASE OF EMPLOYEES.
i. OBLIGATION TO PROVIDE EMPLOYEES. MMC shall provide to Compcare,
to the extent requested by Compcare, the entire requirement of Direct Employees
for use in Compcare's business according to such job descriptions,
qualifications, experience, education, or skills (collectively "Employee
Specifications") as may be specified by Compcare from time to time.
ii. INDEPENDENT HIRING. Notwithstanding Section 1.b.i and
Compcare's present intent to lease Direct Employees from MMC, Compcare shall
have the right, subject to Section 6, to obtain and hire directly any or all
employees from any other sources and on any terms to perform such duties as
Compcare may consider appropriate from time to time. Should Compcare hire
employees from other sources, it will not hire any individual who was an MMC,
BCBSUW or UWS Employee leased to Compcare within three (3) months preceding
such hiring, without the written consent of MMC, BCBSUW and/or UWS.
iii. HUMAN RESOURCES DEPARTMENT. UWS's Human Resources Department
("Human Resources") shall be responsible for the implementation, management, and
operation of MMC's, BCBSUW's and UWS's employee leasing obligations under this
Agreement. Employee Specifications shall be retained in the files of Human
Resources, and Compcare shall notify Human Resources at any time of its
intention to change such Employee Specifications for Direct Employees, at which
time Human Resources shall promptly make the requested changes to the Employee
Specifications.
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c. OFFICERS. Employment, termination, and terms of employment of all
officers shall be reserved to the full Boards of Directors of BCBSUW and UWS,
provided, however, that while any such individual is leased to Compcare to
perform services as an officer, Compcare will be consulted prior to all
determinations regarding the employment, or terms thereof, of such individuals;
provided, however, that Compcare's input shall be of an advisory nature and will
not be binding on BCBSUW or UWS as the common law employers of such individuals.
d. EMPLOYMENT RELATIONSHIPS. Human Resources shall establish performance
criteria or standards, which reflect the Employee Specifications supplied by
Compcare, for leased Direct Employees while performing services for Compcare.
Compcare shall advise Human Resources on the performance of Direct Employees,
and shall have the right to request investigation, disciplinary action,
reassignment, and removal of such employees. If at any time Compcare becomes
dissatisfied with the performance of a Direct Employee, Compcare shall have the
right to reject the continued lease of that particular employee and request a
replacement therefor. MMC, BCBSUW and UWS shall have the exclusive right,
however, to direct all MMC, BCBSUW and UWS employees, respectively, as to the
manner in which services are to be rendered and performance goals are to be
achieved. MMC, BCBSUW and UWS shall be, and shall have all the privileges,
rights, and responsibilities of, common law employers of all MMC, BCBSUW and UWS
employees, respectively, including, but not limited to, establishing work and
disciplinary rules, setting compensation levels, and directing each MMC, BCBSUW
or UWS Employee as to the manner in which daily duties are completed, whether or
not the employee actually performs services for MMC, BCBSUW, UWS or another
company in the BCBSUW/UWS Group. Employees leased to Compcare pursuant to this
Agreement shall remain employees of MMC, BCBSUW or UWS, and shall in no way be
treated as or considered employees of Compcare.
e. NOTIFICATION OF PERSONNEL COST CHANGES. With respect to Direct
Employees performing services for Compcare, if MMC adopts or implements any
change in compensation, employee benefit plans, or any other fringe benefit that
results in higher Total Personnel Costs (as defined at Section 4.a.i) than
those in existence as of the date of this Agreement, MMC shall provide Compcare
with written notice at least 30 days before such change becomes effective
(unless such change is required by law, in which case Compcare will be notified
as soon as possible), describing such new benefit and the projected increase in
the Total Personnel Costs.
2. SERVICES AND OTHER RESOURCES PROVIDED TO COMPCARE
a. SERVICES AND RESOURCES PROVIDED BY BCBSUW. BCBSUW shall provide to
Compcare, to the extent requested by Compcare and subject to Section 6, the
following services and resources (together "BCBSUW Services"). BCBSUW shall
supply BCBSUW Services only if Compcare has determined not to have its own
employees or third parties furnish the BCBSUW Services, subject to Section 6.
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i. OFFICE SPACE AND FACILITIES. Office space and facilities,
including, but not limited to, furniture and equipment, as shall be necessary or
appropriate for the conduct of Compcare's operations.
ii. BUILDING SERVICES. Building services, including, but not
limited to, repair and maintenance of any property and facilities made
available hereunder as shall be necessary to maintain such property and
facilities in good working order, and such other building services as may be
necessary or appropriate for the conduct of Compcare's business.
iii. OFFICE SERVICES. Such office services, including, but not
limited to, warehousing, transportation, stockroom, graphics, printing,
duplicating and forms management, as shall be necessary or appropriate for the
conduct of Compcare's business.
iv. CENTRAL SYSTEMS. Such central systems, including, but not
limited to, management information systems, telecommunications, centralized
mailing, technology support and central data base maintenance, as shall be
necessary or appropriate for the conduct of Compcare's business.
v. ADMINISTRATIVE SERVICES. Such administrative services,
including, but not limited to, administrative support and reporting, word
processing, documentation and training, contracts and booklets, customer service
administration, claims administration, benefits and provider administration, and
lobbyist activities, as shall be necessary or appropriate for the conduct of
Compcare's business.
vi. SALES AND MARKETING SERVICES. Such sales and marketing
services, including, but not limited to, direct and agency sales, sales
training, marketing communications and compliance, membership and electronic
enrollment, and customer relations, as shall be necessary or appropriate for
the conduct of Compcare's business.
vii. FINANCE AND UNDERWRITING SERVICES. Such finance and
underwriting services, including, but not limited to, financial reporting,
cash adjustments, medical review, and small group underwriting, as shall be
necessary or appropriate for the conduct of Compcare's business.
viii. MANAGEMENT SERVICES. Such management services as shall be
necessary or appropriate for the conduct of Compcare's business.
xi. COMPANY CAR AND TRAVEL. Availability and maintenance of
vehicles for company related travel and such other travel related services as
shall be necessary or appropriate for the conduct of Compcare's business.
b. SERVICES AND RESOURCES PROVIDED BY UWS. UWS shall provide to
Compcare, to the extent requested by Compcare and subject to Section 6, the
following services and resources (together "UWS Services"). UWS shall supply
UWS Services only if Compcare has determined not to have its own employees or
third parties furnish the UWS Services, subject to Section 6.
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<PAGE>
i. CORPORATE SUPPORT SERVICES. Such corporate support services,
including, but not limited to, corporate compliance, legal, and government
relations, as shall be necessary or appropriate for the conduct of Compcare's
business.
ii. EXECUTIVE SERVICES. Such executive services as shall be
necessary or appropriate for the conduct of Compcare's business.
iii. MARKETING AND COMMUNICATIONS. Such corporate marketing and
communications services, including, but not limited to, public relations and
employee community events, as shall be necessary or appropriate for the conduct
of Compcare's business.
iv. HUMAN RESOURCES. Such human resource services, including, but
not limited to, staffing, labor and employment relations, training and
development, and administration of payroll and employee benefits, as shall be
necessary or appropriate with respect to Employees utilized by Compcare under
this Agreement or otherwise necessary or appropriate for the conduct of
Compcare's business.
v. FINANCIAL SERVICES. Such financial services, including, but not
limited to, tax, treasury, cash management, administration of financial systems,
corporate accounting, and strategic planning/consulting, as shall be necessary
or appropriate for the conduct of Compcare's business.
vi. ACTUARIAL AND UNDERWRITING SERVICES. Such actuarial and
underwriting services as shall be necessary or appropriate for the conduct of
Compcare's business.
vii. OTHER SERVICES. Such other services, including, but not limited
to, those provided by MMC or Meridian Resource Corporation, as shall be
necessary or appropriate for the conduct of Compcare's business.
c. STAFFING. BCBSUW and UWS shall both maintain an adequate source of
qualified employees to ensure the acceptable performance of BCBSUW and UWS
Services.
3. SERVICES PROVIDED BY COMPCARE TO THE BCBSUW/UWS GROUP
a. SERVICES PROVIDED BY COMPCARE. Compcare shall provide the following
services (together "Compcare Services") to companies in the BCBSUW/UWS Group, to
the extent requested by any such individual company:
i. QUALITY IMPROVEMENT. Such quality improvement services,
including, but not limited to, credentialing, quality alerts, and coordinating
external accreditation, as shall be necessary or appropriate for any company in
the BCBSUW/UWS Group.
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ii. NETWORK MANAGEMENT. Such network management services,
including, but not limited to, network analysis, provider relations support,
provider financial services, and provider reporting and analysis, as shall be
necessary or appropriate for any company in the BCBSUW/UWS Group.
iii. PROVIDER CONTRACTING. Such provider contracting services as
shall be necessary or appropriate for any company in the BCBSUW/UWS Group.
iv. ACCOUNTING. Such accounting services as shall be necessary or
appropriate for any company in the BCBSUW/UWS Group.
v. SALES. Such sales support as shall be necessary or appropriate
for any company in the BCBSUW/UWS Group.
4. COST ALLOCATION METHODS
a. LEASED EMPLOYEES.
i. TOTAL PERSONNEL COSTS. The term "Total Personnel Costs" shall
include all costs or expenses of whatever nature and from whatever origin
arising out of or related to the maintenance of an Employee. Such term shall
include, but shall not be limited to, the following costs, expenses, and
obligations:
salaries, wages, and bonuses;
profit sharing;
benefit plans;
payroll taxes;
employee insurance.
ii. ALLOCATION OF PERSONNEL COSTS. To the extent that Direct
Employees are leased to Compcare, Total Personnel Costs associated with a Direct
Employee shall be directly charged to Compcare on a monthly basis. See Schedule
1.
b. BCBSUW AND UWS SERVICES. To the extent that BCBSUW/UWS Services are
rendered on behalf of or for the benefit of Compcare, costs therefor shall be
allocated to Compcare as follows:
i. DIRECT CHARGES. Costs associated with those BCBSUW/UWS Services
identified on Schedule 1 shall be directly charged to Compcare on a monthly
basis.
ii. INDIRECT ALLOCATIONS. Cost allocations for those BCBSUW/UWS
Services identified on Schedule 2 ("Schedule 2 Services") shall be determined
annually for the next succeeding Fiscal Year ("Fiscal Year" shall mean January 1
through December 31) on the basis of utilization and cost studies performed by
UWS. Through the use of Indirect Allocation Methods, as described in Schedule 3
attached hereto, utilization of Schedule 2 Services shall be reduced to an
allocation percentage for each company in the BCBSUW/UWS
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Group. For any specific Schedule 2 Service, Compcare's total allocation
percentage shall be determined by adding the applicable allocation percentage
from each of the service agreements included in Schedule 2. Each month all
costs associated with the utilization of Schedule 2 Services shall be
multiplied by Compcare's total allocation percentage to determine Compcare's
allocable share of costs for Schedule 2 Services. Notwithstanding the
preceding, (i) allocation percentages are subject to interim Fiscal Year
adjustments to allocate more accurately costs based on actual utilization by
each company in the BCBSUW/UWS Group, (ii) costs associated with Schedule 2
Services performed directly for Compcare shall be allocable to Compcare only,
and (iii) subject to approval by the Vice President of Finance for the
BCBSUW/UWS Group, the Indirect Allocation Method used to allocate costs to
Compcare for specific Schedule 2 Services shall be subject to agreement by
the parties on an annual basis.(1) Schedule 2, attached hereto, sets forth
Compcare's annual allocation percentages for costs and expenses associated
with Schedule 2 Services. Schedule 2 shall be amended annually.
iii. CHARGEBACKS. Costs associated with those BCBSUW/UWS Services
identified on Schedule 4 ("Chargeback Services") either shall be (i) indirectly
allocated to Compcare as discussed in Section 4.b.ii, if the cost is a general
expense for providing the Chargeback Service to all users; or (ii) directly
charged to a Compcare cost center, if the cost is an expense specific to a
Compcare cost center. Thus, costs associated with Chargeback Services shall be
either directly charged or indirectly allocated to Compcare on a monthly basis,
depending on the nature of the cost.
iv. CHARGES AND ALLOCATIONS TO COMPCARE REGIONS. Direct charges to
Compcare, which are attributable to a specific regional operation of Compcare
("Region"), subsequently shall be charged to the Region. The Regions also shall
be allocated a pro rata percentage of the Compcare indirect cost allocations
based on the Region's earned fees. Notwithstanding the preceding, the
methodology used to allocate Compcare indirect cost allocations to the Regions
shall be subject to negotiation, on an annual basis, by the Finance Manager of
Compcare and the directors of the Compcare Regions.
c. COMPCARE SERVICES. To the extent that Compcare Services are rendered
on behalf of or for the benefit of a company in the BCBSUW/UWS Group, costs
therefor shall be allocated to the respective company as follows:
i. INDIRECT ALLOCATIONS. Costs allocations for Compcare Services
(excluding Compcare Sales Services) shall be determined annually for the next
succeeding Fiscal Year on the basis of cost center surveys completed by those
companies in the BCBSUW/UWS Group that utilize Compcare Services ("Internal
Users"). Based on the survey results, Internal Users shall be assigned a fixed
percentage. Each month all costs associated with the utilization of Compcare
Services by Internal Users shall be multiplied by the fixed allocation
percentage of each Internal User to determine the Internal User's respective
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(1) Before granting approval of any negotiated change to the method of
allocating costs for a particular service, the following factors should be
considered: (i) compliance with FAS rules; (ii) other federal government
contracting implications; and (iii) feasibility.
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allocable share of costs for Compcare Services. Notwithstanding the preceding,
(i) allocation percentages are subject to interim Fiscal Year adjustments to
allocate more accurately costs based on actual utilization by each company in
the BCBSUW/UWS Group, and (ii) subject to approval by the Vice President of
Finance for the BCBSUW/UWS Group, the Indirect Allocation Method used to
allocate costs for Compcare Services shall be subject to agreement by the
parties on an annual basis.
ii. SALES CHARGEBACKS. Costs associated with Compcare Sales
Services either shall be (i) indirectly allocated to the Internal User if the
cost is a general expense for providing the Sale Services to all Internal
Users; or (ii) directly charged to an Internal User's cost center, if the
cost is an expense specific to an Internal User's cost center.
d. FEES IN ADDITION TO ALLOCATED COSTS. To the extent that Compcare
leases or utilizes the services of Employees from MMC, BCBSUW and/or UWS, and to
the extent that Compcare utilizes BCBSUW/UWS Services, MMC, BCBSUW and/or UWS
may charge Compcare a reasonable negotiated fee therefor, as set forth in
Schedule 5. To the extent that Compcare provides Compcare Services to any
company in the BCBSUW/UWS Group pursuant to this Agreement, Compcare may charge
a reasonable negotiated fee therefor, as set forth in Schedule 6.
5. SUBSTANTIATION OF AND REIMBURSEMENT FOR ALLOCATED COSTS
a. SUBSTANTIATION OF ALLOCATED COSTS. All costs and expenses shall be
allocated in a fair and reasonable manner. MMC, BCBSUW, UWS and Compcare shall
maintain reasonable and appropriate operating procedures to allocate costs and
expenses so as to enable each party's independent certified public accounting
firm to audit such costs and the allocation thereof. At the end of each month,
(i) MMC, BCBSUW and/or UWS shall provide or make available to Compcare
appropriate documentation respecting the costs and expenses that are allocated,
either directly or indirectly, to Compcare for that month in sufficient detail
to permit Compcare to identify the sources of such charges, and (ii) Compcare
shall provide or make available to the BCBSUW/UWS Group appropriate
documentation respecting the costs and expenses that are allocated to individual
companies in the BCBSUW/UWS Group for that month for Compcare Services in
sufficient detail to permit the identification of the sources of such charges.
b. REIMBURSEMENT FOR ALLOCATED COSTS. At the end of each month, not
later than the 30th day of the following month, (i) Compcare shall promptly
reimburse MMC, BCBSUW and/or UWS for all costs and expenses incurred by MMC,
BCBSUW and/or UWS in furnishing or obtaining the Employees and Services provided
for under Sections I and II, which amount shall be based on the total of direct
charges and indirect allocations to Compcare for the preceding month, and (ii)
any company in the BCBSUW/UWS Group on whose behalf Compcare Services have been
rendered in the preceding month shall promptly reimburse Compcare for all costs
and expenses incurred by Compcare in furnishing Compare Services thereto.
Notwithstanding the preceding, the parties reserve the right to offset amounts
due to each other under this Agreement.
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6. MODIFICATIONS TO LEASED EMPLOYEES AND BCBSUW/UWS SERVICES
a. MID-CONTRACT YEAR MODIFICATIONS. Each Contract Year, Compcare shall
be required to utilize Direct Employees and BCBSUW/UWS Services budgeted to
Compcare for that Contract Year, unless otherwise negotiated by the parties.
("Contract Year" shall mean January 1 through December 31.) If, at any time
during the Contract Year, Compcare requires services or other non-human
resources in addition to those budgeted to Compcare by BCBSUW and UWS, Compcare
may obtain such services or resources from a source outside of the BCBSUW/UWS
Group only if Compcare's additional needs cannot be accommodated by BCBSUW or
UWS.
b. CONTRACT YEAR RENEWAL MODIFICATIONS. Compcare shall provide MMC,
BCBSUW and/or UWS with at least three (3) months' written notice prior to the
next Contract Year (unless the parties mutually agree upon a shorter period) of
its intent to do any of the following:
i. Increase or decrease the number or utilization of Employees or
BCBSUW/UWS Services with respect to the next Contract Year;
ii. Obtain services or other non-human resources, which are
available either from BCBSUW or UWS, from a party outside the BCBSUW/UWS
Group with respect to the next Contract Year.
c. PROVISION OF SERVICES BY BCBSUW/UWS GROUP. MMC, BCBSUW and UWS have
the right to provide Employees and BCBSUW/UWS Services to Compcare either
directly or indirectly, through any company in the BCBSUW/UWS Group. MMC,
BCBSUW and UWS may provide employees, services and other resources to Compcare
indirectly through purchase from or contract with a source outside the
BCBSUW/UWS Group ("Outside Services") only with Compcare's consent. Costs for
Outside Services shall be subject to a cost structure negotiated by the parties
hereto.
7. EXECUTION OF ANCILLARY AGREEMENTS
a. RIGHT TO REQUEST EXECUTION OF ANCILLARY AGREEMENTS. In the event of
the Change of Control (as hereinafter defined in this Section) of any party
hereto and while this Agreement remains in effect, BCBSUW, UWS, MMC or Compcare
may, for the sole purpose of documenting in more detail the terms and respective
rights and obligations of the parties with respect to Employees and Services
provided hereunder, request that any of the following types of ancillary
agreements be executed by any parties hereto and effected thereby:
i. Employee Lease Agreement;
ii. Office and Equipment Lease;
iii. Management Information Systems Agreement;
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iv. Service Agreement(s); or
v. Any other Agreement deemed necessary or expedient by the parties
(together "Ancillary Agreements").
The terms of any executed Ancillary Agreement shall (i) be subject to
negotiation of the respective parties, and (ii) control in case of any conflict
with Sections I through VI of this Agreement. Executed Ancillary Agreements
shall be attached to this Agreement as amendments hereto. "Change of Control"
for purposes of this section shall mean an event whereby a person, group, or
entity that is not affiliated with the BCBSUW/UWS Group purchases all or
substantially all of the assets or acquires the ownership of 50% or more of the
voting stock of a party hereto.
b. EFFECT OF A REQUEST TO EXECUTE. If any party hereto requests the
execution of an Ancillary Agreement ("Requesting Party"), the parties shall have
sixty 60 days (unless the parties hereto mutually agree to a different period)
to negotiate and execute the Ancillary Agreement, during which time the parties
hereto shall remain obligated to perform in accordance with the terms of this
Agreement. If after 60 days (unless a different period is mutually agreed upon
by the parties hereto) the requested Ancillary Agreement has not been executed,
the Requesting Party may terminate this Agreement in accordance with Section
IX.B.2. The parties hereby agree that any negotiations subject to this Section
VII.B shall be performed in good faith and every reasonable effort shall be made
to effect the execution of a requested Ancillary Agreement.
8. ADDITIONAL COVENANTS
a. AVAILABILITY OF RECORDS. BCBSUW, UWS, MMC and Compcare shall make
available to each other, for inspection, examination and copying, all of its
books and records pertaining to the Employees, BCBSUW/UWS Services, and Compcare
Services provided under this Agreement each Contract Year:
i. At all reasonable times at the principal places of business of
BCBSUW, UWS, MMC, and Compcare, or at such other place as the parties hereto
may otherwise agree to and designate;
ii. In a form maintained in accordance with generally accepted
accounting principles and with any other general standards or laws applicable to
such book or record;
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iii. For a term of at least five (5) years, from the end of each
Contract Year, irrespective of the termination of this Agreement.
b. CONFIDENTIALITY.
i. The parties acknowledge and agree that they may deliver to each
other information about themselves and their business which is nonpublic,
confidential or proprietary in nature. All such information, regardless of the
manner in which it is delivered, is referred to as "Proprietary Information."
However, Proprietary Information does not include information which 1. is or
becomes generally available to the public other than as a result of a disclosure
by the other party, 2. was available to the other party on a nonconfidential
basis prior to its disclosure by the disclosing party, or 3. becomes available
to the other party on a nonconfidential basis from a person other than by the
disclosing party. Unless otherwise agreed to in writing by the disclosing
party, the other party shall a. except as required by law, keep all Proprietary
Information confidential and not disclose or reveal any Proprietary Information
to any person other than those employed by the other party, or who is actively
and directly participating in the performance under this Agreement on behalf of
the other party ("Involved Persons"); b. cause each Involved Person to keep all
Proprietary Information confidential and not disclose or reveal any Proprietary
Information to any person other than another Involved Person; and c. not use the
Proprietary Information, and ensure that each Involved Person does not use the
Proprietary Information, for any purpose other than in connection with the
performance under this Agreement.
ii. Upon termination of this Agreement for any reason whatsoever,
each party shall promptly surrender and deliver to each other party all records,
materials, documents, data and any other Proprietary Information of the other
parties and shall not retain any description containing or pertaining to any
Proprietary Information of the other parties, unless otherwise consented to in
writing by a duly authorized officer of BCBSUW, UWS, MMC or Compcare as the case
may be.
c. COOPERATION. The parties hereto will fully cooperate with each other
and their respective counsel, if any, agents and accountants in connection with
any action to be taken in the performance of their obligations under this
Agreement. In the conduct of their affairs and the performance of this
Agreement the parties hereto shall, unless otherwise agreed, maintain the
working relationships of the parties on substantially the same terms as before
the execution of this Agreement. Notwithstanding the preceding, the parties do
not intend, nor should this Agreement be construed, to restrict any party's
ability to contract with any other person or entity to provide services similar
to or the same as those which are the subject of this Agreement.
9. TERM AND TERMINATION
a. TERM. This Agreement shall commence on the Effective Date and shall
automatically renew annually therefrom until such time as otherwise terminated
pursuant to Section 9.b.
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b. TERMINATION.
i. This Agreement may be terminated by any party at any time by
giving one (1) years advance written notice to the nonterminating parties of its
intention to terminate.
ii. This Agreement may be terminated pursuant to Section 7.b by
the Requesting Party giving three (3) months advance written notice to the
nonterminating parties of its intention to terminate.
iii. This Agreement shall terminate immediately at the election of
and upon written notice from the non-defaulting party in the event of any of
the following:
(1) A party hereto becomes incapable of fully
performing its duties and obligations according to the terms
of this Agreement for the following reason(s): insolvency,
bankruptcy, or substantial cessation or interruption of its
business operations for any reason whatsoever;
(2) A party hereto commits fraud or gross negligence in
performing its obligations under this Agreement;
HOWEVER, if the defaulting party provides the non-defaulting parties
with prompt notice of the event of default, the defaulting party shall have 30
days to cure the defect, during which time the non-defaulting parties may not
exercise the termination right under this section 9.b.iii.
iv. Liabilities After Termination. The termination of this
Agreement shall not limit the obligation or liabilities of any party hereto
incurred but not discharged prior to termination.
10. INDEMNIFICATION
a. INDEMNIFICATION BY COMPCARE.
i. Notwithstanding anything to the contrary in this Agreement,
neither MMC, BCBSUW, UWS, nor any other company in the BCBSUW/UWS Group (other
than Compcare), nor any person who is or was, at the time of any action or
inaction affecting Compcare, a director, officer, employee or agent of MMC,
BCBSUW, UWS or any other company in the BCBSUW/UWS Group (other than Compcare)
(collectively "Indemnitees") shall be liable to Compcare for any action or
inaction taken or omitted to be taken by such Indemnitee; PROVIDED, HOWEVER,
that such Indemnitee acted (or failed to act) in good faith and such action or
inaction does not constitute actual fraud, gross negligence or willful or wanton
misconduct.
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ii. Compcare shall, to the fullest extent not prohibited by law,
indemnify and hold harmless each Indemnitee against any liability, damage, cost,
expense, loss, claim or judgment (including, without limitation, reasonable
attorneys' fees and expenses) resulting to, imposed upon or incurred by such
Indemnitee a. in connection with any action, suit, arbitration or proceeding to
which such Indemnitee was or is a party or is threatened to be made a party by
reason of the Employees and BCBSUW/UWS Services provided to Compcare hereunder;
PROVIDED, HOWEVER, that such Indemnitee acted (or failed to act) in good faith
and such action or inaction does not constitute actual fraud, gross negligence
or willful or wanton misconduct, or b. by reason of, arising out of or resulting
from any breach or misrepresentation by Compcare under this Agreement.
b. INDEMNIFICATION BY MMC, BCBSUW AND UWS.
i. Notwithstanding anything to the contrary in this Agreement,
neither Compcare, nor any person who is or was, at the time of any action or
inaction affecting the BCBSUW/UWS Group (other than Compcare), a director,
officer, employee or agent of Compcare (collectively "Indemnitees") shall be
liable to any company in the BCBSUW/UWS Group for any action or inaction taken
or omitted to be taken by such Indemnitee; PROVIDED, HOWEVER, that such
Indemnitee acted (or failed to act) in good faith and such action or inaction
does not constitute actual fraud, gross negligence or willful or wanton
misconduct.
ii. MMC, BCBSUW and UWS, jointly and severally, hereby agree to
indemnify and hold harmless, to the fullest extent not prohibited by law, each
Indemnitee against any liability, damage, cost, expense, loss, claim or judgment
(including, without limitation, reasonable attorneys' fees and expenses)
resulting to, imposed upon or incurred by such Indemnitee a. in connection with
any action, suit, arbitration or proceeding to which such Indemnitee was or is a
party or is threatened to be made a party by reason of the Compcare Services
provided to the BCBSUW/UWS Group hereunder; PROVIDED, HOWEVER, that such
Indemnitee acted (or failed to act) in good faith and such action or inaction
does not constitute actual fraud, gross negligence or willful or wanton
misconduct, or b. by reason of, arising out of or resulting from any breach or
misrepresentation by MMC, BCBSUW or UWS under this Agreement.
11. MISCELLANEOUS
a. ASSIGNMENT. Neither this Agreement nor any rights or obligations
hereunder may be assigned or transferred by any of the parties hereto without
the prior written consent of the other parties. A Change of Control shall be
deemed an assignment requiring the consent of the other parties hereto.
b. AMENDMENT. The parties recognize that it may be desirable to alter
the terms of this Agreement in the future to take into account such events or
conditions as may from time to time occur. Any amendments to this Agreement
shall be in writing and shall be executed by all parties; however, Ancillary
Agreements need only be executed by the parties affected thereby.
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c. WAIVER; REMEDIES. No failure or delay of a party in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. In
addition to any rights granted herein, the parties hereto shall have and may
exercise any and all rights and remedies now or hereafter provided by law except
as may be limited by Section 11.d of this Agreement.
d. RESOLUTION OF DISPUTES.
i. INFORMAL RESOLUTION.
(1) Coordinating Committee: Any conflicts or disputes
regarding 1. occupancy, utilization or delivery of BCBSUW/UWS
Services, or scheduling, performance and utilization of
Employees necessary for the conduct of Compcare's business,
or 2. utilization or delivery of Compcare Services, shall be
submitted to a coordinating committee for resolution. The
coordinating committee shall consist of four (4) persons,
each of whom shall 1. represent the respective interest of a
party hereto, and 2. be mutually agreed upon by the parties
hereto. If the coordinating committee is unable to
unanimously resolve the dispute, then the parties hereto may
resort to the dispute resolution process provided for in
Section 11.d.ii.
(2) Audit Committee: Any conflicts or disputes
regarding allocation methods, allocated costs, offsets, fees
or any matter related thereto shall be submitted to an audit
committee for resolution. The audit committee shall consist
of four (4) persons, each of whom shall 1. represent the
respective interest of a party hereto, and 2. be mutually
agreed upon by the parties hereto. If the audit committee is
unable to unanimously resolve the dispute, then the parties
hereto may resort to the dispute resolution process provided
for in Section 11.d.ii.
ii. FORMAL RESOLUTION.
(1) Any dispute, controversy or claim between or among
the parties hereto that arises out of or relates to this
Agreement or any Ancillary Agreement entered into pursuant
hereto, and which otherwise has been unresolved by a
coordinating committee pursuant to Section 11.d.i(1) or an
audit committee pursuant to Section 11.d.i(2) shall be
settled by arbitration. In order to initiate an arbitration,
BCBSUW, UWS, MMC or Compcare (as the case may be) shall
deliver a written notice of demand for arbitration to the
other affected party(ies). Within thirty (30) days of the
giving of such written notice, each party involved shall
appoint an individual as arbitrator (the "Party
Arbitrators"). Within thirty (30) days of their appointment,
the Party Arbitrators shall
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collectively select one (or two if necessary to constitute an
odd total number of arbitrators) additional arbitrator
(together the "Panel Arbitrators") and shall give the parties
involved notice of such choice.
(2) The arbitration hearings shall be held in
Milwaukee, Wisconsin. Each party shall submit its case to the
Panel Arbitrators within sixty (60) days of the selection of
the Panel Arbitrators or within such longer period as may be
agreed by the Panel Arbitrators. The decision rendered by a
majority of the Panel Arbitrators shall be final and binding
on the parties involved. Such decision shall be a condition
precedent to any right of legal action arising out of the
arbitrated dispute. Judgment upon the award rendered may be
entered in any court having jurisdiction thereof.
(3) Each involved party shall a. pay the fees and
expenses of its own Party Arbitrator, and pay its own legal,
accounting, and other professional fees and expenses, b.
jointly share in the payment of the fees and expenses of the
other one (or two) arbitrator(s) selected by the Party
Arbitrators, and c. jointly share in the payment of the other
expenses jointly incurred by the involved parties directly
related to the arbitration proceeding.
(4) Except as provided above, the arbitration shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association.
e. NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally, or if mailed (by registered or certified mail, postage
prepaid, return receipt requested), or if transmitted by facsimile or e-mail, as
follows:
i. If to BCBSUW:
Ms. Essie Whitelaw
Blue Cross & Blue Shield United of Wisconsin
1515 North RiverCenter Drive
Milwaukee, Wisconsin 53212
Facsimile Telephone Number: (414) 226-6700
With copies to:
Ms. Penny Siewert
Blue Cross & Blue Shield United of Wisconsin
N17W24340 Riverwood Drive
Waukesha, Wisconsin 53188
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Facsimile Telephone Number: (414) 523-4920
ii. If to UWS:
Mr. C. Edward Mordy
United Wisconsin Services, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
iii. If to MMC:
Dr. James Hartert
Meridian Managed Care, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
iv. If to Compcare:
Mr. Roger A. Formisano
Compcare Health Services Insurance Corporation
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
Any notice or other communication given as provided in this Section
11.e, shall be deemed given upon the first business day after actual delivery to
the party to whom such notice or other communication is sent (as evidenced by
the return receipt or shipping invoice signed by a representative of such party
or by the facsimile confirmation or e-mail return receipt). Any party from time
to time may change its address for purpose of notices to that party by giving a
similar notice specifying a new address.
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f. RELATIONSHIP OF THE PARTIES. Negotiations relating to this Agreement
have occurred and shall continue to be carried out on an arm's length basis.
Further, the employees, services and other resources contemplated by this
Agreement shall be provided to Compcare on an independent contractor basis.
Nothing in this Agreement shall be construed to create an employer-employee
relationship between Compcare and Employees or any of the parties hereto.
g. ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits referred to herein constitute the entire understanding and agreement of
the parties hereto and supersede all prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or be
construed to prohibit proof of prior understandings and agreements between or
among the parties to the extent necessary to properly construe or interpret this
Agreement. Notwithstanding the preceding, the parties acknowledge that there
are, and/or may be in the future, any number of independent third party
contracts between various companies in the BCBSUW/UWS Group for various services
and/or business arrangements, and any such contracts, whether written or oral,
shall survive the execution of this Agreement and any renewal hereof.
h. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement.
i. NO THIRD PARTY BENEFICIARIES. This Agreement is only for the benefit
of the parties hereto and does not confer any right, benefit, or privilege upon
any person or entity not a party to this Agreement.
j. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving effect to
principles of conflicts of laws) as to all matters, including, without
limitation, matters of validity, construction, effect, performance and remedies.
k. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party under this Agreement will not be materially
and adversely affected thereby, 1. such provision will be fully severable, 2.
this Agreement will be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof, 3. the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid, or unenforceable provision or by its
severance herefrom, and 4. in lieu of such illegal, invalid, or unenforceable
provision, there will be added automatically as part of this Agreement, a legal,
valid, and enforceable provision as similar terms to such illegal, invalid, or
unenforceable provision as may be possible.
l. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the Effective Date.
BLUE CROSS BLUE SHIELD UNITED OF WISCONSIN
By:
------------------------------------
Title:
---------------------------------
By:
------------------------------------
Title:
---------------------------------
UNITED WISCONSIN SERVICES, INC.
By:
------------------------------------
Title:
---------------------------------
MERIDIAN MANAGED CARE, INC.
By:
------------------------------------
Title:
---------------------------------
COMPCARE HEALTH SERVICES INSURANCE CORPORATION
By:
------------------------------------
Title:
---------------------------------
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INTERCOMPANY SERVICE AGREEMENT
This Intercompany Service Agreement ("Agreement") is entered into as
of this 1st day of January, 1998 ("Effective Date"), by and among Blue
Cross & Blue Shield United of Wisconsin, a service insurance corporation
organized pursuant to Ch. 613, Wisconsin Statutes ("BCBSUW"), United Wisconsin
Services, Inc., an insurance holding company organized pursuant to Ch. 180,
Wisconsin Statutes ("UWS"), and Meridian Resource Corporation, a corporation
organized pursuant to Ch. 180, Wisconsin Statutes ("Meridian Corp") on behalf of
its Investigation and Recovery Services business unit ("Meridian IRS").
RECITALS
WHEREAS, BCBSUW, UWS and Meridian Corp are affiliated corporations,
with Meridian Corp being a wholly owned subsidiary of UWS;
WHEREAS, Meridian IRS is an unincorporated business unit of Meridian
Corp;
WHEREAS, there is an existing service agreement between BCBSUW and UWS
that extends to subsidiaries of UWS (BCBSUW, UWS and its subsidiaries shall
hereinafter be collectively referred to as "BCBSUW/UWS Group"), and this
Agreement is intended to further specify the services, costs, and allocation
methods contemplated by that service agreement;
WHEREAS, Meridian IRS provides subrogation and recovery services,
fraud and abuse investigation services, and collection services to various
companies in the BCBSUW/UWS Group, and Meridian IRS also contracts with outside
entities to provide subrogation and recovery services;
WHEREAS, UWS provides the employees and BCBSUW and UWS collectively
provide the other business resources and services necessary for the continued
operation of Meridian IRS's business;
WHEREAS, by entering into this Agreement, the parties hereto wish to
establish clearly (i) an employee leasing arrangement; (ii) the services and
resources that BCBSUW and UWS will continue to provide to Meridian IRS and that
Meridian IRS will continue to provide to various companies in the BCBSUW/UWS
Group, and the compensation and cost allocations therefor; and (iii) the
respective rights and responsibilities of the parties.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and of the
mutual covenants hereinafter contained, the parties hereto agree as follows:
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1. LEASE OF EMPLOYEES
a. CLASSIFICATION OF EMPLOYEES.
i. "Direct Employees" are those UWS employees that are assigned to
perform all of their services for Meridian IRS. (Direct Employees may also be
referred to herein as "Employees.")
b. LEASE OF EMPLOYEES.
i. OBLIGATION TO PROVIDE EMPLOYEES. UWS shall provide to Meridian
IRS, to the extent requested by Meridian IRS, the entire requirement of Direct
Employees for use in Meridian IRS's business according to such job descriptions,
qualifications, experience, education, or skills (collectively "Employee
Specifications") as may be specified by Meridian IRS from time to time.
ii. INDEPENDENT HIRING. Notwithstanding Section 1.B.i and Meridian
IRS's present intent to lease Direct Employees from UWS, Meridian IRS shall have
the right, subject to Section 6, to obtain and hire directly any or all
employees from any other sources and on any terms to perform such duties as
Meridian IRS may consider appropriate from time to time. Should Meridian IRS
hire employees from other sources, it will not hire any individual who was a
BCBSUW or UWS Employee leased to Meridian IRS within three (3) months preceding
such hiring, without the written consent of BCBSUW and/or UWS.
iii. HUMAN RESOURCES DEPARTMENT. UWS's Human Resources Department
("Human Resources") shall be responsible for the implementation, management, and
operation of BCBSUW's and UWS's employee leasing obligations under this
Agreement. Employee Specifications shall be retained in the files of Human
Resources, and Meridian IRS shall notify Human Resources at any time of its
intention to change such Employee Specifications for Direct Employees, at which
time Human Resources shall promptly make the requested changes to the Employee
Specifications.
c. OFFICERS. Employment, termination, and terms of employment of all
officers shall be reserved to the full Boards of Directors of BCBSUW and UWS,
provided, however, that while any such individual is leased to Meridian IRS to
perform services as an officer, Meridian IRS will be consulted prior to all
determinations regarding the employment, or terms thereof, of such individuals;
provided, however, that Meridian IRS's input shall be of an advisory nature and
will not be binding on BCBSUW or UWS as the common law employers of such
individuals.
d. EMPLOYMENT RELATIONSHIPS. Human Resources shall establish performance
criteria or standards, which reflect the Employee Specifications supplied by
Meridian IRS, for leased Direct Employees while performing services for Meridian
IRS. Meridian IRS shall advise Human Resources on the performance of Direct
Employees, and shall have the right to request investigation, disciplinary
action, reassignment, and removal of such employees. If at any time Meridian
IRS becomes dissatisfied with the performance of a Direct Employee,
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Meridian IRS shall have the right to reject the continued lease of that
particular employee and request a replacement therefor. BCBSUW and UWS shall
have the exclusive right, however, to direct all BCBSUW and UWS employees,
respectively, as to the manner in which services are to be rendered and
performance goals are to be achieved. BCBSUW and UWS shall be, and shall
have all the privileges, rights, and responsibilities of, common law
employers of all BCBSUW and UWS employees, respectively, including, but not
limited to, establishing work and disciplinary rules, setting compensation
levels, and directing each BCBSUW or UWS Employee as to the manner in which
daily duties are completed, whether or not the employee actually performs
services for BCBSUW, UWS or another company in the BCBSUW/UWS Group.
Employees leased to Meridian IRS pursuant to this Agreement shall remain
employees of BCBSUW or UWS, and shall in no way be treated as or considered
employees of Meridian IRS.
e. NOTIFICATION OF PERSONNEL COST CHANGES. With respect to Direct
Employees performing services for Meridian IRS, if UWS adopts or implements any
change in compensation, employee benefit plans, or any other fringe benefit that
results in higher Total Personnel Costs (as defined at Section 4.a.i) than
those in existence as of the date of this Agreement, UWS shall provide Meridian
IRS with written notice at least 30 days before such change becomes effective
(unless such change is required by law, in which case Meridian IRS will be
notified as soon as possible), describing such new benefit and the projected
increase in the Total Personnel Costs.
2. SERVICES AND OTHER RESOURCES PROVIDED TO MERIDIAN IRS
a. SERVICES AND RESOURCES PROVIDED BY BCBSUW. BCBSUW shall provide to
Meridian IRS, to the extent requested by Meridian IRS and subject to Section 6,
the following services and resources (together "BCBSUW Services"). BCBSUW shall
supply BCBSUW Services only if Meridian IRS has determined not to have its own
employees or third parties furnish the BCBSUW Services, subject to Section 6.
i. OFFICE SPACE AND FACILITIES. Office space and facilities,
including, but not limited to, furniture and equipment, as shall be necessary
or appropriate for the conduct of Meridian IRS's operations.
ii. BUILDING SERVICES. Building services, including, but not
limited to, repair and maintenance of any property and facilities made
available hereunder as shall be necessary to maintain such property and
facilities in good working order, and such other building services as may be
necessary or appropriate for the conduct of Meridian IRS's business.
iii. OFFICE SERVICES. Such office services, including, but not
limited to, warehousing, transportation, stockroom, graphics, printing,
duplicating and forms management, as shall be necessary or appropriate for
the conduct of Meridian IRS's business.
iv. CENTRAL SYSTEMS. Such central systems, including, but not
limited to, management information systems, telecommunications, centralized
mailing, technology
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support and central data base maintenance, as shall be
necessary or appropriate for the conduct of Meridian IRS's business.
v. ADMINISTRATIVE SERVICES. Such administrative services,
including, but not limited to, lobbyist activities, documentation and
training, as shall be necessary or appropriate for the conduct of Meridian
IRS's business.
vi. COMPANY CAR AND TRAVEL. Availability and maintenance of
vehicles for company related travel and such other travel related services as
shall be necessary or appropriate for the conduct of Meridian IRS's business.
b. SERVICES AND RESOURCES PROVIDED BY UWS. UWS shall provide to Meridian
IRS, to the extent requested by Meridian IRS and subject to Section 6, the
following services and resources (together "UWS Services"). UWS shall supply
UWS Services only if Meridian IRS has determined not to have its own employees
or third parties furnish the UWS Services, subject to Section 6.
i. CORPORATE SUPPORT SERVICES. Such corporate support services,
including, but not limited to, corporate compliance, legal, and government
relations, as shall be necessary or appropriate for the conduct of Meridian
IRS's business.
ii. EXECUTIVE SERVICES. Such executive services as shall be
necessary or appropriate for the conduct of Meridian IRS's business.
iii. MARKETING AND COMMUNICATIONS. Such marketing and communications
services, including, but not limited to, public relations and employee community
events, as shall be necessary or appropriate for the conduct of Meridian IRS's
business.
iv. HUMAN RESOURCES. Such human resource services, including, but
not limited to, staffing, labor and employment relations, training and
development, and administration of payroll and employee benefits, as shall be
necessary or appropriate with respect to Employees utilized by Meridian IRS
under this Agreement or otherwise necessary or appropriate for the conduct of
Meridian IRS's business.
v. ACCOUNTING SERVICES. Such accounting, audit, bookkeeping and
financial statement preparation services as shall be necessary or appropriate
for the conduct of Meridian IRS's business.
vi. FINANCIAL SERVICES. Such financial services, including, but not
limited to, cash management, tax, treasury, administration of financial systems,
corporate accounting, and strategic planning/consulting, as shall be necessary
or appropriate for the conduct of Meridian IRS's business.
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vii. OTHER SERVICES. Such other services, including, but not limited
to, those provided by Compcare, Dentacare or Meridian Managed Care, as shall be
necessary or appropriate for the conduct of Meridian IRS's business.
c. STAFFING. BCBSUW and UWS shall both maintain an adequate source of
qualified employees to ensure the acceptable performance of BCBSUW and UWS
Services.
3. SERVICES PROVIDED BY MERIDIAN IRS TO THE BCBSUW/UWS GROUP
a. SERVICES PROVIDED BY MERIDIAN IRS. Meridian IRS shall provide the
following services (together "Meridian IRS Services") to companies in the
BCBSUW/UWS Group, to the extent requested by any such individual company:
i. SUBROGATION AND RECOVERY SERVICES. Such subrogation and recovery
services as shall be necessary or appropriate for the conduct of any company in
the BCBSUW/UWS Group.
ii. FRAUD AND ABUSE INVESTIGATION SERVICES. Such fraud and abuse
investigation services as shall be necessary or appropriate for the conduct of
any company in the BCBSUW/UWS Group.
iii. COLLECTION SERVICES. Such collection services as shall be
necessary or appropriate for the conduct of any company in the BCBSUW/UWS Group.
4. COST ALLOCATION METHODS
a. LEASED EMPLOYEES.
i. TOTAL PERSONNEL COSTS. The term "Total Personnel Costs" shall
include all costs or expenses of whatever nature and from whatever origin
arising out of or related to the maintenance of an Employee. Such term shall
include, but shall not be limited to, the following costs, expenses, and
obligations:
a. salaries, wages, and bonuses;
b. profit sharing;
c. benefit plans;
d. payroll taxes;
e. employee insurance.
ii. ALLOCATION OF PERSONNEL COSTS. To the extent that Direct
Employees are leased to Meridian IRS, Total Personnel Costs associated with a
Direct Employee shall be directly charged to Meridian IRS on a monthly basis.
See Schedule 1.
b. BCBSUW AND UWS SERVICES. To the extent that BCBSUW/UWS Services are
rendered on behalf of or for the benefit of Meridian IRS, costs therefor shall
be allocated to Meridian IRS as follows:
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i. DIRECT CHARGES. Costs associated with those BCBSUW/UWS Services
identified on Schedule 1 shall be directly charged to Meridian IRS on a monthly
basis.
ii. INDIRECT ALLOCATIONS. Cost allocations for those BCBSUW/UWS
Services identified on Schedule 2 ("Schedule 2 Services") shall be determined
annually for the next succeeding Fiscal Year ("Fiscal Year" shall mean January 1
through December 31) on the basis of utilization and cost studies performed by
UWS. Through the use of Indirect Allocation Methods, as described in Schedule 3
attached hereto, utilization of Schedule 2 Services shall be reduced to an
allocation percentage for each company in the BCBSUW/UWS Group. Each month all
costs associated with the utilization of Schedule 2 Services shall be multiplied
by the allocation percentage of Meridian Corp to determine Meridian Corp's
allocable share of costs for Schedule 2 Services. Notwithstanding the
preceding, (i) allocation percentages are subject to interim Fiscal Year
adjustments to allocate more accurately costs based on actual utilization by
each company in the BCBSUW/UWS Group, (ii) costs associated with Schedule 2
Services performed directly for Meridian Corp shall be allocable to Meridian
Corp only, and (iii) subject to approval by the Vice President of Finance for
the BCBSUW/UWS Group, the Indirect Allocation Method used to allocate costs to
Meridian Corp for specific Schedule 2 Services shall be subject to agreement by
the parties on an annual basis.(1) Subsequently, indirect cost allocations to
Meridian Corp shall be allocated to each individual business unit within
Meridian Corp, including Meridian IRS, each month based on the ratio of the
unit's directly charged expenses to the total Meridian Corp directly charged
expenses. Notwithstanding the preceding sentence, costs associated with those
Schedule 2 Services not actually utilized by Meridian IRS, such as cost center
104 for the Meridian Madison office, shall not be allocated to Meridian IRS.
Schedule 2, attached hereto, sets forth Meridian Corp's annual allocation
percentage for costs and expenses associated with Schedule 2 Services. Schedule
2 shall be amended annually.
III. CHARGEBACKS. Costs associated with those BCBSUW/UWS Services
identified on Schedule 4 ("Chargeback Services") either shall be (i) indirectly
allocated to Meridian IRS as discussed in Section 4.b.ii, if the cost is a
general expense for providing the Chargeback Service to all users; or (ii)
directly charged to a Meridian IRS cost center, if the cost is an expense
specific to a Meridian IRS cost center. Thus, costs associated with Chargeback
Services shall be either directly charged or indirectly allocated to Meridian
IRS on a monthly basis, depending on the nature of the cost.
c. MERIDIAN IRS SERVICES. To the extent that Meridian IRS Services are
rendered on behalf of or for the benefit of a company in the BCBSUW/UWS Group
(excluding those companies that separately enter into third party contracts with
Meridian IRS for the provision of such services) costs therefor shall be
allocated to the respective company as follows:
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(1) Before granting approval of any negotiated change to the method of
allocating costs for a particular service, the following factors should be
considered: (i) compliance with FAS rules; (ii) other federal government
contracting implications; and (iii) feasibility.
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i. RECOVERY SERVICES. Each month, the total amount of recoveries
and/or savings (the term "savings" as used in this Section 4.C, shall mean
those costs that a company is not ultimately liable for due to discovery (i) of
a responsible third party, or (ii) that the cost is not covered by the
applicable contract) generated by the subrogation, recovery, and collection
services performed for companies in the BCBSUW/UWS Group pursuant to this
Agreement shall be determined ("Total Recovery Savings"). Subsequently, all
costs and expenses associated with such monthly Total Recovery Savings ("Cost
Center 95 Expenses") shall be allocated to individual companies in the
BCBSUW/UWS Group based on the ratio of recoveries/savings actually realized by
each individual company to the Total Recovery Savings.
ii. FRAUD AND ABUSE INVESTIGATIONS. Each month, the total amount of
recoveries and/or savings generated by the fraud and abuse investigation
services performed for companies in the BCBSUW/UWS Group pursuant to this
Agreement shall be determined ("Total Fraud Savings"). Subsequently, all costs
and expenses associated with such monthly Total Fraud Savings ("Cost Center 90
Expenses") shall be allocated to individual companies in the BCBSUW/UWS Group
based on the ratio of recoveries/savings actually realized by each individual
company to the Total Fraud Savings.
iii. OTHER ALLOCATED COSTS. In addition to costs and expenses
directly attributable to recovery and investigation services, as discussed in
Sections 4.c.i and 4.c.ii, costs and expenses associated with the Director of
Meridian IRS, including general support staff therefor ("Cost Center 92
Expenses"), shall be allocated to companies in the BCBSUW/UWS Group as follows:
Each month, (i) Cost Center 95 Expenses and Cost Center 90 Expenses ("Internal
Meridian IRS Service Costs"), and (ii) costs and expenses associated with
Meridian IRS Services performed pursuant to external third party contracts
("Cost Center 108 Expenses") shall be totaled ("Total Meridian IRS Service
Costs"). Subsequently, Cost Center 92 Expenses shall be allocated to individual
companies in the BCBSUW/UWS Group based on the ratio of Internal Meridian IRS
Service Costs actually allocated to each individual company in the BCBSUW/UWS
Group to the Total Meridian IRS Service Costs.
iv. FEDERAL EMPLOYEE PROGRAM COSTS. Notwithstanding the preceding,
to the extent that Meridian IRS Services are performed with respect to the
Federal Employee Program ("FEP"), cost allocations associated therewith must be
based on specific FEP rules and regulations, and thus, FEP cost allocations
shall be subject to negotiation by the respective parties on a case by case
basis.
d. FEES IN ADDITION TO ALLOCATED COSTS. To the extent that Meridian IRS
leases or utilizes the services of Employees from BCBSUW and/or UWS, and to the
extent that Meridian IRS utilizes BCBSUW/UWS Services, BCBSUW and/or UWS may
charge Meridian IRS a reasonable negotiated fee therefor, as set forth in
Schedule 5. To the extent that Meridian IRS provides Meridian IRS Services to
any company in the BCBSUW/UWS Group pursuant to this Agreement, Meridian IRS may
charge a reasonable negotiated fee therefor, as set forth in Schedule 6.
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5. SUBSTANTIATION OF AND REIMBURSEMENT FOR ALLOCATED COSTS
a. SUBSTANTIATION OF ALLOCATED COSTS. All costs and expenses shall be
allocated in a fair and reasonable manner. BCBSUW, UWS and Meridian IRS shall
maintain reasonable and appropriate operating procedures to allocate costs and
expenses so as to enable each party's independent certified public accounting
firm to audit such costs and the allocation thereof. At the end of each month,
(i) BCBSUW and/or UWS shall provide or make available to Meridian IRS
appropriate documentation respecting the costs and expenses that are allocated,
either directly or indirectly, to Meridian IRS for that month in sufficient
detail to permit Meridian IRS to identify the sources of such charges, and (ii)
Meridian IRS shall provide or make available to the BCBSUW/UWS Group appropriate
documentation respecting the costs and expenses that are allocated to individual
companies in the BCBSUW/UWS Group for that month for Meridian IRS Services in
sufficient detail to permit the identification of the sources of such charges.
b. REIMBURSEMENT FOR ALLOCATED COSTS. At the end of each month, not
later than the 30th day of the following month, (i) Meridian IRS shall promptly
reimburse BCBSUW and/or UWS for all costs and expenses incurred by BCBSUW and/or
UWS in furnishing or obtaining the Employees and Services provided for under
Sections I and II, which amount shall be based on the total of direct charges
and indirect allocations to Meridian IRS for the preceding month, and (ii) any
company in the BCBSUW/UWS Group on whose behalf Meridian IRS Services have been
rendered in the preceding month shall promptly reimburse Meridian IRS for all
costs and expenses incurred by Meridian IRS in furnishing Meridian IRS Services
thereto. Notwithstanding the preceding, the parties reserve the right to offset
amounts due to each other under this Agreement.
6. MODIFICATIONS TO LEASED EMPLOYEES AND BCBSUW/UWS SERVICES
a. MID-CONTRACT YEAR MODIFICATIONS. Each Contract Year, Meridian IRS
shall be required to utilize Employees and BCBSUW/UWS Services budgeted to
Meridian IRS for that Contract Year, unless otherwise negotiated by the parties.
("Contract Year" shall mean January 1 through December 31.) If, at any time
during the Contract Year, Meridian IRS requires employees, services or other
resources in addition to those budgeted to Meridian IRS by BCBSUW and UWS,
Meridian IRS may obtain such employees, services or resources from a source
outside of the BCBSUW/UWS Group only if Meridian IRS's additional needs cannot
be accommodated by BCBSUW or UWS.
b. CONTRACT YEAR RENEWAL MODIFICATIONS. Meridian IRS shall provide
BCBSUW and/or UWS with at least three (3) months' written notice prior to the
next Contract Year (unless the parties mutually agree upon a shorter period) of
its intent to do any of the following:
i. Increase or decrease the number or utilization of Employees or
BCBSUW/UWS Services with respect to the next Contract Year;
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ii. Obtain employees, services or other resources, which are
available either from BCBSUW or UWS, from a party outside the BCBSUW/UWS Group
with respect to the next Contract Year.
c. PROVISION OF SERVICES BY BCBSUW/UWS GROUP. BCBSUW and UWS have the
right to provide Employees and BCBSUW/UWS Services to Meridian IRS either
directly or indirectly, through any company in the BCBSUW/UWS Group. BCBSUW and
UWS may provide employees, services and other resources to Meridian IRS
indirectly through purchase from or contract with a source outside the
BCBSUW/UWS Group ("Outside Services") only with Meridian IRS's consent. Costs
for Outside Services shall be subject to a cost structure negotiated by the
parties hereto.
7. EXECUTION OF ANCILLARY AGREEMENTS
a. RIGHT TO REQUEST EXECUTION OF ANCILLARY AGREEMENTS. In the event of
the Change of Control (as hereinafter defined in this Section) of any party
hereto and while this Agreement remains in effect, BCBSUW, UWS or Meridian IRS
may, for the sole purpose of documenting in more detail the terms and respective
rights and obligations of the parties with respect to Employees and Services
provided hereunder, request that any of the following types of ancillary
agreements be executed by any parties hereto and effected thereby:
1. Employee Lease Agreement;
2. Office and Equipment Lease;
3. Management Information Systems Agreement;
4. Service Agreement(s); or
5. Any other Agreement deemed necessary or expedient by the parties
(together "Ancillary Agreements").
The terms of any executed Ancillary Agreement shall (i) be subject to
negotiation of the respective parties, and (ii) control in case of any conflict
with Sections 1 through 6 of this Agreement. Executed Ancillary Agreements
shall be attached to this Agreement as amendments hereto. "Change of Control"
for purposes of this section shall mean an event whereby a person, group, or
entity that is not affiliated with the BCBSUW/UWS Group purchases all or
substantially all of the assets or acquires the ownership of 50% or more of the
voting stock of a party hereto.
b. EFFECT OF A REQUEST TO EXECUTE. If any party hereto requests the
execution of an Ancillary Agreement ("Requesting Party"), the parties shall have
sixty 60 days (unless the parties hereto mutually agree to a different period)
to negotiate and execute the Ancillary Agreement, during which time the parties
hereto shall remain obligated to perform in accordance with the terms of this
Agreement. If after 60 days (unless a different period is mutually agreed upon
by the parties hereto) the requested Ancillary Agreement has not been
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executed, the Requesting Party may terminate this Agreement in accordance
with Section 9.b.ii. The parties hereby agree that any negotiations subject
to this Section 7.b shall be performed in good faith and every reasonable
effort shall be made to effect the execution of a requested Ancillary
Agreement.
8. ADDITIONAL COVENANTS
a. AVAILABILITY OF RECORDS. BCBSUW, UWS and Meridian IRS shall make
available to each other, for inspection, examination and copying, all of its
books and records pertaining to the Employees, BCBSUW/UWS Services, and Meridian
IRS Services provided under this Agreement each Contract Year:
i. At all reasonable times at the principal places of business of
BCBSUW, UWS, and Meridian IRS, or at such other place as the parties hereto may
otherwise agree to and designate;
ii. In a form maintained in accordance with generally accepted
accounting principles and with any other general standards or laws applicable to
such book or record;
iii. For a term of at least five (5) years, from the end of each
Contract Year, irrespective of the termination of this Agreement.
b. CONFIDENTIALITY.
i. The parties acknowledge and agree that they may deliver to each
other information about themselves and their business which is nonpublic,
confidential or proprietary in nature. All such information, regardless of the
manner in which it is delivered, is referred to as "Proprietary Information."
However, Proprietary Information does not include information which 1. is or
becomes generally available to the public other than as a result of a disclosure
by the other party, 2. was available to the other party on a nonconfidential
basis prior to its disclosure by the disclosing party, or 3. becomes available
to the other party on a nonconfidential basis from a person other than by the
disclosing party. Unless otherwise agreed to in writing by the disclosing
party, the other party shall a. except as required by law, keep all Proprietary
Information confidential and not disclose or reveal any Proprietary Information
to any person other than those employed by the other party, or who is actively
and directly participating in the performance under this Agreement on behalf of
the other party ("Involved Persons"); b. cause each Involved Person to keep all
Proprietary Information confidential and not disclose or reveal any Proprietary
Information to any person other than another Involved Person; and c. not use the
Proprietary Information, and ensure that each Involved Person does not use the
Proprietary Information, for any purpose other than in connection with the
performance under this Agreement.
ii. Upon termination of this Agreement for any reason whatsoever,
each party shall promptly surrender and deliver to each other party all records,
materials, documents, data and any other Proprietary Information of the other
parties and shall not retain
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any description containing or pertaining to any Proprietary Information of
the other parties, unless otherwise consented to in writing by a duly
authorized officer of BCBSUW, UWS or Meridian IRS as the case may be.
c. COVENANT NOT TO COMPETE. BCBSUW and UWS agree that no company in the
BCBSUW/UWS Group (excluding Meridian Corp) will directly compete with the
products or markets of Meridian IRS during the term of this Agreement. BCBSUW
and UWS further agree that for a period of two (2) years following the
termination of this Agreement for any reason, no company in the BCBSUW/UWS Group
(excluding Meridian Corp) will directly compete with Meridian IRS in any market
in which Meridian IRS operates or does business at the termination of this
Agreement.
d. COOPERATION. The parties hereto will fully cooperate with each other
and their respective counsel, if any, agents and accountants in connection with
any action to be taken in the performance of their obligations under this
Agreement. In the conduct of their affairs and the performance of this
Agreement the parties hereto shall, unless otherwise agreed, maintain the
working relationships of the parties on substantially the same terms as before
the execution of this Agreement. Notwithstanding the preceding, the parties do
not intend, nor should this Agreement be construed, to restrict any party's
ability to contract with any other person or entity to provide services similar
to or the same as those which are the subject of this Agreement.
9. TERM AND TERMINATION
a. TERM. This Agreement shall commence on the Effective Date and shall
automatically renew annually therefrom until such time as otherwise terminated
pursuant to Section 9.b.
b. TERMINATION.
i. This Agreement may be terminated by any party at any time by
giving one (1) years advance written notice to the nonterminating parties of its
intention to terminate.
ii. This Agreement may be terminated pursuant to Section 7.b by the
Requesting Party giving three (3) months advance written notice to the
nonterminating parties of its intention to terminate.
iii. This Agreement shall terminate immediately at the election of and
upon written notice from the non-defaulting party in the event of any of the
following:
(1) A party hereto becomes incapable of fully performing
its duties and obligations according to the terms of this
Agreement for the following reason(s): insolvency, bankruptcy,
or substantial cessation or interruption of its business
operations for any reason whatsoever;
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(2) A party hereto commits fraud or gross negligence in
performing its obligations under this Agreement;
HOWEVER, if the defaulting party provides the non-defaulting parties with prompt
notice of the event of default, the defaulting party shall have 30 days to cure
the defect, during which time the non-defaulting parties may not exercise the
termination right under this Section 9.b.iii.
iv. Liabilities After Termination. The termination of this Agreement
shall not limit the obligation or liabilities of any party hereto incurred but
not discharged prior to termination.
10. INDEMNIFICATION
a. INDEMNIFICATION BY MERIDIAN IRS.
i. Notwithstanding anything to the contrary in this Agreement,
neither BCBSUW, UWS, nor any other company in the BCBSUW/UWS Group (other than
Meridian Corp), nor any person who is or was, at the time of any action or
inaction affecting Meridian IRS, a director, officer, employee or agent of
BCBSUW, UWS or any other company in the BCBSUW/UWS Group (other than Meridian
Corp) (collectively "Indemnitees") shall be liable to Meridian IRS for any
action or inaction taken or omitted to be taken by such Indemnitee; PROVIDED,
HOWEVER, that such Indemnitee acted (or failed to act) in good faith and such
action or inaction does not constitute actual fraud, gross negligence or willful
or wanton misconduct.
ii. Meridian IRS shall, to the fullest extent not prohibited by law,
indemnify and hold harmless each Indemnitee against any liability, damage, cost,
expense, loss, claim or judgment (including, without limitation, reasonable
attorneys' fees and expenses) resulting to, imposed upon or incurred by such
Indemnitee a. in connection with any action, suit, arbitration or proceeding to
which such Indemnitee was or is a party or is threatened to be made a party by
reason of the Employees and BCBSUW/UWS Services provided to Meridian IRS
hereunder; PROVIDED, HOWEVER, that such Indemnitee acted (or failed to act) in
good faith and such action or inaction does not constitute actual fraud, gross
negligence or willful or wanton misconduct, or b. by reason of, arising out of
or resulting from any breach or misrepresentation by Meridian IRS under this
Agreement.
b. INDEMNIFICATION BY BCBSUW AND UWS.
i. Notwithstanding anything to the contrary in this Agreement,
neither Meridian Corp (as used in this Section 10.b, Meridian Corp shall include
Meridian IRS), nor any person who is or was, at the time of any action or
inaction affecting the BCBSUW/UWS Group (other than Meridian Corp), a director,
officer, employee or agent of Meridian Corp (collectively "Indemnitees") shall
be liable to any company in the BCBSUW/UWS Group for any action or inaction
taken or omitted to be taken by such Indemnitee; PROVIDED, HOWEVER, that such
Indemnitee acted (or failed to act) in good faith and
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such action or inaction does not constitute actual fraud, gross negligence or
willful or wanton misconduct.
ii. BCBSUW and UWS, jointly and severally, hereby agree to indemnify
and hold harmless, to the fullest extent not prohibited by law, each Indemnitee
against any liability, damage, cost, expense, loss, claim or judgment
(including, without limitation, reasonable attorneys' fees and expenses)
resulting to, imposed upon or incurred by such Indemnitee a. in connection with
any action, suit, arbitration or proceeding to which such Indemnitee was or is a
party or is threatened to be made a party by reason of the Meridian IRS Services
provided to the BCBSUW/UWS Group hereunder; PROVIDED, HOWEVER, that such
Indemnitee acted (or failed to act) in good faith and such action or inaction
does not constitute actual fraud, gross negligence or willful or wanton
misconduct, or b. by reason of, arising out of or resulting from any breach or
misrepresentation by BCBSUW or UWS under this Agreement.
11. MISCELLANEOUS
a. ASSIGNMENT. Neither this Agreement nor any rights or obligations
hereunder may be assigned or transferred by any of the parties hereto without
the prior written consent of the other parties. A Change of Control shall be
deemed an assignment requiring the consent of the other parties hereto.
b. AMENDMENT. The parties recognize that it may be desirable to alter
the terms of this Agreement in the future to take into account such events or
conditions as may from time to time occur. Any amendments to this Agreement
shall be in writing and shall be executed by all parties; however, Ancillary
Agreements need only be executed by the parties affected thereby.
c. WAIVER; REMEDIES. No failure or delay of a party in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. In
addition to any rights granted herein, the parties hereto shall have and may
exercise any and all rights and remedies now or hereafter provided by law except
as may be limited by Section 11.d of this Agreement.
d. RESOLUTION OF DISPUTES.
i. INFORMAL RESOLUTION.
(1) Coordinating Committee: Any conflicts or disputes
regarding 1. occupancy, utilization or delivery of BCBSUW/UWS
Services, or scheduling, performance and utilization of
Employees necessary for the conduct of Meridian IRS's
business, or 2. utilization or delivery of Meridian IRS
Services, shall be submitted to a coordinating committee for
resolution. The coordinating committee shall consist of three
(3)
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persons, each of whom shall 1. represent the respective
interest of a party hereto, and 2. be mutually agreed upon by
the parties hereto. If the coordinating committee is unable
to unanimously resolve the dispute, then the parties hereto
may resort to the dispute resolution process provided for in
Section 11.d.ii.
(2) Audit Committee: Any conflicts or disputes
regarding allocation methods, allocated costs, offsets, fees
or any matter related thereto shall be submitted to an audit
committee for resolution. The audit committee shall consist
of three (3) persons, each of whom shall 1. represent the
respective interest of a party hereto, and 2. be mutually
agreed upon by the parties hereto. If the audit committee is
unable to unanimously resolve the dispute, then the parties
hereto may resort to the dispute resolution process provided
for in Section 11.d.ii.
ii. FORMAL RESOLUTION.
(1) Any dispute, controversy or claim between or among
the parties hereto that arises out of or relates to this
Agreement or any Ancillary Agreement entered into pursuant
hereto, and which otherwise has been unresolved by a
coordinating committee pursuant to Section 11.d.i.(1) or an
audit committee pursuant to Section 11.d.i.(2) shall be settled
by arbitration. In order to initiate an arbitration, BCBSUW,
UWS or Meridian IRS (as the case may be) shall deliver a
written notice of demand for arbitration to the other affected
party(ies). Within thirty (30) days of the giving of such
written notice, each party involved shall appoint an
individual as arbitrator (the "Party Arbitrators"). Within
thirty (30) days of their appointment, the Party Arbitrators
shall collectively select one (or two if necessary to
constitute an odd total number of arbitrators) additional
arbitrator (together the "Panel Arbitrators") and shall give
the parties involved notice of such choice.
(2) The arbitration hearings shall be held in Milwaukee,
Wisconsin. Each party shall submit its case to the Panel
Arbitrators within sixty (60) days of the selection of the
Panel Arbitrators or within such longer period as may be
agreed by the Panel Arbitrators. The decision rendered by a
majority of the Panel Arbitrators shall be final and binding
on the parties involved. Such decision shall be a condition
precedent to any right of legal action arising out of the
arbitrated dispute. Judgment upon the award rendered may be
entered in any court having jurisdiction thereof.
(3) Each involved party shall a. pay the fees and
expenses of its own Party Arbitrator, and pay its own legal,
accounting, and other professional fees and expenses, b.
jointly share in the payment of the
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fees and expenses of the other one (or two) arbitrator(s)
selected by the Party Arbitrators, and c. jointly share in the
payment of the other expenses jointly incurred by the involved
parties directly related to the arbitration proceeding.
(4) Except as provided above, the arbitration shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association.
e. NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally, or if mailed (by registered or certified mail, postage
prepaid, return receipt requested), or if transmitted by facsimile or e-mail,
as follows:
1. If to BCBSUW:
Ms. Essie Whitelaw
Blue Cross & Blue Shield United of Wisconsin
1515 North RiverCenter Drive
Milwaukee, Wisconsin 53212
Facsimile Telephone Number: (414) 226-6700
With copies to:
Ms. Penny Siewert
Blue Cross & Blue Shield United of Wisconsin
N17W24340 Riverwood Drive
Waukesha, Wisconsin 53188
Facsimile Telephone Number: (414) 523-4920
2. If to UWS:
Mr. C. Edward Mordy
United Wisconsin Services, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
3. If to Meridian IRS:
Mr. Roger Formisano
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Meridian Resource Corporation
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
Any notice or other communication given as provided in this Section 11.e, shall
be deemed given upon the first business day after actual delivery to the party
to whom such notice or other communication is sent (as evidenced by the return
receipt or shipping invoice signed by a representative of such party or by the
facsimile confirmation or e-mail return receipt). Any party from time to time
may change its address for purpose of notices to that party by giving a similar
notice specifying a new address.
f. RELATIONSHIP OF THE PARTIES. Negotiations relating to this Agreement
have occurred and shall continue to be carried out on an arm's length basis.
Further, the employees, services and other resources contemplated by this
Agreement shall be provided to Meridian IRS on an independent contractor basis.
Nothing in this Agreement shall be construed to create an employer-employee
relationship between Meridian IRS and Employees or any of the parties hereto.
g. ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits referred to herein constitute the entire understanding and agreement of
the parties hereto and supersede all prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or be
construed to prohibit proof of prior understandings and agreements between or
among the parties to the extent necessary to properly construe or interpret this
Agreement. Notwithstanding the preceding, the parties acknowledge that there
are, and/or may be in the future, any number of independent third party
contracts between various companies in the BCBSUW/UWS Group for various services
and/or business arrangements, and any such contracts, whether written or oral,
shall survive the execution of this Agreement and any renewal hereof.
h. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement.
i. NO THIRD PARTY BENEFICIARIES. This Agreement is only for the benefit
of the parties hereto and does not confer any right, benefit, or privilege upon
any person or entity not a party to this Agreement.
j. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving effect to
principles of conflicts of laws) as to all matters, including, without
limitation, matters of validity, construction, effect, performance and remedies.
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k. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party under this Agreement will not be materially
and adversely affected thereby, 1. such provision will be fully severable, 2.
this Agreement will be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof, 3. the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid, or unenforceable provision or by its
severance herefrom, and 4. in lieu of such illegal, invalid, or unenforceable
provision, there will be added automatically as part of this Agreement, a legal,
valid, and enforceable provision as similar terms to such illegal, invalid, or
unenforceable provision as may be possible.
l. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the Effective Date.
BLUE CROSS BLUE SHIELD UNITED OF WISCONSIN
By:
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Title:
---------------------------------
By:
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Title:
---------------------------------
UNITED WISCONSIN SERVICES, INC.
By:
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Title:
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ON BEHALF OF MERIDIAN IRS, MERIDIAN RESOURCE CORPORATION
By:
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Title:
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INTERCOMPANY SERVICE AGREEMENT
This Intercompany Service Agreement ("Agreement") is entered into as
of this 1st day of January, 1998 ("Effective Date"), by and among Blue
Cross & Blue Shield United of Wisconsin, a service insurance corporation
organized pursuant to Ch. 613, Wisconsin Statutes ("BCBSUW"), United Wisconsin
Services, Inc., an insurance holding company organized pursuant to Ch. 180,
Wisconsin Statutes ("UWS"), and Meridian Resource Corporation, a corporation
organized pursuant to Ch. 180, Wisconsin Statutes ("Meridian Corp") on behalf of
its Consulting Services business unit ("Meridian Consulting").
RECITALS
WHEREAS, BCBSUW, UWS and Meridian Corp are affiliated corporations,
with Meridian Corp being a wholly owned subsidiary of UWS;
WHEREAS, Meridian Consulting is an unincorporated business unit of
Meridian Corp;
WHEREAS, there is an existing service agreement between BCBSUW and UWS
that extends to subsidiaries of UWS (BCBSUW, UWS and its subsidiaries shall
hereinafter be collectively referred to as "BCBSUW/UWS Group"), and this
Agreement is intended to further specify the services, costs, and allocation
methods contemplated by that service agreement;
WHEREAS, Meridian Consulting (i) provides consulting services,
including, but not limited to, the Meridian Profiling System, the Standard
Hospital Cost Index, and external accreditation services, to various companies
in the BCBSUW/UWS Group and to outside entities, all on a third party contract
basis, and (ii) through the Medicaid Evaluation and Decision Support Project
("MEDS"), provides the Wisconsin Bureau of Health Care Financing with various
services to support the daily management of the Wisconsin Medicaid program;
WHEREAS, UWS provides the employees and BCBSUW and UWS collectively
provide the other business resources and services necessary for the continued
operation of Meridian Consulting's business;
WHEREAS, by entering into this Agreement, the parties hereto wish to
establish clearly (i) an employee leasing arrangement; (ii) the services and
resources that BCBSUW and UWS will continue to provide to Meridian Consulting
and the compensation and cost allocations therefor; and (iii) the respective
rights and responsibilities of the parties.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and of the
mutual covenants hereinafter contained, the parties hereto agree as follows:
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1. LEASE OF EMPLOYEES
a. CLASSIFICATION OF EMPLOYEES.
i. "Direct Employees" are those UWS employees that are assigned to
perform all of their services for Meridian Consulting. (Direct Employees may
also be referred to herein as "Employees.")
b. LEASE OF EMPLOYEES.
i. OBLIGATION TO PROVIDE EMPLOYEES. UWS shall provide to Meridian
Consulting, to the extent requested by Meridian Consulting, the entire
requirement of Direct Employees for use in Meridian Consulting's business
according to such job descriptions, qualifications, experience, education, or
skills (collectively "Employee Specifications") as may be specified by Meridian
Consulting from time to time.
ii. INDEPENDENT HIRING. Notwithstanding Section 1.b.i and Meridian
Consulting's present intent to lease Direct Employees from UWS, Meridian
Consulting shall have the right, subject to Section 5, to obtain and hire
directly any or all employees from any other sources and on any terms to perform
such duties as Meridian Consulting may consider appropriate from time to time.
Should Meridian Consulting hire employees from other sources, it will not hire
any individual who was a BCBSUW or UWS Employee leased to Meridian Consulting
within three (3) months preceding such hiring, without the written consent of
BCBSUW and/or UWS.
iii. HUMAN RESOURCES DEPARTMENT. UWS's Human Resources Department
("Human Resources") shall be responsible for the implementation, management, and
operation of BCBSUW's and UWS's employee leasing obligations under this
Agreement. Employee Specifications shall be retained in the files of Human
Resources, and Meridian Consulting shall notify Human Resources at any time of
its intention to change such Employee Specifications for Direct Employees, at
which time Human Resources shall promptly make the requested changes to the
Employee Specifications.
c. OFFICERS. Employment, termination, and terms of employment of all
officers shall be reserved to the full Boards of Directors of BCBSUW and UWS,
provided, however, that while any such individual is leased to Meridian
Consulting to perform services as an officer, Meridian Consulting will be
consulted prior to all determinations regarding the employment, or terms
thereof, of such individuals; provided, however, that Meridian Consulting's
input shall be of an advisory nature and will not be binding on BCBSUW or UWS as
the common law employers of such individuals.
d. EMPLOYMENT RELATIONSHIPS. Human Resources shall establish performance
criteria or standards, which reflect the Employee Specifications supplied by
Meridian Consulting, for leased Direct Employees while performing services for
Meridian Consulting. Meridian Consulting shall advise Human Resources on the
performance of Direct Employees, and shall have the right to request
investigation, disciplinary action, reassignment, and removal
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of such employees. If at any time Meridian Consulting becomes dissatisfied
with the performance of a Direct Employee, Meridian Consulting shall have the
right to reject the continued lease of that particular employee and request a
replacement therefor. BCBSUW and UWS shall have the exclusive right, however,
to direct all BCBSUW and UWS employees, respectively, as to the manner in
which services are to be rendered and performance goals are to be achieved.
BCBSUW and UWS shall be, and shall have all the privileges, rights, and
responsibilities of, common law employers of all BCBSUW and UWS employees,
respectively, including, but not limited to, establishing work and
disciplinary rules, setting compensation levels, and directing each BCBSUW or
UWS Employee as to the manner in which daily duties are completed, whether or
not the employee actually performs services for BCBSUW, UWS or another
company in the BCBSUW/UWS Group. Employees leased to Meridian Consulting
pursuant to this Agreement shall remain employees of BCBSUW or UWS, and shall
in no way be treated as or considered employees of Meridian Consulting.
e. NOTIFICATION OF PERSONNEL COST CHANGES. With respect to Direct
Employees performing services for Meridian Consulting, if UWS adopts or
implements any change in compensation, employee benefit plans, or any other
fringe benefit that results in higher Total Personnel Costs (as defined at
Section 3.a.i) than those in existence as of the date of this Agreement, UWS
shall provide Meridian Consulting with written notice at least 30 days before
such change becomes effective (unless such change is required by law, in which
case Meridian Consulting will be notified as soon as possible), describing such
new benefit and the projected increase in the Total Personnel Costs.
2. SERVICES AND OTHER RESOURCES PROVIDED TO MERIDIAN CONSULTING
a. SERVICES AND RESOURCES PROVIDED BY BCBSUW. BCBSUW shall provide to
Meridian Consulting, to the extent requested by Meridian Consulting and subject
to Section 5, the following services and resources (together "BCBSUW Services").
BCBSUW shall supply BCBSUW Services only if Meridian Consulting has determined
not to have its own employees or third parties furnish the BCBSUW Services,
subject to Section 5.
i. OFFICE SPACE AND FACILITIES. Office space and facilities,
including, but not limited to, furniture and equipment, as shall be necessary or
appropriate for the conduct of Meridian Consulting's operations.
ii. BUILDING SERVICES. Building services, including, but not limited
to, repair and maintenance of any property and facilities made available
hereunder as shall be necessary to maintain such property and facilities in good
working order, and such other building services as may be necessary or
appropriate for the conduct of Meridian Consulting's business.
iii. OFFICE SERVICES. Such office services, including, but not
limited to, warehousing, transportation, stockroom, graphics, printing,
duplicating and forms management, as shall be necessary or appropriate for the
conduct of Meridian Consulting's business.
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iv. CENTRAL SYSTEMS. Such central systems, including, but not
limited to, management information systems, telecommunications, centralized
mailing, technology support and central data base maintenance, as shall be
necessary or appropriate for the conduct of Meridian Consulting's business.
v. ADMINISTRATIVE SERVICES. Such administrative services,
including, but not limited to, lobbyist activities, documentation and training,
as shall be necessary or appropriate for the conduct of Meridian Consulting's
business.
vi. COMPANY CAR AND TRAVEL. Availability and maintenance of vehicles
for company related travel and such other travel related services as shall be
necessary or appropriate for the conduct of Meridian Consulting's business.
b. SERVICES AND RESOURCES PROVIDED BY UWS. UWS shall provide to
Meridian Consulting, to the extent requested by Meridian Consulting and
subject to Section 5, the following services and resources (together "UWS
Services"). UWS shall supply UWS Services only if Meridian Consulting has
determined not to have its own employees or third parties furnish the UWS
Services, subject to Section 5.
i. CORPORATE SUPPORT SERVICES. Such corporate support services,
including, but not limited to, corporate compliance, legal, and government
relations, as shall be necessary or appropriate for the conduct of Meridian
Consulting's business.
ii. EXECUTIVE SERVICES. Such executive services as shall be
necessary or appropriate for the conduct of Meridian Consulting's business.
iii. MARKETING AND COMMUNICATIONS. Such marketing and communications
services, including, but not limited to, public relations and employee community
events, as shall be necessary or appropriate for the conduct of Meridian
Consulting's business.
iv. HUMAN RESOURCES. Such human resource services, including, but
not limited to, staffing, labor and employment relations, training and
development, and administration of payroll and employee benefits, as shall be
necessary or appropriate with respect to Employees utilized by Meridian
Consulting under this Agreement or otherwise necessary or appropriate for the
conduct of Meridian Consulting's business.
v. ACCOUNTING SERVICES. Such accounting, audit, bookkeeping and
financial statement preparation services as shall be necessary or appropriate
for the conduct of Meridian Consulting's business.
vi. FINANCIAL SERVICES. Such financial services, including, but not
limited to, cash management, tax, treasury, administration of financial systems,
corporate accounting, and strategic planning/consulting, as shall be necessary
or appropriate for the conduct of Meridian Consulting's business.
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vii. OTHER SERVICES. Such other services, including, but not limited
to, those provided by Compcare, Dentacare or Meridian Managed Care, as shall be
necessary or appropriate for the conduct of Meridian Consulting's business.
c. STAFFING. BCBSUW and UWS shall both maintain an adequate source of
qualified employees to ensure the acceptable performance of BCBSUW and UWS
Services.
3. COST ALLOCATION METHODS
a. LEASED EMPLOYEES.
i. TOTAL PERSONNEL COSTS. The term "Total Personnel Costs" shall
include all costs or expenses of whatever nature and from whatever origin
arising out of or related to the maintenance of an Employee. Such term shall
include, but shall not be limited to, the following costs, expenses, and
obligations:
a. salaries, wages, and bonuses;
b. profit sharing;
c. benefit plans;
d. payroll taxes;
e. employee insurance.
ii. ALLOCATION OF PERSONNEL COSTS. To the extent that Direct
Employees are leased to Meridian Consulting, Total Personnel Costs associated
with a Direct Employee shall be directly charged to Meridian Consulting on a
monthly basis. See Schedule 1.
b. BCBSUW AND UWS SERVICES. To the extent that BCBSUW/UWS Services are
rendered on behalf of or for the benefit of Meridian Consulting, costs therefor
shall be allocated to Meridian Consulting as follows:
i. DIRECT CHARGES. Costs associated with those BCBSUW/UWS Services
identified on Schedule 1 shall be directly charged to Meridian Consulting on a
monthly basis.
ii. INDIRECT ALLOCATIONS. Cost allocations for those BCBSUW/UWS
Services identified on Schedule 2 ("Schedule 2 Services") shall be determined
annually for the next succeeding Fiscal Year ("Fiscal Year" shall mean January 1
through December 31) on the basis of utilization and cost studies performed by
UWS. Through the use of Indirect Allocation Methods, as described in Schedule 3
attached hereto, utilization of Schedule 2 Services shall be reduced to an
allocation percentage for each company in the BCBSUW/UWS Group. Each month all
costs associated with the utilization of Schedule 2 Services shall be multiplied
by the allocation percentage of Meridian Corp to determine Meridian Corp's
allocable share of costs for Schedule 2 Services. Notwithstanding the
preceding, (i) allocation percentages are subject to interim Fiscal Year
adjustments to allocate more accurately costs based on actual utilization by
each company in the BCBSUW/UWS Group, (ii) costs associated
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with Schedule 2 Services performed directly for Meridian Corp shall be
allocable to Meridian Corp only, and (iii) subject to approval by the Vice
President of Finance for the BCBSUW/UWS Group, the Indirect Allocation Method
used to allocate costs to Meridian Corp for specific Schedule 2 Services
shall be subject to agreement by the parties on an annual basis.(1)
Subsequently, indirect cost allocations to Meridian Corp shall be allocated
to each individual business unit within Meridian Corp, including Meridian
Consulting, each month based on the ratio of the unit's directly charged
expenses to the total Meridian Corp directly charged expenses. Schedule 2,
attached hereto, sets forth Meridian Corp's annual allocation percentage for
costs and expenses associated with Schedule 2 Services. Schedule 2 shall be
amended annually.
iii. CHARGEBACKS. Costs associated with those BCBSUW/UWS Services
identified on Schedule 4 ("Chargeback Services") either shall be (i) indirectly
allocated to Meridian Consulting as discussed in Section 3.b.ii, if the cost is
a general expense for providing the Chargeback Service to all users; or (ii)
directly charged to a Meridian Consulting cost center, if the cost is an expense
specific to a Meridian Consulting cost center. Thus, costs associated with
Chargeback Services shall be either directly charged or indirectly allocated to
Meridian Consulting on a monthly basis, depending on the nature of the cost.
c. FEES IN ADDITION TO ALLOCATED COSTS. To the extent that Meridian
Consulting leases or utilizes the services of Employees from BCBSUW and/or UWS,
and to the extent that Meridian Consulting utilizes BCBSUW/UWS Services, BCBSUW
and/or UWS may charge Meridian Consulting a reasonable negotiated fee therefor,
as set forth in Schedule 5.
4. SUBSTANTIATION OF AND REIMBURSEMENT FOR ALLOCATED COSTS
a. SUBSTANTIATION OF ALLOCATED COSTS. All costs and expenses shall be
allocated in a fair and reasonable manner. BCBSUW and UWS shall maintain
reasonable and appropriate operating procedures to allocate costs and expenses
so as to enable Meridian Consulting's independent certified public accounting
firm to audit such costs and the allocation thereof. At the end of each month,
BCBSUW and/or UWS shall provide or make available to Meridian Consulting
appropriate documentation respecting the costs and expenses that are allocated,
either directly or indirectly, to Meridian Consulting for that month in
sufficient detail to permit Meridian Consulting to identify the sources of such
charges.
b. REIMBURSEMENT FOR ALLOCATED COSTS. At the end of each month, not
later than the 30th day of the following month, Meridian Consulting shall
promptly reimburse BCBSUW and/or UWS for all costs and expenses incurred by
BCBSUW and/or UWS in furnishing or obtaining the Employees and Services provided
for under Sections I and II, which amount shall be based on the total of direct
charges and indirect allocations to Meridian
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(1) Before granting approval of any negotiated change to the method of
allocating costs for a particular service, the following factors should be
considered: (i) compliance with FAS rules; (ii) other federal government
contracting implications; and (iii) feasibility.
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Consulting for the preceding month. Notwithstanding the preceding, Meridian
Consulting reserves the right to offset any amounts due to BCBSUW and/or UWS
under this Agreement against other obligations of BCBSUW and/or UWS to
Meridian Consulting.
5. MODIFICATIONS TO LEASED EMPLOYEES AND BCBSUW/UWS SERVICES
a. MID-CONTRACT YEAR MODIFICATIONS. Each Contract Year, Meridian
Consulting shall be required to utilize Employees and BCBSUW/UWS Services
budgeted to Meridian Consulting for that Contract Year, unless otherwise
negotiated by the parties. ("Contract Year" shall mean January 1 through
December 31.) If, at any time during the Contract Year, Meridian Consulting
requires employees, services or other resources in addition to those budgeted to
Meridian Consulting by BCBSUW and UWS, Meridian Consulting may obtain such
employees, services or resources from a source outside of the BCBSUW/UWS Group
only if Meridian Consulting's additional needs cannot be accommodated by BCBSUW
or UWS.
b. CONTRACT YEAR RENEWAL MODIFICATIONS. Meridian Consulting shall
provide BCBSUW and/or UWS with at least three (3) months' written notice prior
to the next Contract Year (unless the parties mutually agree upon a shorter
period) of its intent to do any of the following:
i. Increase or decrease the number or utilization of Employees or
BCBSUW/UWS Services with respect to the next Contract Year;
ii. Obtain employees, services or other resources, which are
available either from BCBSUW or UWS, from a party outside the BCBSUW/UWS Group
with respect to the next Contract Year.
c. PROVISION OF SERVICES BY BCBSUW/UWS GROUP. BCBSUW and UWS have the
right to provide Employees and BCBSUW/UWS Services to Meridian Consulting either
directly or indirectly, through any company in the BCBSUW/UWS Group. BCBSUW and
UWS may provide employees, services and other resources to Meridian Consulting
indirectly through purchase from or contract with a source outside the
BCBSUW/UWS Group ("Outside Services") only with Meridian Consulting's consent.
Costs for Outside Services shall be subject to a cost structure negotiated by
the parties hereto.
6. EXECUTION OF ANCILLARY AGREEMENTS
a. RIGHT TO REQUEST EXECUTION OF ANCILLARY AGREEMENTS. In the event of
the Change of Control (as hereinafter defined in this Section) of any party
hereto and while this Agreement remains in effect, BCBSUW, UWS or Meridian
Consulting may, for the sole purpose of documenting in more detail the terms and
respective rights and obligations of the parties with respect to Employees and
Services provided hereunder, request that any of the following types of
ancillary agreements be executed by any parties hereto and effected thereby:
1. Employee Lease Agreement;
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2. Office and Equipment Lease;
3. Management Information Systems Agreement;
4. Service Agreement(s); or
5. Any other Agreement deemed necessary or expedient by the parties
(together "Ancillary Agreements").
The terms of any executed Ancillary Agreement shall (i) be subject to
negotiation of the respective parties, and (ii) control in case of any conflict
with Sections 1 through 5 of this Agreement. Executed Ancillary Agreements
shall be attached to this Agreement as amendments hereto. "Change of Control"
for purposes of this section shall mean an event whereby a person, group, or
entity that is not affiliated with the BCBSUW/UWS Group purchases all or
substantially all of the assets or acquires the ownership of 50% or more of the
voting stock of a party hereto.
b. EFFECT OF A REQUEST TO EXECUTE. If any party hereto requests the
execution of an Ancillary Agreement ("Requesting Party"), the parties shall have
sixty 60 days (unless the parties hereto mutually agree to a different period)
to negotiate and execute the Ancillary Agreement, during which time the parties
hereto shall remain obligated to perform in accordance with the terms of this
Agreement. If after 60 days (unless a different period is mutually agreed upon
by the parties hereto) the requested Ancillary Agreement has not been executed,
the Requesting Party may terminate this Agreement in accordance with Section
8.b.ii. The parties hereby agree that any negotiations subject to this
Section 6.b shall be performed in good faith and every reasonable effort shall
be made to effect the execution of a requested Ancillary Agreement.
7. ADDITIONAL COVENANTS
a. AVAILABILITY OF RECORDS. BCBSUW and UWS shall make available to
Meridian Consulting, for inspection, examination and copying, all of its books
and records pertaining to the Employees and BCBSUW/UWS Services provided under
this Agreement each Contract Year:
i. At all reasonable times at the principal places of business of
BCBSUW and UWS, or at such other place as the parties hereto may otherwise agree
to and designate;
ii. In a form maintained in accordance with generally accepted
accounting principles and with any other general standards or laws applicable to
such book or record;
iii. For a term of at least five (5) years, from the end of each
Contract Year, irrespective of the termination of this Agreement.
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b. CONFIDENTIALITY.
i. The parties acknowledge and agree that they may deliver to each
other information about themselves and their business which is nonpublic,
confidential or proprietary in nature. All such information, regardless of the
manner in which it is delivered, is referred to as "Proprietary Information."
However, Proprietary Information does not include information which 1. is or
becomes generally available to the public other than as a result of a disclosure
by the other party, 2. was available to the other party on a nonconfidential
basis prior to its disclosure by the disclosing party, or 3. becomes available
to the other party on a nonconfidential basis from a person other than by the
disclosing party. Unless otherwise agreed to in writing by the disclosing
party, the other party shall a. except as required by law, keep all Proprietary
Information confidential and not disclose or reveal any Proprietary Information
to any person other than those employed by the other party, or who is actively
and directly participating in the performance under this Agreement on behalf of
the other party ("Involved Persons"); b. cause each Involved Person to keep all
Proprietary Information confidential and not disclose or reveal any Proprietary
Information to any person other than another Involved Person; and c. not use the
Proprietary Information, and ensure that each Involved Person does not use the
Proprietary Information, for any purpose other than in connection with the
performance under this Agreement.
ii. Upon termination of this Agreement for any reason whatsoever,
each party shall promptly surrender and deliver to each other party all records,
materials, documents, data and any other Proprietary Information of the other
parties and shall not retain any description containing or pertaining to any
Proprietary Information of the other parties, unless otherwise consented to in
writing by a duly authorized officer of BCBSUW, UWS or Meridian Consulting as
the case may be.
c. COVENANT NOT TO COMPETE. BCBSUW and UWS agree that no company in the
BCBSUW/UWS Group (excluding Meridian Corp) will directly compete with the
products or markets of Meridian Consulting during the term of this Agreement.
BCBSUW and UWS further agree that for a period of two (2) years following the
termination of this Agreement for any reason, no company in the BCBSUW/UWS Group
(excluding Meridian Corp) will directly compete with Meridian Consulting in any
market in which Meridian Consulting operates or does business at the termination
of this Agreement.
d. COOPERATION. The parties hereto will fully cooperate with each other
and their respective counsel, if any, agents and accountants in connection with
any action to be taken in the performance of their obligations under this
Agreement. In the conduct of their affairs and the performance of this
Agreement the parties hereto shall, unless otherwise agreed, maintain the
working relationships of the parties on substantially the same terms as before
the execution of this Agreement. Notwithstanding the preceding, the parties do
not intend, nor should this Agreement be construed, to restrict any party's
ability to contract with any other person or entity to provide services similar
to or the same as those which are the subject of this Agreement.
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8. TERM AND TERMINATION
a. TERM. This Agreement shall commence on the Effective Date and shall
automatically renew annually therefrom until such time as otherwise terminated
pursuant to Section 8.b.
b. TERMINATION.
i. This Agreement may be terminated by any party at any time by
giving one (1) years advance written notice to the nonterminating parties of its
intention to terminate.
ii. This Agreement may be terminated pursuant to Section 6.b by the
Requesting Party giving three (3) months advance written notice to the
nonterminating parties of its intention to terminate.
iii. This Agreement shall terminate immediately at the election of and
upon written notice from the non-defaulting party in the event of any of the
following:
(1) A party hereto becomes incapable of fully performing
its duties and obligations according to the terms of this
Agreement for the following reason(s): insolvency, bankruptcy,
or substantial cessation or interruption of its business
operations for any reason whatsoever;
(2) A party hereto commits fraud or gross negligence in
performing its obligations under this Agreement;
HOWEVER, if the defaulting party provides the non-defaulting parties with prompt
notice of the event of default, the defaulting party shall have 30 days to cure
the defect, during which time the non-defaulting parties may not exercise the
termination right under this Section 8.b.iii.
iv. Liabilities After Termination. The termination of this Agreement
shall not limit the obligation or liabilities of any party hereto incurred but
not discharged prior to termination.
9. INDEMNIFICATION
a. INDEMNIFICATION BY MERIDIAN CONSULTING.
i. Notwithstanding anything to the contrary in this Agreement,
neither BCBSUW, UWS, nor any other company in the BCBSUW/UWS Group (other than
Meridian Corp), nor any person who is or was, at the time of any action or
inaction affecting Meridian Consulting, a director, officer, employee or agent
of BCBSUW, UWS or any other company in the BCBSUW/UWS Group (other than Meridian
Corp) (collectively "Indemnitees") shall be liable to Meridian Consulting for
any action or inaction taken or omitted to be taken by such Indemnitee;
PROVIDED, HOWEVER, that such Indemnitee acted (or
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failed to act) in good faith and such action or inaction does not constitute
actual fraud, gross negligence or willful or wanton misconduct.
ii. Meridian Consulting shall, to the fullest extent not prohibited
by law, indemnify and hold harmless each Indemnitee against any liability,
damage, cost, expense, loss, claim or judgment (including, without limitation,
reasonable attorneys' fees and expenses) resulting to, imposed upon or incurred
by such Indemnitee a. in connection with any action, suit, arbitration or
proceeding to which such Indemnitee was or is a party or is threatened to be
made a party by reason of the Employees and BCBSUW/UWS Services provided to
Meridian Consulting hereunder; PROVIDED, HOWEVER, that such Indemnitee acted (or
failed to act) in good faith and such action or inaction does not constitute
actual fraud, gross negligence or willful or wanton misconduct, or b. by reason
of, arising out of or resulting from any breach or misrepresentation by Meridian
Consulting under this Agreement.
b. INDEMNIFICATION BY BCBSUW AND UWS. BCBSUW and UWS, jointly and
severally, hereby agree to indemnify and hold harmless Meridian Consulting, and
its successors and assigns, from and against any liability, damage, cost,
expense, loss, claim or judgment (including, without limitation, reasonable
attorneys' fees and expenses) resulting to, imposed upon or incurred by Meridian
Consulting by reason of, arising out of or resulting from any breach or
misrepresentation by BCBSUW or UWS under this Agreement.
10. MISCELLANEOUS
a. ASSIGNMENT. Neither this Agreement nor any rights or obligations
hereunder may be assigned or transferred by any of the parties hereto without
the prior written consent of the other parties. A Change of Control shall be
deemed an assignment requiring the consent of the other parties hereto.
b. AMENDMENT. The parties recognize that it may be desirable to alter
the terms of this Agreement in the future to take into account such events or
conditions as may from time to time occur. Any amendments to this Agreement
shall be in writing and shall be executed by all parties; however, Ancillary
Agreements need only be executed by the parties affected thereby.
c. WAIVER; REMEDIES. No failure or delay of a party in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. In
addition to any rights granted herein, the parties hereto shall have and may
exercise any and all rights and remedies now or hereafter provided by law except
as may be limited by Section 10.d of this Agreement.
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d. RESOLUTION OF DISPUTES.
i. INFORMAL RESOLUTION.
(1) Coordinating Committee: Any conflicts or disputes
regarding occupancy, utilization or delivery of BCBSUW/UWS
Services, or scheduling, performance and utilization of
Employees necessary for the conduct of Meridian Consulting's
business shall be submitted to a coordinating committee for
resolution. The coordinating committee shall consist of three
(3) persons, each of whom shall 1. represent the respective
interest of a party hereto, and 2. be mutually agreed upon by
the parties hereto. If the coordinating committee is unable to
unanimously resolve the dispute, then the parties hereto may
resort to the dispute resolution process provided for in
Section 10.d.ii.
(2) Audit Committee: Any conflicts or disputes
regarding allocation methods, allocated costs, offsets, fees
or any matter related thereto shall be submitted to an audit
committee for resolution. The audit committee shall consist
of three (3) persons, each of whom shall 1. represent the
respective interest of a party hereto, and 2. be mutually
agreed upon by the parties hereto. If the audit committee is
unable to unanimously resolve the dispute, then the parties
hereto may resort to the dispute resolution process provided
for in Section 10.d.ii.
ii. FORMAL RESOLUTION.
(1) Any dispute, controversy or claim between or among
the parties hereto that arises out of or relates to this
Agreement or any Ancillary Agreement entered into pursuant
hereto, and which otherwise has been unresolved by a
coordinating committee pursuant to Section 10.d.i(1) or an
audit committee pursuant to Section 10.d.i(2) shall be settled
by arbitration. In order to initiate an arbitration, BCBSUW,
UWS or Meridian Consulting (as the case may be) shall deliver
a written notice of demand for arbitration to the other
affected party(ies). Within thirty (30) days of the giving of
such written notice, each party involved shall appoint an
individual as arbitrator (the "Party Arbitrators"). Within
thirty (30) days of their appointment, the Party Arbitrators
shall collectively select one (or two if necessary to
constitute an odd total number of arbitrators) additional
arbitrator (together the "Panel Arbitrators") and shall give
the parties involved notice of such choice.
(2) The arbitration hearings shall be held in Milwaukee,
Wisconsin. Each party shall submit its case to the Panel
Arbitrators within sixty (60) days of the selection of the
Panel Arbitrators or within such longer period as may be
agreed by the Panel Arbitrators. The decision rendered by a
majority of the Panel Arbitrators shall be final
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and binding on the parties involved. Such decision shall be a
condition precedent to any right of legal action arising out
of the arbitrated dispute. Judgment upon the award rendered
may be entered in any court having jurisdiction thereof.
(3) Each involved party shall a. pay the fees and
expenses of its own Party Arbitrator, and pay its own legal,
accounting, and other professional fees and expenses, b.
jointly share in the payment of the fees and expenses of the
other one (or two) arbitrator(s) selected by the Party
Arbitrators, and c. jointly share in the payment of the other
expenses jointly incurred by the involved parties directly
related to the arbitration proceeding.
(4) Except as provided above, the arbitration shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association.
e. NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally, or if mailed (by registered or certified mail, postage
prepaid, return receipt requested), or if transmitted by facsimile or e-mail,
as follows:
1. If to BCBSUW:
Ms. Essie Whitelaw
Blue Cross & Blue Shield United of Wisconsin
1515 North RiverCenter Drive
Milwaukee, Wisconsin 53212
Facsimile Telephone Number: (414) 226-6700
With copies to:
Ms. Penny Siewert
Blue Cross & Blue Shield United of Wisconsin
N17W24340 Riverwood Drive
Waukesha, Wisconsin 53188
Facsimile Telephone Number: (414) 523-4920
2. If to UWS:
Mr. C. Edward Mordy
United Wisconsin Services, Inc.
401 West Michigan Street
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P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
3. If to Meridian Consulting:
Mr. Roger Formisano
Meridian Resource Corporation
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
Any notice or other communication given as provided in this Section 10.e, shall
be deemed given upon the first business day after actual delivery to the party
to whom such notice or other communication is sent (as evidenced by the return
receipt or shipping invoice signed by a representative of such party or by the
facsimile confirmation or e-mail return receipt). Any party from time to time
may change its address for purpose of notices to that party by giving a similar
notice specifying a new address.
f. RELATIONSHIP OF THE PARTIES. Negotiations relating to this Agreement
have occurred and shall continue to be carried out on an arm's length basis.
Further, the employees, services and other resources contemplated by this
Agreement shall be provided to Meridian Consulting on an independent contractor
basis. Nothing in this Agreement shall be construed to create an
employer-employee relationship between Meridian Consulting and Employees or any
of the parties hereto.
g. ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits referred to herein constitute the entire understanding and agreement of
the parties hereto and supersede all prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or be
construed to prohibit proof of prior understandings and agreements between or
among the parties to the extent necessary to properly construe or interpret this
Agreement. Notwithstanding the preceding, the parties acknowledge that there
are, and/or may be in the future, any number of independent third party
contracts between various companies in the BCBSUW/UWS Group for various services
and/or business arrangements, and any such contracts, whether written or oral,
shall survive the execution of this Agreement and any renewal hereof.
h. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement.
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i. NO THIRD PARTY BENEFICIARIES. This Agreement is only for the benefit
of the parties hereto and does not confer any right, benefit, or privilege upon
any person or entity not a party to this Agreement.
j. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving effect to
principles of conflicts of laws) as to all matters, including, without
limitation, matters of validity, construction, effect, performance and remedies.
k. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party under this Agreement will not be materially
and adversely affected thereby, 1. such provision will be fully severable, 2.
this Agreement will be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof, 3. the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid, or unenforceable provision or by its
severance herefrom, and 4. in lieu of such illegal, invalid, or unenforceable
provision, there will be added automatically as part of this Agreement, a legal,
valid, and enforceable provision as similar terms to such illegal, invalid, or
unenforceable provision as may be possible.
l. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the Effective Date.
BLUE CROSS BLUE SHIELD UNITED OF WISCONSIN
By:
------------------------------------
Title:
---------------------------------
By:
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Title:
---------------------------------
UNITED WISCONSIN SERVICES, INC.
By:
------------------------------------
Title:
---------------------------------
ON BEHALF OF MERIDIAN CONSULTING, MERIDIAN RESOURCE CORPORATION
By:
------------------------------------
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Title:
---------------------------------
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INTERCOMPANY SERVICE AGREEMENT
This Intercompany Service Agreement ("Agreement") is entered into as
of this 1st day of January, 1998 ("Effective Date"), by and among Blue
Cross & Blue Shield United of Wisconsin, a service insurance corporation
organized pursuant to Ch. 613, Wisconsin Statutes ("BCBSUW"), United Wisconsin
Services, Inc., an insurance holding company organized pursuant to Ch. 180,
Wisconsin Statutes ("UWS"), and Meridian Resource Corporation, a corporation
organized pursuant to Ch. 180, Wisconsin Statutes ("Meridian Corp") on behalf of
its Audit Services business unit ("Meridian Audit").
RECITALS
WHEREAS, BCBSUW, UWS and Meridian Corp are affiliated corporations,
with Meridian Corp being a wholly owned subsidiary of UWS;
WHEREAS, Meridian Audit is an unincorporated business unit of Meridian
Corp;
WHEREAS, there is an existing service agreement between BCBSUW and UWS
that extends to subsidiaries of UWS (BCBSUW, UWS and its subsidiaries shall
hereinafter be collectively referred to as "BCBSUW/UWS Group"), and this
Agreement is intended to further specify the services, costs, and allocation
methods contemplated by that service agreement;
WHEREAS, Meridian Audit provides hospital bill audit services to
various companies in the BCBSUW/UWS Group on a third party contract basis, and
Meridian Audit also contracts with outside entities to provide hospital bill
audit and claims audit services;
WHEREAS, UWS provides the employees and BCBSUW and UWS collectively
provide the other business resources and services necessary for the continued
operation of Meridian Audit's business;
WHEREAS, by entering into this Agreement, the parties hereto wish to
establish clearly (i) an employee leasing arrangement; (ii) the services and
resources that BCBSUW and UWS will continue to provide to Meridian Audit and the
compensation and cost allocations therefor; and (iii) the respective rights and
responsibilities of the parties.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and of the
mutual covenants hereinafter contained, the parties hereto agree as follows:
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1. LEASE OF EMPLOYEES
a. CLASSIFICATION OF EMPLOYEES.
i. "Direct Employees" are those UWS employees that are assigned to
perform all of their services for Meridian Audit. (Direct Employees may also be
referred to herein as "Employees.")
b. LEASE OF EMPLOYEES.
i. OBLIGATION TO PROVIDE EMPLOYEES. UWS shall provide to Meridian
Audit, to the extent requested by Meridian Audit, the entire requirement of
Direct Employees for use in Meridian Audit's business according to such job
descriptions, qualifications, experience, education, or skills (collectively
"Employee Specifications") as may be specified by Meridian Audit from time to
time.
ii. INDEPENDENT HIRING. Notwithstanding Section 1.b.i and Meridian
Audit's present intent to lease Direct Employees from UWS, Meridian Audit shall
have the right, subject to Section 5, to obtain and hire directly any or all
employees from any other sources and on any terms to perform such duties as
Meridian Audit may consider appropriate from time to time. Should Meridian
Audit hire employees from other sources, it will not hire any individual who was
a BCBSUW or UWS Employee leased to Meridian Audit within three (3) months
preceding such hiring, without the written consent of BCBSUW and/or UWS.
iii. HUMAN RESOURCES DEPARTMENT. UWS's Human Resources Department
("Human Resources") shall be responsible for the implementation, management, and
operation of BCBSUW's and UWS's employee leasing obligations under this
Agreement. Employee Specifications shall be retained in the files of Human
Resources, and Meridian Audit shall notify Human Resources at any time of its
intention to change such Employee Specifications for Direct Employees, at which
time Human Resources shall promptly make the requested changes to the Employee
Specifications.
c. OFFICERS. Employment, termination, and terms of employment of all
officers shall be reserved to the full Boards of Directors of BCBSUW and UWS,
provided, however, that while any such individual is leased to Meridian Audit to
perform services as an officer, Meridian Audit will be consulted prior to all
determinations regarding the employment, or terms thereof, of such individuals;
provided, however, that Meridian Audit's input shall be of an advisory nature
and will not be binding on BCBSUW or UWS as the common law employers of such
individuals.
d. EMPLOYMENT RELATIONSHIPS. Human Resources shall establish performance
criteria or standards, which reflect the Employee Specifications supplied by
Meridian Audit, for leased Direct Employees while performing services for
Meridian Audit. Meridian Audit shall advise Human Resources on the performance
of Direct Employees, and shall have the right to request investigation,
disciplinary action, reassignment, and removal of such employees. If at any
time Meridian Audit becomes dissatisfied with the performance of a
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Direct Employee, Meridian Audit shall have the right to reject the continued
lease of that particular employee and request a replacement therefor. BCBSUW
and UWS shall have the exclusive right, however, to direct all BCBSUW and UWS
employees, respectively, as to the manner in which services are to be
rendered and performance goals are to be achieved. BCBSUW and UWS shall be,
and shall have all the privileges, rights, and responsibilities of, common
law employers of all BCBSUW and UWS employees, respectively, including, but
not limited to, establishing work and disciplinary rules, setting
compensation levels, and directing each BCBSUW or UWS Employee as to the
manner in which daily duties are completed, whether or not the employee
actually performs services for BCBSUW, UWS or another company in the
BCBSUW/UWS Group. Employees leased to Meridian Audit pursuant to this
Agreement shall remain employees of BCBSUW or UWS, and shall in no way be
treated as or considered employees of Meridian Audit.
e. NOTIFICATION OF PERSONNEL COST CHANGES. With respect to Direct
Employees performing services for Meridian Audit, if UWS adopts or implements
any change in compensation, employee benefit plans, or any other fringe benefit
that results in higher Total Personnel Costs (as defined at Section 3.a.i)
than those in existence as of the date of this Agreement, UWS shall provide
Meridian Audit with written notice at least 30 days before such change becomes
effective (unless such change is required by law, in which case Meridian Audit
will be notified as soon as possible), describing such new benefit and the
projected increase in the Total Personnel Costs.
2. SERVICES AND OTHER RESOURCES PROVIDED TO MERIDIAN AUDIT
a. SERVICES AND RESOURCES PROVIDED BY BCBSUW. BCBSUW shall provide to
Meridian Audit, to the extent requested by Meridian Audit and subject to
Section 5, the following services and resources (together "BCBSUW Services").
BCBSUW shall supply BCBSUW Services only if Meridian Audit has determined
not to have its own employees or third parties furnish the BCBSUW Services,
subject to Section 5.
i. OFFICE SPACE AND FACILITIES. Office space and facilities,
including, but not limited to, furniture and equipment, as shall be necessary or
appropriate for the conduct of Meridian Audit's operations.
ii. BUILDING SERVICES. Building services, including, but not limited
to, repair and maintenance of any property and facilities made available
hereunder as shall be necessary to maintain such property and facilities in good
working order, and such other building services as may be necessary or
appropriate for the conduct of Meridian Audit's business.
iii. OFFICE SERVICES. Such office services, including, but not
limited to, warehousing, transportation, stockroom, graphics, printing,
duplicating and forms management, as shall be necessary or appropriate for the
conduct of Meridian Audit's business.
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iv. CENTRAL SYSTEMS. Such central systems, including, but not
limited to, management information systems, telecommunications, centralized
mailing, technology support and central data base maintenance, as shall be
necessary or appropriate for the conduct of Meridian Audit's business.
v. ADMINISTRATIVE SERVICES. Such administrative services,
including, but not limited to, lobbyist activities, documentation and training,
as shall be necessary or appropriate for the conduct of Meridian Audit's
business.
vi. COMPANY CAR AND TRAVEL. Availability and maintenance of vehicles
for company related travel and such other travel related services as shall be
necessary or appropriate for the conduct of Meridian Audit's business.
b. SERVICES AND RESOURCES PROVIDED BY UWS. UWS shall provide to Meridian
Audit, to the extent requested by Meridian Audit and subject to Section 5, the
following services and resources (together "UWS Services"). UWS shall supply
UWS Services only if Meridian Audit has determined not to have its own employees
or third parties furnish the UWS Services, subject to Section 5.
i. CORPORATE SUPPORT SERVICES. Such corporate support services,
including, but not limited to, corporate compliance, legal, and government
relations, as shall be necessary or appropriate for the conduct of Meridian
Audit's business.
ii. EXECUTIVE SERVICES. Such executive services as shall be
necessary or appropriate for the conduct of Meridian Audit's business.
iii. MARKETING AND COMMUNICATIONS. Such marketing and communications
services, including, but not limited to, public relations and employee community
events, as shall be necessary or appropriate for the conduct of Meridian Audit's
business.
iv. HUMAN RESOURCES. Such human resource services, including, but
not limited to, staffing, labor and employment relations, training and
development, and administration of payroll and employee benefits, as shall be
necessary or appropriate with respect to Employees utilized by Meridian Audit
under this Agreement or otherwise necessary or appropriate for the conduct of
Meridian Audit's business.
v. ACCOUNTING SERVICES. Such accounting, audit, bookkeeping and
financial statement preparation services as shall be necessary or appropriate
for the conduct of Meridian Audit's business.
vi. FINANCIAL SERVICES. Such financial services, including, but not
limited to, cash management, tax, treasury, administration of financial systems,
corporate accounting, and strategic planning/consulting, as shall be necessary
or appropriate for the conduct of Meridian Audit's business.
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vii. OTHER SERVICES. Such other services, including, but not limited
to, those provided by Compcare, Dentacare or Meridian Managed Care, as shall be
necessary or appropriate for the conduct of Meridian Audit's business.
c. STAFFING. BCBSUW and UWS shall both maintain an adequate source of
qualified employees to ensure the acceptable performance of BCBSUW and UWS
Services.
3. COST ALLOCATION METHODS
a. LEASED EMPLOYEES.
i. TOTAL PERSONNEL COSTS. The term "Total Personnel Costs" shall
include all costs or expenses of whatever nature and from whatever origin
arising out of or related to the maintenance of an Employee. Such term shall
include, but shall not be limited to, the following costs, expenses, and
obligations:
a. salaries, wages, and bonuses;
b. profit sharing;
c. benefit plans;
d. payroll taxes;
e. employee insurance.
ii. ALLOCATION OF PERSONNEL COSTS. To the extent that Direct
Employees are leased to Meridian Audit, Total Personnel Costs associated with a
Direct Employee shall be directly charged to Meridian Audit on a monthly basis.
See Schedule 1.
b. BCBSUW AND UWS SERVICES. To the extent that BCBSUW/UWS Services are
rendered on behalf of or for the benefit of Meridian Audit, costs therefor shall
be allocated to Meridian Audit as follows:
i. DIRECT CHARGES. Costs associated with those BCBSUW/UWS Services
identified on Schedule 1 shall be directly charged to Meridian Audit on a
monthly basis.
ii. INDIRECT ALLOCATIONS. Cost allocations for those BCBSUW/UWS
Services identified on Schedule 2 ("Schedule 2 Services") shall be determined
annually for the next succeeding Fiscal Year ("Fiscal Year" shall mean January 1
through December 31) on the basis of utilization and cost studies performed by
UWS. Through the use of Indirect Allocation Methods, as described in Schedule 3
attached hereto, utilization of Schedule 2 Services shall be reduced to an
allocation percentage for each company in the BCBSUW/UWS Group. Each month all
costs associated with the utilization of Schedule 2 Services shall be multiplied
by the allocation percentage of Meridian Corp to determine Meridian Corp's
allocable share of costs for Schedule 2 Services. Notwithstanding the
preceding, (i) allocation percentages are subject to interim Fiscal Year
adjustments to allocate more accurately costs based on actual utilization by
each company in the BCBSUW/UWS Group, (ii) costs associated with Schedule 2
Services performed directly for Meridian Corp shall be allocable to Meridian
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Corp only, and (iii) subject to approval by the Vice President of Finance for
the BCBSUW/UWS Group, the Indirect Allocation Method used to allocate costs
to Meridian Corp for specific Schedule 2 Services shall be subject to
agreement by the parties on an annual basis.(1) Subsequently, indirect cost
allocations to Meridian Corp shall be allocated to each individual business
unit within Meridian Corp, including Meridian Audit, each month based on the
ratio of the unit's directly charged expenses to the total Meridian Corp
directly charged expenses. Notwithstanding the preceding sentence, costs
associated with those Schedule 2 Services not actually utilized by Meridian
Audit, such as cost center 104 for the Meridian Madison office, shall not be
allocated to Meridian Audit. Schedule 2, attached hereto, sets forth Meridian
Corp's annual allocation percentage for costs and expenses associated with
Schedule 2 Services. Schedule 2 shall be amended annually.
iii. CHARGEBACKS. Costs associated with those BCBSUW/UWS Services
identified on Schedule 4 ("Chargeback Services") either shall be (i) indirectly
allocated to Meridian Audit as discussed in Section 3.b.ii, if the cost is a
general expense for providing the Chargeback Service to all users; or (ii)
directly charged to a Meridian Audit cost center, if the cost is an expense
specific to a Meridian Audit cost center. Thus, costs associated with
Chargeback Services shall be either directly charged or indirectly allocated to
Meridian Audit on a monthly basis, depending on the nature of the cost.
c. FEES IN ADDITION TO ALLOCATED COSTS. To the extent that Meridian
Audit leases or utilizes the services of Employees from BCBSUW and/or UWS, and
to the extent that Meridian Audit utilizes BCBSUW/UWS Services, BCBSUW and/or
UWS may charge Meridian Audit a reasonable negotiated fee therefor, as set forth
in Schedule 5.
4. SUBSTANTIATION OF AND REIMBURSEMENT FOR ALLOCATED COSTS
a. SUBSTANTIATION OF ALLOCATED COSTS. All costs and expenses shall be
allocated in a fair and reasonable manner. BCBSUW and UWS shall maintain
reasonable and appropriate operating procedures to allocate costs and expenses
so as to enable Meridian Audit's independent certified public accounting firm to
audit such costs and the allocation thereof. At the end of each month, BCBSUW
and/or UWS shall provide or make available to Meridian Audit appropriate
documentation respecting the costs and expenses that are allocated, either
directly or indirectly, to Meridian Audit for that month in sufficient detail to
permit Meridian Audit to identify the sources of such charges.
b. REIMBURSEMENT FOR ALLOCATED COSTS. At the end of each month, not
later than the 30th day of the following month, Meridian Audit shall promptly
reimburse BCBSUW and/or UWS for all costs and expenses incurred by BCBSUW and/or
UWS in furnishing or obtaining the Employees and Services provided for under
Sections I and II, which amount shall be based on the total of direct charges
and indirect allocations to Meridian Audit for the
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(1) Before granting approval of any negotiated change to the method of
allocating costs for a particular service, the following factors should be
considered: (i) compliance with FAS rules; (ii) other federal government
contracting implications; and (iii) feasibility.
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preceding month. Notwithstanding the preceding, Meridian Audit reserves the
right to offset any amounts due to BCBSUW and/or UWS under this Agreement
against other obligations of BCBSUW and/or UWS to Meridian Audit.
5. MODIFICATIONS TO LEASED EMPLOYEES AND BCBSUW/UWS SERVICES
a. MID-CONTRACT YEAR MODIFICATIONS. Each Contract Year, Meridian Audit
shall be required to utilize Employees and BCBSUW/UWS Services budgeted to
Meridian Audit for that Contract Year, unless otherwise negotiated by the
parties. ("Contract Year" shall mean January 1 through December 31.) If, at any
time during the Contract Year, Meridian Audit requires employees, services or
other resources in addition to those budgeted to Meridian Audit by BCBSUW and
UWS, Meridian Audit may obtain such employees, services or resources from a
source outside of the BCBSUW/UWS Group only if Meridian Audit's additional needs
cannot be accommodated by BCBSUW or UWS.
b. CONTRACT YEAR RENEWAL MODIFICATIONS. Meridian Audit shall provide
BCBSUW and/or UWS with at least three (3) months' written notice prior to the
next Contract Year (unless the parties mutually agree upon a shorter period) of
its intent to do any of the following:
i. Increase or decrease the number or utilization of Employees or
BCBSUW/UWS Services with respect to the next Contract Year;
ii. Obtain employees, services or other resources, which are
available either from BCBSUW or UWS, from a party outside the BCBSUW/UWS Group
with respect to the next Contract Year.
c. PROVISION OF SERVICES BY BCBSUW/UWS GROUP. BCBSUW and UWS have the
right to provide Employees and BCBSUW/UWS Services to Meridian Audit either
directly or indirectly, through any company in the BCBSUW/UWS Group. BCBSUW and
UWS may provide employees, services and other resources to Meridian Audit
indirectly through purchase from or contract with a source outside the
BCBSUW/UWS Group ("Outside Services") only with Meridian Audit's consent.
Costs for Outside Services shall be subject to a cost structure negotiated by
the parties hereto.
6. EXECUTION OF ANCILLARY AGREEMENTS
a. RIGHT TO REQUEST EXECUTION OF ANCILLARY AGREEMENTS. In the event of
the Change of Control (as hereinafter defined in this Section) of any party
hereto and while this Agreement remains in effect, BCBSUW, UWS or Meridian Audit
may, for the sole purpose of documenting in more detail the terms and respective
rights and obligations of the parties with respect to Employees and Services
provided hereunder, request that any of the following types of ancillary
agreements be executed by any parties hereto and effected thereby:
1. Employee Lease Agreement;
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2. Office and Equipment Lease;
3. Management Information Systems Agreement;
4. Service Agreement(s); or
5. Any other Agreement deemed necessary or expedient by the parties
(together "Ancillary Agreements").
The terms of any executed Ancillary Agreement shall (i) be subject to
negotiation of the respective parties, and (ii) control in case of any conflict
with Sections 1 through 5 of this Agreement. Executed Ancillary Agreements
shall be attached to this Agreement as amendments hereto. "Change of Control"
for purposes of this section shall mean an event whereby a person, group, or
entity that is not affiliated with the BCBSUW/UWS Group purchases all or
substantially all of the assets or acquires the ownership of 50% or more of the
voting stock of a party hereto.
b. EFFECT OF A REQUEST TO EXECUTE. If any party hereto requests the
execution of an Ancillary Agreement ("Requesting Party"), the parties shall have
sixty 60 days (unless the parties hereto mutually agree to a different period)
to negotiate and execute the Ancillary Agreement, during which time the parties
hereto shall remain obligated to perform in accordance with the terms of this
Agreement. If after 60 days (unless a different period is mutually agreed upon
by the parties hereto) the requested Ancillary Agreement has not been executed,
the Requesting Party may terminate this Agreement in accordance with Section
8.b.ii. The parties hereby agree that any negotiations subject to this
Section 6.b shall be performed in good faith and every reasonable effort shall
be made to effect the execution of a requested Ancillary Agreement.
7. ADDITIONAL COVENANTS
a. AVAILABILITY OF RECORDS. BCBSUW and UWS shall make available to
Meridian Audit, for inspection, examination and copying, all of its books and
records pertaining to the Employees and BCBSUW/UWS Services provided under this
Agreement each Contract Year:
i. At all reasonable times at the principal places of business of
BCBSUW and UWS, or at such other place as the parties hereto may otherwise agree
to and designate;
ii. In a form maintained in accordance with generally accepted
accounting principles and with any other general standards or laws applicable to
such book or record;
iii. For a term of at least five (5) years, from the end of each
Contract Year, irrespective of the termination of this Agreement.
b. CONFIDENTIALITY.
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i. The parties acknowledge and agree that they may deliver to each
other information about themselves and their business which is nonpublic,
confidential or proprietary in nature. All such information, regardless of the
manner in which it is delivered, is referred to as "Proprietary Information."
However, Proprietary Information does not include information which 1. is or
becomes generally available to the public other than as a result of a disclosure
by the other party, 2. was available to the other party on a nonconfidential
basis prior to its disclosure by the disclosing party, or 3. becomes available
to the other party on a nonconfidential basis from a person other than by the
disclosing party. Unless otherwise agreed to in writing by the disclosing
party, the other party shall a. except as required by law, keep all Proprietary
Information confidential and not disclose or reveal any Proprietary Information
to any person other than those employed by the other party, or who is actively
and directly participating in the performance under this Agreement on behalf of
the other party ("Involved Persons"); b. cause each Involved Person to keep all
Proprietary Information confidential and not disclose or reveal any Proprietary
Information to any person other than another Involved Person; and c. not use the
Proprietary Information, and ensure that each Involved Person does not use the
Proprietary Information, for any purpose other than in connection with the
performance under this Agreement.
ii. Upon termination of this Agreement for any reason whatsoever,
each party shall promptly surrender and deliver to each other party all records,
materials, documents, data and any other Proprietary Information of the other
parties and shall not retain any description containing or pertaining to any
Proprietary Information of the other parties, unless otherwise consented to in
writing by a duly authorized officer of BCBSUW, UWS or Meridian Audit as the
case may be.
c. COVENANT NOT TO COMPETE. BCBSUW and UWS agree that no company in the
BCBSUW/UWS Group (excluding Meridian Corp) will directly compete with the
products or markets of Meridian Audit during the term of this Agreement. BCBSUW
and UWS further agree that for a period of two (2) years following the
termination of this Agreement for any reason, no company in the BCBSUW/UWS Group
(excluding Meridian Corp) will directly compete with Meridian Audit in any
market in which Meridian Audit operates or does business at the termination of
this Agreement.
d. COOPERATION. The parties hereto will fully cooperate with each other
and their respective counsel, if any, agents and accountants in connection with
any action to be taken in the performance of their obligations under this
Agreement. In the conduct of their affairs and the performance of this
Agreement the parties hereto shall, unless otherwise agreed, maintain the
working relationships of the parties on substantially the same terms as before
the execution of this Agreement. Notwithstanding the preceding, the parties do
not intend, nor should this Agreement be construed, to restrict any party's
ability to contract with any other person or entity to provide services similar
to or the same as those which are the subject of this Agreement.
8. TERM AND TERMINATION
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a. TERM. This Agreement shall commence on the Effective Date and shall
automatically renew annually therefrom until such time as otherwise terminated
pursuant to Section 8.b.
b. TERMINATION.
i. This Agreement may be terminated by any party at any time by
giving one (1) years advance written notice to the nonterminating parties of its
intention to terminate.
ii. This Agreement may be terminated pursuant to Section 6.b by the
Requesting Party giving three (3) months advance written notice to the
nonterminating parties of its intention to terminate.
iii. This Agreement shall terminate immediately at the election of and
upon written notice from the non-defaulting party in the event of any of the
following:
(1) A party hereto becomes incapable of fully performing
its duties and obligations according to the terms of this
Agreement for the following reason(s): insolvency, bankruptcy,
or substantial cessation or interruption of its business
operations for any reason whatsoever;
(2) A party hereto commits fraud or gross negligence in
performing its obligations under this Agreement;
HOWEVER, if the defaulting party provides the non-defaulting parties with prompt
notice of the event of default, the defaulting party shall have 30 days to cure
the defect, during which time the non-defaulting parties may not exercise the
termination right under this Section 8.b.iii.
iv. Liabilities After Termination. The termination of this Agreement
shall not limit the obligation or liabilities of any party hereto incurred but
not discharged prior to termination.
9. INDEMNIFICATION
a. INDEMNIFICATION BY MERIDIAN AUDIT.
i. Notwithstanding anything to the contrary in this Agreement,
neither BCBSUW, UWS, nor any other company in the BCBSUW/UWS Group (other than
Meridian Corp), nor any person who is or was, at the time of any action or
inaction affecting Meridian Audit, a director, officer, employee or agent of
BCBSUW, UWS or any other company in the BCBSUW/UWS Group (other than Meridian
Corp) (collectively "Indemnitees") shall be liable to Meridian Audit for any
action or inaction taken or omitted to be taken by such Indemnitee; PROVIDED,
HOWEVER, that such Indemnitee acted (or failed to act) in good faith and such
action or inaction does not constitute actual fraud, gross negligence or willful
or wanton misconduct.
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ii. Meridian Audit shall, to the fullest extent not prohibited by
law, indemnify and hold harmless each Indemnitee against any liability, damage,
cost, expense, loss, claim or judgment (including, without limitation,
reasonable attorneys' fees and expenses) resulting to, imposed upon or incurred
by such Indemnitee a. in connection with any action, suit, arbitration or
proceeding to which such Indemnitee was or is a party or is threatened to be
made a party by reason of the Employees and BCBSUW/UWS Services provided to
Meridian Audit hereunder; PROVIDED, HOWEVER, that such Indemnitee acted (or
failed to act) in good faith and such action or inaction does not constitute
actual fraud, gross negligence or willful or wanton misconduct, or b. by reason
of, arising out of or resulting from any breach or misrepresentation by Meridian
Audit under this Agreement.
b. INDEMNIFICATION BY BCBSUW AND UWS. BCBSUW and UWS, jointly and
severally, hereby agree to indemnify and hold harmless Meridian Audit, and its
successors and assigns, from and against any liability, damage, cost, expense,
loss, claim or judgment (including, without limitation, reasonable attorneys'
fees and expenses) resulting to, imposed upon or incurred by Meridian Audit by
reason of, arising out of or resulting from any breach or misrepresentation by
BCBSUW or UWS under this Agreement.
10. MISCELLANEOUS
a. ASSIGNMENT. Neither this Agreement nor any rights or obligations
hereunder may be assigned or transferred by any of the parties hereto without
the prior written consent of the other parties. A Change of Control shall be
deemed an assignment requiring the consent of the other parties hereto.
b. AMENDMENT. The parties recognize that it may be desirable to alter
the terms of this Agreement in the future to take into account such events or
conditions as may from time to time occur. Any amendments to this Agreement
shall be in writing and shall be executed by all parties; however, Ancillary
Agreements need only be executed by the parties affected thereby.
c. WAIVER; REMEDIES. No failure or delay of a party in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. In
addition to any rights granted herein, the parties hereto shall have and may
exercise any and all rights and remedies now or hereafter provided by law except
as may be limited by Section 10.d of this Agreement.
d. RESOLUTION OF DISPUTES.
i. INFORMAL RESOLUTION.
(1) Coordinating Committee: Any conflicts or disputes
regarding occupancy, utilization or delivery of BCBSUW/UWS
Services, or scheduling, performance and utilization of
Employees necessary for the
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conduct of Meridian Audit's business shall be submitted to a
coordinating committee for resolution. The coordinating
committee shall consist of three (3) persons, each of whom
shall 1. represent the respective interest of a party hereto,
and 2. be mutually agreed upon by the parties hereto. If the
coordinating committee is unable to unanimously resolve the
dispute, then the parties hereto may resort to the dispute
resolution process provided for in Section 10.d.ii.
(2) Audit Committee: Any conflicts or disputes
regarding allocation methods, allocated costs, offsets, fees
or any matter related thereto shall be submitted to an audit
committee for resolution. The audit committee shall consist
of three (3) persons, each of whom shall 1. represent the
respective interest of a party hereto, and 2. be mutually
agreed upon by the parties hereto. If the audit committee is
unable to unanimously resolve the dispute, then the parties
hereto may resort to the dispute resolution process provided
for in Section 10.d.ii.
ii. FORMAL RESOLUTION.
(1) Any dispute, controversy or claim between or among
the parties hereto that arises out of or relates to this
Agreement or any Ancillary Agreement entered into pursuant
hereto, and which otherwise has been unresolved by a
coordinating committee pursuant to Section 10.d.i(1) or an
audit committee pursuant to Section 10.d.i(2) shall be settled
by arbitration. In order to initiate an arbitration, BCBSUW,
UWS or Meridian Audit (as the case may be) shall deliver a
written notice of demand for arbitration to the other affected
party(ies). Within thirty (30) days of the giving of such
written notice, each party involved shall appoint an
individual as arbitrator (the "Party Arbitrators"). Within
thirty (30) days of their appointment, the Party Arbitrators
shall collectively select one (or two if necessary to
constitute an odd total number of arbitrators) additional
arbitrator (together the "Panel Arbitrators") and shall give
the parties involved notice of such choice.
(2) The arbitration hearings shall be held in Milwaukee,
Wisconsin. Each party shall submit its case to the Panel
Arbitrators within sixty (60) days of the selection of the
Panel Arbitrators or within such longer period as may be
agreed by the Panel Arbitrators. The decision rendered by a
majority of the Panel Arbitrators shall be final and binding
on the parties involved. Such decision shall be a condition
precedent to any right of legal action arising out of the
arbitrated dispute. Judgment upon the award rendered may be
entered in any court having jurisdiction thereof.
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(3) Each involved party shall a. pay the fees and
expenses of its own Party Arbitrator, and pay its own legal,
accounting, and other professional fees and expenses, b.
jointly share in the payment of the fees and expenses of the
other one (or two) arbitrator(s) selected by the Party
Arbitrators, and c. jointly share in the payment of the other
expenses jointly incurred by the involved parties directly
related to the arbitration proceeding.
(4) Except as provided above, the arbitration shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association.
e. NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally, or if mailed (by registered or certified mail, postage
prepaid, return receipt requested), or if transmitted by facsimile or e-mail, as
follows:
1. If to BCBSUW:
Ms. Essie Whitelaw
Blue Cross & Blue Shield United of Wisconsin
1515 North RiverCenter Drive
Milwaukee, Wisconsin 53212
Facsimile Telephone Number: (414) 226-6700
With copies to:
Ms. Penny Siewert
Blue Cross & Blue Shield United of Wisconsin
N17W24340 Riverwood Drive
Waukesha, Wisconsin 53188
Facsimile Telephone Number: (414) 523-4920
2. If to UWS:
Mr. C. Edward Mordy
United Wisconsin Services, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
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3. If to Meridian Audit:
Mr. Roger Formisano
Meridian Resource Corporation
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
Any notice or other communication given as provided in this Section 10.e, shall
be deemed given upon the first business day after actual delivery to the party
to whom such notice or other communication is sent (as evidenced by the return
receipt or shipping invoice signed by a representative of such party or by the
facsimile confirmation or e-mail return receipt). Any party from time to time
may change its address for purpose of notices to that party by giving a similar
notice specifying a new address.
f. RELATIONSHIP OF THE PARTIES. Negotiations relating to this Agreement
have occurred and shall continue to be carried out on an arm's length basis.
Further, the employees, services and other resources contemplated by this
Agreement shall be provided to Meridian Audit on an independent contractor
basis. Nothing in this Agreement shall be construed to create an
employer-employee relationship between Meridian Audit and Employees or any of
the parties hereto.
g. ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits referred to herein constitute the entire understanding and agreement of
the parties hereto and supersede all prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or be
construed to prohibit proof of prior understandings and agreements between or
among the parties to the extent necessary to properly construe or interpret this
Agreement. Notwithstanding the preceding, the parties acknowledge that there
are, and/or may be in the future, any number of independent third party
contracts between various companies in the BCBSUW/UWS Group for various services
and/or business arrangements, and any such contracts, whether written or oral,
shall survive the execution of this Agreement and any renewal hereof.
h. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement.
i. NO THIRD PARTY BENEFICIARIES. This Agreement is only for the benefit
of the parties hereto and does not confer any right, benefit, or privilege upon
any person or entity not a party to this Agreement.
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j. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving effect to
principles of conflicts of laws) as to all matters, including, without
limitation, matters of validity, construction, effect, performance and remedies.
k. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party under this Agreement will not be materially
and adversely affected thereby, 1. such provision will be fully severable, 2.
this Agreement will be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof, 3. the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid, or unenforceable provision or by its
severance herefrom, and 4. in lieu of such illegal, invalid, or unenforceable
provision, there will be added automatically as part of this Agreement, a legal,
valid, and enforceable provision as similar terms to such illegal, invalid, or
unenforceable provision as may be possible.
l. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the Effective Date.
BLUE CROSS BLUE SHIELD UNITED OF WISCONSIN
By:
------------------------------------
Title:
---------------------------------
By:
------------------------------------
Title:
---------------------------------
UNITED WISCONSIN SERVICES, INC.
By:
------------------------------------
Title:
---------------------------------
ON BEHALF OF MERIDIAN AUDIT, MERIDIAN RESOURCE CORPORATION
By:
------------------------------------
Title:
---------------------------------
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INTERCOMPANY SERVICE AGREEMENT
This Intercompany Service Agreement ("Agreement") is entered into as
of this 1st day of January, 1998 ("Effective Date"), by and among Blue
Cross & Blue Shield United of Wisconsin, a service insurance corporation
organized pursuant to Ch. 613, Wisconsin Statutes ("BCBSUW"), United Wisconsin
Services, Inc., an insurance holding company organized pursuant to Ch. 180,
Wisconsin Statutes ("UWS"), and United Wisconsin Proservices, Inc., a
corporation organized pursuant to Ch. 180, Wisconsin Statutes ("Proservices").
RECITALS
WHEREAS, BCBSUW, UWS and Proservices are affiliated corporations, with
Proservices being a wholly owned subsidiary of UWS;
WHEREAS, there is an existing service agreement between BCBSUW and UWS
that extends to subsidiaries of UWS (BCBSUW, UWS and its subsidiaries shall
hereinafter be collectively referred to as "BCBSUW/UWS Group"), and this
Agreement is intended to further specify the services, costs, and allocation
methods contemplated by that service agreement;
WHEREAS, Proservices created and operates an electronic billing and
claims network that links health care providers and payors throughout Wisconsin
and elsewhere;
WHEREAS, BCBSUW provides the employees and BCBSUW and UWS collectively
provide the other business resources and services necessary for the continued
operation of Proservices' business; and
WHEREAS, by entering into this Agreement, the parties hereto wish to
establish clearly (i) an employee leasing arrangement; (ii) the services and
resources that BCBSUW and UWS will continue to provide to Proservices and the
compensation and cost allocations therefor; and (iii) the respective rights and
responsibilities of the parties.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and of the
mutual covenants hereinafter contained, the parties hereto agree as follows:
1. LEASE OF EMPLOYEES
a. CLASSIFICATION OF EMPLOYEES.
i. "Direct Employees" are those BCBSUW employees that are assigned
to perform all of their services for Proservices.
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ii. "Dual Capacity Employees" are those BCBSUW employees assigned to
the United Government Services business unit who perform services for
Proservices. (Direct and Dual Capacity Employees may collectively be referred to
herein as "Employees.")
b. LEASE OF EMPLOYEES.
i. OBLIGATION TO PROVIDE EMPLOYEES. BCBSUW shall provide to
Proservices, to the extent requested by Proservices, the entire requirement of
Direct Employees for use in Proservices' business according to such job
descriptions, qualifications, experience, education, or skills (collectively
"Employee Specifications") as may be specified by Proservices from time to time.
BCBSUW shall also provide to Proservices, to the extent requested by
Proservices, the entire requirement of Dual Capacity Employees for use in
Proservices' business. Dual Capacity Employees shall meet Employee
Specifications that are mutually acceptable to BCBSUW and Proservices.
ii. INDEPENDENT HIRING. Notwithstanding Section 1.b.i and
Proservices' present intent to lease Direct and Dual Capacity Employees from
BCBSUW, Proservices shall have the right, subject to Section 5, to obtain and
hire directly any or all employees from any other sources and on any terms to
perform such duties as Proservices may consider appropriate from time to time.
Should Proservices hire employees from other sources, it will not hire any
individual who was a BCBSUW or UWS Employee leased to Proservices within three
(3) months preceding such hiring, without the written consent of BCBSUW and/or
UWS.
iii. HUMAN RESOURCES DEPARTMENT. UWS's Human Resources Department
("Human Resources") shall be responsible for the implementation, management, and
operation of BCBSUW's and UWS's employee leasing obligations under this
Agreement. Employee Specifications shall be retained in the files of Human
Resources, and Proservices shall notify Human Resources at any time of its
intention to change such Employee Specifications for Direct Employees, at which
time Human Resources shall promptly make the requested changes to the Employee
Specifications. Changes to Employee Specifications of Dual Capacity Employees
must be mutually agreed to by BCBSUW and Proservices prior to implementation by
Human Resources.
c. OFFICERS. Employment, termination, and terms of employment of all
officers shall be reserved to the full Boards of Directors of BCBSUW and UWS,
provided, however, that while any such individual is leased to Proservices to
perform services as an officer, Proservices will be consulted prior to all
determinations regarding the employment, or terms thereof, of such individuals;
provided, however, that Proservices' input shall be of an advisory nature and
will not be binding on BCBSUW or UWS as the common law employers of such
individuals.
d. EMPLOYMENT RELATIONSHIPS. Human Resources shall establish performance
criteria or standards, which reflect the Employee Specifications supplied by
Proservices, for leased Direct Employees and for leased Dual Capacity Employees
while performing services for
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Proservices. Proservices shall advise Human Resources on the performance of
Direct and Dual Capacity Employees, and shall have the right to request
investigation, disciplinary action, reassignment, and removal of such
employees. If at any time Proservices becomes dissatisfied with the
performance of a Direct or Dual Capacity Employee, Proservices shall have the
right to reject the continued lease of that particular employee and request a
replacement therefor. BCBSUW and UWS shall have the exclusive right,
however, to direct all BCBSUW and UWS employees, respectively, as to the
manner in which services are to be rendered and performance goals are to be
achieved. BCBSUW and UWS shall be, and shall have all the privileges,
rights, and responsibilities of, common law employers of all BCBSUW and UWS
employees, respectively, including, but not limited to, establishing work and
disciplinary rules, setting compensation levels, and directing each BCBSUW or
UWS Employee as to the manner in which daily duties are completed, whether or
not the employee actually performs services for BCBSUW, UWS or another
company in the BCBSUW/UWS Group. Employees leased to Proservices pursuant to
this Agreement shall remain employees of BCBSUW or UWS, and shall in no way
be treated as or considered employees of Proservices.
e. NOTIFICATION OF PERSONNEL COST CHANGES. With respect to Direct and
Dual Capacity Employees performing services for Proservices, if BCBSUW adopts or
implements any change in compensation, employee benefit plans, or any other
fringe benefit that results in higher Total Personnel Costs (as defined at
Section 3.a.i) than those in existence as of the date of this Agreement,
BCBSUW shall provide Proservices with written notice at least 30 days before
such change becomes effective (unless such change is required by law, in which
case Proservices will be notified as soon as possible), describing such new
benefit and the projected increase in the Total Personnel Costs.
2. SERVICES AND OTHER RESOURCES PROVIDED TO PROSERVICES
a. SERVICES AND RESOURCES PROVIDED BY BCBSUW. BCBSUW shall provide to
Proservices, to the extent requested by Proservices and subject to Section 5,
the following services and resources (together "BCBSUW Services"). BCBSUW shall
supply BCBSUW Services only if Proservices has determined not to have its own
employees or third parties furnish the BCBSUW Services, subject to Section 5.
i. OFFICE SPACE AND FACILITIES. Office space and facilities,
including, but not limited to, furniture and equipment, as shall be necessary or
appropriate for the conduct of Proservices' operations.
ii. BUILDING SERVICES. Building services, including, but not
limited to, repair and maintenance of any property and facilities made
available hereunder as shall be necessary to maintain such property and
facilities in good working order, and such other building services as may be
necessary or appropriate for the conduct of Proservices' business.
iii. OFFICE SERVICES. Such office services, including, but not
limited to, warehousing, transportation, stockroom, graphics, printing,
duplicating and forms management, as shall be necessary or appropriate for the
conduct of Proservices' business.
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iv. CENTRAL SYSTEMS. Such central systems, including, but not
limited to, management information systems, telecommunications, centralized
mailing, technology support and central data base maintenance, as shall be
necessary or appropriate for the conduct of Proservices' business.
v. ADMINISTRATIVE SERVICES. Such administrative services,
including, but not limited to, maintenance of liability insurance, lobbyist
activities and payment of director fees, as shall be necessary or appropriate
for the conduct of Proservices' business.
vi. ACCOUNTING SERVICES. Such accounting, audit, bookkeeping and
financial statement preparation services as shall be necessary or appropriate
for the conduct of Proservices' business.
vii. EXECUTIVE SERVICES. Such executive services as shall be
necessary or appropriate for the conduct of Proservices' business.
viii. SALES AND CONFERENCE SERVICES. Such sales and conference
support as shall be necessary or appropriate for the conduct of Proservices'
business.
ix. COMPANY CAR AND TRAVEL. Availability and maintenance of
vehicles for company related travel and such other travel related services as
shall be necessary or appropriate for the conduct of Proservices' business.
b. SERVICES AND RESOURCES PROVIDED BY UWS. UWS shall provide to
Proservices, to the extent requested by Proservices and subject to Section 5,
the following services and resources (together "UWS Services"). UWS shall
supply UWS Services only if Proservices has determined not to have its own
employees or third parties furnish the UWS Services, subject to Section 5.
i. CORPORATE SUPPORT SERVICES. Such corporate support services,
including, but not limited to, corporate compliance, legal, and government
relations, as shall be necessary or appropriate for the conduct of Proservices'
business.
ii. MARKETING AND COMMUNICATIONS. Such marketing and communications
services, including, but not limited to, public relations and employee community
events, as shall be necessary or appropriate for the conduct of Proservices'
business.
iii. HUMAN RESOURCES. Such human resource services, including, but
not limited to, staffing, labor and employment relations, training and
development, and administration of payroll and employee benefits, as shall be
necessary or appropriate with respect to Employees utilized by Proservices under
this Agreement or otherwise necessary or appropriate for the conduct of
Proservices' business.
iv. FINANCIAL SERVICES. Such financial services, including, but not
limited to, cash management, tax, treasury, administration of financial systems,
and strategic
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planning/consulting, as shall be necessary or appropriate for the conduct of
Proservices' business.
c. STAFFING. BCBSUW and UWS shall both maintain an adequate source of
qualified employees to ensure the acceptable performance of BCBSUW and UWS
Services.
3. COST ALLOCATION METHODS
a. LEASED EMPLOYEES.
i. TOTAL PERSONNEL COSTS. The term "Total Personnel Costs" shall
include all costs or expenses of whatever nature and from whatever origin
arising out of or related to the maintenance of an Employee. Such term shall
include, but shall not be limited to, the following costs, expenses, and
obligations:
a. salaries, wages, and bonuses;
b. profit sharing;
c. benefit plans;
d. payroll taxes;
e. employee insurance.
ii. ALLOCATION OF PERSONNEL COSTS. To the extent Employees are
leased to Proservices, Total Personnel Costs for such Employees shall be
directly charged to Proservices as follows:
(1) Direct Employees. The Total Personnel Costs associated
with a Direct Employee shall be directly charged to Proservices on a monthly
basis. See Schedule 1.
(2) Dual Capacity Employees. The Total Personnel Costs
associated with a Dual Capacity Employee shall, on a monthly basis, be directly
charged to Proservices based on hours worked for Proservices. See Schedule 2.
b. BCBSUW AND UWS SERVICES. To the extent that BCBSUW/UWS Services are
rendered on behalf of or for the benefit of Proservices, costs therefor shall be
allocated to Proservices as follows:
i. DIRECT ALLOCATIONS. Costs associated with those BCBSUW/UWS
Services identified on Schedule 1 shall be directly charged to Proservices on a
monthly basis. Costs associated with those BCBSUW/UWS Services identified on
Schedule 2 shall, on a monthly basis, be directly charged to Proservices based
on Proservices' actual use.
ii. INDIRECT ALLOCATIONS. Cost allocations for those BCBSUW/UWS
Services identified on Schedule 3 ("Schedule 3 Services") shall be determined
annually for the next succeeding Fiscal Year ("Fiscal Year" shall mean January 1
through December 31) on the basis of utilization and cost studies performed by
UWS. Through the use of Indirect
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Allocation Methods, as described in Schedule 4 attached hereto, utilization
of Schedule 3 Services shall be reduced to an allocation percentage for each
company in the BCBSUW/UWS Group. Each month all costs associated with the
utilization of Schedule 3 Services shall be multiplied by the allocation
percentage of Proservices to determine Proservices' allocable share of costs
for Schedule 3 Services. Notwithstanding the preceding, (i) allocation
percentages are subject to interim Fiscal Year adjustments to allocate more
accurately costs based on actual utilization by each company in the
BCBSUW/UWS Group, (ii) costs associated with Schedule 3 Services performed
directly for Proservices shall be allocable to Proservices only, and (iii)
subject to approval by the Vice President of Finance for the BCBSUW/UWS
Group, the Indirect Allocation Method used to allocate costs for specific
Schedule 3 Services shall be subject to agreement by the parties on an annual
basis.(1) Schedule 3, attached hereto, sets forth Proservices' annual
allocation percentage for costs and expenses associated with Schedule 3
Services. Schedule 3 shall be amended annually.
iii. CHARGEBACKS. Costs associated with those BCBSUW/UWS Services
identified on Schedule 5 ("Chargeback Services") either shall be (i) indirectly
allocated to Proservices as discussed in Section 3.b.ii, if the cost is a
general expense for providing the Chargeback Service to all users; or (ii)
directly charged to Proservices' cost center, if the cost is an expense specific
to Proservices' cost center. Thus, costs associated with Chargeback Services
shall be either directly charged or indirectly allocated to Proservices on a
monthly basis, depending on the nature of the cost.
c. FEES IN ADDITION TO ALLOCATED COSTS. To the extent that Proservices
leases or utilizes the services of Employees from BCBSUW and/or UWS, and to the
extent that Proservices utilizes BCBSUW/UWS Services, BCBSUW and/or UWS may
charge Proservices a reasonable negotiated fee therefor, as set forth in
Schedule 6.
4. SUBSTANTIATION OF AND REIMBURSEMENT FOR ALLOCATED COSTS
a. SUBSTANTIATION OF ALLOCATED COSTS. All costs and expenses shall be
allocated in a fair and reasonable manner. BCBSUW and UWS shall maintain
reasonable and appropriate operating procedures to allocate costs and expenses
so as to enable Proservices' independent certified public accounting firm to
audit such costs and the allocation thereof. At the end of each month, BCBSUW
and/or UWS shall provide or make available to Proservices appropriate
documentation respecting the costs and expenses that are allocated, either
directly or indirectly, to Proservices for that month in sufficient detail to
permit Proservices to identify the sources of such charges.
b. REIMBURSEMENT FOR ALLOCATED COSTS. At the end of each month, not
later than the 30th day of the following month, Proservices shall promptly
reimburse BCBSUW for all costs and expenses incurred by BCBSUW in furnishing or
obtaining the Employees and
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(1) Before granting approval of any negotiated change to the method of
allocating costs for a particular service, the following factors should be
considered: (i) compliance with FAS rules; (ii) other federal government
contracting implications; and (iii) feasibility.
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Services provided for under Sections I and II, which amount shall be based on
the total of direct charges and indirect allocations to Proservices from
BCBSUW for the preceding month. At the end of each Fiscal Year quarter, not
later than the 30th day after the end of each quarter, Proservices shall
promptly reimburse UWS for all costs and expenses incurred by UWS in
furnishing or obtaining the Employees and Services provided for under Section
1 and 2, which amount shall be based on the total of direct charges and
indirect allocations to Proservices from UWS for the preceding Fiscal Year
quarter. Notwithstanding the preceding, Proservices reserves the right to
offset any amounts due to BCBSUW and/or UWS under this Agreement against
other obligations of BCBSUW and/or UWS to Proservices.
5. MODIFICATIONS TO LEASED EMPLOYEES AND SERVICES
a. MID-CONTRACT YEAR MODIFICATIONS. Each Contract Year, Proservices
shall be required to utilize Employees and BCBSUW/UWS Services budgeted to
Proservices for that Contract Year, unless otherwise negotiated by the parties.
("Contract Year" shall mean January 1 through December 31.) If, at any time
during the Contract Year, Proservices requires employees, services or other
resources in addition to those budgeted to Proservices by BCBSUW and UWS,
Proservices may obtain such employees, services or resources from a source
outside of the BCBSUW/UWS Group only if Proservices' additional needs cannot be
accommodated by BCBSUW or UWS.
b. CONTRACT YEAR RENEWAL MODIFICATIONS. Proservices shall provide BCBSUW
and/or UWS with at least three (3) months' written notice prior to the next
Contract Year (unless the parties mutually agree upon a shorter period) of its
intent to do any of the following:
i. Increase or decrease the number or utilization of Employees or
BCBSUW/UWS Services with respect to the next Contract Year;
ii. Obtain employees, services or other resources, which are
available either from BCBSUW or UWS, from a party outside the BCBSUW/UWS Group
with respect to the next Contract Year.
c. PROVISION OF SERVICES BY BCBSUW/UWS GROUP. BCBSUW and UWS have the
right to provide Employees and BCBSUW/UWS Services to Proservices either
directly or indirectly, through any company in the BCBSUW/UWS Group. BCBSUW and
UWS may provide employees, services and other resources to Proservices
indirectly through purchase from or contract with a source outside the
BCBSUW/UWS Group ("Outside Services") only with Proservices' consent. Costs
for Outside Services shall be subject to a cost structure negotiated by the
parties hereto.
6. EXECUTION OF ANCILLARY AGREEMENTS
a. RIGHT TO REQUEST EXECUTION OF ANCILLARY AGREEMENTS. In the event of
the Change of Control (as hereinafter defined in this Section) of any party
hereto and while this Agreement remains in effect, BCBSUW, UWS or Proservices
may, for the sole purpose of
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documenting in more detail the terms and respective rights and obligations of
the parties with respect to Employees and Services provided hereunder,
request that any of the following types of ancillary agreements be executed
by any parties hereto and effected thereby:
1. Employee Lease Agreement;
2. Office and Equipment Lease;
3. Management Information Systems Agreement;
4. Service Agreement(s); or
5. Any other Agreement deemed necessary or expedient by the parties
(together "Ancillary Agreements").
The terms of any executed Ancillary Agreement shall (i) be subject to
negotiation of the respective parties, and (ii) control in case of any conflict
with Sections 1 through 5 of this Agreement. Executed Ancillary Agreements
shall be attached to this Agreement as amendments hereto. "Change of Control"
for purposes of this section shall mean an event whereby a person, group, or
entity that is not affiliated with the BCBSUW/UWS Group purchases all or
substantially all of the assets or acquires the ownership of 50% or more of the
voting stock of a party hereto.
b. EFFECT OF A REQUEST TO EXECUTE. If any party hereto requests the
execution of an Ancillary Agreement ("Requesting Party"), the parties shall have
sixty 60 days (unless the parties hereto mutually agree to a different period)
to negotiate and execute the Ancillary Agreement, during which time the parties
hereto shall remain obligated to perform in accordance with the terms of this
Agreement. If after 60 days (unless a different period is mutually agreed upon
by the parties hereto) the requested Ancillary Agreement has not been executed,
the Requesting Party may terminate this Agreement in accordance with Section
8.b.ii. The parties hereby agree that any negotiations subject to this
Section 6.b shall be performed in good faith and every reasonable effort shall
be made to effect the execution of a requested Ancillary Agreement.
7. ADDITIONAL COVENANTS
a. AVAILABILITY OF RECORDS. BCBSUW and UWS shall make available to
Proservices, for inspection, examination and copying, all of its books and
records pertaining to the Employees and BCBSUW/UWS Services provided to
Proservices each Contract Year:
i. At all reasonable times at the principal places of business of
BCBSUW and UWS, or at such other place as the parties hereto may otherwise agree
to and designate;
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ii. In a form maintained in accordance with generally accepted
accounting principles and with any other general standards or laws applicable to
such book or record;
iii. For a term of at least five (5) years, from the end of each
Contract Year, irrespective of the termination of this Agreement.
b. CONFIDENTIALITY.
i. The parties acknowledge and agree that they may deliver to each
other information about themselves and their business which is nonpublic,
confidential or proprietary in nature. All such information, regardless of the
manner in which it is delivered, is referred to as "Proprietary Information."
However, Proprietary Information does not include information which 1. is or
becomes generally available to the public other than as a result of a disclosure
by the other party, 2. was available to the other party on a nonconfidential
basis prior to its disclosure by the disclosing party, or 3. becomes available
to the other party on a nonconfidential basis from a person other than by the
disclosing party. Unless otherwise agreed to in writing by the disclosing
party, the other party shall a. except as required by law, keep all Proprietary
Information confidential and not disclose or reveal any Proprietary Information
to any person other than those employed by the other party, or who is actively
and directly participating in the performance under this Agreement on behalf of
the other party ("Involved Persons"); b. cause each Involved Person to keep all
Proprietary Information confidential and not disclose or reveal any Proprietary
Information to any person other than another Involved Person; and c. not use the
Proprietary Information, and ensure that each Involved Person does not use the
Proprietary Information, for any purpose other than in connection with the
performance under this Agreement.
ii. Upon termination of this Agreement for any reason whatsoever,
each party shall promptly surrender and deliver to each other party all records,
materials, documents, data and any other Proprietary Information of the other
parties and shall not retain any description containing or pertaining to any
Proprietary Information of the other parties, unless otherwise consented to in
writing by a duly authorized officer of BCBSUW, UWS or Proservices as the case
may be.
c. COVENANT NOT TO COMPETE. BCBSUW and UWS agree that no company in the
BCBSUW/UWS Group (excluding Proservices) will directly compete with the products
or markets of Proservices during the term of this Agreement. BCBSUW and UWS
further agree that for a period of two (2) years following the termination of
this Agreement for any reason, no company in the BCBSUW/UWS Group (excluding
Proservices) will directly compete with Proservices in any market in which
Proservices operates or does business at the termination of this Agreement.
d. COOPERATION. The parties hereto will fully cooperate with each other
and their respective counsel, if any, agents and accountants in connection with
any action to be taken in the performance of their obligations under this
Agreement. In the conduct of their affairs and the performance of this
Agreement the parties hereto shall, unless otherwise agreed,
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maintain the working relationships of the parties on substantially the same
terms as before the execution of this Agreement. Notwithstanding the
preceding, the parties do not intend, nor should this Agreement be construed,
to restrict in any way Proservices' ability to contract with any other person
or entity to provide services similar to or the same as those which are the
subject of this Agreement.
8. TERM AND TERMINATION
a. TERM. This Agreement shall commence on the Effective Date and shall
automatically renew annually therefrom until such time as otherwise terminated
pursuant to Section 8.b.
b. TERMINATION.
i. This Agreement may be terminated by any party at any time by
giving one (1) years advance written notice to the nonterminating parties of its
intention to terminate.
ii. This Agreement may be terminated pursuant to Section 6.b by the
Requesting Party giving three (3) months advance written notice to the
nonterminating parties of its intention to terminate.
iii. This Agreement shall terminate immediately at the election of
and upon written notice from the non-defaulting party in the event of any of
the following:
(1) A party hereto becomes incapable of fully performing its
duties and obligations according to the terms of this Agreement for the
following reason(s): insolvency, bankruptcy, or substantial cessation or
interruption of its business operations for any reason whatsoever;
(2) A party hereto commits fraud or gross negligence in
performing its obligations under this Agreement;
HOWEVER, if the defaulting party provides the non-defaulting parties with prompt
notice of the event of default, the defaulting party shall have 30 days to cure
the defect, during which time the non-defaulting parties may not exercise the
termination right under this section 8.b.iii.
iv. Liabilities After Termination. The termination of this
Agreement shall not limit the obligation or liabilities of any party hereto
incurred but not discharged prior to termination.
9. INDEMNIFICATION
a. INDEMNIFICATION BY PROSERVICES.
i. Notwithstanding anything to the contrary in this Agreement,
neither BCBSUW, UWS, nor any other company in the BCBSUW/UWS Group (other than
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Proservices), nor any person who is or was, at the time of any action or
inaction affecting Proservices, a director, officer, employee or agent of
BCBSUW, UWS or any other company in the BCBSUW/UWS Group (other than
Proservices) (collectively "Indemnitees") shall be liable to Proservices for
any action or inaction taken or omitted to be taken by such Indemnitee;
PROVIDED, HOWEVER, that such Indemnitee acted (or failed to act) in good
faith and such action or inaction does not constitute actual fraud, gross
negligence or willful or wanton misconduct.
ii. Proservices shall, to the fullest extent not prohibited by law,
indemnify and hold harmless each Indemnitee against any liability, damage, cost,
expense, loss, claim or judgment (including, without limitation, reasonable
attorneys' fees and expenses) resulting to, imposed upon or incurred by such
Indemnitee a. in connection with any action, suit, arbitration or proceeding to
which such Indemnitee was or is a party or is threatened to be made a party by
reason of the Employees and BCBSUW/UWS Services provided to Proservices
hereunder; PROVIDED, HOWEVER, that such Indemnitee acted (or failed to act) in
good faith and such action or inaction does not constitute actual fraud, gross
negligence or willful or wanton misconduct, or b. by reason of, arising out of
or resulting from any breach or misrepresentation by Proservices under this
Agreement.
b. INDEMNIFICATION BY BCBSUW AND UWS. BCBSUW and UWS, jointly and
severally, hereby agree to indemnify and hold harmless Proservices, and its
successors and assigns, from and against any liability, damage, cost, expense,
loss, claim or judgment (including, without limitation, reasonable attorneys'
fees and expenses) resulting to, imposed upon or incurred by Proservices by
reason of, arising out of or resulting from any breach or misrepresentation by
BCBSUW or UWS under this Agreement.
10. MISCELLANEOUS
a. ASSIGNMENT. Neither this Agreement nor any rights or obligations
hereunder may be assigned or transferred by any of the parties hereto without
the prior written consent of the other parties. A Change of Control shall be
deemed an assignment requiring the consent of the other parties hereto.
b. AMENDMENT. The parties recognize that it may be desirable to alter
the terms of this Agreement in the future to take into account such events or
conditions as may from time to time occur. Any amendments to this Agreement
shall be in writing and shall be executed by all parties; however, Ancillary
Agreements need only be executed by the parties affected thereby.
c. WAIVER; REMEDIES. No failure or delay of a party in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. In
addition to any rights granted herein, the parties hereto shall have and may
exercise any and all rights and remedies now or hereafter provided by law except
as may be limited by Section 10.D of this Agreement.
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d. RESOLUTION OF DISPUTES.
i. INFORMAL RESOLUTION.
(1) Coordinating Committee: Any conflicts or disputes
regarding occupancy, utilization or delivery of BCBSUW/UWS Services, or
scheduling, performance and utilization of Employees necessary for the
conduct of Proservices' business shall be submitted to a coordinating
committee for resolution. The coordinating committee shall consist of three
(3) persons, each of whom shall 1. represent the respective interest of a
party hereto, and 2. be mutually agreed upon by the parties hereto. If the
coordinating committee is unable to unanimously resolve the dispute, then the
parties hereto may resort to the dispute resolution process provided for in
Section 10.d.ii.
(2) Audit Committee: Any conflicts or disputes regarding
allocation methods, allocated costs, offsets, fees or any matter related
thereto shall be submitted to an audit committee for resolution. The audit
committee shall consist of three (3) persons, each of whom shall 1. represent
the respective interest of a party hereto, and 2. be mutually agreed upon by
the parties hereto. If the audit committee is unable to unanimously resolve
the dispute, then the parties hereto may resort to the dispute resolution
process provided for in Section 10.d.ii.
ii. FORMAL RESOLUTION.
(1) Any dispute, controversy or claim between or among the
parties hereto that arises out of or relates to this Agreement or any
Ancillary Agreement entered into pursuant hereto, and which otherwise has
been unresolved by a coordinating committee pursuant to Section 10.d(1) or
an audit committee pursuant to Section 10.d.i(2) shall be settled by
arbitration. In order to initiate an arbitration, BCBSUW, UWS or Proservices
(as the case may be) shall deliver a written notice of demand for arbitration
to the other affected party(ies). Within thirty (30) days of the giving of
such written notice, each party involved shall appoint an individual as
arbitrator (the "Party Arbitrators"). Within thirty (30) days of their
appointment, the Party Arbitrators shall collectively select one (or two if
necessary to constitute an odd total number of arbitrators) additional
arbitrator (together the "Panel Arbitrators") and shall give the parties
involved notice of such choice.
(2) The arbitration hearings shall be held in Milwaukee,
Wisconsin. Each party shall submit its case to the Panel Arbitrators within
sixty (60) days of the selection of the Panel Arbitrators or within such
longer period as may be agreed by the Panel Arbitrators. The decision
rendered by a majority of the Panel Arbitrators shall be final and binding on
the parties involved. Such decision shall be a condition precedent to any
right of legal action arising out of the arbitrated dispute. Judgment upon
the award rendered may be entered in any court having jurisdiction thereof.
(3) Each involved party shall a. pay the fees and expense of
its own Party Arbitrator, and pay its own legal, accounting, and other
professional fees and expenses, b. jointly share in the payment of the fees
and expenses of the other one (or two)
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<PAGE>
arbitrator(s) selected by the Party Arbitrators, and c. jointly share in the
payment of the other expenses jointly incurred by the involved parties
directly related to the arbitration proceeding.
(4) Except as provided above, the arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association.
e. NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally, or if mailed (by registered or certified mail, postage
prepaid, return receipt requested), or if transmitted by facsimile or e-mail, as
follows:
1. If to BCBSUW:
Ms. Essie Whitelaw
Blue Cross & Blue Shield United of Wisconsin
1515 North RiverCenter Drive
Milwaukee, Wisconsin 53212
Facsimile Telephone Number: (414) 226-6700
With copies to:
Ms. Penny Siewert
Blue Cross & Blue Shield United of Wisconsin
N17W24340 Riverwood Drive
Waukesha, Wisconsin 53188
Facsimile Telephone Number: (414) 523-4920
2. If to UWS:
Mr. Roger Formisano
United Wisconsin Services, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
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3. If to Proservices:
Mr. C. Edward Mordy
United Wisconsin Proservices, Inc.
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: (414) 226-6229
Any notice or other communication given as provided in this Section 10.e, shall
be deemed given upon the first business day after actual delivery to the party
to whom such notice or other communication is sent (as evidenced by the return
receipt or shipping invoice signed by a representative of such party or by the
facsimile confirmation or e-mail return receipt). Any party from time to time
may change its address for purpose of notices to that party by giving a similar
notice specifying a new address.
f. RELATIONSHIP OF THE PARTIES. Negotiations relating to this Agreement
have occurred and shall continue to be carried out on an arm's length basis.
Further, the employees, services and other resources contemplated by this
Agreement shall be provided to Proservices on an independent contractor basis.
Nothing in this Agreement shall be construed to create an employer-employee
relationship between Proservices and Employees or any of the parties hereto.
g. ENTIRE AGREEMENT. This Agreement, including the schedules and
exhibits referred to herein constitute the entire understanding and agreement of
the parties hereto and supersede all prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or be
construed to prohibit proof of prior understandings and agreements between or
among the parties to the extent necessary to properly construe or interpret this
Agreement. Notwithstanding the preceding, the parties acknowledge that there
are, and/or may be in the future, any number of independent third party
contracts between various companies in the BCBSUW/UWS Group for various services
and/or business arrangements, and any such contracts, whether written or oral,
shall survive the execution of this Agreement and any renewal hereof.
h. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement.
i. NO THIRD PARTY BENEFICIARIES. This Agreement is only for the benefit
of the parties hereto and does not confer any right, benefit, or privilege upon
any person or entity not a party to this Agreement.
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<PAGE>
j. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving effect to
principles of conflicts of laws) as to all matters, including, without
limitation, matters of validity, construction, effect, performance and remedies.
k. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party under this Agreement will not be materially
and adversely affected thereby, 1. such provision will be fully severable, 2.
this Agreement will be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part hereof, 3. the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid, or unenforceable provision or by its
severance herefrom, and 4. in lieu of such illegal, invalid, or unenforceable
provision, there will be added automatically as part of this Agreement, a legal,
valid, and enforceable provision as similar terms to such illegal, invalid, or
unenforceable provision as may be possible.
l. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the Effective Date.
BLUE CROSS BLUE SHIELD UNITED OF WISCONSIN
By:
------------------------------------
Title:
---------------------------------
By:
------------------------------------
Title:
---------------------------------
UNITED WISCONSIN SERVICES, INC.
By:
------------------------------------
Title:
---------------------------------
UNITED WISCONSIN PROSERVICES, INC.
By:
------------------------------------
Title:
---------------------------------
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<PAGE>
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<PAGE>
SERVICE AGREEMENT
BETWEEN
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
and
VALLEY HEALTH PLAN, INC.
This agreement is effective the 1st day of January, 1993 by and between Blue
Cross and Blue Shield of Wisconsin, a Wisconsin Corporation, hereinafter
referred to as BCBSUW, Valley Health Plan, Inc. hereinafter referred to as VHP.
This agreement is a companion agreement to a like agreement between Midelfort
Clinic - A Mayo Regional Practice, Meridian Resource Corporation, and Take
Control, Inc.
WITNESSETH
In consideration of the mutual covenants and agreements hereinafter set forth,
the parties do hereby and for their successors and assigns agree as follows:
ARTICLE I: This service agreement shall be effective January 1, 1993,
replaces and supersedes all other service agreements, supplements, amendments
and modifications entered into between the parties.
ARTICLE II: In consideration of the payment of charges specified by the
agreement and its amendment BCBSUW will provide the service specified in Article
III in connection with VHP's operation and vice versa.
ARTICLE III:
A. BCBSUW will provide the services show in Exhibit 1 and incorporated herein
by reference to VHP for an estimated fee, the fee, being established by
amendments to this agreement annually. VHP reserves the right to determine
which services they wish to purchase from BCBS. The list of services to be
provided will be agreed upon annually. Actual amount to be charged will be
based on various allocations methodologies as specified on Exhibit 1.
B. VHP will provide the services and incorporated herein by reference to Blue
Cross for an estimated fee, the fee being established by amendment to this
agreement annually. Actual amount to be charged will be based on various
allocation methodologies
C. BCBSUW will reimburse VHP on an actual cost basis, as billed for costs
incurred on BCBSUW on an actual cost basis, as billed for costs incurred on
VHP's behalf.
D. VHP will reimburse BCBSUW on an actual cost basis, as billed for costs
incurred on VHP's behalf.
ARTICLE IV: The services stated in Article III-A and III-B shall be reported to
VHP via a quarterly report. The net amount due BCBSUW and/or VHP will
approximated each month based on the prior months actual expense. This amount
shall be adjusted to actual at least annually.
ARTICLE V: BCBSUW and VHP mutually agree that this service agreement is not
an exclusive one.
<PAGE>
ARTICLE VI: This agreement shall be effect for one (1) year commencing January
1, 1993 and ending December 31, 1993, unless terminated in accordance with the
provisions of Article VII. This agreement shall be automatically renewed for a
period on one (1) year on each succeeding January 1, subject to negotiation of
the rates and allocations shown on the exhibits.
ARTICLE VII: This agreement or any portion of it may be terminated by either
party upon notice to the other party at least ninety (90) days prior to the
termination date.
ARTICLE VII, FORCE MAJEURE: Neither of the parties to this Agreement shall be
considered in default in performance of its obligations hereunder if performance
of such obligations is prevented or delayed by Act of God, or other
circumstances beyond the control of the non-performing party. Time of
performance of either party shall be extended by the time period reasonably
necessary to overcome the efforts of such force majeure occurrences.
ARTICLE IX, INTERPRETATION:
This Agreement shall be construed in accordance with the laws of the State of
Wisconsin
ARTICLE X, INTEGRATION: This Agreement, including only modifications or
amendments agreed to in writing and incorporated herein by reference expressed
the entire understanding and agreement of the parties with reference to the
subject matter hereof, and is a complete and exclusive statement of the terms of
this agreement, and no representations or agreements modifying of supplementing
the terms of this Agreement shall be valid unless in writing, and signed by
persons authorized to sign agreements on behalf of both parties.
Executed at Milwaukee, Wisconsin, this 21st day of April, 1993
BLUE CROSS BLUE SHIELD
UNITED OF WISCONSIN
by:
--------------------------------
Authorized Signature
Executed at Milwaukee, Wisconsin, this 21st day of April, 1993
VALLEY HEALTH PLAN, INC.
by:
-------------------------------
Authorized Signature
<PAGE>
SERVICE AGREEMENT
This SERVICE AGREEMENT is made this 1st day of November, 1994, by and
between United Wisconsin Services, Inc., a Wisconsin corporation ("UWS"), and
Community Health Systems, L.L.C., a Wisconsin limited liability company ("LLC").
RECITALS
1. UWS, Blue Cross & Blue Shield United of Wisconsin, a Wisconsin service
insurance corporation ("Blue Cross") and HMO of Wisconsin Insurance Corporation,
a Wisconsin health maintenance organization insurer ("HMOW") have entered into a
cooperative arrangement in order to produce, market and administer managed care
products which utilize a provider network (the "Joint Venture");
2. Blue Cross owns more than 50% of the stock of UWS and on the date
hereof, UWS has acquired all of the stock of HMO-W, Incorporated, a Wisconsin
corporation ("HMO-W") which owns all of the stock of HMOW;
3. LLC is a limited liability company whose members presently consist of
health care providers who provide health care services to HMOW members;
<PAGE>
4. UWS and its affiliates desire to have the services and availability of
services of LLC to facilitate the contracting of HMOW with health care providers
and to allow UWS and its affiliates to provide services to HMOW members; and
5. LLC desires to provide and make its services available as provided
herein in order to benefit directly individual patients of its members, who are
HMOW customers, through delivery of lower cost health services and to enhance
the availability, quality and cost effective delivery of health services in
member communities.
In consideration of the premises and the mutual promises and covenants
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. SERVICES. During the Service Period, LLC will make its services
available according to a schedule to be agreed upon by the parties: to advise
and consult with UWS and its affiliates concerning access of said entities to
health care providers in the network of the Joint Venture; to facilitate the
contracting of HMOW with medical and non-medical personnel and hospitals
(whether directly or through Community Physicians' Network, Inc. ("CPN"), a
member of LLC) in order to allow UWS and its affiliates to provide services to
HMOW members; and to provide expertise to the governing board of the Joint
Venture and the Board of Directors of HMOW on the operations and maintenance of
a rural health maintenance organization.
2. DIRECTORS. LLC agrees to provide the following number of members of
the governing board of the Joint Venture (as contemplated in the Acquisition
Agreement) and Board of Directors of HMOW (which shall have such power and
authority as set forth in the Acquisition Agreement and the HMOW Bylaws) and UWS
agrees to cause such members to be elected or appointed to such governing board
and to elect such members as directors to the Board of Directors of HMOW during
the Service Period:
<PAGE>
(a) UWS and Blue Cross are negotiating with University Health Care,
Inc. ("UHC") and U-Care HMO, Inc. ("U-Care") to become a part of the Joint
Venture. In the event UWS enters into the venture with UHC and U-Care, UWS
agrees that the number of members of the governing board of the Joint Venture
and number of directors of the HMOW Board of Directors shall each be eleven (11)
and LLC shall provide four (4) members to the governing board of the Joint
Venture and to the Board of Directors of HMOW.
(b) In the event that UWS does not enter into the venture with UHC
and U-Care, or the venture with UHC and U-Care terminates, UWS agrees that the
number of members of the governing board of the Joint Venture and the number of
directors of the HMOW Board of Directors shall be eight (8) and LLC shall
provide four (4) members to the governing board of the Joint Venture and to the
Board of Directors of HMOW.
3. PAYMENTS TO LLC. In consideration of LLC's making its services
available to UWS and its affiliates, UWS shall pay or cause to be paid to LLC
the Annual Service Payment during the Service Period.
(a) ANNUAL SERVICE PAYMENT.
(i) If UWS does not enter into the venture with UHC and U-Care,
or such venture terminates, UWS shall pay or cause to be paid to LLC 50% of the
sum of:
(A) the aggregate income (loss) before income taxes for the
applicable accounting period (the "applicable period") of all health maintenance
organization ("HMO") and point of service ("POS") plans offered by the Joint
Venture, determined in accordance with generally accepted accounting principles,
and
<PAGE>
(B) the aggregate income (loss) before income taxes for the
applicable period of all insured Preferred Provider Organization ("PPO") plans
offered by the Joint Venture, which shall mean for each plan the (1) net earned
premium, minus (2) the amount of incurred claims and administrative expenses,
plus (3) net investment income earned.
(ii) If UWS enters into the venture with UHC and U-Care, UWS
shall pay or cause to be paid 30% of the aggregate income (loss) before income
taxes for the applicable period of all PPO (calculated as provided in Section
3(a)(i)(B) above), HMO and POS plans offered by the Joint Venture, determined in
accordance with generally accepted accounting principles.
(iii) For purposes of the calculations required by Sections
3(a)(i) and 3(a)(ii) above:
(A) income does not include investment income attributable
to funds of UWS not withdrawn from the Joint Venture or attributable to
additional capital contributions from UWS or one of its affiliates to HMOW;
(B) the administrative expenses of each plan offered shall
not exceed the actual costs incurred by the underwriter(s) of such plan;
(C) the amount of an aggregate loss for the applicable
period shall carry over and reduce income from the plans offered by the Joint
Venture in the successive applicable period(s) to the extent of such loss;
(D) no expense, loss or liability attributable to that
approximate $4.4 million debt assumed and outstanding by U-Care to University of
Wisconsin Hospital and Clinics referenced in Section 13.4 of the Amended and
Restated Joint Venture Agreement by and among Blue Cross, UWS, UHC, U-Care and
<PAGE>
Health Professionals, Inc. and certain affiliated entities ("U-Care Joint
Venture Agreement") shall be taken into account; and
(E) Income (loss) shall be computed without regard to: (1)
administrative service payments by UWS affiliates to UWS pursuant to any
administrative service agreement between UWS and its affiliates in connection
with the payments to: (I) LLC hereunder, (II) U-Care or any successor thereto
under a License Agreement, dated as of November 1, 1994, between UWS and U-Care
(the "License Agreement"), or (III) Health Professionals, Inc. ("HPI") under a
service agreement dated as of November 1, 1994 between UWS and HPI; (2) any
payment to HPI under its service agreement with UWS; (3) any payment to LLC
hereunder; and (4) any payment to U-Care or any successor thereto under the
License Agreement.
(iv) The Annual Service Payment (and any amount payable to LLC
under Section 3(e) hereof) shall be payable to LLC for making its services
available hereunder regardless of the amount of services actually performed by
LLC and the aggregate income before taxes (calculated pursuant to this Section
3) of the plans offered by the Joint Venture for the applicable period less the
Annual Service Payment shall be the sole property of UWS and Blue Cross.
(b) TIME OF PAYMENT. The Annual Service Payment shall first be paid
to LLC for the period October 1, 1994 through December 31, 1995 within 15 days
of notification of the amount thereof as provided in Section 3(d) but in any
event not later than April 15, 1996. Commencing with calendar year 1996 and for
each calendar year thereafter during the Service Period, the Annual Service Fee
shall be paid to LLC for
<PAGE>
each calendar year within 15 days of notification of the amount thereof as
provided in Section 3(d) but not later than April 15th of the succeeding
calendar year.
(c) APPLICABLE GEOGRAPHIC AREA. The term Applicable Geographic Area
means the following Wisconsin counties: Adams, Columbia, Crawford, Dane, Fond
du Lac, Grant, Green, Green Lake, Iowa, Juneau, Lafayette, Marquette, Monroe,
Richland, Sauk, Vernon, Waushara and Winnebago. If UWS should enter into a
joint venture with UHC and U-Care, Dodge County shall be included in the
Applicable Geographic Area.
(i) If UWS or Blue Cross enter into a new joint venture with
another person covering the Wisconsin Counties of Winnebago, Fond du Lac,
Waushara and Green Lake (the "Fox Valley Area"), UWS and Blue Cross may, within
their sole discretion and without approval by the governing board of the Joint
Venture, transfer HMO membership and provider relationships in the Fox Valley
Area to such new joint venture and such Counties shall not be part of the
Applicable Geographic Area. In the event of any such transfer, the governing
board of the Joint Venture shall approve the amount of consideration to be paid
by UWS to LLC therefor, if any. The amount of consideration, if any, to be paid
by UWS shall be calculated to reflect any adverse impact to LLC as to the amount
of the Annual Service Payment. If the governing board of the Joint Venture does
not approve the amount of such consideration offered by UWS, then the amount of
consideration to be paid by UWS to LLC shall be arbitrated as provided in
Section 15 below.
(d) CALCULATION. The calculation of the Annual Service Payment shall
be made by an independent accounting firm of recognized standing selected by the
governing board of the Joint Venture. Such accounting firm shall make the
calculation
<PAGE>
of the Annual Service Payment for each year not later than March 31 of the next
succeeding year and shall promptly notify UWS and LLC in writing of such
calculation and shall set forth in reasonable detail the basis therefor.
(e) FINAL ACCOUNTING. Upon termination of the Service Period, a
payment shall be calculated as set forth in Sections 3(a)(i) and 3(a)(ii),
whichever is applicable, for the period October 1, 1994 through the date of such
termination (the "Total Service Payment"). To the extent the Total Service
Payment as so computed exceeds the sum of the Annual Service Payments previously
received by LLC, such excess shall be paid to LLC within 60 days of the date of
termination. To the extent the sum of the Annual Service Payments previously
received by or due LLC exceed the Total Service Payment as so computed, LLC
shall pay to UWS such excess less the amount of any Annual Service Payment due
LLC (which shall be canceled) within 60 days of the date of termination, but not
in an amount greater than the aggregate Annual Service Payments received by LLC
hereunder.
4. OPTION TO PURCHASE. UWS agrees that on the fifth (5th) anniversary
and tenth (10th) anniversary of this Agreement, LLC shall have the option to
purchase all of the stock of HMO-W, Incorporated, a Wisconsin corporation,
subject to the terms and conditions contained in this Section 4. LLC may
exercise this option by giving UWS written notice of the exercise at least 180
days before the fifth (5th) anniversary or tenth (10th) anniversary of this
Agreement, as the case may be: provided if UHC has given notice of exercise of
its option as set forth in Article 8 of the U-Care Joint Venture Agreement, then
LLC may give such written notice of exercise no later than five (5) months prior
to such anniversary dates. In addition, UWS agrees that LLC shall have the
option to purchase all of the stock of HMO-W, Incorporated within 90 days after
<PAGE>
termination of the Service Period under Section 5(b)(ii). Such option may be
exercised by LLC by giving UWS written notice of exercise on or before the 90th
day after such termination of the Service Period.
(a) The price at which LLC may purchase all of the stock of HMO-W,
Incorporated shall be the then current Net Worth of HMO-W, Incorporated as of
the date of said purchase plus any amounts UWS paid to Community Physicians'
Network, Inc. ("CPN"), pursuant to the Agreement of Merger and Joint Venture
dated October 11, 1994, as amended, by and among UWS, Blue Cross, HMO-W,
Incorporated, HMOW, and UWS Acquisition Corporation ("Acquisition Agreement"),
that were not distributed as contract signing incentives to primary care
physicians or used for the development, enhancement and maintenance of
independent physician practices. The purchase price shall be paid in cash. Net
Worth shall be determined by applying the same accounting principles as were
applied in determining the price at which UWS acquired the stock of HMO-W,
Incorporated pursuant to the Acquisition Agreement.
(b) UWS agrees to maintain HMO-W, Incorporated as a direct or
indirect wholly owned subsidiary and HMOW as a direct wholly owned subsidiary of
HMO-W, Incorporated for so long as the options provided herein have not expired.
In the event LLC exercises an option provided herein, the assets and business of
HMOW shall include the remaining assets and business of HMOW which existed
immediately prior to the date of this Agreement (including the groups and
members which were then with HMOW) and subsequently acquired assets plus an
equitable division of new business obtained by the Joint Venture, but shall not
include other managed care business acquired by UWS with the Joint Venture or
merged with the Joint Venture such as the U-Care business and its proportionate
share of subsequent growth. Any
<PAGE>
tax liabilities resulting to HMOW and/or HMO-W, Incorporated as a result of
transferring or adjusting the business and assets of HMOW to comply with the
immediately preceding sentence shall be reimbursed to HMO-W, Incorporated by UWS
in the event such liabilities were not reflected in the net worth of HMO-W,
Incorporated for purposes of determining the purchase price in Section 4(a)
above.
(c) In the event LLC exercises the option to purchase the HMO-W,
Incorporated stock, UWS shall make warranties and representations to LLC similar
to those as made by HMO-W, Incorporated to UWS in the Acquisition Agreement.
5. SERVICE PERIOD; TERMINATION.
(a) The initial Service Period shall commence on the date hereof and
end on September 30, 2004, unless sooner terminated as provided in Section 5(b)
hereof. If LLC does not exercise its options set forth in Section 4 hereof, the
Service Period shall automatically renew for additional five (5) year terms
unless written notice of termination is given by either party to the other at
least 180 days prior to the end of the current or then current Service Period;
provided that if any party to the U-Care Joint Venture Agreement has given
notice of termination of the U-Care Joint Venture, then either party hereto may
give written notice of termination to the other no later than five (5) months
prior to the end of the current term.
(b) (i) The Service Period will automatically terminate if LLC
exercises the option to purchase provided in Section 4 hereof unless UWS and LLC
otherwise agree.
(ii) UWS may terminate the Service Period on September 30, 1999
by giving written notice to LLC that any one or more of the following events
exists on said date:
<PAGE>
(A) There exists an aggregate net loss for the period
October 1, 1994 through September 30, 1999 calculated and determined as provided
in Sections 3(a)(i) or 3(a)(ii), whichever is applicable, by the accounting firm
selected as provided in Section 3(d) hereof.
(B) UWS demonstrates to the governing board of the Joint
Venture and the governing board agrees that there is a reasonable likelihood
that an aggregate loss before income taxes will be incurred for the period
October 1, 1999 through September 30, 2004, calculated and determined as
provided in Sections 3(a)(i) or 3(a)(ii), whichever is applicable; provided that
in the event the governing board prohibits UWS from exercising its termination
rights hereunder said decision shall be subject to the provisions of Section 15
hereunder.
(C) HMOW fails to procure a provider agreement with CPN to
serve as the central provider of professional medical services within the
Applicable Geographic Area for the period January 1, 2000 through December 31,
2004, which agreement shall have such terms and conditions as are satisfactory
to the governing board of the Joint Venture.
(D) UWS demonstrates to the governing board of the Joint
Venture and the governing board agrees that HMOW shall have failed to procure
service agreements with an adequate number of hospitals serving the Applicable
Geographic Area, which agreements shall have terms and conditions as are
satisfactory to the governing board of the Joint Venture; provided that in the
event the governing board prohibits UWS from exercising its termination rights
hereunder, said decision shall be subject to the provisions of Section 15
hereunder.
<PAGE>
6. INDEPENDENT CONTRACTOR. LLC shall at all times be an independent
contractor. LLC shall have no authority to bind UWS, Blue Cross or HMOW to any
agreement, except to the extent such authority is expressly conferred upon it by
UWS in writing (exclusive of this Agreement) and LLC will not take any action
inconsistent with the provisions of this Section 6.
7. ACQUISITION AGREEMENT. UWS agrees that it will not execute or permit
HMO-W, Incorporated or HMOW to execute any amendment, addendum or any other
instrument changing any of the terms of the Acquisition Agreement without the
prior written consent of LLC.
8. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party will not be materially and adversely affected
thereby, (a) such provision will be fully severable, (b) this Agreement will be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof, (c) the remaining provisions of this
Agreement will remain in full force and effect and will not be affected by the
illegal, invalid, or unenforceable provision or by its severance herefrom, and
(d) in lieu of such illegal, invalid, or unenforceable provision, there will be
added automatically as a part of this Agreement, a legal, valid, and enforceable
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible.
9. NOTICE. Any notice or communication given pursuant to this Agreement
must be in writing and will be deemed to have been duly given if mailed (by
registered or certified mail, postage prepaid, return receipt requested), or if
transmitted by facsimile, or if delivered by courier, as follows:
If to UWS:
<PAGE>
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, WI 53203
Attention: Michael Bernstein
Facsimile: 1-414-226-6229
If to LLC:
Community Health Systems, L.L.C.
c/o Rural Wisconsin Hospital Cooperative
724 Water Street
Sauk City, WI 53583
Attention: Tim Size
Facsimile: 1-608-643-4936
10. WAIVER. A waiver by a party of any breach by the other party of any
provision of this Agreement shall not be deemed to be a waiver by such first
party of any subsequent breach.
11. ASSIGNMENT. This Agreement may not be assigned by UWS without the
written consent of LLC, except that if UWS shall merge or consolidate with or
into, or transfer substantially all of its business and assets to another
corporation or other form of business or other entity, this Agreement may be
assigned to such a successor and it shall be binding upon and inure to its
benefit. LLC may not assign this Agreement or any interest herein.
12. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, and UWS's permitted successors and assigns.
13. AMENDMENT. This Agreement may be amended only by a written instrument
executed by the parties hereto or their respective successors or assigns, as
applicable.
<PAGE>
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Wisconsin.
15. ARBITRATION. If UWS and LLC are unable to resolve any dispute
hereunder, such dispute may be submitted to arbitration in accordance herewith.
A. Each side shall appoint an individual as arbitrator and the two
so appointed shall then appoint a third arbitrator. If either side refuses or
neglects to appoint an arbitrator within thirty (30) days of receipt of a
written notice of demand for arbitration, the other side may appoint the second
arbitrator. If the two arbitrators do not agree on a third arbitrator within
thirty (30) days of their appointment, each of the arbitrators shall nominate
three individuals. Each arbitrator shall then decline two of the nominations
presented by the other arbitrator. The third arbitrator shall then be chosen
from the remaining two nominations by drawing lots. The arbitrators shall be
active or former officers of insurance or reinsurance companies, managed care
organizations, or Lloyd's of London Underwriters; the arbitrators shall not have
a personal or financial interest in the result of the arbitration.
B. The arbitration hearings shall be held in Madison, Wisconsin, or
such other place as may be mutually agreed. Each side shall submit its case to
the arbitrators within thirty (30) days of the selection of the third arbitrator
or within such longer period as may be agreed by the arbitrators. The
arbitrators shall not be obliged to follow judicial formalities or the rules of
evidence except to the extent required by governing law, that is, the state law
of the situs of the arbitration as herein agreed; they shall make their
decisions according to the practice of the reinsurance business. The decision
rendered by a majority of the arbitrators shall be final and binding on both
sides. Such decision shall be a condition precedent to any right of legal
action arising
<PAGE>
out of the arbitrated dispute which either side may have against the other.
Judgment upon the award rendered may be entered in any court having jurisdiction
thereof.
C. Each side shall pay (i) the fees and expenses of its own
arbitrator, (ii) one-half of the fees and expenses of the third arbitrator and
(iii) one-half of the other expenses that the parties jointly incur directly
related to the arbitration proceeding. Other than as set forth above, each
party shall bear its own costs in connection with any such arbitration
including, without limitation, (i) all legal, accounting, and other professional
fees and expenses and (ii) all other costs and expenses each party incurs to
prepare for such arbitration.
D. Except as provided above, arbitration shall be based, insofar as
applicable, upon the Commercial Arbitration Rules of the American Arbitration
Association.
E. In the event there is an issue(s) concerning the amount of assets
and business to be retained by HMOW under Section 4(b) hereof which involves
persons in addition to UWS and LLC, which issue(s) are to be arbitrated, then
such persons and UWS and LLC shall conduct a single arbitration proceeding.
16. CONFIDENTIAL INFORMATION. The parties acknowledge that all
information of a given party which has or will come into the possession of
another party in connection with this Agreement is non-public, confidential or
proprietary in nature. Each party agrees to hold such information in strictest
confidence, not to make use thereof other than for the performance of this
Agreement, and not to release or disclose it to any third party other than for
the performance of this Agreement or as required by law. In the event that any
party (the "Disclosing Party") is requested pursuant to, or required by,
applicable law or regulation or by legal process to disclose any such
information of
<PAGE>
another party, the Disclosing Party shall provide such other party with prompt
notice of such request to enable such other party to seek an appropriate
protective order. The Disclosing Party shall cooperate with such other party in
connection with such matter.
17. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement. Unless the context of this Agreement otherwise
requires, (a) words of any gender will be deemed to include each other gender,
(b) words using the singular or plural number will also include the plural or
singular number, respectively, (c) the terms hereof, herein, hereby, and
derivative or similar words will refer to this entire Agreement, and (d) the
conjunction "or" will denote any one or more, or any combination or all, of the
specified items or matters involved in the respective list.
18. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
United Wisconsin Services, Inc.
By:
-------------------------------
Its:
-----------------------------
Attest:
---------------------------
Its:
------------------------------
<PAGE>
Community Health Systems, L.L.C.
By:
--------------------------------
, a Manager
--------------------
<PAGE>
SERVICE AGREEMENT
This Service Agreement ("Agreement") is entered into as of this _____ day
of _______________, 1998 ("Effective Date"), by and between, United Wisconsin
Services, Inc., f/k/a Newco/UWS, Inc., an insurance holding company organized
pursuant to Ch. 180, Wisconsin Statutes ("UWSI"), and American Medical Security
Group, Inc., f/k/a United Wisconsin Services, Inc., an insurance holding company
organized pursuant to Ch. 180, Wisconsin Statutes ("AMSG").
RECITALS
WHEREAS, UWSI provides various business resources and services necessary
for the continued operation of the business of AMSG (including its
subsidiaries);
WHEREAS, by entering into this Agreement, the parties hereto wish to
establish clearly (i) the services and resources that UWSI will provide to AMSG
and the compensation therefor; and (ii) the respective rights and
responsibilities of the parties.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and of the
mutual covenants hereinafter contained, the parties hereto agree as follows:
I. SERVICES AND RESOURCES PROVIDED TO AMSG BY UWSI
A. UWSI Services. UWSI shall provide to AMSG, to the extent requested by
AMSG from time to time, the following services and resources (together
"UWSI Services"). UWSI shall supply UWSI Services only if AMSG has
determined not to have its own employees or third parties furnish such
UWSI Services.
1. Investment Management and Accounting Services. Such investment
management and accounting services, including, but not limited
to, investment portfolio oversight, cash management, treasury,
and related accounting services, as shall be necessary or
appropriate for the conduct of AMSG's business.
2. Risk Management Services. Such risk management services,
including, but not limited to, the selection and purchase of
insurance, as shall be necessary or appropriate for the conduct
of AMSG's business.
3. Corporate Accounting, Financial and Legal Services. Such
corporate accounting, financial and legal services, including,
but not limited to, assistance with SEC filings, risk-based
capital calculations, budget preparation, and audit functions, as
shall be necessary or appropriate for the conduct of AMSG's
business.
<PAGE>
4. Corporate Communications. Such corporate communications
services, including, but not limited to, public relations,
corporate marketing, and assistance with shareholder, proxy and
investor related materials, as shall be necessary or appropriate
for the conduct of AMSG's business.
B. Staffing. UWSI shall maintain an adequate source of qualified
employees to ensure the acceptable performance of UWSI Services.
C. Provision of Services by UWSI Group. Notwithstanding Section I.B,
UWSI has the right to provide UWSI Services to AMSG either directly or
indirectly, through any subsidiary of UWSI (the "UWSI Group"). UWSI
may provide UWSI Services to AMSG indirectly through purchase from or
contract with a source outside the UWSI Group only with AMSG's written
consent. Unless otherwise specified herein, charges for outside
services shall be subject to negotiation by the parties hereto.
II. COMPENSATION FOR UWSI SERVICES
A. Investment Management and Accounting Services. To the extent that
UWSI provides Investment Management and Accounting Services pursuant
to Section I.A.1, UWSI shall be compensated as follows:
1. Percentage of Investment Portfolio Plus Fixed Fee. With respect
to each investment portfolio that UWSI oversees on behalf of
AMSG, or any of AMSG's subsidiaries ("Investment Portfolio"),
UWSI shall be entitled, on a monthly basis, to a percentage of
the outstanding balance of the Investment Portfolio ("UWSI's
Investment Fee"), calculated as follows: The average outstanding
balance of the Investment Portfolio during the immediately
preceding calendar month, multiplied by a rate per annum of point
zero five percent (.05% or .0005). For each company, including
AMSG and its subsidiaries, that UWSI provides Investment
Management and Accounting Services under this Agreement, UWSI
also shall be entitled to a monthly fee of $700 per company, in
addition to UWSI's Investment Fee.
2. Reimbursement for Third Party Costs. Any charges, costs or
expenses incurred by UWSI, on behalf or for the benefit of AMSG,
for outside trust, money management or consultant services shall
be directly charged to AMSG by UWSI and AMSG shall promptly
reimburse UWSI for the same.
B. Risk Management Services. To the extent that UWSI provides any Risk
Management Services pursuant to Section I.A.2, UWSI shall be
compensated as follows:
<PAGE>
1. Premium Reimbursement. Any premium attributable to insurance
procured by UWSI on behalf or for the benefit of AMSG shall be
directly charged to AMSG by UWSI, as often as UWSI is billed for
the same, and AMSG shall promptly reimburse UWSI for such billed
premium.
2. Risk Management Fee. UWSI also shall be entitled to a monthly
"Risk Management Fee," calculated as follows: (a) The annual
premium attributable to insurance procured by UWSI on behalf or
for the benefit of AMSG, as reasonably determined by UWSI, times
(b) a rate per annum of five percent (5%).
C. Corporate Accounting, Financial and Legal Services. To the extent that
UWSI provides any Corporate Accounting, Financial and Legal Services
pursuant to Section I.A.3, UWSI shall charge AMSG for such services at
the rate of $75.00 per hour, plus any non-labor costs and expenses
incurred directly by UWSI.
D. Corporate Communications. To the extent that UWSI provides any
Corporate Communications Services pursuant to Section I.A.4, UWSI
shall charge AMSG for such services at the rate of $40.00 per hour,
plus any non-labor costs and expenses incurred directly by UWSI.
III. SUBSTANTIATION AND PAYMENT OF CHARGES
A. Substantiation of Charges. UWSI shall calculate, determine and
allocate, in a fair and reasonable manner, all fees, costs, expenses
and other sums chargeable to AMSG pursuant to this Agreement
("Charges"). UWSI shall maintain reasonable and appropriate operating
procedures for calculating and tracking all Charges so as to enable
AMSG and it's independent certified public accounting firm to audit
such Charges. At the end of each month, UWSI shall provide to AMSG
appropriate documentation respecting the Charges for that month in
sufficient detail to permit AMSG to identify the sources of such
Charges.
B. Payment of Charges. Unless otherwise specified herein, at the end of
each month, not later than the 30th day of the following month, AMSG
shall promptly pay UWSI for all Charges for the immediately preceding
month.
IV. ADDITIONAL COVENANTS
A. Availability of Records. UWSI shall make available to AMSG, for
inspection, examination and copying, all of its books and records
pertaining to UWSI Services provided under this Agreement each
contract year:
<PAGE>
1. At all reasonable times at the principal place of business of
UWSI, or at such other place as the parties hereto may otherwise
agree to and designate;
2. In a form maintained in accordance with generally accepted
accounting principles and with any other general standards or
laws applicable to such book or record;
3. For a term of at least seven (7) years, from the end of each
contract year, irrespective of the termination of this Agreement.
B. Confidentiality.
1. The parties acknowledge and agree that they may deliver to each
other information about themselves and their business which is
nonpublic, confidential or proprietary in nature. All such
information, regardless of the manner in which it is delivered,
is referred to as "Proprietary Information." However,
Proprietary Information does not include information which
1. is or becomes generally available to the public other
than as a result of a disclosure by the other party,
2. was available to the other party on a nonconfidential
basis prior to its disclosure by the disclosing party,
or
3. becomes available to the other party on a
nonconfidential basis from a person other than by the
disclosing party. Unless otherwise agreed to in
writing by the disclosing party, the other party shall
a. except as required by law, keep all Proprietary
Information confidential and not disclose or
reveal any Proprietary Information to any person
other than those employed by the other party, or
who is actively and directly participating in the
performance under this Agreement on behalf of the
other party ("Involved Persons");
b. cause each Involved Person to keep all Proprietary
Information confidential and not disclose or
reveal any Proprietary Information to any person
other than another Involved Person; and c. not use
the Proprietary Information, and ensure that each
Involved Person does not use the Proprietary
<PAGE>
Information, for any purpose other than in
connection with the performance under this
Agreement.
2. Upon termination of this Agreement for any reason whatsoever,
each party shall promptly surrender and deliver to each other
party all records, materials, documents, data and any other
Proprietary Information of the other parties and shall not retain
any description containing or pertaining to any Proprietary
Information of the other parties, unless otherwise consented to
in writing by a duly authorized officer of UWSI or AMSG as the
case may be.
C. Cooperation. The parties hereto will fully cooperate with each other
and their respective counsel, if any, agents and accountants in
connection with any action to be taken in the performance of their
obligations under this Agreement. In the conduct of their affairs and
the performance of this Agreement the parties hereto shall, unless
otherwise agreed, maintain the working relationships of the parties on
substantially the same terms as before the execution of this
Agreement. Notwithstanding the preceding, the parties do not intend,
nor should this Agreement be construed, to restrict any party's
ability to contract with any other person or entity to provide
services similar to or the same as those which are the subject of this
Agreement.
V. TERM AND TERMINATION
A. Term. This Agreement shall commence on the Effective Date and shall
continue in force until December 31, 1999, unless otherwise terminated
pursuant to Section V.B.
B. Termination.
1. This Agreement may be terminated by any party at any time by
giving sixty (60) days advance written notice to the
nonterminating party of its intention to terminate.
2. This Agreement shall terminate immediately at the election of and
upon written notice from the non-defaulting party in the event of
any of the following:
(a) A party hereto becomes incapable of fully performing its
duties and obligations according to the terms of this
Agreement for the following reason(s): insolvency,
bankruptcy, or substantial cessation or interruption of its
business operations for any reason whatsoever;
<PAGE>
(b) A party hereto commits fraud or willful, wanton or reckless
misconduct in performing its obligations under this
Agreement; however, if the defaulting party provides the
non-defaulting parties with prompt notice of the event of
default, the defaulting party shall have 30 days to cure the
defect, during which time the non-defaulting parties may not
exercise the termination right under this Section V.B.2.
3. Liabilities After Termination. The termination of this Agreement
shall not limit the obligation or liabilities of any party hereto
incurred but not discharged prior to termination.
VI. INDEMNIFICATION
A. Indemnification by AMSG.
1. Notwithstanding anything to the contrary in this Agreement,
neither UWSI, nor any other company in the UWSI Group, nor any
person who is or was, at the time of any action or inaction
affecting AMSG, a director, officer, employee or agent of UWSI or
any other company in the UWSI Group (collectively "Indemnitees")
shall be liable to AMSG for any action or inaction taken or
omitted to be taken by such Indemnitee; provided, however, that
such Indemnitee acted or made an omission in good faith and such
action or inaction does not constitute actual fraud or willful,
wanton or reckless misconduct.
2. AMSG shall, to the fullest extent not prohibited by law,
indemnify and hold harmless each Indemnitee against any
liability, damage, cost, expense, loss, claim or judgment
(including, without limitation, reasonable attorneys' fees and
expenses) resulting to, imposed upon or incurred by such
Indemnitee a. in connection with any action, suit, arbitration or
proceeding to which such Indemnitee was or is a party or is
threatened to be made a party by reason of the UWSI Services
provided to AMSG hereunder; provided, however, that such
Indemnitee acted or made an omission in good faith and such
action or inaction does not constitute actual fraud or willful,
wanton or reckless misconduct, or b. by reason of, arising out of
or resulting from any breach or misrepresentation by AMSG under
this Agreement.
B. Indemnification by UWSI. UWSI hereby agrees, to the fullest extent
not prohibited by law, to indemnify and hold harmless AMSG, and its
successors and assigns, from and against any liability, damage, cost,
expense, loss, claim or judgment (including, without limitation,
reasonable attorneys' fees and expenses) resulting to, imposed upon or
incurred by AMSG by reason of, arising out of or resulting from any
breach or misrepresentation by UWSI under this Agreement.
<PAGE>
VII. MISCELLANEOUS
A. Assignment. Neither this Agreement nor any rights or obligations
hereunder may be assigned or transferred by any party hereto without
the prior written consent of the other party.
B. Amendment. The parties recognize that it may be desirable to alter
the terms of this Agreement in the future to take into account such
events or conditions as may from time to time occur. Any amendments
to this Agreement shall be in writing and shall be executed by all
parties.
C. Waiver; Remedies. No failure or delay of a party in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or
power, preclude any other or further exercise thereof or the exercise
of any other right or power. In addition to any rights granted
herein, the parties hereto shall have and may exercise any and all
rights and remedies now or hereafter provided by law except as may be
limited by Section VII.D of this Agreement.
D. Resolution of Disputes.
1. Any dispute, controversy or claim between the parties hereto that
arises out of or relates to this Agreement shall be settled by
arbitration. In order to initiate an arbitration, UWSI or AMSG
(as the case may be) shall deliver a written notice of demand for
arbitration to the other party. Within thirty (30) days of the
giving of such written notice, each party shall appoint an
individual as arbitrator (the "Party Arbitrators"). Within
thirty (30) days of their appointment, the Party Arbitrators
shall collectively select one additional arbitrator (together the
"Panel Arbitrators") and shall give the parties notice of such
choice.
2. The arbitration hearings shall be held in Milwaukee, Wisconsin.
Each party shall submit its case to the Panel Arbitrators within
sixty (60) days of the selection of the Panel Arbitrators or
within such longer period as may be agreed by the Panel
Arbitrators. The decision rendered by a majority of the Panel
Arbitrators shall be final and binding on the parties. Such
decision shall be a condition precedent to any right of legal
action arising out of the arbitrated dispute. Judgment upon the
award rendered may be entered in any court having jurisdiction
thereof.
3. Each party shall
<PAGE>
a. pay the fees and expenses of its own Party Arbitrator, and
pay its own legal, accounting, and other professional fees
and expenses,
b. jointly share in the payment of the fees and expenses of the
other arbitrator selected by the Party Arbitrators, and
c. jointly share in the payment of the other expenses jointly
incurred by the parties directly related to the arbitration
proceeding.
4. Except as provided above, the arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association.
E. Notices. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally, or if mailed (by registered or
certified mail, postage prepaid, return receipt requested), or if
transmitted by facsimile or e-mail, as follows:
1. If to UWSI:
General Counsel
UWSI
401 West Michigan Street
P.O. Box 2025
Milwaukee, Wisconsin 53201-2025
Facsimile Telephone Number: 414/226-6229
2. If to AMSG:
General Counsel
AMSG
3100 AMS Blvd.
Green Bay, Wisconsin 54313
Facsimile Telephone Number: 920/661-1131
Any notice or other communication given as provided in this Section VII.E,
shall be deemed given upon the first business day after actual delivery to the
party to whom such notice or other communication is sent (as evidenced by the
return receipt or shipping invoice signed by a representative of such party or
by the facsimile confirmation or e-mail return receipt). Any party from time to
time may change its address for purpose of notices to that party by giving a
similar notice specifying a new address.
<PAGE>
F. Relationship of the Parties. Negotiations relating to this Agreement
have occurred and shall continue to be carried out on an arm's length
basis. Further, the services and other resources contemplated by this
Agreement shall be provided to AMSG on an independent contractor
basis. Nothing in this Agreement shall be construed to create an
employer-employee relationship between AMSG and UWSI or any of UWSI
Group employees.
G. Entire Agreement. This Agreement constitutes the entire understanding
and agreement of the parties hereto and supersedes all prior
agreements and understandings, written or oral, between the parties
with respect to the transactions contemplated herein. Provided,
however, the foregoing shall not operate or be construed to prohibit
proof of prior understandings and agreements between or among the
parties to the extent necessary to properly construe or interpret this
Agreement.
H. Headings. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or
interpreted in connection with this Agreement.
I. No Third Party Beneficiaries. This Agreement is only for the benefit
of the parties hereto and does not confer any right, benefit, or
privilege upon any person or entity not a party to this Agreement.
J. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving
effect to principles of conflicts of laws) as to all matters,
including, without limitation, matters of validity, construction,
effect, performance and remedies.
K. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law,
and if the rights or obligations of any party under this Agreement
will not be materially and adversely affected thereby,
1. such provision will be fully severable,
2. this Agreement will be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part
hereof,
3. the remaining provisions of this Agreement will remain in full
force and effect and will not be affected by the illegal,
invalid, or unenforceable provision or by its severance here
from, and
4. in lieu of such illegal, invalid, or unenforceable provision,
there will be added automatically as part of this Agreement, a
legal, valid, and
<PAGE>
enforceable provision as similar terms to such illegal, invalid,
or unenforceable provision as may be possible.
L. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but
all of which will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the Effective Date.
United Wisconsin Services, Inc.
By:___________________________________
Title:_________________________________
American Medical Security Group, Inc.
By:___________________________________
Title:_________________________________
<PAGE>
AMENDED AND RESTATED
JOINT VENTURE AGREEMENT
BY AND AMONG
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
UNITED WISCONSIN SERVICES, INC.
UNIVERSITY HEALTH CARE, INC.
U-CARE HMO, INC.
AND
HEALTH PROFESSIONALS, INC.
<PAGE>
AMENDED AND RESTATED JOINT VENTURE AGREEMENT
This AMENDED AND RESTATED JOINT VENTURE AGREEMENT ("Agreement") is made and
entered into as of October 31, 1994, by and among Blue Cross & Blue Shield
United of Wisconsin, a Wisconsin insurance corporation ("Blue Cross"), United
Wisconsin Services, Inc., a Wisconsin business corporation ("UWS"), University
Health Care, Inc., a corporation organized under Chapter 181 of the Wisconsin
Statutes ("UHC"), U-Care HMO, Inc., a Wisconsin health maintenance organization
organized under Chapter 613 of the Wisconsin Statutes ("U-Care"), Health
Professionals, Inc., a corporation organized under Chapter 181 of the Wisconsin
Statutes ("HPI"), and the entities which agree to be bound to this Agreement
pursuant to Section 4.1.F (collectively, "Parties").
RECITALS
1. U-Care desires to obtain the resources and insurance expertise
necessary to further its goal of delivering quality managed care programs to an
expanded population of insured members.
2. UHC has as its purpose to further the teaching, research and
service functions of the University of Wisconsin-Madison Medical School (the
"Medical School"), University of Wisconsin Hospital and Clinics and the Center
for Health Sciences at the University of Wisconsin-Madison ("UW Center for
Health Sciences"), and is fulfilling that purpose by providing opportunities for
teaching, research and service by entering this Agreement.
3. Blue Cross and UWS desire to establish a managed care operation
in Southern Wisconsin, utilizing the provider relationships U-Care and UHC have
established in the region.
4. HPI, either directly or through a newly formed for-profit
subsidiary ("Newco"), intends to continue to expand and operate its regional
provider network.
5. The Parties wish to coordinate the design and marketing of
various managed care products, including, without limitation, one or more
Preferred Provider Organization ("PPO"), Point of Service ("POS"), and Health
Maintenance Organization ("HMO") products and programs.
6. The Parties believe that the formation of a joint venture ("Joint
Venture"), upon the terms and conditions set forth in this Agreement and in the
documents to be executed and performed pursuant to this Agreement, a list of
which is attached hereto as Schedule 1 (collectively, "Joint Venture
Documents"), will assist the Parties in meeting the foregoing objectives.
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<PAGE>
7. The Parties previously entered into a Joint Venture Agreement
dated as of September 9, 1994 ("Previous Joint Venture Agreement"), and wish to
amend and restate such agreement on the terms and conditions set forth in this
Agreement.
In consideration of the premises and the mutual promises and covenants
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Parties agree as follows:
AGREEMENT
ARTICLE 1 - FORMATION OF JOINT VENTURE
1.1. JOINT VENTURE. The Parties are entering into a series of related
contracts with one another and with certain third parties in order to produce,
market, and administer managed care products which utilize a provider network.
The Joint Venture will coordinate the design and marketing of various managed
care products, including, without limitation, one or more PPO, POS, and HMO
products and programs, all of which may be fully insured or self-funded. The
Joint Venture shall become operational upon the Closing contemplated in Section
5.5. The Parties may, but shall not be obligated to, create a separate entity
to conduct the business of the Joint Venture.
1.2. AGENCY RELATIONSHIP. This Agreement shall not create any agency
relationship between the Parties other than those specifically enumerated
herein and in the Joint Venture Documents. The relationships between the
Parties are that of independent cont~actors in a cooperative arrangement. It
is not the intent of the Parties to create, nor should this Agreement be
construed to create, a partnership or an employment relationship between the
Parties. This Agreement creates no fiduciary relationship between the
Parties.
1.3. HMO OF WISCONSIN JOINT VENTURE. UWS and Blue Cross (collectively,
"UWS Entities") have negotiated with HMO-W, Inc. (the "Holding Company") and HMO
of Wisconsin Insurance Corporation ("HMOW") to form a joint venture ("HMOW Joint
Venture") and for UWS to acquire one hundred percent (100%) of the stock of the
Holding Company pursuant to a merger between the Holding Company and a wholly
owned subsidiary of UWS, both as provided in the Agreement of Merger and Joint
Venture by and among UWS, UWS Acquisition Corporation, Blue Cross, Holding
Company, and HMOW dated as of October 11, 1994 ("HMOW Joint Venture Agreement").
Should the transactions contemplated in the HMOW Joint Venture Agreement close
("HMOW Closing"), the Parties agree that the business of the Joint Venture and
the business of the HMOW Joint Venture shall be merged.
1.4. OTHER JOINT VENTURES. The Parties further agree that if the UWS
Entities enter into a new joint venture with another partner in the Fox Valley
area ("Fox Valley Joint Venture"), the UWS Entities may, within their sole
discretion and without the approval or review by the Governing Board (as defined
below), transfer HMO membership and provider relationships in the
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<PAGE>
counties of Fond du Lac, Green Lake, Waushara and Winnebago from the Joint
Venture to the Fox Valley Joint Venture, and the business attributable to such
HMO membership and provider relationships shall not be included in the
calculation of Royalties under the License Agreement (defined in section 4.3.F)
or any Service Payment under the Service Agreement (as defined in Section
4.3.G). Each of the University Affiliated Entities (as defined in Section 3.1)
shall use their respective best efforts to obtain all consents that the UWS may
deem reasonably necessary to effectuate such transfers. The formation and
operation of the Fox Valley Joint Venture by the UWS Entities or any of their
affiliates shall not be a violation of Section 7.1.
ARTICLE 2 - GOVERNANCE
2.1. GOVERNING BOARD.
The Joint Venture shall be managed by a governing board
("Governing Board") which shall consist of the members appointed as follows:
A. In the event that the HMOW Closing occurs:
UWS four members
LLC (as defined in four members
Section 3.7(F) of the
HMOW Joint Venture
Agreement)
UHC three members
B. In the event that (i) the HMOW Closing does not occur or (ii) the
HMOW Closing occurs and either the HMOW Joint Venture subsequently terminates
pursuant to Section 8.3 of the HMOW Joint Venture Agreement or the Service
Agreement between HMOW and LLC dated November 1, 1994, subsequently terminates:
UWS five members
UHC five members
C. The Parties shall cause the Governing Board to meet at least once
in each fiscal quarter at the Joint Ventures's home office facility or such
other place as the Governing Board may from time to time agree. Any individual
member of the Governing Board shall have the power and authority upon three days
written notice, to call a meeting of the Governing Board to discuss and
administer the business of the Joint Venture. Members of the Governing Board
may participate in meetings either telephonically or in person. The Joint
Venture shall not pay members of the Governing Board.
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<PAGE>
D. A chairman shall preside over each meeting of the Governing
Board. The chairman shall be a member of the Governing Board and the entities
entitled to appoint members shall each have the power to appoint the chairman
for a one year term on a rotating basis.
E. Eight (8) members of the Governing Board shall constitute a
quorum for the transaction of business (five members if the HMOW Closing does
not occur or the HMOW Joint Venture terminates), subject to the voting
requirements in Section 2.2 below.
F. Any action that the Governing Board could take at a meeting may
be taken instead by a written consent signed by all of the members of the
Governing Board.
2.2. VOTING REQUIREMENT. The Governing Board may not take any action
without the approval of at least eight of its members (five if the HMOW Closing
does not occur or the HMOW Joint Venture terminates), which shall include at
least one member elected by each entity appointing members to the Governing
Board.
2.3. Duties of the Governing Board.
A. The Governing Board shall be responsible for the general
management of the Joint Venture. Notwithstanding the foregoing, the
Underwriters (as defined in Section 6.1) shall have the sole authority, without
the approval of the Governing Board, to establish rates and arrange reinsurance
for the Joint Venture business.
B. The Governing Board shall establish such books, records and
accounts for the Joint Venture as it deems reasonably necessary and allow each
of the Parties, upon request, to review such books, records and accounts. The
Governing Board shall maintain records of all of its meetings and actions taken
in a manner substantially similar to that which a Board of Directors of a
corporation organized under Chapter 180 of the Wisconsin Statutes would
maintain.
2.4. COMMITTEES. The Governing Board may establish such committees as it
may deem necessary or appropriate; provided, however, that any committee so
created must contain at least one member from each of the entities entitled to
appoint members to the Governing Board.
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES
3.1. THE UNIVERSITY AFFILIATED ENTITIES.
UHC, U-Care, HPI and each of the entities which agree to be bound to this
Agreement pursuant to Section 4.1.F (collectively, "University Affiliated
Entities") each hereby represents and warrants to the UWS Entities as follows:
A. UHC is a corporation organized under Chapter 181 of the Wisconsin
Statutes and is duly organized, validly existing and in good standing. U-Care
is a Wisconsin service insurance corporation organized pursuant to Chapter 613
of the Wisconsin Statutes and is duly organized, validly existing and in good
standing. HPI is a corporation organized under Chapter 181 of the Wisconsin
Statutes and is duly organized, validly existing and in good standing. Each of
the University Affiliated Entities other than UHC, U-Care, and HPI are
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<PAGE>
organized as set forth in the Acknowledgement and Agreement to be Bound (as
defined in Section 4.1.F) to which they are a party and are duly organized,
validly existing and in good standing under the laws of the state of their
respective organization.
B. Each of the University Affiliated Entities (a) is duly qualified
as a foreign corporation and in good standing under the laws of each
jurisdiction where the failure to qualify would have a material adverse effect
upon it; (b) has the requisite corporate power and authority and the legal right
to own, pledge and operate its properties, to lease the property it operates
under lease and to conduct its business as now conducted; (c) has all necessary
licenses, permits, consents or approvals from or by, and has made all necessary
filings with, and has given all necessary notices to, all governmental
authorities having jurisdiction, to the extent required for such ownership,
operation and conduct except where the failure to obtain such licenses, permits,
consents or approvals or to make such filings with not have a material adverse
effect upon it; (d) is in compliance with its certificate or articles of
incorporation and by-laws and all material agreements to which it is a party or
by which it is bound except where the failure to comply will not have a material
adverse effect upon it; and (e) is in compliance in all respects with all
applicable provisions of law except where the failure to comply will not have a
material adverse effect upon it. The University Affiliated Entities have no
subsidiaries.
C. The execution, delivery and performance of this Agreement and all
documents to be executed and delivered by any of the University Affiliated
Entities hereunder, (a) are within their respective corporate power; (b) have
been duly authorized by all necessary or proper corporate and other action,
including the consent of shareholders, members, board of directors, or Board of
Regents where required; (c) are not in contravention of any provision of their
respective certificate or articles of incorporation or by-laws; (d) do not
violate any law or regulation, or any order or decree of any court or
governmental instrumentality applicable to it; and (e) except for provider
agreements between third party providers and U-Care, which may prohibit
disclosure or assignment without the consent of such third parties ("Third Party
Consents"), do not conflict with or result in the breach of, or constitute a
de&tilt under, any indenture, mortgage, deed of trust, lease, agreement or other
instrument to which it is a party or by which it or any of its property is
bound, and the same do not require the consent or approval of any governmental
body, agency, authority or other entity other than those that have been
obtained. This Agreement has been duly executed and delivered by each of the
University Affiliated Entities and constitutes the legal, valid and binding
obligation of it, enforceable against it in accordance with its terms except as
such enforceability may be limited by bankruptcy or similar laws affecting the
enforceability of creditor's rights generally and by general principles of
equity.
D. None of the University Affiliated Entities is a party to any
litigation or administrative proceeding, nor so far as is known by them is any
litigation or adverse administrative proceeding or hearing threatened against
any entity which in either case relates to the execution, delivery or
performance of this Agreement or the Joint Venture.
E. UHC has access to and the authority to invest, within five years
after the Closing Date, $10 million in Reorganized HPI (as defined in Section
4.1.D) or Newco, as the case may be, for the sole purpose of enabling
Reorganized HPI or Newco to expand and operate the regional provider network
currently operated by HPI.
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<PAGE>
F. The University of Wisconsin Hospital and Clinics ("Hospital"),
the faculty physicians of the University of Wisconsin Medical School, and HPI
are the only entities that are (i) part of the University of Wisconsin system
and (ii) serve as providers of medical services on behalf of U-Care or in
connection with the U-Care Business (as defined in Section 5.1.).
G. UHC has the authority to bind each of the Hospital, the faculty
physicians of the University of Wisconsin Medical School, the Clinical Practice
Plan Partnerships, and HPI ("University Providers") to the Provider Agreements
referenced in Section 6.5.
H. The following documents ("Section 3.1.H Documents"), which the
University Affiliated Entities are obligated to deliver to the UWS Entities on
or before the 20th day prior to Closing pursuant to Section 4.1.J, will
constitute true, complete, and correct copies of such documents as of the date
delivered and the Closing Date:
(i) The Bylaws of each of the University Affiliated
Entities;
(ii) The certified Articles of Incorporation of each of the
University Affiliated Entities;
(iii) A list of all of the members of each of the University
Affiliated Entities certified by their respective secretaries or, where
applicable, a list of all of the shareholders of each of the University
Affiliated Entities certified by their respective secretaries.
(iv) The unaudited financial statements of each University
Affiliated Entity dated as of June 30, 1994, and the audited financial
statements of each University Affiliated Entity dated as of December 31, 1993,
which were prepared in accordance with generally accepted accounting principles
and fairly and accurately reflect the financial condition of such entities on
such date;
(v) A list of all contracts and leases to which (a) U-Care
is a party or (b) UHC is a party that are necessary for U-Care to conduct its
business;
(vi) Copies of all reports, licenses, permits, consents,
approvals, orders, judgments and other documents and instruments which relate to
the Joint Venture or U-Care; and
(vii) A list of all tangible and intangible assets or
property (real and personal) of (a) U-Care ("U-Care Assets") and (b) UHC that
are necessary for U-Care to conduct its business ("UHC Assets"), including,
without limitation, U-Care's name and any trademarks or other intellectual
property rights.
I. Except as disclosed in writing to the UWS Entities on or before
the 20th day prior to Closing, U-Care and UHC have good and marketable title to
all of the U-Care Assets and UHC Assets, respectively, free and clear of all
mortgages, liens (statutory or otherwise), security interests, claims, pledges,
licenses, restrictions, exceptions, charges or encumbrances of any nature
whatsoever.
J. No information, exhibit or report, whether written or oral,
furnished by the University Affiliated Entities to the UWS Entities in
connection with the negotiation or execution
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<PAGE>
of this Agreement contained any misstatement of a material fact or omitted to
state a material fact necessary to make the statements contained therein not
misleading as of the date when made.
3.2. THE UW ENTITIES.
The UWS Entities hereby represent and warrant to the University
Affiliated Entities as follows:
A. Blue Cross is a corporation duly organized, validly existing and
in good standing under the laws of Wisconsin. UWS is a corporation duly
organized, validly existing and in good standing under the laws of Wisconsin.
B. The execution, delivery and performance of this Agreement by each
of the UWS Entities (a) is within its corporate power; (b) has been duly
authorized by all necessary or proper corporate action, including the consent of
shareholders where required; (c) does not contravene any provision of its
certificate or articles of incorporation or by-laws; (d) does not violate any
law or regulation, or any order or decree of any court or governmental
instrumentality applicable to it; and (e) does not conflict with or result in
the breach of, or constitute a default under, any indenture, mortgage, deed of
trust, lease, agreement or other instrument to which it is a party or by which
it or any of its property is bound, and the same do not require the consent or
approval of any governmental body, agency, authority or other entity other than
those that have been obtained. This Agreement has been duly executed and
delivered by each of the UWS Entities and constitutes the legal, valid and
binding obligation of each of the UWS Entities, enforceable against it in
accordance with its terms except as such enforceability may be limited by
bankruptcy or similar laws affecting the enforceability of creditors rights
generally.
C. UWS has delivered to UHC a true and correct copy of the letter of
intent, dated August 23, 1994, among the UWS Entities, the Holding Company and
HMOW and any documents or agreements related thereto (collectively, the "HMOW
Letter of Intent"), which have not been amended or modified and remain in full
force and effect. The Definitive HMOW Documents (as defined in Section 4.2.D)
will constitute true, complete, and correct copies of such documents as of the
date delivered to UHC.
D. Each of the UWS Entities (a) is duly qualified as a foreign
corporation and in good standing under the laws of each jurisdiction where the
failure to qualify would have a material adverse effect upon it; (b) has the
requisite corporate power and authority and the legal right to own, pledge and
operate its properties, to lease the property it operates under lease and to
conduct its business as now conducted; (c) has all necessary licenses, permits,
consents or approvals from or by, and has made all necessary filings with, and
has given all necessary notices to, all governmental authorities having
jurisdiction, to the extent required for such ownership, operation and conduct
except where the failure to obtain such licenses, permits, consents or approvals
or to make such filings will not have a material adverse effect upon it; (d) is
in compliance with its certificate or articles of incorporation and by-laws and
all material agreements to which it is a party or by which it is bound except
where the failure to comply will not have a material adverse effect upon it; and
(e) is in compliance in all respects with all applicable provisions of law
except where the failure to comply will not have a material adverse effect upon
it.
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<PAGE>
E. None of the UWS Entities is a party to any litigation or
administrative proceeding, nor so far as is known by them is any litigation or
adverse administrative proceeding or hearing threatened against any entity which
in either case relates to the execution, delivery or performance of this
Agreement or the Joint Venture.
F. No information, exhibit or report, whether written or oral,
furnished by the UWS Entities to the University Affiliated Entities in
connection with the negotiation or execution of this Agreement contained any
misstatement of a material fact or omitted to state a material fact necessary to
make the statements contained therein not misleading as of the date when made.
ARTICLE 4 - COVENANTS
4.1. UNIVERSITY AFFILIATED ENTITIES.
A. DUE DILIGENCE. During the period from the date hereof until the
Closing Date, each of the University Affiliated Entities shall give each of the
UWS Entities, their counsel, accountants and other representatives (including,
without limitation, representatives of HMOW) (a) access during normal business
hours to all of the properties, books, records, contracts and documents of each
University Affiliated Entity that relate to U-Care or the U-Care Business for
the purpose of such inspection, investigation and testing as the UWS Entities
deem appropriate; and (b) subject to such restrictions as the University
Affiliated Entities may reasonably impose, access to employees, agents and
representatives of the University Affiliated Entities for the purposes of such
meetings and communications that relate to U-Care or the U-Care Business as the
UWS Entities may reasonably desire.
B. CONDUCT OF BUSINESS PRIOR TO CLOSING. U-Care shall carry on its
business diligently in the same manner as heretofore and shall not make or
institute any material changes in its methods of management, accounting, or
operation.
C. CONSENTS. Each of the University Affiliated Entities shall take
all action prior to Closing that may be reasonably necessary to obtain all
requisite consents for the consummation of the transactions contemplated hereby
including, without limitation, all requisite regulatory approvals.
D. REORGANIZATION OF UHC AND HPI. Prior to Closing, the University
Affiliated Entities shall take all action reasonably necessary to reorganize the
business of UHC and HPI in a manner which is reasonably acceptable to the UWS
Entities, and shall keep the UWS Entities informed as to the status of such
reorganization ("Reorganization"). As part of the Reorganization, the
University Affiliated Entities shall either (a) cause HPI to be restructured
("Reorganized HPI") as a for-profit business corporation under Chapter 180 of
the Wisconsin Statutes or (b) cause Newco to be formed as a for-profit business
corporation under Chapter 180 of the Wisconsin Statutes and cause HPI to
contribute assets to Newco in exchange for stock in Newco.
E. CLOSING. The University Affiliated Entities shall use all
reasonable efforts to cause a fulfillment at the earliest possible date of all
of the conditions to the Parties' obligations to consummate the transactions
contemplated in this Agreement, including, without limitation, the execution,
delivery and performance of the Joint Venture Documents (including without
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limitation the agreements referred to in Section 9.9) on terms and conditions
reasonably acceptable to the UWS Entities.
F. ADDITIONAL PARTIES. The University Affiliated Entities shall
cause any new entities created as part of the Reorganization, which in the
reasonable opinion of the UWS Entities need to be Parties to this Agreement
excluding corporations controlled by the University of Wisconsin Board of
Regents ("Regents") and any corporation in which an entity controlled by the
Regents holds 50% or more of the membership, to agree to be bound by this
Agreement as University Affiliated Entities by executing and delivering at
Closing an agreement substantially in the form of Exhibit 4.1.F attached hereto
("Acknowledgement and Agreement to be Bound").
G. SIGNATORIES TO ARTICLE 7. The University Affiliated Entities
shall cause such of their affiliates as the UWS Entities may reasonably
designate and the Clinical Practice Plan Partnerships to agree to be bound by
Article 7 of this Agreement and, where relevant, to the assignment of any
provider agreement to which such entity is a party as contemplated in Section
5.7, by executing an agreement substantially in the form of Exhibit 4.1.G hereto
("Noncompetition and Assignment Agreement").
H. INVESTMENT IN REORGANIZED HPI. Within five (5) years of the
Closing, UHC shall invest $10 million in Reorganized HPI or Newco, as the case
may be, in form and substance reasonably acceptable to the UWS Entities, for the
sole purpose of enabling Reorganized HPI or Newco to expand and operate the
regional provider network currently operated by HPI.
I. DISSOLUTION OF U-CARE. As soon as practical after the Closing,
and in any event not more than 180 days thereafter, the University Affiliated
Entities shall take all action that may be reasonably necessary to dissolve and
wind up the affairs of U-Care, subject to obtaining all necessary regulatory
approvals. In the event that all such approvals have not been obtained on or
before such 180th day, the University Affiliated Entities shall (i) promptly
change U-Care's name and (ii) continue to take all action that may be reasonably
necessary to obtain the requisite regulatory approvals and dissolve and wind up
U-Care as soon as possible.
J. SECTION 3.1.H DOCUMENTS. The University Affiliated Entities
shall, on or before the 20th day prior to the Closing Date, deliver to the UWS
Entities all of the Section 3.1.H Documents.
K. PREFERRED STOCK. Prior to Closing, Reorganized HPI or Newco, as
the case may be, shall amend ("Articles of Amendment") its Articles of
Incorporation to authorize such corporation to issue 1,500 shares of a single
series of preferred stock ("Preferred Stock"). The terms and conditions of the
Articles of Amendment and Preferred Stock shall be in a form that is reasonably
acceptable to the UWS Entities and shall generally include the terms set forth
on Exhibit 4.1.K hereto.
4.2. UWS ENTITIES.
A. CLOSING. Each of the UWS Entities shall use all reasonable
efforts to cause a fulfillment at the earliest possible date of all of the
conditions to the Parties' obligations to consummate the transactions
contemplated in this Agreement, including, without limitation, the execution,
delivery and performance of the Joint Venture Documents (including the
agreements
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referred to in Section 10.9) on terms and conditions reasonably acceptable to
the University Affiliated Entities.
B. VOTING OF STOCK OF HMOW. In the event that UWS acquires HMOW, it
shall vote the stock of HMOW in such a way as to ensure that (a) the Governing
Board constitutes all of the members of the Board of Directors of HMOW and (b)
HMOW adopts bylaws that are reasonably acceptable to the Parties ("New HMOW
Bylaws").
C. DUE DILIGENCE OF HMOW. The UWS Entities shall permit two (2)
representatives of the University Affiliated Entities to accompany the UWS
Entities during UWS's due diligence of HMOW. If the University Affiliated
Entities wish to send more than two (2) representatives, they shall so notify
the UWS Entities prior to the applicable meeting and shall be entitled to send
such additional representatives unless the UWS Entities shall reasonably object.
The UWS Entities shall provide to the University Affiliated Entities copies of
all HMOW due diligence reports prepared by third party consultants retained by
the UWS Entities.
D. HMOW DOCUMENTS. The UWS Entities shall deliver to UHC as soon as
available, but in no event later than 10 days prior to the Closing Date (a) all
definitive agreements entered into or the latest draft of any such agreements
proposed to be entered into by any UWS Entity in connection with the HMOW Joint
Venture (including, without limitation, the HMOW Joint Venture Agreement) and
(b) if proposed to be amended or modified in connection with the HMOW
Joint-Venture, the articles of incorporation, bylaws and other governing
documents of the UWS Entities and all contracts, provider agreements,
reinsurance agreements and stop-loss agreements to which any UWS Entity is a
party and which relate to the HMOW Joint Venture (collectively, "Definitive HMOW
Documents").
E. NOTICE. In the event that LLC has given notice to UWS of its
option to reacquire the stock of HMOW as set forth in Section 4 of the Service
Agreement dated November 1, 1994, between LLC and UWS, UWS shall promptly
provide such notice to UHC.
4.3. Mutual Covenants.
A. IMPLEMENTATION PLAN. Prior to Closing, the Parties shall develop
a marketing plan, budget and transition plan (which shall include the HMOW
business if the HMOW Closing occurs) relating to Joint Venture business that is
mutually acceptable to the Parties ("Implementation Plan").
B. BYLAWS. Prior to Closing, the Parties shall prepare mutually
acceptable Bylaws for the Governing Board, which the Governing Board shall
adopt.
C. ISSUANCE OF PREFERRED STOCK. At Closing, Reorganized HPI or
Newco, as the case may be, shall enter into a stock subscription agreement with
UWS ("Subscription Agreement") pursuant to which Blue Cross shall purchase, and
Reorganized HPI or Newco shall issue, all of the authorized shares of Preferred
Stock. In consideration of the issuance of the Preferred Stock, Blue Cross
shall pay to Reorganized HPI or Newco, as the case may be, $1.5 million at
Closing by wire transfer in immediately available funds to an account designated
by Reorganized HPI or Newco. At Closing, Reorganized HPI or Newco, as the case
may be, shall
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issue one or more certificates ("Certificates") representing the shares of
Preferred Stock to Blue Cross.
D. CREDIT AGREEMENT. At Closing, Blue Cross and UHC, HPI or Newco,
as the case may be, shall execute and deliver the Revolving Credit Agreement
attached hereto as Exhibit 4.3.D ("Credit Agreement") and each Party shall
execute and deliver the instruments and documents referred to therein to which
such Party is a party. Prior to Closing, the Parties shall in good faith
negotiate and prepare all of the instruments and documents referred to in the
Credit Agreement including, without limitation, all of the exhibits thereto.
E. RELOCATION OF OPERATIONS. If the HMOW Closing occurs, then the
Parties shall cause the home office facility of the Joint Venture promptly to be
moved to Sauk City, Wisconsin.
F. LICENSE AGREEMENT. At Closing, UHC, U-Care and HMOW (or, in the
event that the HMOW Closing does not occur, then a health maintenance
organization of the UWS Entities' choosing) shall enter into the License
Agreement attached hereto as Exhibit 4.3.F ("License Agreement").
G. SERVICE AGREEMENT. At Closing, HPI and HMOW (or, in the event
that the HMOW Closing does not occur, then a health maintenance organization of
the UWS Entities' choosing) shall enter into the Service Agreement attached
hereto as Exhibit 4.3.G ("HPI Service Agreement").
ARTICLE 5 - ACQUISITION OF U-CARE
5.1. REINSURANCE OF U-CARE BUSINESS. UWS shall acquire all of the
insurance business of U-Care ("U-Care Business") by causing HMOW(, in the event
that the HMOW closing does not occur, then a health maintenance organization
("HMO") of UWS's choosing) to enter into an Assumption Reinsurance Agreement
with U Care in the form attached hereto as Exhibit 5.1 ("Assumption Reinsurance
Transaction"). The reinsurance premium payable under the Assumption Reinsurance
Agreement shall be assets of U Care, the book value of which equals the
liabilities being transferred. Both the assets and liabilities will be
determined as of September 30, 1994.
5.2. ACQUISITION OF REMAINING U-CARE ASSETS. After giving effect to the
Assumption Reinsurance Transaction, UWS shall purchase, and U-Care shall sell to
UWS, the U-Care Assets (other than the name "U-Care" and related logos and
marks) for the Purchase Price calculated in accordance with Section 5.3 and
shall enter into the License Agreement. The Purchase Price shall be paid to
U-Care at the Closing by transfer of available funds to an account specified by
U-Care. U-Care shall take whatever action may be reasonably necessary to
effectuate the purchase of the U-Care Assets described in this Section 5.2
including, without limitation, the execution or endorsement of any documents or
instruments that UWS may reasonably request.
5.3. PURCHASE PRICE.
A. The Purchase Price shall be 100% of the statutory net worth of
U-Care as of September 30, 1994, as determined by U-Care's regular accountant,
Suby, Von Haden &
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Associates, S.C., ("Accountant") after giving effect to the Assumption
Reinsurance Transaction ("Net Worth"), plus $500,000 attributable to good will.
Net Worth shall be determined by applying the same accounting principles applied
in determining U-Care's 1993 net worth.
B. If the Net Worth has not yet been determined by the Accountant by
the Closing Date, the Parties shall make a good faith estimate of the Net Worth
using the unaudited June 30, 1994, financial statement for U-Care to calculate a
purchase price to be paid at Closing. As soon as the Accountant has determined
the actual Net Worth, but no later than March 1, 1995, such Net Worth shall be
used to calculate the Purchase Price which should have been paid at the Closing
and the Parties will promptly make payment in conformity with such recalculated
Purchase Price.
5.4. ACQUISITION OF UHC ASSETS. In addition to the acquisition of the
U-Care Assets, UWS shall purchase, and UHC shall sell to UWS, the UHC Assets for
a purchase price equal to the book value of the UHC Assets on UHC's financial
statements as of September 30, 1994. UWS shall pay such purchase price to UHC
at the Closing by transfer of funds to an account specified by UHC. UHC shall
take whatever action may be reasonably necessary to effectuate the purchase of
the UHC Assets as described in this Section 5.4 including, without limitation,
the execution or endorsement of any documents or instruments that UWS may
reasonably request.
5.5. CLOSING. The consummation of the acquisition of the U-Care Business
and the other transactions contemplated by this Agreement and the Joint Venture
Documents (the "Closing") shall take place at the offices of Foley & Lardner,
Firstar Plaza, One South Pinckney Street, Madison, Wisconsin, or at such other
place as may be mutually agreed upon by the parties. The Closing shall occur at
10:00 a.m., Central Standard Time, on or before November 1, 1994, or at such
other time as may be agreed upon by the parties hereto (the time and date of the
Closing being referred to herein as the "Closing Date").
5.6. TAX LIABILITIES. U-Care shall be liable for any federal, state, and
local tax liability incurred by it on or before the Closing Date. The
University Affiliated Entities shall be responsible for any tax liability
incurred by U-Care after the Closing. If the amount of taxes that U-Care paid
prior to the Closing Date, plus the accrued liability for any such taxes shown
on the financial statements used to compute the Purchase Price shall be
insufficient, then the University Affiliated Entities shall pay to UWS the
amount of the deficiency promptly upon its assessment. The University
Affiliated Entities may contest any such assessments at their own expense and,
if successful, shall promptly be reimbursed by UWS for the amount of any excess
payment.
5.7. U-CARE PROVIDER AGREEMENTS. Subject to obtaining any necessary third
party consents, U-Care shall assign to HMOW or such other HMO of UWS's choosing,
all of U-Care's rights and responsibilities under such provider agreements or
other service agreements that the UWS Entities may designate and that relate to
the U-Care Business. The UWS Entities hereby acknowledge and agree that U-Care
will be unable to obtain all Third Party Consents prior to Closing. U-Care
shall use its best efforts to obtain after Closing any necessary Third Party
Consents that are not obtained prior to the Closing. Notwithstanding the
foregoing, UHC hereby consents to the assignment of all provider agreements with
the University Providers.
5.8. VENDOR CONTRACTS. Blue Cross, UWS, HMOW or such other HMO of UWS's
choosing shall have the option to assume any contracts or leases to which U-Care
is a party or to
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which UHC is a party that are necessary for U-Care to conduct its business. If
Blue Cross, UWS, or HMOW elects to assume any such contracts or leases, notice
of such intention shall be given to U-Care or UHC, as the case may be, at least
thirty (30) days prior to Closing. U-Care or UHC, as the case may be, shall use
best efforts to obtain any necessary third party consents for such assignments
prior to the Closing.
5.9. LEASE. U-Care currently leases space at 440 Science Drive, Suite 200,
Madison, Wisconsin ("U-Care Office") pursuant to a lease attached hereto as
Exhibit 5.9 ("Lease"). Effective October 1, 1994, the Joint Venture shall
assume liability for and pay the rent due under the Lease; provided, however,
that such obligation shall terminate upon the earlier to occur of (i) 90 days
after all or any portion of the U Care Office becomes vacant but only with
respect to the portion that becomes vacant or (ii) all or any portion of the
U-Care Office is leased to any third party including, without limitation, any
University Affiliated Entity other than in connection with Joint Venture
business. UHC shall promptly notify the Joint Venture and UWS when the U-Care
Office becomes vacant. UHC covenants to market the U-Care Office diligently in
an attempt to obtain a new tenant and mitigate damages.
5.10. LIABILITIES. Except for the liabilities expressly assumed by the
UWS Entities or HMOW under the Assumption Reinsurance Agreement, the Provider
Agreements under Section 5.7, the selected contracts and leases under Section
5.8, and the Lease of the U-Care Office under Section 5.9, neither the UWS
Entities, nor any of their affiliates, nor HMOW, nor the Joint Venture assume
any liabilities of U-Care or the University Affiliated Entities.
ARTICLE 6 - OPERATIONS OF THE JOINT VENTURE
6.1. UNDERWRITING. Blue Cross shall be the underwriter for any PPO plans
offered by the Joint Venture and HMOW or such other HMO of UWS's choosing shall
be the underwriter of the HMO and HMO portion of the POS plans (the indemnity
portion to be underwritten by Blue Cross or an affiliate) offered by the Joint
Venture (in such capacity, Blue Cross, its affiliates, and HMOW shall be
referred to as "Underwriters"). The U-Care Business acquired by UWS shall
immediately be part of the Joint Venture.
6.2. BENEFIT ADMINISTRATION. On self-funded programs, Blue Cross shall
administer benefits under the PPO plans and HMOW or such other HMO of UWS's
choosing shall administer benefits under the HMO and POS plans (in such
capacity, Blue Cross and HMOW shall be referred to as "Administrators").
6.3. OTHER ADMINISTRATIVE SERVICES. The Underwriters and Administrators
shall enter into an Administrative Services Agreement with the UWS Entities as
of the Closing Date. The UWS Entities will be compensated for providing the
administrative services on a cost basis such that all administrative "profit"
will remain with the product to be divided as underwriting profit. All such
Administrative Services Agreements shall be subject to approval by the Governing
Board of the Joint Venture. The administrative services to be provided by the
UWS Entities shall include, but are not limited to, accounting, actuarial,
financial reporting, management information, legal, and any other administrative
services needed by the Underwriter or Administrator.
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6.4. MEDICAL MANAGEMENT AND REVIEW. Notwithstanding that the center of
operations for the Joint Venture may be in Sauk City, Wisconsin (see Section
4.3.E), all medical management and review services which relate directly to
Joint Venture business with the University Providers shall be located in
Madison, Wisconsin. The Governing Board may determine that additional services
should be performed at a facility located in the Madison area.
6.5. PROVIDER AGREEMENTS.
A. Effective as of the Closing, UHC shalt enter into provider
agreements with the Clinical Practice Plan Partnerships, the faculty physicians
of the University of Wisconsin Medical School, Reorganized HPI or Newco (as the
case may be), and the Hospital to provide or arrange for the provision of
medical, surgical, hospital and ancillary services within the network for the
Joint Venture or cause U-Care to assign to HMOW existing provider agreements
between U-Care and such entities ("Provider Agreements"). The Provider
Agreements shall have terms that are coextensive with the initial and any
renewal term of the Joint Venture and shall adopt reimbursement rates that
guarantee to the Joint Venture that the Joint Venture will receive (i) a
discount of 10% relative to the "best price" for Regional Business (as defined
in Section 6.5.B) offered to any competitive insurance product for like services
and (ii) "best price" for business in the counties of Fond du Lac, Green Lake,
Waushara, and Winnebago relative to the price offered to any competitive
insurance product for like services ("Best Price Guarantee"). The arrangement
between the University Affiliated Entities and Group Health Cooperative of South
Central Wisconsin ("GHC") shall be excepted from the Best Price Guarantee,
provided that the University Affiliated Entities shall not offer GHC a lower
price than the price offered to the Joint Venture for like services.
Calculation of "best price" shall not take into consideration reimbursement
rates applicable to government programs.
B. "Regional Business" means managed care plans covering employers
with facilities located in and/or having five percent (5%) or more of their
employees residing in the Wisconsin counties of Adams, Columbia, Crawford, Dane,
Dodge, Grant, Green, Iowa, Juneau, Lafayette, Marquette, Monroe, Richland, Sauk
and Vernon. "Regional Business" also means managed care plans covering
individuals residing in or working in the Wisconsin counties in the preceding
sentence.
C. The provider agreements between UHC and U-CARE HMO Inc. shall
continue in full force and effect following the Closing Date, subject to (i)
annual increases equal to the lesser of the rate of increase of the Consumer
Price Index or the medical component of the Consumer Price Index and (ii) the
condition that, in the event any such provider agreements include reimbursement
rates greater than the rate provided by the Best Price Guarantee, then such
provider agreements shall automatically be amended to include a reimbursement
rate equal to the rate provided by the Best Price Guarantee. Within the total
capitation amounts provided by the Provider Agreements, the providers which are
University Affiliated Entities or otherwise affiliated with the University of
Wisconsin-Madison may determine amongst themselves their respective shares of
the total capitation.
D. The University Affiliated Entities intend to expand the Joint
Venture business, and intend to negotiate, as necessary, additional
reimbursement discounts or conditions, e.g., per diems or capitations, which
will compete effectively with other providers to the Joint Venture.
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ARTICLE 7 - NONCOMPETITION
7.1. NONCOMPETE WITH JOINT VENTURE.
A. Unless otherwise agreed by the Governing Board pursuant to
Section 2.2, neither (i) the University Affiliated Entities, (ii) the entities
or individuals executing or being bound to this Agreement pursuant to Section
4.1.G (.Section 4.1.G Entities.), nor (iii) the UWS Entities during the term of
the Joint Venture, directly or indirectly offer or participate in the offering,
except through the Joint Venture, of any HMO, PPO, POS or other managed care
products, either insured or self-funded, which utilize a provider network, which
has a location in U-Care's current service area of the following Wisconsin
counties: Dane, Sauk, Columbia, Juneau, Marquette, Richland, Dodge, Iowa,
Lafayette and Grant. The Parties and the 4.1.G Entities further agree that if
the HMOW Closing occurs and the HMOW loins Venture Agreement has not been
terminated, the Parties and the 4.1.G Entities shall not, during the term of the
Joint Venture, directly or indirectly offer or participate in the offering,
except through the Joint Venture, of any HMO, PPO, POS or other managed care
products, either insured or self-funded, which utilize a provider network, which
has a location in any of the following Wisconsin counties: Adams, Columbia,
Crawford, Dane, Dodge, Grant, Green, Iowa, Juneau, Lafayette, Marquette, Monroe,
Richland, Sauk and Vernon.
B. Notwithstanding Section 7.1.A, the Parties agree that U~C may
participate in other managed care programs within the service areas identified
above so long as reimbursement rates for any such managed care programs are at
least 10% greater than the rates paid by the Underwriters pursuant to Section
6.5.
C. The Parties and the Section 4.1.G Entities acknowledge that Blue
Cross has existing PPO relationships, which are disclosed on Exhibit 7.1.C, and
it is agreed that these existing relationships do not violate this Section 7.1.
D. Notwithstanding Section 7.1.A, the Parties and the 4.1.G Entities
may, after UHC has given notice pursuant to Section 8.1 or any Party has given
written notice of termination pursuant to Section 11.2.C, negotiate and execute,
but not perform under, contracts with third parties pursuant to which such Party
will directly or indirectly offer or participate in the offering of an HMO, PPO,
POS or other managed care product, either insured or self-funded, which utilizes
a provider network in the applicable counties set forth in Section 7.1.A.
7.2. STANDSTILL. Until November 1, 1994, none of the University Affiliated
Entities shall directly or indirectly solicit, negotiate with or furnish any
information to any third party or entity concerning the possible acquisition of
U-Care. Until November 1, 1994, no Party shall enter into any substantive
contract or letter of intent with Dean Clinic or Physicians Plus Medical Group,
or their affiliated insurance companies, with respect to managed care products
which utilize a provider network, without the prior consent of the other
parties.
ARTICLE 8 - OPTION TO REACQUIRE
8.1. OPTION. UHC shall have the option to reacquire the U-Care Business on
the fifth and tenth anniversaries of the Closing Date subject to the following
terms and conditions. UHC
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shall give the UWS Entities and, if the HMOW Closing occurs and the HMOW Joint
Venture Agreement has not been terminated, the LLC, six (6) months prior written
notice of its intention to exercise this option; provided that if the LLC has
given notice of its option to reacquire the stock of the HMOW as set forth in
Section 4 of the Service Agreement cited November 1, 1994, between LLC and UWS
(.LLC Service Agreement.), then UHC must give such written notice no later that
five (5) months prior to such anniversary dates. UHC's exercise of its right to
reacquire the U-Care Business shall terminate the Joint Venture unless the
Parties agree otherwise. The termination of the Joint Venture shall have no
effect on the provider agreements entered into by the Parties, which shall
continue until their scheduled termination date. The reimbursement arrangement
contained in the provider agreements then in effect shall continue following
termination of the Joint Venture; provided, however, the Best Price Guarantee
set forth in Section 6.5.A shall not continue following such termination.
8.2. EXERCISE PRICE. The price at which UHC may reacquire the U-Care
Business shall be $500,000 plus the then current net worth of the successor
entity to the U-Care Business. If the HMOW Closing occurs and the HMOW Joint
Venture Agreement has not been terminated, the price at which UHC may reacquire
the U-Care Business shall be $500,000 plus the proportionate share of the net
worth of HMOW attributable to the U-Care Business. In either case, net worth
shall be determined by applying the same accounting principles as were applied
in Section 5.3 to determine the price at which UWS purchased the U-Care Business
and shall not include any amount attributable to good will.
8.3. FORM OF REACQUISITION. The reacquisition of the U-Care Business shall
take the form of assumption reinsurance to be effective upon the fifth or tenth
anniversary of the Closing Date. Groups and their members which were with
U-Care prior to the Closing Date shall be included in the U-Care Business to be
reacquired, as well as an equitable distribution of new groups obtained by the
Joint Venture. The provider agreements relating to the U-Care Business will not
be assigned to the University Affiliated Entities, but it is expressly
acknowledged that such provider agreements will not be exclusive, and the
University Affiliated Entities shall be free to enter into provider agreements
with providers of their choosing. If UWS acquires or merges other managed care
business with the Joint Venture, including the HMOW Joint Venture, such business
and its proportionate share of subsequent growth shall not be transferred to
UHC. The assets to be transferred to cover the liabilities assumed shall be at
the discretion of UWS. The License Agreement will terminate upon the
reacquisition of the U-Care Business.
ARTICLE 9 - CONDITIONS TO THE OBLIGATION OF THE UWS ENTITIES
TO CLOSE
The obligations of the UWS Entities to consummate the transactions
contemplated herein shall be subject to the satisfaction, on or prior to the
Closing Date, of all of the following conditions (any of which may be waived by
the UWS Entities):
9.1. COMPLETION OF DUE DILIGENCE. The UWS Entities shall have completed to
their satisfaction a thorough due diligence review of the financial condition,
legal matters and operational information and other matters associated with the
University Affiliated Entities and no material adverse change in the operations
or financial condition of any University Affiliated Entity between the date
hereof and the Closing shall have occurred.
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9.2. LEGAL OPINION. The UWS Entities shall have been furnished with an
opinion of counsel for the University Affiliated Entities, substantially in the
form attached as Exhibit 9.2, subject to whatever changes the opinion giver may
deem reasonably necessary to comply with the legal opinion standards of such
opinion giver; provided, however, that the opinion as changed provides the same
comfort to the recipient, in the reasonable opinion of the recipient.
9.3. REGULATORY APPROVALS AND THIRD PARTY CONSENTS.
A. This Agreement, and all aspects of the transactions contemplated
hereby, shall have received all appropriate and necessary regulatory approvals,
waivers or consents, including without limitation, the approvals of the
Wisconsin Office of the Commissioner of Insurance, Securities and Exchange
Commission, and Department of Justice, and all third party consents and
approvals (collectively, "Approvals"), which Approvals shall be in full force
and effect;
B. any conditions and directions contained in the Approvals shall
have been fully complied with in all material respects; and
C. the Approvals shall not modify the terms and conditions of this
Agreement, and the transactions contemplated herein, in any material respect.
9.4. REPRESENTATIONS AND WARRANTIES ACCURATE. The representations and
warranties of the University Affiliated Entities contained in this Agreement
shall be true and accurate on and as of the Closing Date.
9.5. COMPLIANCE. The University Affiliated Entities shall have performed
and complied with all of their respective obligations under this Agreement which
are to be performed or complied with by them prior to or on the Closing Date.
9.6. GOVERNMENT ORDER, INJUNCTION. No court, domestic or foreign, shall
have entered and maintained in effect an injunction or other similar order
enjoining consummation of the transactions provided for herein, and no action or
proceeding shall have been instituted and remain pending before a court or other
governmental body by any governmental agency or public authority to restrain or
prohibit the transactions contemplated by this Agreement, nor shall any
governmental agency have notified any party to this Agreement that consummation
of the transactions contemplated hereby would constitute a violation of the laws
of the United States or Wisconsin and that it intends to commence proceedings to
restrain the consummation of the transactions contemplated hereby unless such
agency shall have withdrawn such notice prior to the Closing.
9.7. SATISFACTORY REORGANIZATION OF UHC AND HPI. UHC and HPI shall have
been reorganized in compliance with all applicable laws and regulations and in a
manner that is reasonably satisfactory to the UWS Entities and their attorneys.
9.8. IMPLEMENTATION PLAN. The Parties shall have developed the
Implementation Plan.
9.9. DELIVERY OF ITEMS AS CLOSING. At the Closing, the University
Affiliated Entities shall have delivered to the UWS Entities:
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A. The legal opinion described in Section 9.2.
B. A certificate dated as of the Closing Date and reasonably
satisfactory in form and substance to the UWS Entities and their counsel of an
executive officer of each of the University Affiliated Entities, certifying that
the conditions in Sections 9.4 and 9.5 have been met.
C. The resolutions of the Boards of Directors of each of the
University Affiliated Entities, and the University of Wisconsin Board of
Regents, authorizing the transactions contemplated by this Agreement, duly
certified as of the Closing Date.
D. An executed original of the Assumption Reinsurance Agreement
referred to in Section 5.1.
E. Executed originals of the Administrative Services Agreements
referred to in Section 6.3.
F. Executed originals of the Provider Agreements referred to in
Section 6.5.
G. Executed originals of the Acknowledgement and Agreements to Bound
referred to Section 4.1.F.
H. Executed originals of the Noncompetition and Assignment
Agreements referred to in Section 4.1.G.
I. Executed original of the Subscription Agreement and validly
issued Certificates, each referred to in Section 4.3.C
J. Executed original of the Credit Agreement referred to in Section
4.3.D and all of the Collateral Documents and other instruments and documents
referred to therein.
K. Evidence satisfactory to the UWS Entities of UHC's ability to
bind the Hospital, the Clinical Practice Plan Partnerships, HPI, the faculty
physicians of the University of Wisconsin Medical School, and Reorganized HPI or
Newco (as the case may be) to the Provider Agreements.
L. Executed original of the License Agreement referred to in Section
4.3.F.
M. Executed original of the HPI Service Agreement referred to in
Section 4.3.G.
ARTICLE 10 - CONDITIONS TO THE OBLIGATION OF THE UNIVERSITY
AFFILIATED ENTITIES TO CLOSE
The obligations of the University Affiliated Entities to consummate the
transactions contemplated herein shall be subject to the satisfaction, on or
prior to the Closing Date, of all of the following conditions (any of which may
be waived by the University Affiliated Entities):
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10.1. LEGAL OPINION. The University Affiliated Entities shall have
been furnished with an opinion of counsel for the UWS Entities, substantially in
the form attached hereto as Exhibit 10.1, subject to whatever changes the
opinion giver may deem reasonably necessary to comply with the legal opinion
standards of such opinion giver provided; however, that the opinion as changed
provides the same comfort to the recipient, in the reasonable opinion of the
recipient.
10.2. COMPLETION OF DUE DILIGENCE. The University Affiliated Entities
shall have completed to their satisfaction a thorough due diligence review of
the financial condition, legal matters and operational information and other
matters associated with the UWS Entities, HMOW and the Holding Company and no
material adverse change in the operations of any UWS Entity, HMOW or the Holding
Company between the date hereof and the Closing shall have occurred.
10.3. REGULATORY APPROVALS AND THIRD PARTY CONSENTS.
A. This Agreement, and all aspects of the transactions contemplated
hereby, including all of the transactions contemplated by the Joint Venture
Agreement, shall have received all Approvals, which Approvals shall be in full
force and effect;
B. any conditions and directions contained in the Approvals shall
have been fully complied with in all material respects; and
C. the Approvals shall not modify the terms and conditions of this
Agreement, and the transactions contemplated herein, in any material respect.
10.4. REPRESENTATIONS AND WARRANTIES ACCURATE. The representations and
warranties of the UWS Entities contained in this Agreement shall be true and
accurate on and as of the Closing Date.
10.5. COMPLIANCE. UWS Entities shall have performed and complied with
in all material respects, all of their respective obligations under this
Agreement which are to be performed or complied with by them prior to or on the
Closing Date.
10.6. GOVERNMENT ORDER, INJUNCTION. No court, domestic or foreign,
shall have entered and maintained in effect an injunction or other similar order
enjoining consummation of the transactions provided for herein, and no action or
proceeding shall have been instituted and remain pending before a court or other
governmental body by any governmental agency or public authority to restrain or
prohibit the transactions contemplated by this Agreement, nor shall any
governmental agency have notified any party to this Agreement that consummation
of the transactions contemplated hereby would constitute a violation of the laws
of the United States or Wisconsin and that it intends to commence proceedings to
restrain the consummation of the transactions contemplated hereby unless such
agency shall have withdrawn such notice prior to the Closing.
10.7. HMOW DOCUMENTS. If the UWS Entities shall have entered into
definitive agreements with respect to the HMOW Joint Venture, copies of all such
agreements, including without limitation all amendments thereto and all of the
Definitive HMOW Documents, shall have been furnished to UHC. Such agreements
shall not contain any terms or conditions not contained in the HMOW Letter of
Intent that are adverse to UHC in any material respect.
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10.8. IMPLEMENTATION PLAN. The Parties shall have developed the
Implementation Plan.
10.9. DELIVERY OF ITEMS AT CLOSING. At the Closing, Blue Cross and/or
UWS shall have delivered to the applicable University Affiliated Entity:
A. The Purchase Price in the manner set forth in Section 5.3 and the
purchase price for the UHC Assets as set forth in Section 5.4.
B. A certificate dated as of the Closing Date and reasonably
satisfactory in form and substance to the University Affiliated Entities and
their counsel of an executive officer of UWS and Blue Cross that the conditions
in Sections 10.4 and 10.5 have been met.
C. The legal opinion referred to in Section 10.1 of this Agreement.
D. The resolution of the Board of Directors of Blue Cross and UWS
authorizing the transactions contemplated by this Agreement, duly certified as
of the Closing Date by their respective Secretaries.
E. An executed original of the Assumption Reinsurance Agreement
referred to in Section 5.1.
F. Executed originals of the Administrative Services Agreements
referred to in Section 6.3.
G. Executed originals of the Provider Agreements referred to in
Section 6.5.
H. An executed original of the Credit Agreement referred to in
Section 4.3.C and all of the Collateral Documents (as defined therein) and other
instruments and the documents referred to therein.
I. An executed original of the Subscription Agreement along with
payment of $1.5 million as provided in Section 4.3.B.
J. Executed original of the License Agreement referred to in Section
4.3.F.
K. Executed original of the HPI Service Agreement referred to in
Section 4.3.G.
ARTICLE 11- TERM AND TERMINATION
11.1. TERM. The Joint Venture shall have an initial term of ten (10)
years from October 1, 1994 ("Effective Date") unless terminated in accordance
with this Article or Article 8. If UHC does not exercise its right to reacquire
the U-Care Business under Article 8, the Joint Venture shall automatically renew
for additional five (5) year terms unless written notice of termination is given
at least six (6) months prior to the end of the then current term; provided,
that if the LLC has given written notice of termination of the HMOW Joint
Venture pursuant to Section 5(a) of the LLC Service Agreement, then the Party
wishing to terminate must give written notice of
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termination of this Joint Venture no later than five (5) months prior to the end
of the then current term.
11.2. TERMINATION. The Joint Venture may be terminated only as
follows.
A. The Parties may terminate this Agreement prior to the Closing by
mutual agreement.
B. This Agreement will terminate automatically if Closing does not
occur by November 1, 1994.
C. The Joint Venture may be terminated at the end of any term by any
Party giving written notice of termination to all other Parties and, if the HMOW
Closing occurs and the HMOW Joint Venture Agreement has not been terminated, to
the LLC at least six (6) months prior to the end of the then current term;
provided, that if the LLC has given written notice of termination of the HMOW
Joint Venture pursuant to Section 5(a) of the LLC Service Agreement, then the
Party wishing to terminate must give written notice of termination of this Joint
Venture no later than five (5) months prior to the end of the then current term.
D. The Joint Venture will automatically terminate if UHC exercises
its right to reacquire the U-Care Business in accordance with Article 8, unless
the Parties agree otherwise.
E. The Joint Venture shall terminate 90 days after any Party shall
notify the other Parties that (i) a Party to which such notifying party is not
affiliated ("Breaching Party") has breached any of its obligations under this
Agreement or (ii) a representation or warranty of the Breaching Party has proven
to have been materially false when made, unless under either (i) or (ii) the
Breaching Party shall have cured such breach or the condition which renders such
representation or warranty to be false on or before the expiration of such 90
day period; provided, however, that if such breach or condition is incurrable,
the Joint Venture shall not terminate unless such breach or condition impairs or
could reasonably be expected to in any material respect the operation of the
Joint Venture or the interest of the Party providing the notice under this
Section 11.2.E or any of its affiliates. In the event that the HMOW Closing
occurs and the HMOW Joint Venture Agreement has not been terminated, then the
Party notifying the other Parties as provided in the previous sentence shall
promptly send a copy of such notice to the LLC.
11.3. EFFECT OF TERMINATION PRIOR TO CLOSING. If this Agreement is
terminated prior to the Closing and the transactions contemplated hereby are not
consummated as described above, this Agreement shall become null and void and of
no further force and effect. On termination each Party shall bear their
respective expenses incurred in connection with this Agreement.
11.4. EFFECT OF TERMINATION OF JOINT VENTURE. The termination of the
Joint Venture shall have no effect on the provider agreements entered into by
the parties, which shall continue until their scheduled termination date. The
reimbursement arrangement contained in the provider agreements then in effect
shall continue following termination of the Joint Venture; provided, however,
the Best Price Guarantee set forth in Section 6.5.A shall not continue following
such termination.
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<PAGE>
11.5. EFFECT OF TERMINATION OF HMOW JOINT VENTURE. In the event that
the HMOW Closing occurs and the HMOW Joint Venture Agreement is subsequently
terminated, such termination shall not trigger a corresponding termination of
this Joint Venture and this Joint Venture shall continue in accordance with its
terms as if the HMO Closing did not occur.
ARTICLE 12 - ARBITRATION
12.1. NEGOTIATION. In the event of any dispute between any of the UWS
Entities on the one hand and the University Affiliated Entities on the other
hand arising out of or relating to the formation, interpretation, performance or
breach of this Agreement or any of the Joint Venture Documents, the UWS Entities
and the University Affiliated Entities shall use their best efforts to resolve
such dispute. If they are unable to do so, such dispute shall be submitted to
the Governing Board for resolution. The Governing Board shall have the
authority to consult legal, financial or other advisors for the purpose of
resolving such dispute, and the fees and expenses of any such advisors shall be
shared equally by the Disputing Parties. If the Governing Board is unable to
resolve such dispute by the vote required by Article 2 within 30 days, such
dispute may be submitted to arbitration in accordance with Section 12.2.
12.2. ARBITRATION.
A. Each side shall each appoint an individual as arbitrator and the
two so appointed shall then appoint a third arbitrator. If either side refuses
or neglects to appoint an arbitrator within thirty (30) days of receipt of a
written notice of demand for arbitration, the other side may appoint the second
arbitrator. If the two arbitrators do not agree on a third arbitrator within
thirty (30) days of their appointment, each of the arbitrators shall nominate
three individuals. Each arbitrator shall then decline two of the nominations
presented by each of the other arbitrators. The third arbitrator shall then be
chosen from the remaining two nominations by drawing lots. The arbitrators
shall be active or former officers of insurance or reinsurance companies,
managed care organizations, or Lloyd's of London underwriters; the arbitrator
shall not have a personal or financial interest in the result of the
arbitration.
B. The arbitration hearings shall be held in Madison, Wisconsin, or
such other place as may be mutually agreed. Each side shall submit its case to
the arbitrators within thirty (30) days of the selection of the third arbitrator
or within such longer period as may be agreed by the arbitrators. The
arbitrators shall not be obliged to follow judicial formalities or the rules of
evidence except to the extent required by governing law, that is, the state law
of the situs of the arbitration as herein agreed; they shall make their
decisions according to the practice of the reinsurance business. The decision
rendered by a majority of the arbitrators shall be final and binding on both
sides. Such decision shall be a condition precedent to any right of legal
action arising out of the arbitrated dispute which any side may have against the
others. Judgment upon the award rendered may be entered in any court having
jurisdiction thereof.
C. Each side shall pay (i) the fee and expenses of its own
arbitrator, (ii) one-half of the fee and expenses of the third arbitrator and
(iii) one-half of the other expenses that the Parties jointly incur directly
related to the arbitration proceeding. Other than as set forth above, each Party
shall bear its own costs in connection with any such Arbitration including,
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<PAGE>
without limitation, (i) all legal, accounting, and other professional fees and
expenses and (ii) all other costs and expenses each Party incurs to prepare for
such arbitration.
D. Except as provided above, arbitration shall be based, insofar as
applicable, upon the Commercial Arbitration Rules of the American Arbitration
Association.
ARTICLE 13 - GENERAL PROVISIONS
13.1. AMENDMENTS. This Agreement may only be amended by the consent of
the Parties expressed in a written addendum; and such addendum, when executed by
all Parties, shall be deemed to be an integral part of this Agreement and
binding on the Parties.
13.2. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and bind each of the Parties and their successors and assigns.
Neither this Agreement nor any right hereunder nor any part hereof may be
assigned by any Party without the prior written consent of the other Parties and
all necessary regulatory authorities.
13.3. CONFIDENTIAL INFORMATION. The Parties acknowledge that all
information of a given Party which has or will come into the possession of
another Party in connection with this Agreement is non-public, confidential or
proprietary in nature. Each Party agrees to hold such information in strictest
confidence, not to make use thereof other than for the performance of this
Agreement, and not to release or disclose it to any third Party other than for
the performance of this Agreement or as required by law. In the event that any
Party ("Disclosing Party") is requested pursuant to, or required by, applicable
law or regulation or by legal process to disclose any such information of
another Party, the Disclosing Party shall provide such other Party with prompt
notice of such request to enable such other Party to seek an appropriate
protective order. The Disclosing Party shall cooperate with such other Party in
connection with such matter.
13.4. INDEMNIFICATION. Each of the University Affiliated Entities
hereby agrees to indemnify, defend and hold harmless each of the UWS Entities
and their affiliates and the Joint Venture from and against any liability,
damage, cost, expense, loss, claim or judgment incurred by either of the UWS
Entities or their affiliates or the Joint Venture arising out of or in any way
relating to the $4.4 million debt that U-Care has assumed and owes to the
Hospital ("$4.4 Million Debt"). The University Affiliated Entities acknowledge
and agree that neither the Joint Venture nor the UWS Entities and their
affiliates have assumed or agreed to discharge the $4.4 Million Debt.
13.5. INTERPRETATION. This Agreement shall be interpreted to preserve
the purposes of the Joint Venture and to maintain its integrity. It is the
intent of the Parties that minor, technical and immaterial violations of this
Agreement and related documents and minor inconsistencies and ambiguities should
be resolved in favor of continuation of the Joint Venture.
13.6. GOVERNANCE LAW. This Agreement will be governed by and construed
in accordance with the laws of the State of Wisconsin (without giving effect to
principles of conflicts of laws) applicable to a contract executed and to be
performed in such state.
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<PAGE>
13.7. ENTIRE AGREEMENT. This Agreement, and the Joint Venture
Documents, supersede all prior discussions and agreements between, and contain
the sole and entire agreement between the Parties with respect to the subject
matter hereof. Without limiting the generality of the foregoing, this Agreement
amends and restates the Previous Joint Venture Agreement in its entirety, and
the Previous Joint Venture Agreement is no longer of any force or effect.
13.8. HEADINGS, ETC. The headings used in this Agreement have been
inserted for convenience and do not constitute matter to be construed or
interpreted in connection with this Agreement. Unless the context of this
Agreement otherwise requires, (a) words of any gender will be deemed to include
each other gender, (b) words using the singular or plural number will also
include the plural or singular number, respectively, (c) the terms hereof,
herein, hereby, and derivative or similar words will refer to this entire
Agreement, and (d) the conjunction "or" will denote any one or more, or any
combination or all, of the specified items or matters involved in the respective
list.
13.9. NON-WAIVER. The failure of any Party at any time to enforce any
provision of this Agreement shall not be construed as a waiver of that provision
and shall not affect the right of any Party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
13.10. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any Party will not be materially and adversely affected
thereby, (a) such provision will be fully severable, (b) this Agreement will be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof, (c) the remaining provisions of this
Agreement wil1 remain in full force and effect and will not be affected by the
illegal, invalid, or unenforceable provision or by its severance herefrom, and
(d) in lieu of such illegal, invalid, or unenforceable provision, there will be
added automatically as a part of this Agreement, a legal, valid, and enforceable
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible.
13.11. NOTICES. Any notice or communication given pursuant to this
Agreement must be in writing and will be deemed to have been duly given if
mailed (by registered or certified mail, postage prepaid, return receipt
requested), or if transmitted by facsimile, or if delivered by courier, as
follows:
To Blue Cross
Blue Cross & Blue Shield United of Wisconsin
401 West Michigan Street
Milwaukee, Wisconsin 53203
Facsimile: 1-414-226-6229
Attention: Michael Bernstein
To UWS
United Wisconsin Services, Inc.
401 West Michigan Street
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<PAGE>
Milwaukee, Wisconsin 53203
Facsimile: 1-414-226-6229
Attention: Michael Bernstein
To UHC
University Health Care, Inc.
440 Science Drive
Madison, Wisconsin 53711
Attention: Peter Pruessing
To U-Care
U-Care HMO, Inc.
440 Science Drive
Madison, Wisconsin 53711
Attention: Dr. Mark Hansen
To HPI
Health Professionals, Inc.
440 Science Drive
Madison, Wisconsin 53711
Attention: Peter Pruessing
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this paragraph will, whether sent by mail,
facsimile, or courier, be deemed given upon the first business day after actual
delivery to the party to whom such notice or other communication is sent (as
evidenced by the return receipt or shipping invoice signed by a representative
of such party or by the facsimile confirmation). Any party from time to time
may change its address for the purpose of notices to that Party by giving a
similar notice specifying a new address, but no such notice will be deemed to
have been given until it is actually received by the party sought to be charged
with the contents thereof.
13.12. COUNTERPARTS. This Agreement may be executed simultaneously in
any number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first set forth
above.
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
By:
------------------------------------------
Title:
---------------------------------------
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<PAGE>
UNITED WISCONSIN SERVICES, INC.
By:
------------------------------------------
Title:
---------------------------------------
UNIVERSITY HEALTH CARE, INC.
By:
------------------------------------------
Title:
---------------------------------------
U-CARE HMO, INC.
By:
------------------------------------------
Title:
---------------------------------------
HEALTH PROFESSIONALS, INC.
By:
------------------------------------------
Title:
---------------------------------------
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<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Name of Document Section of Joint Venture Agreement
<S> <C>
Acknowledgement and Agreement to Be Bound 4.1.F
Noncompetition and Assignment Agreement 4.1.G
Articles of Amendment and Preferred Stock 4.1.K
Implementation Plan 4.2.E, 4.3.A
Subscription Agreement 4.3.C
Credit Agreement (and all agreements entered into thereunder) 4.3.D
License Agreement 4.3.F
HPI Service Agreement 4.3.G
Assumption Reinsurance Agreement 5.1
Existing Provider Agreements 5.7
Assumed Contracts or Leases 5.8
Lease 5.9
Administrative Services Agreement 6.3
Provider Agreements 6.5
</TABLE>
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<PAGE>
SERVICE AGREEMENT
Service Agreement, dated as of November 1, 1994, between United Wisconsin
Services, Inc., a Wisconsin corporation ("UWS"), and Health Professionals, Inc.,
a Wisconsin nonstock corporation ("HPI").
RECITALS
Blue Cross & Blue Shield United of Wisconsin ("Blue Cross"), UWS,
University Health Care, Inc. ("UHC"), U-Care HMO, Inc. ("U-Care") and HPI have
formed a joint venture (the "UHC Joint Venture") pursuant to an amended and
restated joint venture agreement, dated as of October 31, 1994 (the "UHC Joint
Venture Agreement"). Blue Cross, UWS, UWS Acquisition Corporation, HMO-W,
Incorporated and HMO of Wisconsin Insurance Corporation ("HMOW") have formed a
joint venture (the "HMOW Joint Venture") pursuant to an agreement of merger and
joint venture, dated as of October 11, 1994 (the "HMOW Joint Venture Agreement"
and, together with the UHC Joint Venture Agreement, the "Joint Venture
Agreements"). The parties to the Joint Venture Agreements have agreed to
coordinate the efforts of the UHC Joint Venture and the HMOW Joint Venture in a
single joint venture (the "Joint Venture").
HPI has organized Health Professionals of Wisconsin, Inc. ("HPW") and,
concurrently with the execution of this Agreement, is transferring to HPW
substantially all of HPI's tangible assets in exchange for 13,500 shares of HPW
common stock, and HPW is selling
<PAGE>
1,500 shares of preferred stock to Blue Cross for $1,500,000 in cash.
HPW and Blue Cross are entering into a Revolving Credit Agreement, dated as
of November 1, 1994, under which HPW may borrow up to $15,000,000 to expand and
operate HPI's existing provider network.
UWS desires to engage HPI to provide regular services that will further the
Joint Venture's business by acquiring physician practices and expanding and
managing the regional provider network, which will offer the Joint Venture's
managed care products.
Accordingly, UWS and HPI agree as follows:
A. SERVICES. During the term of the UHC Joint Venture, HPI shall perform
the following services:
(a) cooperate with UWS and HMOW to develop an acquisition strategy
and establish criteria to analyze providers for possible acquisition;
(b) identify, investigate and, through HPW, acquire physician
practices in the Applicable Geographical Area (as defined in Section 2(c)(i));
and
(c) as requested, advise the parties to the Joint Venture and its
governing board (the "Governing Board") on matters relating to the offering of
managed care products through regional provider networks.
2. PAYMENT FOR SERVICES.
(a) During the term of this Agreement, UWS shall make or cause to be
made payments to HPI (the "Service Payments"), in
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<PAGE>
consideration for the services referred to in Section 1, calculated as follows:
(i) so long as the UHC Joint Venture and the HMOW Joint Venture
remain in effect, 10% of the aggregate income (loss) before income taxes
for the applicable period of all insured preferred provider organization
("PPO"), health maintenance organization ("HMO") and point of service
("POS") plans offered by the Joint Venture in the Applicable Geographical
Area, which means (A) for PPO plans, (1) net earned premium minus (2) the
sum of incurred claims and administrative expenses plus (3) net investment
income earned and (B) for HMO and POS plans, the amount determined in
accordance with generally accepted accounting principles; and
(ii) if the HMOW Joint Venture or the Service Period (as defined
in the Service Agreement, dated as of November 1, 1994 (the "LLC Service
Agreement"), between UWS and Community Health Systems, L.L.C. (the "LLC"))
terminates for any reason, 25% of the sum of:
(A) (1) the aggregate income (loss) before income taxes for the
applicable period of all HMO and POS plans offered by the UHC Joint Venture in
the Applicable Geographical Area, determined in accordance with the accounting
principles applied to prepare the financial statements of U-Care for the year
ended December 31, 1993, minus (2) an amount equal to U-Care's net profits for
1993 (or, in the case of the first distribution, an amount equal to the sum of
U-Care's net profits for 1993 and the fourth quarter of 1992), and
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<PAGE>
(B) the aggregate income (loss) before income taxes for the applicable
period of all PPO plans offered by the UHC Joint Venture in the Applicable
Geographical Area (calculated as provided above).
(b) Service Payments shall be calculated for each calendar year or
portion thereof, commencing October 1, 1994, and ending on the date this
Agreement terminates in accordance with Section 3, by an independent accounting
firm of recognized standing selected by the Governing Board. Such accounting
firm shall make the calculation with respect to each year not later than March
31 of the next succeeding year and shall promptly notify the Governing Board,
Blue Cross, UWS, HPI, UHC and, unless the HMOW Joint Venture has terminated,
HMOW in writing of such calculation and shall set forth in reasonable detail the
basis therefor. Promptly following receipt of such notice, payment shall be
made to HPI by check mailed to its address specified in Section 11. Any
disputes between UWS and HPI regarding the calculation of Service Payments shall
be resolved in accordance with Section 4. The first calculation of Service
Payments shall be made for the period commencing October 1, 1994 and ending
December 31, 1995.
(c) For purposes of calculating Service Payments:
(i) "Applicable Geographical Area" means (A) so long as the
UHC Joint Venture and the HMOW Joint Venture remain in effect, the
following Wisconsin counties: Adams, Columbia, Crawford, Dane, Dodge, Fond
du Lac, Grant, Green, Green Lake, Iowa, Juneau, Lafayette, Marquette,
Monroe,
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<PAGE>
Richland, Sauk, Vernon, Waushara and Winnebago and (ii) if the HMOW Joint
Venture terminates for any reason, the following Wisconsin counties:
Columbia, Dane, Dodge, Grant, Iowa, Juneau, Lafayette, Marquette, Richland
and Sauk;
(ii) income does not include investment income attributable to
funds of UWS not withdrawn from the Joint Venture or attributable to
additional capital contributions from UWS or one of its affiliates to HMOW;
(iii) the administrative expenses of each plan offered shall
not exceed the actual costs incurred by the underwriter(s) of such plan;
(iv) the amount of an aggregate loss for the applicable period
shall carry over and reduce income from the plans offered by the Joint
Venture in the successive applicable period(s) to the extent of such loss;
(v) no expense, loss or liability attributable to the
approximate $4.4 million debt assumed and outstanding by U-Care to
University of Wisconsin Hospital and Clinics referred to in Section 13.4 of
the UHC Joint Venture Agreement shall be taken into account;
(vi) income (loss) shall be computed without regard to
(A) administrative service payments by UWS affiliates to UWS pursuant to
any administrative service agreement between UWS and its affiliates in
connection with the payments to (1) LLC under the LLC Services Agreement,
(2) HPI under this Agreement or (3) U-Care under the License Agreement,
dated as of November 1, 1994, between UWS and U-
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<PAGE>
Care, (B) any payment to LLC under the LLC Services Agreement, (C) any
payment to HPI under this Agreement or (D) any payment to U-Care under the
License Agreement, dated as of November 1, 1994, between UWS and U-Care;
and
(vii) If the HMOW Joint Venture terminates other than on
December 31 of any year, the Service Payment for that year shall be
calculated in accordance with Section 2(a)(i) for the period prior to
termination and in accordance with Section 2(a)(ii) for the period after
termination.
(d) UWS and HPI expect that the amount of services performed by HPI
under this Agreement will vary from year to year and, in any year, may be more
or less than they anticipated as of the date of this Agreement. Accordingly,
UWS shall pay HPI the amount calculated under Section 2, without increase or
decrease for the services performed in any given year.
3. TERMINATION AND FINAL ACCOUNTING.
(a) This Agreement will terminate automatically if the UHC Joint
Venture terminates for any reason, including, without limitation, UHC's exercise
of its option to reacquire the U-Care business pursuant to Article 8 of the UHC
Joint Venture Agreement. If this Agreement terminates, a payment shall be
calculated for the period commencing October 1, 1994 and ending on the date of
termination (the "Total Service Payment") in accordance with the method for
calculating Service Payments under Section 2(a), subject to Section 2(c). To
the extent the Total Service Payment exceeds the aggregate Service Payments
previously received by HPI, the excess shall be paid to HPI within 60 days of
the date of
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<PAGE>
termination. To the extent the aggregate Service Payments previously received
by or owed to HPI exceeds the Total Service Payment, HPI shall pay to UWS such
excess less the amount of any Service Payment owed to HPI (which shall be
canceled) within 60 days of the date of termination, but not in an amount
greater than the aggregate Service Payments received by HPI hereunder.
4. ARBITRATION. If UWS and HPI cannot resolve a dispute arising from
this Agreement, the dispute will be submitted to arbitration in accordance with
this Section 4.
(a) Each side shall appoint an individual as arbitrator and the two
so appointed shall then appoint a third arbitrator. If either side refuses or
neglects to appoint an arbitrator within 30 days of receipt of a written notice
of demand for arbitration, the other side may appoint the second arbitrator. If
the two arbitrators do not agree on a third arbitrator within 30 days of their
appointment, each of the arbitrators shall nominate three individuals. Each
arbitrator shall then decline two of the nominations presented by the other
arbitrator. The third arbitrator shall then be chosen from the remaining two
nominations by drawing lots. The arbitrators shall be active or former officers
of insurance or reinsurance companies, managed care organizations, or Lloyd's of
London Underwriters; the arbitrators shall not have a personal or financial
interest in the result of the arbitration.
(b) The arbitration hearings shall be held in Madison, Wisconsin, or
such other place as may be mutually agreed. Each side shall submit its case to
the arbitrators within 30 days of
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<PAGE>
the selection of the third arbitrator or within such longer period as may be
agreed by the arbitrators. The arbitrators shall not be obliged to follow
judicial formalities or the rules of evidence except to the extent required by
governing law, that is, the state law of the situs of the arbitration as herein
agreed; they shall make their decisions according to the practice of the
reinsurance business. The decision rendered by a majority of the arbitrators
shall be final and binding on both sides. Such decision shall be a condition
precedent to any right of legal action arising out of the arbitrated dispute
which either side may have against the other. Judgment upon the award rendered
may be entered in any court having jurisdiction thereof.
(c) Each side shall pay (i) the fees and expenses of its own
arbitrator, (ii) one-half of the fees and expenses of the third arbitrator and
(iii) one-half of the other expenses that the parties jointly incur directly
related to the arbitration proceeding. Other than as set forth above, each
party shall bear its own costs in connection with any such arbitration,
including, without limitation, (i) all legal, accounting and other professional
fees and expenses and (ii) all other costs and expenses each party incurs to
prepare for such arbitration.
(d) Except as provided above, arbitration shall be based, insofar as
applicable, upon the Commercial Arbitration Rules of the American Arbitration
Association.
5. REPRESENTATIONS AND WARRANTIES. Each of UWS and HPI represents to the
other that (a) it has the corporate power and authority to enter into, execute
and deliver this Agreement and to
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<PAGE>
consummate the transactions contemplated hereby, and (b) the execution and
deliver of this Agreement and the consummation of such transactions (i) have
been duly authorized by all necessary corporate action and (ii) will not
conflict with, or result in a violation of, any contract, commitment, agreement
or arrangement to which it is a party.
6. AMENDMENTS. This Agreement may be amended only by a written agreement
signed by UWS and HPI.
7. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and bind UWS and HPI and their respective successors and assigns. Neither this
Agreement nor any right hereunder may be assigned by either party without the
prior written consent of the other.
8. CONFIDENTIAL INFORMATION. UWS and HPI acknowledge that all
information of either of them that has or will come into the possession of the
other in connection with this Agreement is non-public, confidential or
proprietary in nature. UWS and HPI agree to hold such information in strictest
confidence, not to make use thereof other than for the performance of this
Agreement, and not to release or disclose it to any third party other than for
the performance of this Agreement or as required by law. In the event that USW
or HPI (the "Disclosing Party") is requested pursuant to, or required by,
applicable law or regulation or by legal process to disclose any such
information of a third party, the Disclosing Party shall promptly notify the
other party to this Agreement of such request to enable such other party to seek
an appropriate protective order. The Disclosing Party shall cooperate with the
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<PAGE>
other party in connection with such matter.
9. INDEPENDENT CONTRACTOR. HPI shall at all times be an independent
contractor. HPI shall have no authority to bind UWS, Blue Cross or HMOW to any
agreement, except to the extent such authority is expressly conferred upon it by
UWS in writing (exclusive of this Agreement) and HPI will not take any actions
inconsistent with the provisions of this Section 9.
10. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party will not be materially and adversely affected
thereby, (a) such provision will be fully severable, (b) this Agreement will be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof, (c) the remaining provisions of this
Agreement will remain in full force and effect and will not be affected by the
illegal, invalid, or unenforceable provision or by its severance herefrom, and
(d) in lieu of such illegal, invalid, or unenforceable provision, there will be
added automatically as a part of this Agreement, a legal, valid, and enforceable
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible.
11. WAIVER. A waiver by a party of any breach by the other party of any
provision of this Agreement shall not be deemed to be a waiver by such first
party of any subsequent breach.
12. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving effect to
principles of conflicts of laws)
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<PAGE>
applicable to a contract executed and to be performed in such state.
13. HEADINGS, ETC. The headings used in this Agreement have been inserted
for convenience and do not constitute matters to be construed or interpreted in
connection with this Agreement. Unless the context of this Agreement otherwise
requires, (a) words using the singular or plural number also include the plural
or singular number, respectively, and (b) the terms "hereof," "herein," "hereby"
and derivative or similar words refer to this entire Agreement.
14. NOTICES. Any notice or communication given pursuant to this Agreement
must be in writing and will be deemed to have been duly given if mailed (by
registered or certified mail, postage prepaid, return receipt requested), or if
transmitted by facsimile, or if delivered by courier, as follows:
To UWS
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
Facsimile: 414-226-6229
Attention: President
To HPI
Health Professionals, Inc.
440 Science Drive
Madison, Wisconsin 53711
Facsimile: 608-238-4363
Attention: Peter Pruessing
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this paragraph will, whether sent by mail,
facsimile or courier, be deemed given upon the first business day after actual
delivery to the party to
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<PAGE>
whom such notice or other communication is sent (as evidenced by the return
receipt or shipping invoice signed by a representative of such party or by the
facsimile confirmation). Either party from time to time may change its address
for the purpose of notices to that party by giving a similar notice specifying a
new address, but no such notice will be deemed to have been given until it is
actually received by the party sought to be charged with the contents thereof.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which will
constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first set forth
above.
UNITED WISCONSIN SERVICES, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
HEALTH PROFESSIONALS, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
<PAGE>
LICENSE AGREEMENT
License Agreement, dated as of November 1, 1994, between United Wisconsin
Services, Inc., a Wisconsin corporation ("UWS"), and U-Care HMO, Inc., a
Wisconsin service insurance corporation ("U-Care").
RECITALS
Blue Cross & Blue Shield United of Wisconsin ("Blue Cross"), UWS,
University Health Care, Inc. ("UHC"), U-Care and Health Professionals, Inc.
("HPI") have formed a joint venture (the "UHC Joint Venture") pursuant to an
amended and restated joint venture agreement, dated as of October 31, 1994 (the
"UHC Joint Venture Agreement"). Blue Cross, UWS, UWS Acquisition Corporation,
HMO-W, Incorporated and HMO of Wisconsin Insurance Corporation ("HMOW") have
formed a joint venture (the "HMOW Joint Venture") pursuant to an agreement of
merger and joint venture, dated as of October 11, 1994 (the "HMOW Joint Venture
Agreement" and, together with the UHC Joint Venture Agreement, the "Joint
Venture Agreements"). The parties to the Joint Venture Agreements have agreed
to coordinate the efforts of the UHC Joint Venture and the HMOW Joint Venture in
a single joint venture (the "Joint Venture").
Under Article 5 of the UHC Joint Venture Agreement, U-Care is selling its
assets, excluding the name "U-Care," to UWS. UWS and U-Care recognize that the
name "U-Care" is a valuable asset that will enhance the ability of the Joint
Venture to offer managed care products. UWS and U-Care wish to provide for the
licensing by U-Care to UWS of the right to use the name "U-Care."
<PAGE>
Accordingly, UWS and U-Care agree as follows:
A. GRANT OF LICENSE. U-Care grants to UWS the exclusive license (the
"License") to use the trademark "U-Care" and all related logos and marks now
used by U-Care to identify services provided by U-Care, including, without
limitation, the name "UW-Care" (collectively, the "Trademarks"). UWS may use
the Trademarks solely for the purpose of marketing and providing managed care
products offered by the Joint Venture, and may not grant sublicenses or
franchises of the License. Without limiting the generality of the foregoing,
U-Care may not use the Trademarks while the License is in effect. The License
terminates on the date, if any, on which (i) U-Care or its successors or assigns
repurchases U-Care's business as provided in the UHC Joint Venture Agreement or
(ii) the UHC Joint Venture terminates. If the U-Care business is not so
repurchased and the UHC Joint Venture is not terminated, the License continues
indefinitely. If the UHC Joint Venture terminates other than by reason of the
repurchase of the U-Care business, UHC may use the Trademarks without
restriction, unless (i) the termination occurs after November 1, 2004 or (ii)
the termination occurs prior to November 1, 2004 because of a breach or default
under the Joint Venture Agreement by UHC, in which case neither UWS nor UHC may
use the Trademarks for any purpose.
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<PAGE>
2. PAYMENT OF ROYALTIES.
(a) In consideration of the grant of the License, UWS shall pay or
cause to be paid royalties ("Royalties") to U-Care calculated as follows:
(i) so long as the UHC Joint Venture and the HMOW Joint Venture
remain in effect, 10% of the aggregate income (loss) before income taxes
for the applicable period of all insured preferred provider organization
("PPO"), health maintenance organization ("HMO") and point of service
("POS") plans offered by the Joint Venture in the Applicable Geographical
Area (as defined in Section 2(c)(i)), which means (A) for PPO plans, (1)
net earned premium minus (2) the sum of incurred claims and administrative
expenses plus (3) net investment income earned and (B) for HMO and POS
plans, the amount determined in accordance with generally accepted
accounting principles; and
(ii) if the HMOW Joint Venture or the Service Period (as defined
in the Service Agreement, dated as of November 1, 1994 (the "LLC Service
Agreement"), between UWS and Community Health Systems, L.L.C. (the "LLC"))
terminates for any reason, 25% of the sum of:
(A) (1) the aggregate income (loss) before income taxes for the
applicable period of all HMO and POS plans offered by the UHC Joint Venture in
the Applicable Geographical Area, determined in accordance with the accounting
principles applied to prepare
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the financial statements of U-Care for the year ended December 31, 1993, minus
(2) an amount equal to U-Care's net profits for 1993 (or, in the case of the
first distribution, an amount equal to the sum of U-Care's net profits for 1993
and the fourth quarter of 1992), and
(B) the aggregate income (loss) before income taxes for the applicable
period of all PPO plans offered by the UHC Joint Venture in the Applicable
Geographical Area (calculated as provided above).
(b) Royalties shall be calculated for each calendar year or portion
thereof, commencing October 1, 1994, and ending on the date this Agreement
terminates in accordance with Section 3, by an independent accounting firm of
recognized standing selected by the Governing Board. Such accounting firm shall
make the calculation with respect to each year not later than March 31 of the
next succeeding year and shall promptly notify the Governing Board, Blue Cross,
UWS, UHC, U-Care and, unless the HMOW Joint Venture has terminated, HMOW in
writing of such calculation and shall set forth in reasonable detail the basis
therefor. Promptly following receipt of such notice, payment shall be made to
U-Care by check mailed to its address specified in Section 11. Any disputes
between UWS and U-Care regarding the calculation of Royalties shall be resolved
in accordance with Section 4. The first calculation of Royalties shall be made
for the period commencing October 1, 1994 and ending December 31, 1995.
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<PAGE>
(c) For purposes of calculating Royalties:
(i) "Applicable Geographical Area" means (A) so long as the UHC
Joint Venture and the HMOW Joint Venture remain in effect, the following
Wisconsin counties: Adams, Columbia, Crawford, Dane, Dodge, Fond du Lac,
Grant, Green, Green Lake, Iowa, Juneau, Lafayette, Marquette, Monroe,
Richland, Sauk, Vernon, Waushara and Winnebago and (ii) if the HMOW Joint
Venture terminates for any reason, the following Wisconsin counties:
Columbia, Dane, Dodge, Grant, Iowa, Juneau, Lafayette, Marquette, Richland
and Sauk;
(ii) income does not include investment income attributable to
funds of UWS not withdrawn from the Joint Venture or attributable to
additional capital contributions from UWS or one of its affiliates to HMOW;
(iii) the administrative expenses of each plan offered shall
not exceed the actual costs incurred by the underwriter(s) of such plan;
(iv) the amount of an aggregate loss for the applicable period
shall carry over and reduce income from the plans offered by the Joint
Venture in the successive applicable period(s) to the extent of such loss;
(v) no expense, loss or liability attributable to the
approximate $4.4 million debt assumed and outstanding by U-Care to
University of Wisconsin Hospital and Clinics referred to in Section 13.4 of
the UHC Joint Venture
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<PAGE>
Agreement shall be taken into account;
(vi) income (loss) shall be computed without regard to
(A) administrative service payments by UWS affiliates to UWS pursuant to
any administrative service agreement between UWS and its affiliates in
connection with the payments to (1) LLC under the LLC Services Agreement,
(2) U-Care under this Agreement or (3) HPI under the Service Agreement,
dated as of November 1, 1994, between UWS and HPI, (B) any payment to LLC
under the LLC Services Agreement, (C) any payment to U-Care under this
Agreement or (D) any payment to HPI under the Service Agreement, dated as
of November 1, 1994, between UWS and HPI; and
(vii) if the HMOW Joint Venture terminates other than on
December 31 of any year, Royalties for that year shall be calculated in
accordance with Section 2(a)(i) for the period prior to termination and in
accordance with Section 2(a)(ii) for the period after termination.
3. TERMINATION AND FINAL ACCOUNTING.
This Agreement will terminate automatically if the UHC Joint Venture
terminates for any reason, including, without limitation, UHC's exercise of its
option to reacquire the U-Care business pursuant to Article 8 of the UHC Joint
Venture Agreement. If this Agreement terminates, a Royalty shall be calculated
for the period commencing October 1, 1994 and ending on the date of termination
("Aggregate Royalties") in accordance with the method for
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calculating Royalties under Section 2(a), subject to Section 2(c). To the
extent that Aggregate Royalties exceed the sum of the Royalties previously
received by U-Care, the excess shall be paid to U-Care within 60 days of the
date of termination. To the extent the sum of the Royalties previously received
by or owed to U-Care exceeds Aggregate Royalties, U-Care shall pay to UWS such
excess less the amount of any Royalty owed to U-Care (which shall be canceled)
within 60 days of the date of termination, but not in an amount greater than the
sum of the Royalties received by U-Care hereunder.
4. ARBITRATION. If UWS and U-Care cannot resolve a dispute arising from
this Agreement, the dispute will be submitted to arbitration in accordance with
this Section 4.
(a) Each side shall appoint an individual as arbitrator and the two
so appointed shall then appoint a third arbitrator. If either side refuses or
neglects to appoint an arbitrator within 30 days of receipt of a written notice
of demand for arbitration, the other side may appoint the second arbitrator. If
the two arbitrators do not agree on a third arbitrator within 30 days of their
appointment, each of the arbitrators shall nominate three individuals. Each
arbitrator shall then decline two of the nominations presented by the other
arbitrator. The third arbitrator shall then be chosen from the remaining two
nominations by drawing lots. The arbitrators shall be active or former officers
of insurance or reinsurance companies, managed
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<PAGE>
care organizations, or Lloyd's of London Underwriters; the arbitrators shall not
have a personal or financial interest in the result of the arbitration.
(b) The arbitration hearings shall be held in Madison, Wisconsin, or
such other place as may be mutually agreed. Each side shall submit its case to
the arbitrators within 30 days of the selection of the third arbitrator or
within such longer period as may be agreed by the arbitrators. The arbitrators
shall not be obliged to follow judicial formalities or the rules of evidence
except to the extent required by governing law, that is, the state law of the
situs of the arbitration as herein agreed; they shall make their decisions
according to the practice of the reinsurance business. The decision rendered by
a majority of the arbitrators shall be final and binding on both sides. Such
decision shall be a condition precedent to any right of legal action arising out
of the arbitrated dispute which either side may have against the other.
Judgment upon the award rendered may be entered in any court having jurisdiction
thereof.
(c) Each side shall pay (i) the fees and expenses of its own
arbitrator, (ii) one-half of the fees and expenses of the third arbitrator and
(iii) one-half of the other expenses that the parties jointly incur directly
related to the arbitration proceeding. Other than as set forth above, each
party shall bear its own costs in connection with any such arbitration,
including, without limitation, (i) all legal, accounting and other
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<PAGE>
professional fees and expenses and (ii) all other costs and expenses each party
incurs to prepare for such arbitration.
(d) Except as provided above, arbitration shall be based, insofar as
applicable, upon the Commercial Arbitration Rules of the American Arbitration
Association.
5. REPRESENTATIONS AND WARRANTIES. Each of UWS and U-Care represents to
the other that (a) it has the corporate power and authority to enter into,
execute and deliver this Agreement and to consummate the transactions
contemplated hereby, and (b) the execution and deliver of this Agreement and the
consummation of such transactions (i) have been duly authorized by all necessary
corporate action and (ii) will not conflict with, or result in a violation of,
any contract, commitment, agreement or arrangement to which it is a party.
6. AMENDMENTS. This Agreement may be amended only by a written agreement
signed by UWS and U-Care.
7. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall inure to the benefit of and bind UWS and
U-Care and their respective successors and assigns. Neither this Agreement nor
any right hereunder may be assigned by either party without the prior written
consent of the other.
(b) In accordance with Article 4 of the UHC Joint Venture Agreement,
U-Care will be dissolved. Prior to dissolution, U-Care may assign its rights
under this Agreement to a third party. In that event, the assignee will be
entitled to
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<PAGE>
all rights of U-Care under this Agreement as if it were an original party to
this Agreement.
8. INDEPENDENT CONTRACTOR. U-Care shall at all times be an independent
contractor. U-Care shall have no authority to bind UWS, Blue Cross or HMOW to
any agreement, except to the extent such authority is expressly conferred upon
it by UWS in writing (exclusive of this Agreement) and U-Care will not take any
actions inconsistent with the provisions of this Section 8.
9. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under any present or future law, and if the
rights or obligations of any party will not be materially and adversely affected
thereby, (a) such provision will be fully severable, (b) this Agreement will be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof, (c) the remaining provisions of this
Agreement will remain in full force and effect and will not be affected by the
illegal, invalid, or unenforceable provision or by its severance herefrom, and
(d) in lieu of such illegal, invalid, or unenforceable provision, there will be
added automatically as a part of this Agreement, a legal, valid, and enforceable
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible.
10. WAIVER. A waiver by a party of any breach by the other party of any
provision of this Agreement shall not be deemed to be a waiver by such first
party of any subsequent breach.
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<PAGE>
11. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Wisconsin (without giving effect to
principles of conflicts of laws) applicable to a contract executed and to be
performed in such state.
12. HEADINGS, ETC. The headings used in this Agreement have been inserted
for convenience and do not constitute matters to be construed or interpreted in
connection with this Agreement. Unless the context of this Agreement otherwise
requires, (a) words using the singular or plural number also include the plural
or singular number, respectively, and (b) the terms "hereof," "herein," "hereby"
and derivative or similar words refer to this entire Agreement.
13. NOTICES. Any notice or communication given pursuant to this Agreement
must be in writing and will be deemed to have been duly given if mailed (by
registered or certified mail, postage prepaid, return receipt requested), or if
transmitted by facsimile, or if delivered by courier, as follows:
To UWS
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
Facsimile: 414-226-6229
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<PAGE>
Attention: President
To U-Care
U-Care HMO, Inc.
440 Science Drive
Madison, Wisconsin 53711
Facsimile: 608-238-4503
Attention: President
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this paragraph will, whether sent by mail,
facsimile or courier, be deemed given upon the first business day after actual
delivery to the party to whom such notice or other communication is sent (as
evidenced by the return receipt or shipping invoice signed by a representative
of such party or by the facsimile confirmation). Either party from time to time
may change its address for the purpose of notices to that party by giving a
similar notice specifying a new address, but no such notice will be deemed to
have been given until it is actually received by the party sought to be charged
with the contents thereof.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which will
constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first set forth
above.
UNITED WISCONSIN SERVICES, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
U-CARE HMO, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
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<PAGE>
JOINT VENTURE AGREEMENT
AMONG
UNITED WISCONSIN SERVICES, INC.,
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN,
COMPCARE HEALTH SERVICES INSURANCE CORPORATION
AND
NORTHWOODS HEALTH CARE, LLC
1ST DAY OF JULY, 1996
<PAGE>
JOINT VENTURE AGREEMENT
This Joint Venture Agreement ("Agreement") is entered into on this 1st day
of July, 1996, by and among United Wisconsin Services, Inc., a corporation
organized under Chapter 180 of the Wisconsin Statutes ("UWS"), Blue Cross & Blue
Shield United of Wisconsin, a service insurance corporation organized under
Chapter 613 of the Wisconsin Statutes ("Blue Cross"), Compcare Health Services
Insurance Corporation, a health maintenance organization organized under Chapter
611 of the Wisconsin Statutes ("Compcare") and Northwoods Health Care, LLC, a
limited liability company organized under Chapter 183 of the Wisconsin Statutes
("NHC").
RECITALS
WHEREAS, UWS, Blue Cross and Compcare (collectively, the "UWS Parties")
desire to develop and market a broad array of quality, competitive managed
health care products, including health maintenance organization ("HMO") and
point-of-service ("POS") products and a Medicare managed care product, in the
northern region of Wisconsin, utilizing the relationships with health care
providers that NHC has and continues to build in that region; and
WHEREAS, NHC desires to obtain the resources and insurance expertise of the
UWS Parties as necessary to further its goal of offering a broad array of
quality, competitive managed health care products including HMO and POS products
in the northern region of Wisconsin; and
WHEREAS, the UWS Parties and NHC (collectively, the "Parties") wish to
coordinate their efforts through a joint venture arrangement (the "Joint
Venture") upon the terms and conditions set forth in this Agreement to achieve
the objectives set forth in the recitals above.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants hereinafter set forth, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Parties agree
as follows:
<PAGE>
ARTICLE 1
JOINT VENTURE FORMATION
A. JOINT VENTURE PRODUCTS. Through a series of implementing contracts with
one another and with third parties, the Parties shall jointly offer a broad
spectrum of managed health care products, including HMO and POS products
(collectively, the "Products") on both a fully-insured and self-insured
basis, to groups and individuals.
B. SERVICE AREA. The initial service area of the Joint Venture shall be
comprised of the following Wisconsin counties: Clark, Florence, Forest,
Iron, Langlade, Lincoln, Marathon, Marinette, Menominee, Oconto, Oneida,
Portage, Price, Shawano, Taylor, Waupaca, Wood and Vilas counties
(collectively, the "Service Area"). Upon mutual agreement of the Parties
and the receipt of necessary regulatory approval, the service area of the
Joint Venture may be expanded.
C. AGENCY RELATIONSHIP. This Agreement shall not create any agency
relationship between the Parties other than as specifically enumerated
herein and in the agreements and documents to be executed and performed
pursuant hereto (collectively, the "Joint Venture Documents"). The
relationship between the Parties is that of independent contractors in a
cooperative arrangement. It is not the intent of the Parties to create,
nor should this Agreement be construed to create, a partnership or an
employment relationship between the Parties. This Agreement creates no
fiduciary relationship between the Parties.
ARTICLE 2
GOVERNING COMMITTEE
A. GOVERNING COMMITTEE REPRESENTATION. The Joint Venture shall be managed by
a governing committee ("Governing Committee") which shall consist of six
(6) members, three (3) appointed by the UWS Parties and three (3) appointed
by NHC.
B. DUTIES OF THE GOVERNING COMMITTEE. The Governing Committee shall serve as
a forum for affording the Parties the opportunity to collaborate and
coordinate the development and marketing of the Products. The Governing
Committee shall not be a separate legal entity and shall have no authority
to bind the Parties in any manner. The Governing Committee shall establish
such books, records and accounts for the Joint Venture as it deems
reasonably necessary and shall allow each of the Parties, upon request, to
review such books, records and accounts. The Governing Committee shall
maintain records of all of its meetings and recommendations made. The
Governing Committee may establish such subcommittees as it deems
appropriate; provided, however, that any subcommittee so
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created must be comprised of an equal number of representatives from each
entity entitled to appoint members to the Governing Committee.
C. MEETINGS AND VOTING REQUIREMENTS. The Governing Committee shall meet at
least once every fiscal quarter. A chairperson, who shall be a voting
member of the Governing Committee, shall preside over each meeting.
Members of the Governing Committee may participate in meetings either
telephonically or in person. Any action that the Governing Committee may
take at a meeting may be taken instead by a written consent signed by all
of the members of the Governing Committee. The UWS Parties and NHC,
respectively, shall each have the power to appoint a chairperson every
alternate year for a one (1) calendar year term. NHC may appoint a
chairperson for the first calendar year upon the Effective Date of this
Joint Venture (as hereinafter defined). The Governing Committee may not
take any action without the approval of at least a quorum of its members.
Four members of the Governing Committee shall constitute a quorum. The
Joint Venture shall not pay members of the Governing Committee.
ARTICLE 3
INSURANCE OPERATIONS
A. UWS. UWS shall provide administrative services to the Joint Venture
including, but not limited to, accounting, actuarial, financial reporting,
management information, legal and investment services according to the
terms of an administrative services agreement ("Administrative Services
Agreement") attached as EXHIBIT A. UWS shall be compensated for providing
administrative services on a reasonable cost basis such that all
administrative "profit" will remain with the Products to be shared equally
by the Parties as underwriting profit.
B. BLUE CROSS. Blue Cross shall be the sole underwriter of the indemnity
segment of POS Products. Blue Cross shall have sole authority, without
approval of the Governing Committee being required, to perform all duties
of an insurer for insurance business underwritten or administered by Blue
Cross.
C. COMPCARE. Compcare shall be the sole underwriter for insured and
self-insured HMO products and the HMO segment of POS products. Compcare
shall also serve as the administrator for HMO plans and the HMO and
indemnity segments of POS plans. Compcare shall have sole authority,
without approval of the Governing Committee being required, to perform all
duties of an insurer for the Products underwritten or administered by
Compcare.
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ARTICLE 4
MEDICAL SERVICES AGREEMENT
NHC shall arrange for the delivery of all health care services for the Joint
Venture according to the terms of the medical services agreement (the "Medical
Services Agreement") between NHC and the UWS Parties attached hereto as EXHIBIT
B. The capitation rates NHC will be paid by the UWS Parties for the initial
three year term of the Joint Venture shall be as established in the attached
EXHIBIT C. Capitation shall be paid to NHC on a monthly basis for each enrolled
plan member; such capitation shall be adjusted for age, sex and benefit plan
design. The capitation rate for each additional one (1) year term(s), if any,
after the initial term of the Joint Venture shall be established in a written
agreement between the Parties by June 30 of each year, to become effective in
the next succeeding calendar year. It is the expectation of the Parties that
NHC shall capitate or otherwise compensate providers under the agreements NHC
will have with providers for the delivery of health care services under the
Joint Venture. Such provider agreements, executed by NHC and individual
providers, shall include provision for (i) a withhold of at least fifteen
percent (15%), unless such withhold is waived by unanimous consent of the
Governing Committee; and (ii) periodic price adjustments. The overall
responsibility for medical management shall remain with the underwriters;
however, the Medical Services Agreement shall define those responsibilities
relating to medical management and utilization review which shall be delegated
to NHC.
ARTICLE 5
RISK-SHARING
A. CAPITATION RISK. The Parties shall share in capitation risk as follows:
1. In the event that claims for covered health care services exceed the
capitation paid to NHC by Blue Cross and Compcare under the terms of
the Medical Services Agreement ("Aggregate Service Loss"), the
provider withhold shall first be applied to reduce the deficit. After
the withhold has been applied, the UWS Parties shall pay NHC fifty
percent (50%) of any remaining Aggregate Service Loss.
2. In the event that claims for covered health care services are less
than the capitation paid to NHC by Blue Cross and Compcare under the
terms of the Medical Services Agreement ("Aggregate Service Profit"),
the withhold shall be returned to the providers; then NHC shall pay to
the UWS Parties fifty percent (50%) of any remaining Aggregate Service
Profit.
3. Subject to section 5.D., below, relating to reconciliation following
the initial term of this Agreement, calculation of Aggregate Service
Losses and Aggregate Service Profits shall be made at the end of each
calendar year and shall be paid within 120
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days after the end of the calendar year.
B. UNDERWRITING RISK. The Parties shall share in underwriting risk as
follows:
1. In the event that before tax, the Products' aggregate sum of net
earned premium is less than the Products' aggregate sum of capitation
and administrative expenses ("Aggregate Net Underwriting Loss"), NHC
shall pay the UWS Parties fifty percent (50%) of the Aggregate Net
Underwriting Loss.
2. In the event that before tax, the Products' aggregate sum of net
earned premium is greater than the Products' aggregate sum of
capitation, incurred claims and administrative expenses ("Aggregate
Net Underwriting Profit"), the UWS Parties shall pay NHC fifty percent
(50%) of the Aggregate Net Underwriting Profit.
3. Subject to section 5.D. below, relating to reconciliation following
the initial term of this Agreement, calculation of Aggregate Net
Underwriting Losses and Aggregate Net Underwriting Profits shall be
made at the end of each calendar year and shall be paid within 120
days after the end of the calendar year.
C. LIMITATION ON RISK-SHARING. As a condition precedent to the UWS Parties'
obligations under this Agreement, Howard Young Health Care, Inc. shall
provide capitalization to NHC of $1.5 million for the initial term of the
Agreement. Such capitalization shall be in the form of either cash or a
non-revocable letter of credit from Howard Young Health Care, Inc. or
another party acceptable to UWS. UWS shall not unreasonably withhold
permission to substitute another party for all or part of the irrevocable
letter of credit. NHC's obligation for sharing in Aggregate Service Losses
and Aggregate Net Underwriting Losses during the initial three (3) year
term of the Agreement shall be limited to a total of $1.5 million. If the
Joint Venture is extended for an additional term or terms, NHC shall
provide additional capitalization as mutually agreed by the Parties.
D. RECONCILIATION FOLLOWING INITIAL TERM. The Parties shall reconcile amounts
owed with respect to the Aggregate Service Profit (Loss) and the Aggregate
Net Underwriting Profit (Loss) within 180 days after the end of the initial
three (3) year term of this Agreement. Either Party may offset any
balance, whether on account of Aggregate Service Profit (Loss) or Aggregate
Net Underwriting Profit (Loss), due from one party to the other under this
Agreement.
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ARTICLE 6
TERM AND TERMINATION
A. TERM. The initial term of this Agreement shall commence on the ____ day of
____, 1996, ("Effective Date") and terminate three (3) calendar years from
the Effective Date, on the 31st day of December, 1999. The Joint Venture
shall automatically renew for additional one year terms unless written
notice of termination is given in accordance with section 6.B., below.
B. TERMINATION. This Agreement may be terminated as follows:
1. Either party may terminate this Agreement at the end of the initial
three (3) year term or any subsequent term upon 180 days advance
written notice to all other Parties. Termination shall be effective
on December 31.
2. All providers with whom NHC has contracted to provide health care
services under this Joint Venture Agreement shall continue to provide
services according to the terms of the applicable Product benefit plan
until the end of the then current term of such benefit plan.
3. The capitation amounts paid to NHC for the provision of health care
services, as referenced in Article 4 herein, shall continue to be paid
until the end of applicable Product benefit plan years thereunder and
at the rates in effect at the time of termination.
C. EFFECT OF TERMINATION.
1. Upon termination, the Parties may mutually agree to form an HMO and
transfer the business of the Joint Venture to said HMO.
2. In the event the Joint Venture is terminated and the Parties do not
agree to form the HMO referenced in section 6.C.1. above, then the UWS
Parties shall have the right to retain all business of the Joint
Venture. However, upon such termination or upon transfer or sale of
the membership by the underwriter(s) to a third party, the Governing
Committee shall approve the amount of consideration, if any, to be
paid by the underwriter(s) to NHC. Consideration shall be calculated
to reflect any adverse impact to the UWS Parties and NHC with respect
to the risk-sharing described in Article 5 herein. If the Governing
Committee disapproves any consideration offered by the underwriter(s),
then the amount of the consideration to be paid by the underwriter(s)
to NHC shall be subject to binding arbitration as provided in Article
7.
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3. Notwithstanding the termination of the Joint Venture, all provider
agreements entered into by the Parties shall continue until their
scheduled termination date.
ARTICLE 7
ARBITRATION
A. If any dispute arises between the Parties to this Agreement with reference
to the interpretation of this Agreement or their rights with respect to any
transaction involved, whether such dispute arises before or after
termination of this Agreement, such dispute, upon the written request of
either party, shall be submitted to three arbitrators, one to be chosen by
each party, and the third to be chosen by the other two arbitrators.
B. If either party refuses or neglects to appoint an arbitrator within thirty
(30) days after the receipt of written notice from the other party
requesting it to do so, the requesting party may appoint two arbitrators.
If the two arbitrators fail to agree on the selection of a third arbitrator
within thirty (30) days of their appointment, each of them shall name two,
of whom the other shall strike one, and the selection of the third
arbitrator shall be made by drawing lots. All arbitrators shall be present
or former executive officers of insurance or reinsurance companies other
than the Parties to this Agreement or Underwriters at Lloyd's of London.
C. The arbitrators shall interpret this Agreement as an honorable engagement
and not merely as a legal obligation. They are relieved of all judicial
formalities and may abstain from following the strict rules of law, and
they shall make their award with a view of effecting the general purpose of
this Agreement in a reasonable manner rather than in accordance with a
literal interpretation of the language. Each party shall submit its case
to the arbitrators within thirty (30) days of the appointment of the third
arbitrator.
D. The decision in writing of any two arbitrators, when provided to the
Parties pursuant to section 9.I of this Agreement, shall be final and
binding on both parties. Each party shall bear the expense of its own
arbitrator and shall jointly and equally bear with the other party the
expense of the third arbitrator and the arbitration. Said arbitration
shall take place in Milwaukee, Wisconsin, unless some other place is
mutually agreed upon by the parties.
-7-
<PAGE>
ARTICLE 8
REPRESENTATIONS AND WARRANTIES
A. REPRESENTATIONS AND WARRANTIES OF NHC. NHC hereby represents and warrants
to the UWS Parties as follows: (1) NHC is a corporation duly organized,
validly existing and in current standing under the laws of the State of
Wisconsin. (2) The execution, delivery and performance of this Agreement
and all documents to be executed and delivered by the entities hereunder:
(a) are within their respective corporate power; (b) have been duly
authorized by all necessary or proper corporate and other action, including
the consent of shareholders, members or boards of directors, where
required; (c) are not in contravention of any provision of their respective
articles of incorporation or bylaws; (d) do not violate any law, statute,
ordinance, rule or regulation or any order or decree of any court or
governmental instrumentality applicable to them; and (e) do not conflict
with or result in the breach of, or constitute a default under, any
agreement or other instrument to which NHC is a party.
B. REPRESENTATIONS AND WARRANTIES OF UWS PARTIES. Blue Cross, Compcare and
UWS, each hereby represent and warrant to NHC as follows: (1) Blue Cross,
Compcare and UWS, respectively, are corporations duly organized, validly
existing and in current standing under the laws of the State of Wisconsin.
(2) The execution, delivery and performance of this Agreement and all
documents to be executed and delivered by the entities hereunder: (a) are
within their respective corporate power; (b) have been duly authorized by
all necessary or proper corporate and other action, including the consent
of shareholders, members or boards of directors, where required; (c) are
not in contravention of any provision of their respective articles of
incorporation or bylaws; (d) do not violate any law, statute, ordinance,
rule or regulation or any order or decree of any court or governmental
instrumentality applicable to them; and (e) do not conflict with or result
in the breach of, or constitute a default under, any agreement or other
instrument to which any of the UWS Parties is a party.
C. ENFORCEABILITY. The UWS Parties and NHC each have the right to bring an
action for up to three years from the Effective Date of this Agreement for
any and all legal and equitable remedies available in the event any of the
representations or warranties of either Party as stated in sections 8.A.
and 8.B. of this Agreement prove to be untrue.
D. HOLD HARMLESS. UWS Parties shall indemnify and hold harmless NHC from any
and all claims, liabilities, damages or other costs to the extent they
result from or arise out of acts or omissions of the UWS Parties or any of
the UWS Parties' employees or agents that constitute criminal conduct,
negligence or willful misconduct with respect to the UWS Parties'
responsibilities under the Joint Venture. NHC shall indemnify and hold
harmless the UWS Parties from any and all claims, liabilities, damages or
other costs to the extent
-8-
<PAGE>
they result from or arise out of acts or omissions of NHC or any of NHC's
employees or agents that constitute criminal conduct, negligence or willful
misconduct with respect to NHC's responsibilities under the Joint Venture.
ARTICLE 9
GENERAL PROVISIONS
A. NON-EXCLUSIVITY. This Agreement shall be non-exclusive. The Parties are
free to compete in the Service Area with any products and with any other
entities.
B. AMENDMENTS. This Agreement may be amended only by the consent of the
Parties expressed in a written addendum; and such addendum, when executed
by all Parties, shall be deemed to be an integral part of this Agreement
and binding on the Parties.
C. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and
bind each of the Parties and their successors and assigns. Neither this
Agreement nor any right hereunder nor any part hereof may be assigned by
any party without the prior written consent of the other Parties and all
necessary regulatory authorities.
D. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Wisconsin applicable to a contract
executed and to be performed in such state.
E. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement.
F. WAIVER. The failure of any party at any time or enforce any provision of
this Agreement shall not be construed as a waiver of that provision and
shall not affect the right of any party thereafter to enforce each and
every provision of this Agreement in accordance with its terms.
G. COUNTERPARTS. This Agreement may be executed simultaneously in any number
of counterparts, each of which will be deemed an original, but all of which
will constitute one and the same instrument.
H. CONFIDENTIALITY. The Parties acknowledge that all materials and
information of either Party which has or will come into the possession of
another party in connection with this Agreement consists of confidential
and proprietary data. Each Party agrees to hold such material and
information in strictest confidence, not to make use thereof other than for
the performance of this Agreement, and not to release or disclose it to any
third party other than
-9-
<PAGE>
for the performance of this Agreement.
I. NOTICES. Any notice or communication given pursuant to this Agreement must
be in writing and will be deemed to have been duly given if mailed (by
registered or certified mail, postage prepaid, return receipt requested),
or if transmitted by facsimile, or if delivered by courier, as follows:
TO BLUE CROSS:
Blue Cross & Blue Shield United of Wisconsin
401 West Michigan Street
Milwaukee, Wisconsin 53203
Facsimile: (414) 226-6229
Attention: Penny J. Siewert
TO UWS:
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
Facsimile: (414) 226-6229
Attention: Thomas R. Hefty
TO COMPCARE:
Compcare Health Services Insurance Corporation
401 West Michigan Street
Milwaukee, Wisconsin 53203
Facsimile: (414) 226-6229
Attention: Roger A. Formisano
TO NHC:
Howard Young Health Care, Inc.
P. O. Box 470
Woodruff, Wisconsin 54568
Facsimile: 715-356-6097
Attention: Douglas O. Rosenberg
All notices and other communications required or permitted under this
Agreement that are
-10-
<PAGE>
addressed as provided in this paragraph will, whether sent by mail,
facsimile, or courier, be deemed given upon the first business day after
actual delivery to the party to whom such notice or other communication is
sent (as evidenced by the return receipt or shipping invoice signed by a
representative of such party or by the facsimile confirmation). Any party
from time to time may change its address for the purpose of notices to that
party by giving a similar notice specifying a new address, but no such
notice will be deemed to have been given until it is actually received by
the party sought to be charged with the contents thereof.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized representative as of the date first set forth
above.
BLUE CROSS & BLUE SHIELD
UNITED OF WISCONSIN
By:
---------------------------------
Title:
------------------------------
Date:
-------------------------------
UNITED WISCONSIN SERVICES, INC.
By:
---------------------------------
Title:
------------------------------
Date:
-------------------------------
-11-
<PAGE>
COMPCARE HEALTH SERVICES
INSURANCE CORPORATION
By:
---------------------------------
Title:
------------------------------
Date:
-------------------------------
NORTHWOODS HEALTH CARE, LLC
By:
---------------------------------
Title:
------------------------------
Date:
-------------------------------
-12-
<PAGE>
AMENDMENT TO JOINT VENTURE AGREEMENT
This Amendment to the Joint Venture Agreement (the "Amendment") is made
and entered into this 24 day of October 1996, by and among United
Wisconsin Services, Inc., a corporation organized under chapter 180 of the
Wisconsin Statutes ("UWS"), Blue Cross & Blue Shield United of Wisconsin, a
service insurance corporation organized under Chapter 613 of the Wisconsin
Statutes ("Blue Cross"), Compcare Health Services Insurance Corporation, a
health maintenance organization organized under Chapter 611 of the Wisconsin
Statutes ("Compcare") and Northwoods Health Care, LLC, a limited liability
company organized under Chapter 183 of the Wisconsin Statutes ("NHC").
WHEREAS, the parties entered into a certain joint venture agreement
dated July 1, 1996 (the "Agreement");
WHEREAS, the Agreement provides for an initial term of three calendar
years, commencing on July 1, 1996 and terminating on December 31, 1999; and
WHEREAS, the parties desire to amend the Agreement to extend the initial
term to five calendar years, commencing on July 1, 1996 and terminating on
December 31, 12001, and to amend other provisions of the Agreement consistent
with this extension.
NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth in this Amendment, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. The parties agree that Article 4, relating to the Medical Services
Agreement, is hereby amended to read in its entirety as follows:
NHC shall arrange for the delivery of all health care services for the
Joint Venture according to the terms of a medical services agreement
(the "Medical Services Agreement") between NHC and Compcare, attached
hereto as EXHIBITS B. The capitation rates to be paid to NHC by
Compcare for calendar years 1997, 1998 and 1999 shall be as
established in the attached EXHIBIT C. Capitation shall be paid to
NHC on a monthly basis for each enrolled plan member; such capitation
shall be adjusted for age, sex and benefit plan design. Compcare and
NHC shall establish the capitation rate for each additional calendar
year of the Joint Venture, including any extensions thereof, in a
written agreement by June 30 of each year, such capitation rate to
become effective in the next succeeding calendar year. It is the
expectation of the Parties that Compcare and NHC will capitate
providers for the delivery of health care services under the Joint
Venture. The provider agreements, executed by NHC, Compcare and
individual providers, shall include provision for: (i) a withhold of
at least fifteen percent (15%), unless such withhold is waived by
unanimous consent of the Governing Committee; and (ii) periodic price
adjustments. The overall responsibility for medical management shall
remain with the underwriters; however, the Medical Services Agreement
shall define those responsibilities relating to medical management and
utilization review that shall be delegated to NHC.
<PAGE>
2. The parties agree that section 5.C, relating to limitation on
risk-sharing, is hereby amended to read in its entirety as follows:
5.C. LIMITATION OF RISK-SHARING. As a condition precedent to the UWS
Parties' obligations under this Agreement, Howard Young Health Care,
Inc. shall provide capitalization to NHC of TWO (2) MILLION DOLLARS
for the initial term of the Agreement. Such capitalization shall be
in the form of either cash or a non-revocable letter of credit from
Howard Young Health Care, Inc. or another party acceptable to UWS.
UWS shall not unreasonably withhold permission to substitute another
party for all or part of the irrevocable letter of credit. NHC's
obligation for sharing in Aggregate Service Losses and Aggregate Net
Underwriting Losses during the initial five (5) year term of the
Agreement shall be limited to a total of TWO (2) MILLION DOLLARS. If
the Joint Venture is extended for an additional term or terms, NHC
shall provide additional capitalization as mutually agreed by the
Parties.
3. The parties agree that amounts owed with respect to the Aggregate
Service Profit (Loss) and the Aggregate Net Underwriting Profit (Loss) shall
be reconciled at the end of the initial five year term, and that section 5.D
is hereby amended to read in its entirety as follows:
5.D RECONCILIATION FOLLOWING INITIAL TERM. The UWS Parties and NHC
shall reconcile amounts owed with respect to the Aggregate Service
Profit (Loss) and the Aggregate Net Underwriting Profit (Loss) within
180 days after the end of the initial five (5) year term of this
Agreement. Either Party may offset any balance, whether on account of
Aggregate Service Profit (Loss) or Aggregate Net Underwriting Profit
(Loss) or Aggregate Net Underwriting Profit (Loss), due from one party
to the other under this Agreement.
4. The parties hereby agree that the initial term of the joint venture
shall commence on July 1, 1996 and terminate on December 31, 2001, and that
sections 6.A and 6.B are hereby amended to read in their entirety as follows:
6.A TERM. The initial term of this Agreement shall commence on July
1, 1996, (the "Effective Date") and terminate five (5) calendar years
from the Effective Date on December 31, 2001. The Joint Venture shall
automatically renew for additional one year terms unless written
notice of termination is give in accordance with section 6.B, below.
6.B TERMINATION. This Agreement may be terminated as follows:
1. Any party may terminate this Agreement at the end of the
initial five (5) year term, or any subsequent term, upon 180 days
advance written notice to all other parties. Termination shall be
effective on December 31.
2. All providers with whom NHC and Compcare have contracted
to provide health care services under this Joint Venture Agreement
shall continue to provide services according to the terms of the
applicable Product benefit plan until the end of the then current
term of such benefit plan.
<PAGE>
3. The capitation amounts paid to NHC for the provision of
health care services, as referenced in Article 4 herein, shall
continue to be paid until the end of the applicable Product benefit
plan years thereunder and at the rates in effect at the time of
termination.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their respective representatives and to become effective as of
the Effective Date.
BLUE CROSS & BLUE SHIELD
UNITED OF WISCONSIN
By:
----------------------------------
Title:
-------------------------------
Date:
--------------------------------
UNITED WISCONSIN SERVICES, INC.
By:
----------------------------------
Title:
-------------------------------
Date:
--------------------------------
COMPCARE HEALTH SERVICES
INSURANCE CORPORATION
By:
----------------------------------
Title:
-------------------------------
Date:
--------------------------------
NORTHWOODS HEALTH CARE, LLC
By:
----------------------------------
Title:
-------------------------------
Date: October 24, 1996
--------------------------------
<PAGE>
INFORMATION SYSTEM SERVICES AGREEMENT
BETWEEN
BLUE CROSS BLUE SHIELD OF SOUTH CAROLINA
AND
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
DATED AS OF
AUGUST 23, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Scope of Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(a) Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(b) Current Applications. . . . . . . . . . . . . . . . . . . . . . . . 5
(c) New Applications. . . . . . . . . . . . . . . . . . . . . . . . . . 6
(d) Print Center. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(e) Monthly Reporting . . . . . . . . . . . . . . . . . . . . . . . . . 7
(f) System Security . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(g) Access Facilities and System Suitability. . . . . . . . . . . . . . 7
3. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4. Operating Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(a) In General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(b) Adjustments to the Operating Fee. . . . . . . . . . . . . . . . . . 8
(c) Scope Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 8
(d) Print Center Credit . . . . . . . . . . . . . . . . . . . . . . . . 9
(e) Strategic Development Charge. . . . . . . . . . . . . . . . . . . . 9
5. Services Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(a) Basic Services. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(b) Implementation Services . . . . . . . . . . . . . . . . . . . . . . 10
(c) Support Services. . . . . . . . . . . . . . . . . . . . . . . . . . 10
(d) Record Keeping and Audit Rights . . . . . . . . . . . . . . . . . . 10
6. Taxes Additional . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7. Billings and Payments. . . . . . . . . . . . . . . . . . . . . . . . . . 11
8. Steering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(a) Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(b) Steering Minimum. . . . . . . . . . . . . . . . . . . . . . . . . . 11
(c) Initial System Enhancements and Modifications . . . . . . . . . . . 12
(d) Progress Reporting. . . . . . . . . . . . . . . . . . . . . . . . . 12
(e) Ownership of Work Product . . . . . . . . . . . . . . . . . . . . . 12
9. Implementation Matters . . . . . . . . . . . . . . . . . . . . . . . . . 12
(a) Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(b) Sharing of Costs Related to Implementation Projects . . . . . . . . 12
(c) EDS Migration . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(d) Phasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(e) Implementation Team . . . . . . . . . . . . . . . . . . . . . . . . 13
10. Migration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
i
<PAGE>
11. Regulatory Mandates. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(a) Federal Mandates. . . . . . . . . . . . . . . . . . . . . . . . . . 14
(b) BCA Mandates. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(c) State of Wisconsin Mandates . . . . . . . . . . . . . . . . . . . . 14
12. Other Plan Responsibilities. . . . . . . . . . . . . . . . . . . . . . . 15
(a) Facilities for Use by BCBSSC. . . . . . . . . . . . . . . . . . . . 15
(b) System Related Facilities . . . . . . . . . . . . . . . . . . . . . 15
(c) Representative. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
13. Ownership of Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
14. Proprietary Rights of BCBSSC . . . . . . . . . . . . . . . . . . . . . . 16
(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
15. Termination by BCBSUW for Convenience. . . . . . . . . . . . . . . . . . 17
16. Service Level Commitments. . . . . . . . . . . . . . . . . . . . . . . . 17
(a) Definition of Service Level Commitments . . . . . . . . . . . . . . 17
(b) Exclusive Remedies for Failure to Satisfy Service Level
Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
17. Conformity with Documentation. . . . . . . . . . . . . . . . . . . . . . 19
(a) Covenant by BCBSSC. . . . . . . . . . . . . . . . . . . . . . . . . 19
(b) Exclusive Remedies for Failure of System to Conform to
Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
18. Events of Default; Remedies. . . . . . . . . . . . . . . . . . . . . . . 19
(a) Default by BCBSSC . . . . . . . . . . . . . . . . . . . . . . . . . 19
(b) Remedies for Event of Default by BCBSSC . . . . . . . . . . . . . . 20
(c) Default by the Plan; BCBSSC's Remedies. . . . . . . . . . . . . . . 20
19. Limitation of Liability. . . . . . . . . . . . . . . . . . . . . . . . . 20
(a) Termination Damages . . . . . . . . . . . . . . . . . . . . . . . . 20
(b) Punitive Damages. Neither Party shall be liable to the other
party for any punitive damages. . . . . . . . . . . . . . . . . . . 21
(c) Limitation on Amount of Damages . . . . . . . . . . . . . . . . . . 21
20. Transition Services. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
21. Limited Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
22. Indemnities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(a) By BCBSSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(b) By BCBSUW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
23. Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(a) Mutual Obligations. . . . . . . . . . . . . . . . . . . . . . . . . 22
(b) BCBSSC Obligations. . . . . . . . . . . . . . . . . . . . . . . . . 22
(c) Plan Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . 23
(d) Public Announcements. . . . . . . . . . . . . . . . . . . . . . . . 23
ii
<PAGE>
24. Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(a) Informal Dispute Resolution . . . . . . . . . . . . . . . . . . . . 23
(b) Binding Arbitration . . . . . . . . . . . . . . . . . . . . . . . . 23
(c) Provisional Relief. . . . . . . . . . . . . . . . . . . . . . . . . 24
(d) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
25. Credit or Payment Relating to Contacts with Other BCA Affiliates . . . . 24
(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
26. Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(a) Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(c) Selection of Arbitrator . . . . . . . . . . . . . . . . . . . . . . 25
(d) Site of Proceeding. . . . . . . . . . . . . . . . . . . . . . . . . 25
(e) Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
27. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
(a) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
(b) Relationship of Parties . . . . . . . . . . . . . . . . . . . . . . 27
(c) Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . 28
(d) No Third Party Beneficiaries. . . . . . . . . . . . . . . . . . . . 28
(e) Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(f) Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(g) Succession and Assignment . . . . . . . . . . . . . . . . . . . . . 28
(h) Amendments and Waivers. . . . . . . . . . . . . . . . . . . . . . . 28
(i) Forces Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(j) Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
iii
<PAGE>
THIS INFORMATION SYSTEM SERVICES AGREEMENT is made by and between Blue
Cross and Blue Shield of South Carolina ("BCBSSC") and Blue Cross and Blue
Shield United of Wisconsin ("BCBSUW") as of the date immediately preceding
the signatures of the parties subscribed hereinbelow.
INTRODUCTION. This Agreement is the "Definitive Agreement" referred to
in that certain Letter of Intent between the Parties dated as of August 21,
1996, concerning the provisions of certain information system services by
BCBSSC to BCBSUW (the "Letter of Intent").
AGREEMENT. In consideration of the mutual promises and covenants
hereinafter set forth, the Parties hereby agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, the following definitions shall apply:
"ACCESS FACILITIES" means a channel attachment between the Plan's
network controller located at BCBSSC's data center and BCBSSC's central
processing facility in South Carolina, providing the Plan with access to the
System (as defined below). The Access Facilities do not include
telecommunication lines, telecommunication hubs, network controllers,
terminals, cabling, terminal emulation software, or other equipment or
software required at the Plan's sites for access to the System.
"AGREEMENT" means the within Information System Services Agreement
between the Parties, together with all exhibits, schedules or attachments
referred to herein, all as modified or amended from time to time in
accordance with the provisions hereof.
"BASE FEE" means, as to any Pricing Unit, the Base Rate multiplied by
the number of Subscribers for such Pricing Unit, in any given calendar month.
"BASE RATE" means, as to any Pricing Unit the monthly fee per Subscriber
set forth below:
<TABLE>
<CAPTION>
<S> <C>
Pricing Unit Base Rate
------------ ---------
BCBSUW Medical $ 2.34
BCBSUW Dental $ 0.41
UWS Medical $ 1.80
UWS Dental $ 0.36
</TABLE>
"BASIC SERVICES" means (and only means) the services provided by BCBSSC
to the Plan which are required to: (i) operate the System so as to allow the
Plan access to the System and use of the System Functions (as defined below)
in accordance with the terms and
1
<PAGE>
conditions of this Agreement, (ii) provide customary help desk support (via a
toll-free line provided by BCBSSC), including logging of all calls on the
Inform tracking system or equivalent, and (iii) perform such other services
as are expressly identified herein as included in Basic Services.
"BUSINESS SEGMENT" means any Plan line of business (or other category of
Plan business mutually agreed upon by the Parties prior to the Commencement
Date) that will be part of the domestic health and dental business carried on
by the Plan during the Term, including without limitation ASO, state group,
group health insured, dental, FEP, HIRSP, Dentacare, Compcare HMO, and
individual health and dental product lines of business, and including future
expansion of such business (whether in the form of expansion of existing
health and dental business lines or the addition of new health and dental
business lines).
"COMMENCEMENT DATE" means the first date on which all Business Segments
mutually agreed upon by the Parties as intended to become System Active
Business Segments (as defined below) qualify as System Active Business
Segments.
"CONTRACT" means an individual or group contract for health care or
dental benefits (whether indemnity or service benefits) issued or
administered by the Plan.
"CONTRACT YEAR" means each twelve month period following either the
Commencement Date or an anniversary of the Commencement Date.
"CPI" means the Consumer Price Index for All Urban Consumers (All Items
Index for All U.S. Cities (Base 1984=100)) for any calendar year as published
by the United States Department of Labor, Bureau of Labor Statistics.
"CPI PERCENTAGE" means, at any given time, the percentage increase or
decrease, if any, in the then most currently available CPI ("Current Index")
over the CPI most currently available as of twelve months prior to the
Current Index.
"DOCUMENTATION" means (i) the description of application functions set
forth in Exhibit A hereto; (ii) with respect to all enhancements and
modifications to the application functions (including any new application
functions) implemented after the date of this Agreement pursuant to ISSM, the
description of such new, enhanced or modified application functions set forth
in the "Post Implementation Sign-Off" (as defined in the ISSM) mutually
agreed to by the Parties pursuant to the ISSM; and (iii) with respect to
"Scope Adjustments" pursuant to Paragraph 4(c) below, the additions to,
deletions from or other modifications of application functionality described
in the "Scope Adjustment Sign-Off" referred to in Paragraph 4(c) below.
"IMPLEMENTATION SERVICES" means all services provided by BCBSSC to or on
behalf of the Plan in connection with implementing (or de-implementing) the
Plan's access to the System and/or use of the System Functions prior to the
Commencement Date.
2
<PAGE>
"ISSM" means BCBSSC's comprehensive on-line manual entitled "Information
Systems Standards Manual" setting forth the standards, procedures,
methodologies, policies and guidelines applicable to BCBSSC's information
services operations (including the System), as updated, amended or otherwise
modified from time to time in BCBSSC's sole discretion.
"LABOR RATE" means, for any given calendar year, the annual average
hourly amount actually paid by BCBSSC during the immediately preceding
calendar year as Compensation to the non-management personnel, including
contract programmers, who provide implementation services and/or support
services on behalf of BCBSSC and the customers of BCBSSC. As used herein,
"Compensation" includes all amounts reasonably related to the cost to BCBSSC
of such non-management personnel, including contract programmers, (such as
wages, bonuses and other wage and employment related taxes and benefits
customarily awarded to BCBSSC employees).
"LABOR RATE ADJUSTMENT" means the percentage increase or decrease, if
any, in the current annual Labor Rate over the previous calendar year's Labor
Rate.
"PARTY(IES)" mean either BCBSSC or BCBSUW, or both, as applicable.
"PLAN" means BCBSUW, UWS, and each other affiliate of BCBSUW which
BCBSUW desires to receive System Services under this Agreement.
"PRICING UNIT" means any one of the following stand-alone segments of
the Plan's business: (i) BCBSUW medical; (ii) BCBSUW dental; (iii) UWS
medical; and (iv) UWS dental; and "PRICING UNITS" means all four such
stand-alone segments.
"STEERING" means the process by which BCBSSC's information systems
personnel resources (measured in chargeable hours) are deployed and managed
in connection with a particular project or task related to the System, all as
more particularly set forth in the ISSM. BCBSSC information systems
personnel resources assigned to a project or task in response to a request of
the Chairman of a Steering Committee of one of the Parties are sometimes
referred to herein as "Steering resources of" that Party. For purposes of
this definition, "chargeable hours" does not include travel time to or from
South Carolina.
"SUBSCRIBER" means an individual who has contracted for health care or
dental benefits (whether on an individual or group basis) pursuant to a
System Active Contract. (However, "Subscriber" does not include dependents
entitled to health care or dental benefits under a Contract providing family
coverage). The number of Subscribers for any given calendar month and any
given Business Segment shall be, for all purposes of this Agreement,
reflected in the Systems routine BB30 monthly report for such calendar month
and Business Segment. A single individual may be counted as two (or more)
Subscribers if such individual is a Subscriber under two (or more) separate
System Active Contracts.
3
<PAGE>
"SUPPORT SERVICES" means the services provided by BCBSSC to or on behalf
of the Plan, other than Basic Services, Implementation Services, services
performed under Paragraph 10(a) and activities related to Strategic
Development, and including, without limitation, services in connection with
development and integration into the System, of enhancements and
modifications requested by BCBSUW.
"SYSTEM" means BCBSSC's computer hardware, computer programs (including
without limitation system software, application software and interface
software), the Access Facilities, and related equipment, documentation,
know-how, and other information and third party software by which BCBSSC
makes available to the Plan the System Functions.
"SYSTEM ACTIVE BUSINESS SEGMENT" means any Business Segment whose
Contracts are (in whole or substantial part) System Active Contracts.
"SYSTEM ACTIVE CONTRACT" means, as to any given calendar month, a
Contract which the System routine BB30 report for such month reflects as not
expired or canceled.
"SYSTEM FUNCTIONS" means the application functions currently supported
by the System related to the administration and operation of BCBSSC's
domestic health and dental business lines, including those set forth in the
Documentation, together with such enhancements of, additions to, deletions
from or modifications of the application functions (including any new
application functions) as mutually agreed to by the Parties that are
implemented by the Parties after the date hereof pursuant to the ISSM.
BCBSUW acknowledges that the availability of certain System Functions
(including certain System Functions described in the Documentation) for use
by BCBSUW depends upon BCBSUW obtaining licenses of certain software from
third party vendors, and that obtaining such licenses is BCBSUW's sole
responsibility.
"SYSTEM SERVICES" means the Basic Services, Implementation Services, and
the Support Services, collectively.
"UWS" means United Wisconsin Services, Inc.
"VOLUME" means the aggregate number of System Active Contracts in any
calendar month.
2. SCOPE OF SERVICES.
(a) GENERALLY. During the term of this Agreement (as set forth below),
BCBSSC shall make available to the Plan, and the Plan shall utilize, the
System and the System Services for the Plan's internal administration and
operation of the Business Segments selected by BCBSUW from time to time.
BCBSSC hereby grants the Plan a non-exclusive and non-transferable license to
access the System and utilize the System Functions. This license does not
permit access to or use of the System or the System Functions by any other
4
<PAGE>
person or entity, nor does it permit the Plan to possess, copy, reproduce in
any form, modify, or exercise any other right of control over any System
software, in whole or in part. This license does not grant the Plan access
to, use of, or any other rights with respect to, any other software products
or functions of BCBSSC, its affiliates, or any third party.
(b) CURRENT APPLICATIONS. The System's software applications currently
include, without limitation, the following:
<TABLE>
<C> <S>
AMMS claims processing system and subsystems, including claims
inquiry;
TMCS managed care system, including authorization, referral and
case management subsystems;
CARS back-end group reporting system;
PIMS provider information management system, including provider
demographics, certification and pricing;
Inform correspondence tracking system;
GMIS claims rebundling software (only those modules licensed to
BCBSSC; if BCBSUW desires to add GMIS modules not licensed
to BCBSSC, Support Services chargeable to BCBSUW will be
required to integrate additional modules)**;
OPAS on-line productivity and performance system;
ALGS automated letter generating system used to generate all
system letters in ad hoc or batch mode**;
- membership and enrollment systems, including inquiry
subsystem (and including new CES membership system when
completed and implemented by BCBSSC for its domestic health
and dental business lines);
- benefit file processing and inquiry system;
- premium billing, cash receipts, income accounting and
commission systems; and
- Blue Cross Association ("BCA") mandated systems applicable
to BCBSSC, including ITS, IPDR and FEP.
</TABLE>
5
<PAGE>
<TABLE>
<C> <S>
- Capitation system when completed and implemented by BCBSSC
for its domestic health and dental business lines.
</TABLE>
** Indicates software requiring BCBSUW (at its sole cost) to obtain a third
party vendor license.
Services rendered by BCBSSC to provide the Plan with access to and use
of any and all such current applications shall be chargeable to BCBSUW as
Implementation Services or Support Services, as applicable.
(c) NEW APPLICATIONS.
(i) At BCBSUW's option, and subject to agreement by the Parties as
to an adjustment to the Operating Fee as set forth in subparagraph (ii)
below, BCBSSC shall integrate with the System the following software
applications (individually "New Application" and collectively "New
Applications") (the cost of purchasing, developing, integrating or
licensing such software shall be BCBSUW's sole responsibility):
<TABLE>
<C> <S>
- third party vendor financial systems, including general ledger,
accounts payable, purchasing, fixed assets, and cost allocation;
- additional GMIS modules not licensed to BCBSSC;
- other Plan systems such as drug processing (ProVantage), data
warehouse, and financial and electronic commerce systems; and
- new applications developed with Steering resources of BCBSUW.
</TABLE>
(ii) BCBSSC shall not be required to implement any New Application
until the Parties have agreed upon an appropriate adjustment in the
Operating Fee under Paragraph 4 for the processing of such New
Application.
(iii) All BCBSSC services required to integrate any New
Application into the System shall constitute Implementation Services
chargeable under Paragraph 5(b) or Support Services chargeable under
Paragraph 5(c), as applicable.
(d) PRINT CENTER. BCBSUW shall operate a print center at a mutually
satisfactory Plan site (the "Print Center") to provide the Plan with System
related printing services, including production of identification cards in the
same format and on the same cardstock as currently used by the Plan. BCBSUW
shall provide staffing, equipment, paper and other supplies, and mainframe and
LAN/WAN connections and interface software necessary to support the Print
Center. BCBSUW shall be responsible for all other costs and requirements of the
Print Center, including without limitation all mailing costs, and all cabling
and
6
<PAGE>
environmental requirements of the Print Center. BCBSSC shall not be
responsible for any Print Center costs of any kind whatsoever.
(e) MONTHLY REPORTING. As part of the Basic Services, BCBSSC shall
provide BCBSUW with monthly reports concerning the status of key projects,
performance metrics, issues log, anticipated workload, and compliance with
the service level commitments set forth in Paragraph 16 below.
(f) SYSTEM SECURITY. As part of the Basic Services, BCBSSC shall
follow reasonable security procedures to protect Plan data files from
unauthorized access by third parties or unauthorized BCBSSC personnel. At a
minimum, such security procedures shall be at the level provided by BCBSSC
for the protection of its own data of a similar nature. BCBSSC shall cause
its independent financial auditors to conduct an annual audit of its security
procedures and data center controls and report in writing thereon, and shall
promptly upon its receipt of such report provide a copy thereof to BCBSUW.
If the Parties mutually agree to changes in security procedures recommended
in any such report, such changes shall be promptly implemented at BCBSSC's
sole cost and expense. BCBSSC shall also consider other recommendations by
BCBSUW concerning changes in security procedures. In any event, however,
implementation of any such changes in security procedures shall be in the
sole discretion of BCBSSC.
(g) ACCESS FACILITIES AND SYSTEM SUITABILITY. The Access Facilities
and the System shall be adequately sized to support the Plan's then current
processing volume, with appropriate allowances for unanticipated large
increases in processing volume, and provided that BCBSUW gives BCBSSC
reasonable notice of anticipated large increases in processing volume.
3. TERM.
The initial term ("Initial Term") of this Agreement shall begin with the
effective date thereof and end upon the fifth anniversary of the Commencement
Date. BCBSUW shall have the option to renew this Agreement for two
additional one-year periods (the "Renewal Terms") by giving written notice of
renewal to BCBSSC at least one year prior to the end of the Initial Term and
at least six months prior to any Renewal Term. The Initial Term and the
Renewal Terms are sometimes referred to collectively herein as the "Term."
Notwithstanding the foregoing, this Agreement may be terminated prior to the
expiration of the Initial Term or any Renewal Term pursuant to Paragraphs 15,
16(b)(ii), 17(b)(ii), 18(b) or 18(c) below.
4. OPERATING FEE.
(a) IN GENERAL. In consideration of the System access license referred
to in Paragraph 2(a) above, and the performance of the Basic Services, BCBSUW
shall pay BCBSSC for each calendar month during the Term a fee (the
"Operating Fee") equal to the
7
<PAGE>
sum of the Base Fees for all four Pricing Units for such calendar month;
provided, however, that from and after the Commencement Date, there shall be
a minimum Operating Fee of $500,000 per month.
(b) ADJUSTMENTS TO THE OPERATING FEE. The Operating Fee shall be
adjusted as follows:
(i) if the aggregate number of the BCBSUW Medical Pricing Unit
Subscribers and the UWS Medical Pricing Unit Subscribers exceeds 504,000
for any calendar month during the Term, then the Base Rate for each such
Pricing Unit shall be reduced by 5% for such calendar month;
(ii) the Operating Fee shall be adjusted by all applicable Scope
Adjustments provided for in Paragraph 4(c) below;
(iii) the Operating Fee shall be adjusted following the
implementation of any New Application, in accordance with Paragraph
2(c)(ii) above;
(iv) if the aggregate number of the BCBSUW Dental Pricing Unit
Subscribers and the UWS Dental Pricing Unit Subscribers exceeds 3,400,000
in any Contract Year, the Base Rate applicable to each such Pricing Unit
shall be increased by $0.10 per Subscriber commencing on the first day of
the next succeeding Contract Year;
(v) if the aggregate number of the BCBSUW Dental Pricing Unit
Subscribers and the UWS Dental Pricing Unit Subscribers exceeds 5,000,000
in any Contract Year, the Base Rate applicable to each such Pricing Unit
shall be increased by $0.15 per Subscriber commencing on the first day of
the next succeeding Contract Year; and
(vi) on January 1, 1998, and on each January 1 thereafter, the
Operating Fee shall be adjusted by the CPI Percentage.
(c) SCOPE ADJUSTMENTS. Scope Adjustments are amounts by which the
otherwise applicable Base Rate will be increased or decreased if BCBSUW
elects to include or exclude certain System capabilities from the System
license. (The Base Rates set forth in the definition of "Base Rate" in
Paragraph 1 above assumes each of the following capabilities are included.)
Following are the Scope Adjustments BCBSUW may elect:
<TABLE>
<CAPTION>
Based Rate Adjustment Amount Capability Excluded
---------------------------- -------------------
<S> <C>
$0.01 CARS
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
$0.01 support of Plan financial system
software on BCBSSC main frame
$0.04 TMCS
$0.01 INFO, OPAS and ALGS (all three must
be excluded for credit to apply)
$0.05 BCBSSC data warehouse and statistical
reporting systems
</TABLE>
Additional Scope Adjustments, if any, shall be mutually agreed upon by the
Parties. Steering resources necessary to effect Scope Adjustments shall be
part of BCBSUW's Steering resources chargeable as Implementation Services or
Support Services under Paragraph 5(b) or Paragraph 5(c), as applicable. No
Scope Adjustment shall be effective until both Parties mutually agree upon
and execute a written "Scope Adjustment Sign-off" which shall, INTER ALIA,
contain a description of additions to, deletions from or other modifications
of application functionality resulting from such Scope Adjustment.
(d) PRINT CENTER CREDIT. In consideration of BCBSUW's election to
exclude the Print Center from the scope of Basic Services to be provided by
BCBSSC under this Agreement, for all periods from and after the Commencement
Date BCBSUW shall receive a credit against the Operating Fee equal to
$70,673.00 per month. On January 1, 1998 and on each January 1 thereafter,
the credit for the Print Center shall be adjusted by the CPI Percentage.
(e) STRATEGIC DEVELOPMENT CHARGE. BCBSUW hereby agrees to pay to
BCBSSC a strategic development charge ("Strategic Development Charge") to
defray the cost of BCBSSC's strategic development activities. For purposes
hereof, "strategic development" means all system-related development and
implementation activities classified as "strategic" by BCBSSC, in its sole
discretion. The Strategic Development Charge shall be payable monthly to
BCBSSC, in the amounts and for the Pricing Units set forth below:
<TABLE>
<CAPTION>
Pricing Unit Monthly Strategic Development Charge
------------ ------------------------------------
<S> <C>
BCBSUW Medical $78,675
UWS Medical $20,195
</TABLE>
The first payment for either Pricing Unit set forth above shall be
payable in the month following the month in which there is a System Active
Contract and, thereafter, shall continue for the Initial and Renewal Terms of
this Agreement. Following the Commencement Date and for each Contract Year
thereafter, BCBSUW shall be reimbursed by BCBSSC for the amount, if any, by
which the Strategic Development Charge paid by BCBSUW in any Contract Year
exceeds the amount of Strategic Development costs incurred
9
<PAGE>
by BCBSSC for such Contract Year, as reflected on BCBSSC's books and records.
BCBSSC shall forward to BCBSUW, within 90 days after expiration of each
Contract Year, a detailed statement reconciling the Strategic Development
activities and related costs incurred by BCBSSC with the amounts paid by
BCBSUW, accompanied by the reimbursement amount, if any, owed to BCBSUW. If
BCBSUW wishes to contest any determination by BCBSSC of its System related
strategic development costs, it may request (but no more than once during, or
in respect of, any Contract Year) that BCBSSC's independent financial auditor
determine the amount of such costs and prepare a written report of its
findings. If the auditor's written report indicates a rebate is owed to
BCBSUW, BCBSSC shall pay such rebate in full within 30 days after receipt of
the auditor's written report, and shall promptly pay the cost of the
auditor's work. Otherwise, BCBSUW shall promptly pay (or reimburse BCBSSC
for, as applicable) the cost of the auditor's work.
5. SERVICES FEES.
(a) BASIC SERVICES. Basic Services are included in the Operating Fee
and are provided at no additional charge.
(b) IMPLEMENTATION SERVICES. Subject to Paragraph 9(b) below:
(i) Implementation Services shall be charged to BCBSUW at an initial
rate consisting of two components: (1) a labor component (the "Labor
Component") of $65.00 per chargeable hour, and (2) a CPU component (the
"CPU Component") of $16.25 per chargeable hour.
(ii) On January 1, 1997, and on each January 1 thereafter, the Labor
Component portion of the fee for Implementation Services shall be adjusted
in accordance with the Labor Rate Adjustment.
(c) SUPPORT SERVICES. Support Services shall be charged to BCBSUW at
the rate of $65.00 per chargeable hour. On January 1, 1997, and on each
January 1 thereafter, the fee for Support Services shall be adjusted in
accordance with the Labor Rate Adjustment.
(d) RECORD KEEPING AND AUDIT RIGHTS. All BCBSSC personnel shall keep
written daily time logs in respect of System Services performed. Each time
log entry shall briefly describe the services performed, and reflect in
one-hour increments the time expended in performing the services. BCBSUW
shall have the right (exercisable no more than once during any twelve month
period), at its sole cost and expense, and at a mutually satisfactory time to
be reasonably agreed upon, to inspect and audit, through a mutually-selected
"Big Six" accounting firm, BCBSSC's billing and time log records and Labor
Rate computations relating to the System Services provided to the Plan.
10
<PAGE>
6. TAXES ADDITIONAL.
BCBSUW shall pay all tariffs and taxes assessed or levied by any
governmental entity that are now or may become applicable to this Agreement,
or measured by payments made thereunder or required to be collected by BCBSSC
or paid by BCBSSC to tax authorities (including interest assessments thereon
if such assessments are due to the Plan's actions or inactions) including but
not limited to, sales, use, excise, gross receipt and personal property
taxes, but excluding taxes based upon the net income of BCBSSC.
7. BILLINGS AND PAYMENTS.
BCBSSC shall on or before the last day of every calendar month invoice
BCBSUW for the total fees due under Paragraphs 4 and 5 above and the total
amount of late charges (if any), due in respect of the preceding calendar
month. Each such invoice shall be due and payable in full by BCBSUW within 30
days of its receipt of such invoice. Delinquent amounts shall accrue on a
per diem basis a late charge at the rate of 1.5% per month (or, if less, the
highest rate permitted by law).
8. STEERING.
(a) GENERALLY. BCBSUW shall establish from among Plan personnel one or
more Steering Committees, each of which shall be headed by a Chairman
selected by BCBSUW and identified in writing to BCBSSC. BCBSUW shall
promptly notify BCBSSC of changes in the identity of any Steering Committee
Chairman. Each Steering Committee Chairman shall have the authority on
behalf of BCBSUW to request that BCBSSC undertake projects or tasks related
to System enhancements or modifications desired by BCBSUW as part of Steering
resources of BCBSUW. All services performed by BCBSSC at the request of a
Chairman of a BCBSUW Steering Committee shall be conclusively deemed to be
compensable Implementation Services under Paragraph 5(b) or Support Services
under Paragraph 5(c), as applicable. Steering shall be carried out in
accordance with the ISSM.
(b) STEERING MINIMUM. BCBSUW may elect to establish a minimum number
of Steering chargeable hours ("Steering Minimum") to be dedicated to projects
or tasks on behalf of BCBSUW for each Contract Year. The Steering Minimum
for the first Contract Year shall be communicated by BCBSUW to BCBSSC six
months prior to the formation of BCBSUW's Steering resources. BCBSUW may
modify the Steering Minimum on an annual basis thereafter, effective as of
the commencement of the Contract Year immediately following such
modification; provided, however, that BCBSUW must give BCBSSC written notice
of each modification at least 90 days prior to the effective date.
Notwithstanding the foregoing, the Steering Minimum shall not exceed 60,000
chargeable hours in any Contract Year without the prior consent of BCBSSC,
which consent shall not be unreasonably withheld.
11
<PAGE>
(c) INITIAL SYSTEM ENHANCEMENTS AND MODIFICATIONS. System enhancements
and modifications initially desired by BCBSUW include:
(i) development of an interface link to allow regular downloads to
the Plan's data warehousing systems; and
(ii) development of a front-end data collection and router system for
claims distribution.
The development and implementation of such System enhancements and
modifications shall be billed to BCBSUW as either Implementation Services or
Support Services, as applicable.
(d) PROGRESS REPORTING. BCBSSC shall provide BCBSUW with regular,
periodic reports covering project status and budget, issues and time lines in
connection with projects being carried out with Steering resources of BCBSUW.
(e) OWNERSHIP OF WORK PRODUCT. All work product (including without
limitation software code and documentation, software and system designs and
methodologies, and other know-how), and all patent rights and copyrights in
respect of such work product, related to the System or developed in
connection with this Agreement, shall be the exclusive property of BCBSSC,
regardless of whether BCBSSC receives any fees or payments from BCBSUW in
respect of such work product or the services resulting in such work product.
9. IMPLEMENTATION MATTERS.
(a) GENERALLY. The Parties shall work together reasonably and in good
faith to identify the categories of tasks (each an "Implementation Project")
constituting the Implementation Services. Each Implementation Project will
be carried out in accordance with the ISSM.
(b) SHARING OF COSTS RELATED TO IMPLEMENTATION PROJECTS. As part of
the Design process required by the ISSM, BCBSSC will provide BCBSUW with a
Design cost estimate ("Design Cost Estimate") for each Implementation
Project. BCBSUW shall pay for the costs of each Implementation Project that
is approved by BCBSUW and undertaken by BCBSSC pursuant to the ISSM at the
rate set forth in Paragraph 5(b) hereof, except that (i) if the actual cost
for any Implementation Project exceeds the most recent Design Cost Estimate
for that Implementation Project by at least 25% (but less than 75%), BCBSSC
shall be responsible for 25% of such excess amount, and (ii) in addition, if
the actual cost for any Implementation Project exceeds the most recent Design
Cost Estimate for that Implementation Project by 75% or more, BCBSSC shall be
responsible for 50% of the amount exceeding the Design Cost Estimate by 75%
or more.
12
<PAGE>
(c) EDS MIGRATION. Implementation Services will include technical
assistance requested by BCBSUW regarding its migration from the EDS system,
but BCBSUW shall be solely responsible for obtaining EDS' cooperation in
connection with such migration. BCBSUW shall also remain solely responsible
for compliance by both EDS and BCBSUW with any and all agreements between EDS
and BCBSUW. BCBSUW shall take all reasonable actions necessary to obtain the
cooperation of EDS and its personnel in transitioning the Plan from the EDS
system to the System. Notwithstanding the foregoing, BCBSUW shall cause EDS
to provide to BCBSSC electronic data files of all providers, networks,
pricing, enrollment and membership, benefits, claims history, and managed
care data for the Plan. BCBSUW hereby agrees to indemnify, defend, and hold
harmless BCBSSC and its directors, officers, employees, agents and other
representatives from and against any damage, loss, expense or liability
arising out of, or resulting from, any claim, action or proceeding by EDS (or
any other third party) related, directly or indirectly, to the Plan's
migration to or implementation of the System.
(d) PHASING. The Parties shall consult with each other and agree upon
a strategy for phasing System implementation by Business Segment. Final
decisions as to such phasing strategy shall be in the reasonable discretion
of BCBSUW based on BCBSUW's overall business needs.
(e) IMPLEMENTATION TEAM. The Parties agree that, initially, the key
BCBSSC personnel responsible for System implementation shall be James Shealy
and Patricia Dickerson. BCBSSC shall use reasonable efforts to keep the
System implementation team intact until the Commencement Date and any
replacements to key personnel shall have comparable education and experience
with the particular portion of the System over which such replacement would
have responsibility.
(f) SERVICES PRIOR TO THIS AGREEMENT. BCBSUW acknowledges BCBSSC has
performed preliminary Implementation Services prior to the date of this
Agreement. BCBSUW agrees to pay for such services pursuant to Paragraph 5(b)
hereof so long as the amount due in respect of such services does not exceed
$100,000.00.
10. MIGRATION.
(a) BCBSUW will have the right to migrate functions and Business
Segments from the System during the Term and will not be obligated to migrate
to the System any new functions or Business Segments developed or acquired by
the Plan after the date of this Agreement. Before BCBSUW migrates any Plan
function or Business Segments from the System, it will grant BCBSSC a right
of first refusal to meet or beat the proposed terms, conditions and projected
or quoted costs for performance of the function or Business Segments. This
right of first refusal will not apply to any function or Business Segments
developed or acquired by the Plan after the date of this Agreement, and
BCBSUW will not be obligated to make BCBSSC aware of any such functionality
or Business Segment. However, BCBSUW may request BCBSSC to consider adding a
new function or Business
13
<PAGE>
Segment to the System, and BCBSSC will respond in accordance with the
procedures set forth in this Agreement and as otherwise reasonably
established by BCBSSC from time to time.
(b) Services provided to the Plan under this Paragraph 10 initially
shall be charged to the Plan at the rate described in Paragraph 5(b)(i)
above. On January 1, 1997, and on each January 1 thereafter, the Labor
Component portion of such rate shall be adjusted in accordance with the Labor
Rate Adjustment.
11. REGULATORY MANDATES.
(a) FEDERAL MANDATES. Each Party shall, as its sole responsibility and
at no cost to the other party, monitor on an ongoing basis all mandates
imposed by federal law or federal regulatory authorities applicable to its
own business (collectively, the "Federal Mandates"). In addition, each Party
shall provide timely notification to the other Party of its desire to
implement, or not to implement, the System modifications required for
compliance with each such Federal Mandate (collectively, the "Federal Mandate
Modifications"). All Federal Mandate Modifications desired by at least one
Party shall be funded equally by both Parties. BCBSSC shall implement all
Federal Mandate Modifications that either one of the Parties desires to
implement. BCBSSC shall endeavor, but shall not be obligated, to implement
all Federal Mandate Modifications desired by any Party within the applicable
federal time deadline.
(b) BCA MANDATES.
(i) Each Party shall, at no cost to the other Party, monitor on an
ongoing basis all changes mandated by the BCA (including, among others, ITS
release 8.0 and all future ITS releases, IPDR and FEP) (collectively, "BCA
Mandates"). Except as otherwise provided in subparagraph (ii) below,
BCBSSC shall, as part of the Basic Services: (1) fully implement the
System modifications required for compliance as determined by BCBSSC with
ITS Release 8.0 by no later than the BCA-mandated date, and (2) fully
implement the System modifications required for compliance with all other
BCA Mandates by the applicable deadline.
(ii) The costs of any Wisconsin-specific changes due to BCA Mandates
shall be chargeable to BCBSUW under Paragraph 5(b) or 5(c), as applicable.
(c) STATE OF WISCONSIN MANDATES. BCBSUW shall be solely responsible
for (i) identifying and communicating to BCBSSC with reasonable notice all
changes in Wisconsin laws, rules and regulations affecting the Plan
(collectively, "Wisconsin Mandates"); and (ii) the Steering resources
necessary to implement the System modifications required for compliance with
Wisconsin Mandates.
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12. OTHER PLAN RESPONSIBILITIES.
(a) FACILITIES FOR USE BY BCBSSC. BCBSUW shall make available to
BCBSSC at no charge (i) such office space, furniture, equipment and
telephones at the Plan's sites as BCBSSC may reasonably request; and (ii)
print center facilities and all related office, storage, power and physical
security (including UPS and power generators). BCBSUW shall not be
responsible for long distance telephone calls or for providing BCBSSC with
special equipment, such as personal computers, modems and printers.
(b) SYSTEM RELATED FACILITIES. BCBSUW is solely responsible for
providing and maintaining all personnel, hardware, software, equipment,
supplies, and other items required at the Plan sites for access to and use of
the System except for the Access Facilities. Without limiting the generality
of the foregoing, BCBSUW shall be responsible for the following:
(i) All hardware at the Plan Sites, including without limitation
servers, workstations, terminals, printers, modems, uninterruptable power
supply equipment, cabling and interface cards.
(ii) All telecommunications equipment, hardware and software
(including without limitation all terminal emulation software required by
intelligent workstations used to access the System) for each Plan site in
conformity with all BCBSSC specifications as may be applicable thereto,
including, without limitation, if required, all hardware and software
necessary to establish and maintain a dedicated dial or lease line circuit
connecting each Plan site to the central telecommunications hub and a high
speed telecommunications line which connects to the Plan's network
controller located at BCBSSC's data center.
(c) REPRESENTATIVE.
(i) Each Party shall designate and maintain at all times a
Representative to work on all aspects of the implementation and use of the
System. Subject to subparagraph (ii) below, each Party's Representative
shall have at all times full power and authority to act on behalf of and
bind such Party as to all matters and activities related to or contemplated
by this Agreement (including, without limitation, requesting development
and implementation of modifications or enhancements by BCBSSC or the
performance of other special services by BCBSSC). Initially, BCBSUW's
Representative shall be Thomas E. Liechty and BCBSSC's Representative shall
be Stephen Von Fange. Each party may change the Representative from time
to time by written notice to the other Party.
(ii) Notwithstanding anything to the contrary in subparagraph (i)
above, no act by a Representative shall be binding on the Party he or she
represents unless set forth in writing by such Representative.
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13. OWNERSHIP OF DATA.
BCBSUW shall be the exclusive owner of all its stored data in BCBSSC's
possession, and BCBSSC shall deliver all such data to BCBSUW promptly upon
its request upon termination of this Agreement. BCBSSC will possess no lien
on, or any other right to, such data.
14. PROPRIETARY RIGHTS OF BCBSSC.
BCBSUW acknowledges and agrees as follows:
(a) BCBSSC shall possess and retain all right, title, and interest
(including without limitation all trade secret rights, copyrights and patent
rights) in and to the System and its component parts, including without
limitation (i) all software code and documentation, (ii) the ISSM and all
other manuals or user information, (iii) the design and format of the input
and output screens, graphical user interface, and printable forms, reports
and other hard copy output incorporated in or generated by the System, and
(iv) all additions, enhancements, revisions, updates or other modifications
to the System or any part thereof, regardless of any fee or charge paid by
BCBSUW to BCBSSC in respect of the design, creation or use thereof. BCBSUW
shall not cause or permit removal or alteration in any way of any notice,
legend or symbol denoting any copyright, trademark, patent or other
proprietary right or interest of BCBSSC appearing on (i) any input or output
screen or hard copy output incorporated in or generated by the System, or
(ii) any documentation, manuals, brochures, or other written or printed
materials of any kind.
(b) The System and its component parts described above, and the process
methodologies, design elements and other know-how related thereto, constitute
valuable proprietary information and trade secrets of BCBSSC. BCBSUW shall
not disclose (nor permit any Plan employee or agent to disclose) to any
person or entity, or allow any person or entity access to, any such
proprietary information or trade secrets in whole or in part; provided,
however, use of the System in accordance with the terms and conditions of
this Agreement shall be permitted for employees of the Plan in the ordinary
course and scope of their employment by the Plan. BCBSUW shall not cause or
permit any part of the System's software components to be reverse engineered,
decompiled, or disassembled. BCBSUW shall not cause or permit the software,
documentation, or other information related to the System to be copied or
reproduced in any form or medium, in whole or in part. BCBSUW shall take
such actions to preserve and protect BCBSSC's proprietary rights and interest
of confidentiality in and with respect to the System which are, at a minimum,
commensurate with those actions taken by BCBSUW to preserve and protect its
most valuable trade secrets or other proprietary or confidential information.
(c) BCBSUW's confidentiality obligations to BCBSSC under Paragraphs
14(a) and 14(b) do not apply to any information which (i) was lawfully and
rightfully in the Plan's
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possession at the time of disclosure by BCBSSC and was not acquired directly
or indirectly from BCBSSC, (ii) was lawfully and rightfully acquired by the
Plan from others who had no confidentiality obligation to BCBSSC with respect
to same, or (iii) is now, or hereafter becomes, through no fault of the Plan,
part of the public domain by publication or otherwise.
(d) The Plan has no right to use the System or any part thereof except
as specifically granted under the license referred to in Paragraph 2(a). The
Plan shall not, directly or indirectly, take any action in derogation of, or
in conflict with, BCBSSC's rights in the System as set forth above.
15. TERMINATION BY BCBSUW FOR CONVENIENCE.
In the event BCBSUW terminates this Agreement without "cause" (as
defined below), BCBSUW shall pay BCBSSC a termination fee in the amount of
Six Million Dollars ($6,000,000) as liquidated damages. BCBSUW agrees that
this termination fee is not a penalty, but represents a reasonable QUID PRO
QUO in respect of such termination in light of the substantial investment
made by BCBSSC of money, key personnel time, lost business opportunities, and
other resources in order to fulfill its obligations under this Agreement.
For purposes hereof, "cause" means (and only means) either (i) a "Failure"
within the meaning of Paragraph 16(a)(vi) below, (ii) a "material" failure of
the System to conform with the functionality described in the Documentation
within the meaning of Paragraph 17(b)(i), (iii) an Event of Default within
the meaning of Paragraph 18(a) below, or (iv) a suspension of performance by
BCBSSC due to a force majeure which continues for 30 or more consecutive days.
16. SERVICE LEVEL COMMITMENTS.
(a) DEFINITION OF SERVICE LEVEL COMMITMENTS. The following Service
Level Commitments shall be effective on a date which is six months after the
Commencement Date and shall continue through the Term.
(i) "CICS AVAILABILITY PERCENTAGE" shall mean the ratio, expressed as
a percentage, of the actual amount of time each of the Plan's Production
CICS Regions is available for use by the Plan, divided by the total amount
of time between the mutually agreed upon business hours during any monthly
period. System SMF data will be used to calculate the CICS Availability
Percentage on a monthly basis.
(ii) "CICS RESPONSE TIME AVERAGE" shall mean the ratio, expressed in
seconds or a fraction thereof, of the sum of all of the Plan's interactive
Production CICS transaction response times for a calendar month divided by
the total number of the Plan's interactive Production CICS transactions
during that same month. TMON (or equivalent) software will be used to
calculate the CICS Response Time Average. Response time shall be the time
elapsed between the moment a transaction is received by BCBSSC from the
Plan's network controller until the moment an intended
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response is presented back to the Plan's same network controller by
the System.
(iii) "INFORMATIONAL FILES AVAILABILITY PERCENTAGE" shall mean the
ratio, expressed as a percentage, of the formula ((A-B)/(A)) where (A) is
the total scheduled available hours in a month times the number of
production informational files, and (B) is the number of hours during which
production informational files were not available during the month. Hours
that fall into the following categories will not be used to calculate (B)
above: (1) mutually agreed upon holidays; (2) normal scheduled maintenance
periods for which BCBSUW receives prior notification through BCBSSC's
E-mail system; (3) periods during which the file in question is being
updated or loaded and (4) Sundays while regular weekly maintenance is
being performed. File unavailability will be logged to the BCBSSC InForm
System which will be used to calculate the Informational Files Availability
Percentage for each month.
(iv) "DISASTER RECOVERY." BCBSSC shall provide disaster recovery
services and hotsite capabilities and procedures for testing such
capabilities at least on an annual basis.
(v) "BATCH SYSTEM COMPLETION." Prior to the Commencement Date, the
Parties shall jointly develop and mutually agree to a schedule setting
forth the time of day each business day that each category of production
files will be available. Such schedule shall become part of this Service
Level Commitment.
(vi) "FAILURE." Each of the following shall constitute a failure to
satisfy a Service Level Commitment ("Failure"): (1) a CICS Availability
Percentage was less than 98.25% for two consecutive months; (2) a CICS
Response-Time Average was more than 1.8 seconds for two consecutive months;
(3) an Informational Files Availability Percentage was less than 95% for
two consecutive months; (4) Disaster Recovery Testing was unsuccessful in
any 12-month period and retesting within 90 days thereafter was also
unsuccessful; or (5) Batch Systems Completion has been missed more than two
times during a calendar month for two consecutive months.
(b) EXCLUSIVE REMEDIES FOR FAILURE TO SATISFY SERVICE LEVEL
COMMITMENTS. Subject to the $6 million limitation expressed in Paragraph
19(c) below, the Plan's exclusive remedies for BCBSSC's failure to satisfy
any Service Level Commitment shall be as follows:
(i) CREDITS. For each Failure (as defined above), BCBSSC shall pay
to BCBSUW $50,000 for that Failure. If any Failure continues to the next
consecutive month, BCBSSC shall pay to BCBSUW $100,000 for such month, and
$350,000 for each consecutive month thereafter until the Service Level
Standard has been met. Notwithstanding the foregoing, (A) BCBSSC's
liability to the Plan during any month shall not exceed $350,000 regardless
of the number of Failures occurring in such month; and (B) BCBSSC's
aggregate liability to BCBSUW under this subparagraph
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(b)(i) shall not exceed $3 million for all time. BCBSSC agrees that the
credit payments hereunder are not a penalty, but represent a reasonable
QUID PRO QUO in respect of the losses and inconvenience incurred by
BCBSUW due to the degradation in the level of services provided to the
Plan.
(ii) TERMINATION. If, during the term of this Agreement, BCBSUW has
reached the $3 million limitation of damages specified in subparagraph
(b)(i)(B) above then, upon the next occurrence of a Failure to satisfy a
Service Level Standard by BCBSSC BCBSUW shall be entitled to terminate this
Agreement and recover from BCBSSC one-half the reasonable costs incurred by
BCBSUW to convert to an alternate system, such recovery not to exceed $3
million.
17. CONFORMITY WITH DOCUMENTATION.
(a) COVENANT BY BCBSSC. BCBSSC agrees that the System will conform in
material respects with the functionality described in the Documentation.
(b) EXCLUSIVE REMEDIES FOR FAILURE OF SYSTEM TO CONFORM TO
DOCUMENTATION. Subject to the $6 million limitation expressed in Paragraph
19(c) below, BCBSUW's exclusive remedies for any breach by BCBSSC of its
covenant under Paragraph 17(a) above shall be as follows:
(i) CORRECTIVE ACTION AND COSTS. BCBSSC promptly shall correct, at
its own cost, any material failure (as defined in the next sentence) of the
System to conform with the functionality described in the Documentation.
For purposes of the foregoing, a failure is "material" if BCBSSC has
received from BCBSUW written notice of the failure and the failure is
deemed material by both Parties. Pending the completion of any such
corrective action, BCBSSC shall provide the Plan with a manual or automated
work-around at no charge to the Plan, and, upon the approval of both of the
Parties (which approval shall not be unreasonably withheld), shall
reimburse or credit BCBSUW for the reasonable costs in excess of $10,000
incurred by the Plan in connection with the System failure.
(ii) TERMINATION. In the event that BCBSSC fails to promptly initiate
corrective action under subparagraph (i) above or fails to diligently
pursue such action to completion, BCBSUW shall have the right, upon 90
days' prior written notice to BCBSSC, to terminate this Agreement and
recover its Termination Damages (as defined in Paragraph 19 below).
18. EVENTS OF DEFAULT; REMEDIES.
(a) DEFAULT BY BCBSSC. Each of the following shall be deemed an Event
of Default by BCBSSC:
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(i) BCBSSC materially breaches its confidentiality obligations under
Paragraph 23 below; or
(ii) BCBSSC fails to perform any material obligation to migrate
functions and Business Segments from the EDS System, as set forth in the
conversion schedule to be jointly developed by and mutually agreed upon by
the Parties and such failure continues for 60 days after written notice to
BCBSSC; provided that such failure is within the reasonable control of
BCBSSC and is not caused (in whole or in material part) by the acts or
omissions of the Plan or EDS or their respective agents and employees; or
(iii) BCBSSC materially breaches its indemnification obligations
under Paragraph 22 below.
(b) REMEDIES FOR EVENT OF DEFAULT BY BCBSSC. Upon the occurrence of an
Event of Default by BCBSSC, BCBSUW, at its option, may terminate this
Agreement and recover its Termination Damages.
(c) DEFAULT BY THE PLAN; BCBSSC'S REMEDIES. In the event of any
default by BCBSUW in the performance or observance of any of its material
obligations under this Agreement that remains uncured for more than 30 days
after written notice thereof, BCBSSC shall have the right to (A) terminate
this Agreement effective 180 days after the giving of written notice to
BCBSUW, and, subject to the limitation expressed in Paragraph 19(c) below,
recover its Termination Damages; or (B) without terminating this Agreement,
recover its actual damages caused by the Plan's failure to perform, subject
to the limitation expressed in Paragraph 19(c) below. In the event any
amount owed by BCBSUW to BCBSSC under this Agreement remains delinquent for
60 days or more, BCBSSC shall have the right, in its sole discretion, and in
addition to any and all other rights or remedies available hereunder, to
interrupt the Plan's access to any or all of the System Functions and the
System Services.
19. LIMITATION OF LIABILITY.
(a) TERMINATION DAMAGES. "Termination Damages" means the following
damages with respect to each Party, subject to the $6 million limitation set
forth in Paragraph 19(c):
(i) FOR THE PLAN. The sum of the following amounts:
(A) The actual, documented damages incurred by the Plan as a
result of the breach or failure by BCBSSC under Paragraphs 16(a)(vi),
17(b)(i), or 18(a) above, limited in the aggregate to $3 million; and
(B) One-half of the actual costs incurred by the Plan to convert
from the System to an alternate system.
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(ii) BCBSSC. The actual, documented damages incurred by BCBSSC as a
result of the breach or failure by the Plan which gives rise to such claim.
(b) PUNITIVE DAMAGES. Neither Party shall be liable to the other party
for any punitive damages.
(c) LIMITATION ON AMOUNT OF DAMAGES. Except for the Parties'
indemnification obligations under Paragraph 22 below, which shall not be
contractually limited: (i) in no event shall either Party's aggregate
liability to the other Party in respect of any and all claims arising out of
or otherwise related to this Agreement exceed six million ($6,000,000); and
(ii) in no event shall either Party have any liability whatsoever to the
other for damages of any kind in respect of this Agreement (regardless of
whether the claim for damages is grounded in contract, tort or any other
legal basis) except to the extent (and there only to the extent) expressly
provided in this Agreement.
20. TRANSITION SERVICES.
(a) Upon expiration or termination of this Agreement for any reason:
(i) at the request of BCBSUW, BCBSSC shall reasonably assist BCBSUW in
migrating to an alternate system, with BCBSSC's services in connection
therewith to be compensated by BCBSUW as Support Services under Paragraph
5(c) above; and (ii) at the request of BCBSUW, BCBSSC shall continue to
provide services to the Plan on a month-to-month basis for a period of up to
12 months, on a per-claim and per-encounter basis at a rate of $2.25 per
claim or encounter, as applicable, and otherwise in accordance with this
Agreement. On January 1, 1998 and on each January 1 thereafter, the rate
shall be adjusted by the CPI Percentage.
(b) Promptly following the effective date of termination of BCBSSC's
services under this Agreement for any reason, BCBSUW shall promptly return to
BCBSSC any and all manuals, documents or other written materials in its
possession relating to the System. Following termination of this Agreement
for any reason BCBSUW shall remain obligated to pay to BCBSSC all amounts
accrued or owing under this Agreement prior to the effective date of
termination.
21. LIMITED WARRANTY.
BCBSSC warrants that the System and the Plan's use thereof pursuant to
this Agreement do not, and during the Term and will not, infringe the rights
of any third party. BCBSSC MAKES NO OTHER WARRANTY OF ANY KIND, WHETHER
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO ANY PRODUCT OR
SERVICE PROVIDED BY BCBSSC TO THE PLAN. WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, BCBSUW ACKNOWLEDGES AND AGREES THAT: (1) THE SYSTEM SERVICES
(INCLUDING WITHOUT LIMITATION THE PLAN'S RIGHT OF ACCESS TO AND USE OF THE
SYSTEM
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FUNCTIONS) ARE PROVIDED BY BCBSSC STRICTLY ON AN "AS IS" BASIS; (2) BCBSSC
HAS NOT MADE, AND DOES NOT MAKE, ANY REPRESENTATION OR WARRANTY OF ANY KIND;
AND (3) EXCEPT AS EXPRESSLY PROVIDED IN PARAGRAPHS 16 AND 17 ABOVE, BCBSSC
HAS NOT MADE, AND DOES NOT MAKE, ANY GUARANTY OR OTHER ASSURANCE OF ANY KIND
AS TO EITHER THE QUALITY OR PERFORMANCE OF ANY PRODUCT OR SERVICE PROVIDED BY
BCBSSC, OR THE ACCURACY, EFFICIENCY, SPEED OR OTHER PERFORMANCE
CHARACTERISTICS OF THE SYSTEM OR ANY SYSTEM FUNCTION.
22. INDEMNITIES.
(a) BY BCBSSC. BCBSSC hereby agrees to indemnify, defend, and hold
harmless the Plan and its directors, officers, employees, agents and other
representatives from and against any damage, loss, expense or liability
arising out of, or resulting from either (i) any third party claim, action or
proceeding for intellectual property infringement resulting from the Plan's
use of the System, in whole or in part, in accordance with the terms and
conditions of this Agreement; or (ii) any breach by BCBSSC or its agents and
employees of its confidentiality obligations under Paragraph 23 below.
(b) BY BCBSUW. BCBSUW hereby agrees to indemnify, defend, and hold
harmless BCBSSC and its directors, officers, employees, agents and other
representatives from and against any damage, loss, expense or liability
(collectively, "Losses") arising out of, or resulting from either (i) any
third party claim, action or proceeding (including, without limitation, a
claim alleging medical malpractice or false claim for reimbursement but
excluding any third party claim, action or proceeding to which subparagraph
(a) above applies) arising out of, or resulting from, in whole or in part,
the Plan's use of the System, (ii) any breach by BCBSUW of its
confidentiality obligations under Paragraph 23 below, or (iii) any
infringement by BCBSUW of any right of BCBSSC described in Paragraph 14 above.
23. CONFIDENTIALITY.
(a) MUTUAL OBLIGATIONS. Except as otherwise provided in subparagraph
(d) of this Paragraph 23, each Party agrees (i) to hold in strict confidence
and not to disclose to any other person or entity the terms of this Agreement
and this Agreement, except to the extent otherwise required by applicable
law, and (ii) to limit access to such information to only those of its
employees or agents with a legitimate need for the information; provided,
however, each party shall have the right, in connection with a legitimate
business purpose, to disclose generally that BCBSSC is providing information
system services to the Plan without disclosing specific terms or conditions
hereof.
(b) BCBSSC OBLIGATIONS. BCBSSC recognizes the Plan's fiduciary duty to
hold patient information in strict confidence, and agrees that the Plan's
data files include
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information which is proprietary to and a valuable asset of The Plan. BCBSSC
agrees (i) to hold in strict confidence, and not to disclose or otherwise
make available to any third party, all Plan data files (including all patient
and other information contained therein), except to the extent (A) otherwise
required by applicable law, (B) such information is lawfully and rightfully
acquired by BCBSSC from others who had no confidentiality obligation to the
Plan with respect to the same, (C) such information is obtained or obtainable
by BCBSSC by lawful and rightful means, or (D) is now, or hereafter becomes,
through no fault of BCBSSC, part of the public domain by publication or
otherwise; (ii) to limit access to such information to only those BCBSSC
employees needing the information for purposes of performing services under
this Agreement; and (iii) to use such information solely for purposes
contemplated by this Agreement. In addition, BCBSSC agrees not to copy any
Plan data files except as required by law or for back up purposes for data
protection without the Plan's prior written consent.
(c) PLAN OBLIGATIONS. In addition to BCBSUW's obligations of
confidentiality under Paragraph 14, BCBSUW agrees (i) to hold in strict
confidence, and not to disclose or otherwise make available to any third
party, any and all other information of a confidential nature provided by
BCBSSC to the Plan, except to the extent (A) otherwise required by applicable
law, (B) such information is lawfully and rightfully acquired by the Plan
from others who had no confidentiality obligation to BCBSSC with respect to
the same, (C) such information is obtained or obtainable by the Plan by
lawful and rightful means, or (D) is now, or hereafter becomes, through no
fault of the Plan, part of the public domain by publication or otherwise;
(ii) to limit access to such information to only those Plan employees needing
the information for purposes contemplated by this Agreement; and (iii) to use
such information solely for purposes contemplated by this Agreement.
(d) PUBLIC ANNOUNCEMENTS. The Parties shall mutually agree to the
timing and contents of any public announcement of the existence or subject
matter of this Agreement.
24. DISPUTE RESOLUTION.
(a) INFORMAL DISPUTE RESOLUTION. If a dispute arises out of or
relating to this Agreement, including, without limitation, a dispute as to
any amount payable by BCBSUW hereunder, the Parties shall engage in mandatory
informal dispute resolution. The first attempt at informal dispute
resolution shall be at the level of each Party's managers with day to day
responsibility for services to the Plan. If that attempt is unsuccessful the
senior management of each Party shall attempt to informally resolve the
dispute. In no event shall either Party be obligated to continue informal
dispute resolution efforts for a total of more than thirty days before
submitting the dispute to binding arbitration pursuant to Paragraph 24(b)
below.
(b) BINDING ARBITRATION. If a dispute is not resolved under Paragraph
24(a) above to the mutual satisfaction of the Parties, the Parties shall
promptly submit such dispute to binding arbitration pursuant to Paragraph 26
below.
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(c) PROVISIONAL RELIEF. Subject to BCBSSC's right to interrupt service
to the Plan set forth in Paragraph 18(c) above, at all times prior to the
completion of the dispute resolution procedures set forth in Paragraphs 24(a)
and (b) above, each Party shall perform its respective obligations under this
Agreement, and the Plan shall continue to make timely payments on all
invoices submitted by BCBSSC pending the completion of the dispute resolution
procedures.
(d) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of South Carolina without giving
effect to any choice or conflict of law provision or rule of any jurisdiction
that would cause the application of the laws of any jurisdiction other than
the State of South Carolina.
25. CREDIT OR PAYMENT RELATING TO CONTACTS WITH OTHER BCA AFFILIATES.
In recognition of the value of BCBSSC's relationship with BCBSUW to
BCBSSC's ability to enter into information systems contracts with other BCA
licensee plans, BCBSSC shall credit or pay BCBSUW the following sum with
respect to certain of such contracts (each a "BCA Licensee Contract"):
(a) For the first comprehensive BCA Licensee Contract entered into
during the Term, a sum equal to $0.10 per Subscriber per month under such BCA
Licensee Contract for the first full production year.
(b) For the second comprehensive BCA Licensee Contract entered into
during the Term, a sum equal to $0.05 per Subscriber per month under such BCA
Licensee Contract for that contract's first full production year.
26. ARBITRATION.
(a) GENERALLY. Except as otherwise specifically set forth in this
Agreement, in any action, dispute, claim or controversy between the Parties,
whether sounding in contract, tort, or otherwise, arising under this
Agreement, including any action based upon, arising out of, or in connection
with any course of conduct, course of dealing, statement (whether oral or
written), or actions of either Party ("Dispute" or "Disputes"), shall be
resolved by binding arbitration in accordance with this Paragraph 26, and
otherwise in accordance with Title 9 of the United States Code, as amended,
and the Commercial Arbitration Rules of the American Arbitration Association
("AAA"), as in effect from time to time (the "Rules"). In the event of any
inconsistency between the Rules and the provisions of this Paragraph 26, the
provisions of this Paragraph 26 shall supersede the Rules. All statutes of
limitations that would otherwise be applicable shall apply to any arbitration
proceeding hereunder. In any arbitration proceeding subject to the
provisions of this Paragraph 26, the arbitrator is specifically empowered to
decide (by documents only, or with a hearing, at the arbitrator's sole
discretion) pre-hearing motions that are substantially similar to pre-hearing
motions to dismiss and motions for summary adjudication. Judgment upon the
award rendered may be
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entered in any court having jurisdiction. Whenever an arbitration is
required, the Parties shall select an arbitrator in the manner provided in
Paragraph 26(c) below.
(b) [Intentionally Left Blank]
(c) SELECTION OF ARBITRATOR. Whenever an arbitration is required under
Paragraph 26(a) above, the arbitrator shall be selected in accordance with
this Paragraph 26(c). Except as otherwise provided, the arbitrator or
referee shall be an attorney or retired judge selected in accordance with the
Rules of the AAA. Any arbitrator or referee selected under this Paragraph
26(c) shall be knowledgeable in the subject matter of the Dispute. Qualified
retired judges shall be selected through panels maintained by AAA, a state
trial court of general jurisdiction over civil matters without regard to the
monetary amount in controversy (or a higher state court), or private
organization providing such services. A single arbitrator who is an attorney
but is not a retired judge shall have the power to render a maximum award of
$100,000. Where any Party makes timely written request prior to appointment
of the arbitrator, or where the claim of any Party exceeds $100,000, the
arbitrator shall be a retired judge formerly sitting on the bench in a state
trial court of general jurisdiction over civil matters without regard to the
monetary amount in controversy (or a higher state court), or a retired
Federal court judge formerly sitting on the bench in a United States Court of
Appeals or any Federal District Court. A single arbitrator who is a retired
judge shall have the power to render a maximum award of $1,000,000. Where
any Party seeks an award in excess of $1,000,000, the Dispute shall be
decided by a majority vote of three arbitrators, at least one of whom shall
meet the requirements for retired judges set forth herein. For purposes of
this Paragraph 26(c), the computation of the maximum award an arbitrator may
make shall include any amounts awarded for arbitration fees, attorneys fees
and all other related costs provided by Paragraph 26(e) below.
(d) SITE OF PROCEEDING. Any arbitration proceeding pursuant to this
Paragraph 26 shall, unless the Parties otherwise mutually agree in writing,
be conducted in (i) Milwaukee, Wisconsin if the Dispute is submitted to
arbitration by BCBSSC, and (ii) in Columbia, South Carolina if the Dispute is
submitted to arbitration by BCBSUW; provided, however, in the event one
Party, in contravention of this Agreement, commences civil litigation with
respect to a Dispute rather than submitting the Dispute to binding
arbitration, if the second Party submits such Dispute to binding arbitration,
such second Party shall have the right to decide whether the site of the
arbitration proceeding shall be in Milwaukee, Wisconsin or Columbia, South
Carolina.
(e) MISCELLANEOUS. This Agreement shall be interpreted, and the
resolution of all Disputes and the rights and liabilities of the Parties
shall be determined, in accordance with the internal laws (as opposed to
conflicts of law provisions) of the State of South Carolina; provided that
any arbitration questions arising under this Paragraph 26 on dispute
resolution shall be governed in accordance with Title 9 of the United States
Code, as amended; and provided further, however, that no law of the State of
South Carolina or any other jurisdiction shall be applicable hereto to the
extent such law should prohibit or limit in any
25
<PAGE>
way the arbitration of Disputes pursuant to this Paragraph 26. To the extent
any provision of this Paragraph 26 is prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Paragraph 26. The provisions
of this Paragraph 26 shall survive any termination or expiration of this
Agreement until payment in full of the obligations thereunder, unless the
Parties otherwise expressly agree in writing. The arbitrator shall have the
power to award to the prevailing Party recovery of all costs, expenses and
fees incurred by it (including reasonable attorneys' fees, administrative
fees, arbitrators' fees, and court costs), and in particular, but without
limitation of the foregoing, shall have the power to award to either Party
hereto, whether or not such Party shall be the prevailing Party in an
arbitration, recovery of all costs, expenses and fees incurred by it
(including reasonable attorneys' fees, administrative fees, arbitrators'
fees, and court costs), but only to the extent payable or reimbursable by the
other Party under the applicable provisions of this Agreement.
27. MISCELLANEOUS.
(a) NOTICES. All legal notices between the Parties under this
Agreement shall be in writing, and shall be deemed to have been duly made
upon the earlier of (i) actual receipt by the intended recipient, or (ii)
three business days after being sent by certified or registered United States
mail, delivery restricted to the addressee, postage pre-paid, to the address
specified below for the intended recipient, or to such other address as the
intended recipient may hereafter specify in a notice duly given to the other
Party in the manner herein set forth.
If to BCBSSC:
Blue Cross and Blue Shield of South Carolina
I-20 at Alpine Road
Columbia, SC 29219
Attn: Stephen K. Wiggins
Judith M. Davis, Esq.
If to the BCBSUW:
Blue Cross and Blue Shield United of Wisconsin
401 West Michigan Street
Milwaukee WI 53203
Attn: C. Edward Mordy
Stephen E. Bablitch, Esq.
Either Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary
26
<PAGE>
mail, or electronic mail), but no such notice, request, demand, claim, or
other communication shall be deemed to have been duly given unless and until
it actually is received by the intended recipient. Any Party may change the
address to which notices, requests, demands, claims, and other communications
hereunder are to be delivered by giving the other Party notice in the manner
herein set forth.
(b) RELATIONSHIP OF PARTIES. The Parties agree that, in performing any
and all System Services, BCBSSC is acting as an independent contractor.
BCBSSC assumes no liability or responsibility for obligations of the Plan in
respect of its customers or any other person or entity. Nothing in this
Agreement shall be construed to make BCBSSC a partner, joint venturer or
employee of the Plan. Nothing in this Agreement shall be construed to make
BCBSSC responsible for complying with any disclosure, reporting or other
requirement of the Plan's business or operations.
(c) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the Parties hereto respecting the subject matter hereof and
supersedes and replaces any and all prior agreements or arrangements between
the Parties whether written or oral (including without limitation the Letter
of Intent).
(d) NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any person or entity other than the Parties and their
respective successors and permitted assigns.
(e) SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof, thereof or the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction.
(f) HEADINGS. The Paragraph headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the Parties and their respective successors and
permitted assigns. Except as provided below, no Party may assign this
Agreement or any of its rights, interests, or obligations hereunder without
the prior written approval of the other Party; provided, however, either
Party may (i) assign any or all of its rights and interests hereunder to one
or more of its affiliates which it controls, and (ii) designate one or more
of its affiliates which it controls to perform its obligations hereunder, but
in either case such Party shall nonetheless remain responsible for the
performance of all of its obligations hereunder).
(h) AMENDMENTS AND WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
the Parties. No waiver by any Party of any default, misrepresentation, or
breach of warranty or covenant
27
<PAGE>
hereunder or thereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or thereunder, or affect in any way any rights
arising by virtue of any prior or subsequent such occurrence.
(i) FORCES MAJEURE. All periods of time specified for performance of
obligations (other than monetary payment obligations) by either Party in this
Agreement shall be subject to an extension for a period of time equal to any
delay caused by a "Force Majeure" as hereinafter defined. "Force Majeure"
shall mean and include acts of God, changes in government regulations, acts
of governmental bodies or their employees or agents, weather, strikes,
lockouts, boycotts, and inability to secure labor or any material specified
or reasonably necessary in connection with property through ordinary business
channels, fire, unusual delays in transportation, unavoidable casualties or
any other causes beyond the Parties' control. Following the occurrence of
any Force Majeure, the performance effected thereby shall be extended to a
number of days equal to the period of such delay. Notwithstanding the
foregoing, if performance by BCBSSC is suspended for 30 or more consecutive
days, the Plan shall have the right to terminate this Agreement and recover
its Termination Damages from BCBSSC.
(j) CONSTRUCTION. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be
construed as if drafted jointly by the Parties and no presumption or burden
of proof shall arise favoring or disfavoring any Party by virtue of the
authorship of any of the provisions of this Agreement. Any reference to any
federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise. The word "including" shall mean including without
limitation.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed, sealed and delivered as of the 23rd day of August, 1996.
BLUE CROSS AND BLUE SHIELD
UNITED OF WISCONSIN (SEAL)
BY: [ILLEGIBLE]
----------------------------------
TITLE: Chairman & CEO
-------------------------------
BLUE CROSS AND BLUE SHIELD
OF SOUTH CAROLINA (SEAL)
BY: [ILLEGIBLE]
----------------------------------
TITLE: Pres & CEO
-------------------------------
28
<PAGE>
AMENDMENT #1 TO
INFORMATION SYSTEM SERVICES AGREEMENT
DATED AS OF AUGUST 23, 1996 BETWEEN
BLUE CROSS AND BLUE SHIELD OF SOUTH CAROLINA AND
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
1. PARTIES. This amendment (the "Amendment") is between Blue Cross and Blue
Shield of South Carolina ("BCBSSC") and Blue Cross & Blue Shield United of
Wisconsin ("BCBSUW"). BCBSSC and BCBSUW are sometimes referred to herein
individually as a "Party", and collectively as the "Parties".
2. EFFECTIVE DATE. The effective date of this Amendment shall be as of
January 1, 1997 (the "Effective Date").
3. PURPOSE. The purpose of this Amendment is to amend that certain
Information Systems Services Agreement between the Parties dated as of
August 23, 1996 (the "Agreement"). Except as expressly set forth herein,
the Agreement shall remain in full force and effect without modification.
Terms not otherwise defined herein shall have the meanings ascribed to them
by the Agreement.
4. DEFINITIONAL MODIFICATIONS. Paragraph 1 of the Agreement is hereby amended
as set forth below in this Paragraph.
(a) Add the following definitions:
"Business Services" means any and all services provided by any member
of the Business Services Group (as defined below).
"Business Services Group" means the corporate group within BCBSSC's
Information System Services Division which provides services related to:
workflow design, documentation assistance, development or analysis of desk
procedures, work measurement assistance, OPAS system support,
administrative proposal support, reengineering business process support,
staffing model development, and other areas designated by BCBSSC from time
to time.
"Customer Expert" means any BCBSSC employee designated from time to
time by BCBSSC as a Customer Expert to provide services related to system
requirements development; system modifications testing; training program
development; trainer training; quality control program design,
implementation and operation; and other areas designated by BCBSSC from
time to time.
"Customer Expert Services" means any and all services provided by any
Customer Expert other than the Customer Expert staff Coordinator, who
currently is Pat Dickerson. Services rendered by such staff Coordinator
shall be chargeable as Support Services (as defined below).
(b) The following definition is amended and restated as follows:
"System Services" means Basic Services, Implementation Services,
Support Services, Business Services, and Customer Expert Services,
collectively.
5. SERVICES FEES MODIFICATIONS. Paragraph 5 of the Agreement is hereby
amended as set forth below in this Paragraph.
(a) Subparagraph "(d)" is hereby redesignated as subparagraph "e".
<PAGE>
(b) Add a new subparagraph (d) that provides as follows:
(d) BUSINESS SERVICES AND CUSTOMER EXPERT SERVICES. For each
calendar year commencing with 1997, Business Services shall be charged to
BCBSUW at the rate of $45.00 per hour and Customer Expert Services shall be
charged to BCBSUW at the rate of $40.00 per hour. On January 1 of each
calendar year beginning with 1998, the fee rate for Business Services and
Customer Expert Services shall be adjusted by the CPI Percentage.
6. TRAVEL-RELATED EXPENSE REIMBURSEMENT. Paragraph 12 of the Agreement is
hereby amended by adding a new subparagraph (d) that provides as follows:
(d) TRAVEL-RELATED EXPENSE REIMBURSEMENT. All travel-related
expenses of BCBSSC and its personnel related to the performance of
either Business Services or Customer Expert Services shall be reimbursed
by BCBSUW in accordance with the rules set forth in BCBSSC's official
policy (as in effect from time to time) governing BCBSSC's reimbursement
of travel-related expenses incurred by its employees. All such
reimbursements shall be billed by BCBSSC and paid by BCBSUW in
accordance with Paragraph 7 above.
7. EXECUTION. The Parties have duly executed and delivered this Amendment
this 6 day of May, 1997, to be effective as of the Effective Date.
BLUE CROSS AND BLUE SHIELD OF SOUTH
CAROLINA
BY: [ILLEGIBLE]
----------------------------------
TITLE: [ILLEGIBLE]
-------------------------------
BLUE CROSS & BLUE SHIELD UNITED OF
WISCONSIN
BY: [ILLEGIBLE]
----------------------------------
TITLE: VP
-------------------------------
2
<PAGE>
Exhibit 10.30
TRADEMARK ASSIGNMENT AGREEMENT
This Agreement ("Agreement") is entered into by and among United Wisconsin
Services, Inc., a Wisconsin corporation ("UWSI"), NEWCO/UWS, Inc., a Wisconsin
corporation ("NEWCO") and United Wisconsin Life Insurance Company, a Wisconsin
corporation ("UWLIC").
RECITALS
WHEREAS, UWSI and its wholly owned subsidiary UWLIC each respectively own
several trademarks and trade names; and
WHEREAS, UWSI intends to spinoff its managed care and specialty operations
from its small group insurance operations; and
WHEREAS, pursuant to this spinoff, UWSI and UWLIC will become part of the
small group insurance operations and NEWCO will become the holding company for
the managed care and specialty operations; and
WHEREAS, the trademarks and trade names owned by UWSI and UWLIC are
valuable to NEWCO; and
WHEREAS, UWSI and UWLIC each desire to assign their respective ownership
rights in certain trademarks owned and trade names used by UWSI and UWLIC to
NEWCO and NEWCO desires to accept such assignment.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
AGREEMENT
1. ASSIGNMENT OF INTELLECTUAL PROPERTY. UWSI and UWLIC each hereby
irrevocably grant, assign and convey to NEWCO their respective entire right,
title and interest in and to:
(a) The trademarks, service marks and trade names identified by Exhibit A
hereto (collectively, the "marks") and the goodwill of the respective businesses
symbolized by the marks;
(b) All registrations, registration applications, renewals, reissues,
continuations, extensions or the like of any mark and like protection, including
without limitation, those obtained or permissible under past, present and future
laws and statutes of the United States, any state or any other country or place
anywhere in the world;
<PAGE>
(c) All rights of action on account of past, present, and future
unauthorized use of any of said marks, and for infringement of said
marks and like protection; and
(d) The right to file and prosecute applications for registration of said
marks in the United States or any other country or place anywhere in
the world.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of this _____ day of ____________, 1998.
United Wisconsin Services, Inc.
By:
Name:
Title:
-------------------------------
United Wisconsin Life Insurance Company
By:
Name:
Title:
-------------------------------
NEWCO/UWS, Inc.
By:
Name:
Title:
-------------------------------
<PAGE>
EXHIBIT A
I. UWSI Marks
<TABLE>
<CAPTION>
Registered Marks Reg. No. Reg. Date
- ------------------------------------------------------------------------------
<S> <C> <C>
Compcare 1,018,180 08-12-75
Design Healthcare 1,978,510 06-04-96
Income Security 100 (and design) 2,112,092 11-11-97
Meridian Managed Care, Inc. 2,029,709 01-14-97
Meridian Resource Corporation (stylized) 2,036,485 02-11-97
Rapidpay Income Replacement 1,959,385 02-27-96
Savings Select (and design) 2,134,100 02-03-98
Take Control Health Enhancement
Program (and design) 1,408,034 09-02-86
U United Wisconsin Services, Inc. (and design) 2,045,368 03-18-97
United Wisconsin Insurance Company 2,125,181 12-30-97
United Wisconsin Proservices 2,108,910 10-28-97
<CAPTION>
Applications Serial No. Filing Date
- ------------------------------------------------------------------------------
Dentacare 75-162,026 09-06-96
Heartland Dental 75-350,539 09-02-97
Meridian Marketing Services, Inc. 74-700,106 07-12-95
U United 24 (and design) 75-278,058 04-21-97
UH United Heartland (and design) 74-698,596 07-07-95
United Heartland Life Insurance Company 75-279,913 04-23-97
United Wisconsin Services, Inc. (stylized) 74-213,192 10-18-91
Valley Health Plan (VHP) 75-181,030 10-15-96
</TABLE>
UNREGISTERED MARKS
Community Plan
Evergreen Health Plan
Hometown Insurance Services, Inc.
Meridian Managed Care
Meridian Marketing Services
Meridian Resource
Rapid Pay Income Replacement
SeniorSCRIPT
United Health Alliance
II. UWLIC Marks
UNREGISTERED MARKS
Base Plus
Value Options
<PAGE>
PROMISSORY NOTE
$70,000,000 October 30, 1996
FOR VALUE RECEIVED, United Wisconsin Services, Inc., a Wisconsin
corporation ("UWS") hereby promises to pay to the order of Blue Cross & Blue
Shield United of Wisconsin, a Wisconsin service insurance corporation
("BCBSUW"), on October 30, 1999 (the "Maturity Date"), the principal sum of
Seventy Million Dollars ($70,000,000), together with interest on the unpaid
principal balance at an annual rate equal to the London Interbank Offered
Rate plus 1 1/4 percent (the "Note Rate"). The initial Note Rate is 7.0625
percent. The Note Rate shall be adjusted on January 1, 1997, and on the first
date of each calendar quarter thereafter, until the unpaid principal balance
has been paid in full. Interest is computed for the actual number of days
principal is unpaid on the basis of a 360-day year.
UWS shall pay BCBSUW the principal and interest due hereunder in quarterly
payments of interest beginning on December 31, 1996, and continuing on the last
day of each calendar quarter thereafter, and a final payment of unpaid principal
and interest due on the Maturity Date. All payments of principal and interest
shall be made in lawful money of the United States of America to BCBSUW at its
offices at 1515 North RiverCenter Drive, Milwaukee, WI 53212 or at such other
place as BCBSUW may designate to UWS in writing. Presentment, notice of
protest, demand and notice of dishonor of this Note are waived.
All or any portion of the outstanding principal balance of this Note may be
prepaid at any time without penalty or premium.
This Note is secured by a Pledge Agreement of even date from UWS to BCBSUW.
In the event that UWS fails to make any payment under this Note when due, or in
the event of the occurrence of an Event of Default described in the Pledge
Agreement securing this Note, then, in any or all such events, BCBSUW may
declare the entire balance of principal and accrued interest under this Note to
be immediately due and payable. In the event that UWS (i) becomes insolvent or
admits, by action or inaction, its inability to pay its debts as they become
due, or (ii) makes an assignment for the benefit of creditors, or (iii) becomes
the subject of any order for relief under the United States Bankruptcy Code or
the subject of any state insolvency or similar proceeding, then the entire
unpaid principal of, and accrued interest on, this Note shall become
automatically due and payable. UWS hereby agrees to pay all reasonable fees and
expenses incurred both before and after any judgment by BCBSUW or any subsequent
holder in connection with the protection and enforcement of the rights of BCBSUW
or any subsequent holder under this Note (including, without limitation,
reasonable attorneys' fees and legal expenses and all other expenses of
collecting any amounts due under this Note and protecting and enforcing the
rights of BCBSUW and any subsequent holder in any bankruptcy, reorganization or
insolvency proceeding involving UWS) until BCBSUW is paid in full.
This Note shall be governed by and construed in accordance with the laws of
the State of Wisconsin.
UNITED WISCONSIN SERVICES, INC.
(CORPORATE SEAL)
By:/s/ Thomas R. Hefty
-----------------------------------------------
Title:
----------------------------------------
<PAGE>
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT ("Agreement") is made this 30th day of October, 1996
by and between United Wisconsin Services, Inc., a Wisconsin corporation ("UWS")
and Blue Cross & Blue Shield United of Wisconsin, a Wisconsin service insurance
corporation ("BCBSUW").
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the meanings
specified:
1.1 "ACT" means the Securities Act of 1933, as amended from time to time,
and the rules and regulations issued thereunder.
1.2 "CERTIFICATES" means the certificates representing the Stock.
1.3 "EVENT OF DEFAULT" means an event described in Section V of this
Agreement.
1.4 "NOTE" means the promissory note from UWS to BCBSUW dated October 30,
1996 in the original principal amount of Seventy Million Dollars ($70,000,000)
and any amendment or modification thereof.
1.5 "OBLIGATIONS" means (a) the outstanding principal of, and all interest
on, the Note; (b) all liabilities, obligations, covenants and agreements of UWS
contained in the Note; and (c) all liabilities, obligations, covenants and
agreements of UWS contained in this Agreement.
1.6 "OCI" means the Office of the Commissioner of Insurance of the State
of Wisconsin.
1.7 "PROCEEDS" means whatever is received upon the sale, exchange,
collection or other disposition of the Stock or proceeds of the Stock,
including, without limitation, all interest and other income from the Stock and
distributions with respect to the Stock.
1.8 "STOCK" means 100% of the issued and outstanding capital stock of
Compcare Health Services Insurance Corporation, a Wisconsin stock insurance
corporation wholly owned by UWS, and 100% of the issued and outstanding capital
stock of United Wisconsin Insurance Company, a Wisconsin stock insurance
corporations wholly owned by UWS.
1.9 "STOCK RIGHTS" means any stock dividend or other right or property
that UWS receives or becomes entitled to receive for any reason with respect
to, in substitution for, or in exchange for any shares of the Stock.
1.10 "UCC" means the Uniform Commercial Code as adopted in Wisconsin and in
effect from time to time.
<PAGE>
ARTICLE II
THE PLEDGE
2.1 THE PLEDGE. To secure the full and complete payment and performance
when due (whether at stated maturity, by acceleration or otherwise) of each of
the Obligations, UWS hereby grants to BCBSUW a security interest in the Stock,
together with all Proceeds and products of the Stock, wherever located and
whether now owned or hereafter acquired.
2.2 CERTIFICATES; STOCK POWERS. UWS shall deliver to BCBSUW, to hold in
accordance with the terms and conditions of this Agreement, the Certificates and
appropriate stock powers duly endorsed by UWS in blank.
2.3 ACTIONS PRIOR TO AN EVENT OF DEFAULT. Prior to the occurrence of an
Event of Default, UWS shall have the sole right to vote the stock and the sole
right to receive and retain any and all cash dividends and distributions
declared and paid on the Stock; provided, however, that no vote shall be cast,
or corporate right exercised, or other action taken, that would result in
violation of any provision of the Note or this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HOLDINGS
UWS hereby represents and warrants to BCBSUW as follows:
3.1 OWNERSHIP OF STOCK. UWS is the owner of the Stock, free and clear of
all liens, encumbrances, security interests and restrictions, except the
security interest granted by this Agreement.
3.2. ENFORCEABILITY. This Agreement is a valid and binding obligation of
UWS, enforceable against UWS in accordance with its terms, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency, or
similar laws generally affecting the rights of creditors. Upon delivery of the
Certificates to BCBSUW, the security interest granted pursuant to this Agreement
will constitute a valid, perfected first priority lien against the Stock,
enforceable against all persons.
3.3 ABSENCE OF CONFLICTING OBLIGATIONS. The making, execution, delivery
and performance of this Agreement by UWS, and compliance with its terms, do not
violate any presently existing provision of law, the articles of incorporation
or bylaws of UWS, or any agreement to which UWS is a party or by which UWS or
any of its assets is bound.
ARTICLE IV
COVENANTS OF UWS
4.1 MAINTENANCE OF SECURITY INTEREST. UWS shall pay all expenses and,
upon request, take any action reasonably deemed advisable by BCBSUW to defend
and preserve UWS's title to the Stock or to establish, determine priority of,
perfect, continue perfected, terminate and enforce UWS's security interest in
the Stock or the rights of BCBSUW under this Agreement.
2
<PAGE>
4.2 TAXES. UWS shall pay, when due, all taxes and other governmental
charges levied or assessed upon or against the Stock.
4.3 DELIVERY OF CERTAIN ITEMS. UWS shall hold in trust for BCBSUW upon
receipt, and immediately thereafter shall deliver to BCBSUW, any stock
certificate, instrument or other document evidencing or constituting any Stock
Rights.
4.4 NO OTHER LIENS. UWS shall keep the Stock free from all liens,
encumbrances and security interests (other than the security interest granted by
this Agreement) and shall defend the Stock against all claims and legal
proceedings by persons other than BCBSUW.
4.5 DISPOSITION OF STOCK. UWS shall not sell, transfer (including,
without limitation, transfer of a security interest or other collateral
interest) or otherwise dispose of all or any part of the Stock, without the
prior written consent of OCI and BCBSUW.
ARTICLE V
EVENTS OF DEFAULT; REMEDIES
5.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an Event of Default:
(a) A breach by UWS of any of the terms or provisions of Article IV
of this Agreement;
(b) A material falsity in any representation or warranty made by UWS
to BCBSUW under or in connection with this Agreement as of the date on
which made;
(c) Any failure by UWS to pay or perform any one or more of the
Obligations when due, whether at stated maturity, by acceleration or
otherwise;
(d) UWS's becoming insolvent or the subject of any order for relief
under the United States Bankruptcy Code or successor law or the subject of
any state insolvency or similar proceeding; or
(e) Any other event that causes BCBSUW, in good faith, to deem itself
insecure.
5.2 RIGHTS AND REMEDIES OF BCBSUW. Upon the occurrence of any Event of
Default: (i) all of the Obligations shall, at BCBSUW's option, become
immediately due and payable without presentment, demand, protest or notice of
any kind (all of which hereby are expressly waived); (ii) BCBSUW shall have all
of the rights and remedies provided in the Note, by Article 9 of the UCC and by
any other applicable law; (iii) BCBSUW may exercise its right under Article 9 of
the UCC and other applicable laws to retain the Stock; (iv) in the event that
BCBSUW elects not to retain the Stock, it may exercise its right under Article 9
of the UCC and any other applicable law to sell or otherwise dispose of the
Stock, subject to the prior approval of the terms and conditions of such
transaction by OCI; and (v) in the interim between BCBSUW's acceleration of the
Obligations following an Event of Default and BCBSUW's retention of the Stock
under subparagraph (iii) above, or final disposition of the Stock under
3
<PAGE>
subparagraph (iv) above, BCBSUW may exercise voting rights over the Stock and
shall have the sole right to receive any dividends declared and paid on the
Stock. With respect to the foregoing rights and remedies:
(i) Written notice, when required by law, sent to any address of UWS
in this Agreement at least ten calendar days (counting the day of sending)
before the date of a proposed disposition of the Stock is reasonable
notice.
(ii) UWS shall pay all fees and expenses incurred by BCBSUW, including
the reasonable fees of counsel, in connection with the administration,
protection and enforcement of BCBSUW's rights under this Agreement or with
respect to the Stock, including, without limitation, the protection and
enforcement of such rights in any bankruptcy or insolvency proceeding
involving UWS.
5.3 METHOD OF DISPOSITION. Whenever BCBSUW would have the right under
this Agreement and prior approval from OCI to sell the Stock, the parties agree
that if, in the opinion of BCBSUW or its legal counsel, sales of the Stock by
BCBSUW or UWS without registration of the Stock under the Act might, unless
accomplished by one or more of the methods described in this Section 5.3,
constitute either BCBSUW or UWS an "underwriter," as that term is defined in
Section 2(11) of the Act, it shall be commercially reasonable for BCBSUW,
without registration, notwithstanding that the terms of any such sale might be
less favorable than sale through registration, to take any of the following
actions:
(a) sell all or part of the Stock in compliance with Rule 144, Rule
237, Regulation A or Regulation D under the Act as then in effect, or
pursuant to any other rules or regulations under the Act then in effect,
compliance with which would make the exemptions provided pursuant to
Sections 3(b) or 4(1) of the Act applicable to the sale; or
(b) sell all or part of the Stock in an intrastate public offering
within the meaning of Section 3(a)(11) of the Act; or
(c) sell all or part of the Stock in one or more private transactions
not involving any public offering in order to secure the exemption provided
in Section 4(1) of the Act, if: (i) the Stock is sold for cash to the
highest bidder after biding or "firm" offers to purchase have been received
from at least two offerors; and (ii) BCBSUW has reasonable grounds to
believe and does believe that each such offeror has sufficient financial
resources to enable such offeror to purchase the Stock offered and that the
offer was made in good faith; and (iii) each such offeror was informed,
prior to the time such offer was made, that offers to purchase the Stock
were also being solicited from others; and (iv) BCBSUW has, for at least 60
days prior to the sale, solicited offers to purchase the stock within the
restrictions imposed by federal or state securities Laws.
Nothing in this Section 5.3 shall prevent BCBSUW from making any other
commercially reasonable disposition of the Stock, and no sale of the Stock shall
be commercially unreasonable solely because it was not made in compliance with
this Section.
5.4 APPLICATION OF PROCEEDS. BCBSUW shall apply the Proceeds resulting
from any sale or disposition of the Stock pursuant to this Agreement in the
following order of priority:
4
<PAGE>
(a) to the costs of the sale;
(b) to the expenses incurred by BCBSUW in connection with the sale,
including reasonable attorneys' fees;
(c) to the payment of the Obligations then due and owing in any order
selected by BCBSUW; and
(d) to UWS.
5.5 OTHER REMEDIES. No remedy herein conferred upon BCBSUW is intended
to be exclusive of any other remedy, and each and every such remedy shall be
cumulative and shall be in addition to every other remedy given under this
Agreement or the Note or now or hereafter existing at law or in equity or by
statute or otherwise. No failure or delay on the part of BCBSUW in exercising
any right or remedy hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any right hereunder preclude other or further
exercise thereof or the exercise of any other right or remedy.
5.6 LIMITATION ON BCBSUW'S DUTIES REGARDING COLLATERAL. Subject to any
contrary order by OCI, BCBSUW's sole duty with respect to the custody,
safekeeping and physical preservation of the Stock in its possession, under the
UCC or otherwise, shall be to deal with it in the same manner as BCBSUW deals
with similar securities and property for its own account. Neither BCBSUW nor
any of its directors, officers, employees or agents shall be liable for failure
to demand, collect or realize upon any of the Stock or for any delay in doing so
or shall be under any obligation to sell or otherwise dispose of any Stock upon
the request of UWS or otherwise.
ARTICLE VI
MISCELLANEOUS
6.1 ASSIGNABILITY; SUCCESSORS. UWS's rights and liabilities under this
Agreement are not assignable or delegable, in whole or in part, without the
prior written consent of BCBSUW and OCI. The provisions of this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of the
parties.
6.2 SURVIVAL. All agreements, representations and warranties made herein
or in any document delivered pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the delivery of any such document.
6.3 GOVERNING LAW. This Agreement shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Wisconsin.
6.4 AMENDMENT. No amendment of this Agreement shall be effective unless
in writing, signed by both parties, and approved by OCI.
5
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the day and year
first above written.
UNITED WISCONSIN SERVICES, INC.
By: /s/ Thomas R. Hefty
------------------------------------------------
Title:
---------------------------------------
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
By: /s/ C. Edward Mordy
------------------------------------------------
Title:
---------------------------------------
7
<PAGE>
SUBSIDIARIES OF REGISTRANT
United Wisconsin Insurance Company - a Wisconsin insurance corporation
United Wisconsin Proservices, Inc. - a Wisconsin corporation
United Heartland Life Insurance Company - a Wisconsin insurance company
Compcare Health Services Insurance Corporation - a Wisconsin corporation
Meridian Managed Care, Inc. - a Wisconsin corporation
Meridian Resource Corporation - a Wisconsin corporation
Meridian Marketing Services, Inc. - a Wisconsin corporation
Valley Health Plan, Inc. - a Wisconsin corporation
United Heartland, Inc. - a Wisconsin corporation
CNR Health, Inc. - a Wisconsin corporation
HMO-W, Incorporated - a Wisconsin corporation
Unity Health Plans Insurance Corporation - a Wisconsin corporation
Hometown Insurance Services, Inc. - a Wisconsin corporation
Heartland Dental Plan, Inc. - a Wisconsin corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEETS AND THE COMBINED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 17,033
<SECURITIES> 159,546
<RECEIVABLES> 54,460
<ALLOWANCES> 394
<INVENTORY> 0
<CURRENT-ASSETS> 231,056
<PP&E> 14,748
<DEPRECIATION> 7,770
<TOTAL-ASSETS> 266,256
<CURRENT-LIABILITIES> 117,322
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 123,616
<TOTAL-LIABILITY-AND-EQUITY> 266,256
<SALES> 586,871
<TOTAL-REVENUES> 609,109
<CGS> 485,735
<TOTAL-COSTS> 485,735
<OTHER-EXPENSES> 96,861
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 26,513
<INCOME-TAX> 9,918
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,595
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.00
</TABLE>
<PAGE>
EXHIBIT 99
[UWS NAME AND LOGO]
, 1998
Dear Future Shareholder:
On , 1998, the Board of Directors of United Wisconsin Services,
Inc. ("UWS") approved the distribution ("DISTRIBUTION") to UWS shareholders of
all of the outstanding shares of common stock of Newco/UWS, Inc. ("NEWCO"), a
newly formed corporation of which you will soon become a shareholder. Upon
completion of the Distribution, Newco will be known as "United Wisconsin
Services, Inc.," and will be an independent public company owning and operating
the managed care and specialty products businesses and management business
currently owned and operated by UWS. The shares of Newco's common stock have
been approved for listing on the New York Stock Exchange under the symbol "UWZ"
upon notice of issuance. After the Distribution, UWS will continue to own and
operate its small group business, and will be known as "American Medical
Security Group, Inc."
The enclosed Information Statement explains the Distribution in detail and
provides important financial and other information regarding Newco. The
Distribution will give you a direct investment and ownership interest in two
separate companies. We believe that as separate companies, each one will have
additional and increased marketing, joint venture and acquisition opportunities.
The Distribution will allow Newco, which will operate under the name "United
Wisconsin Services, Inc." following the Distribution, to fully develop our
managed care and specialty products business, and utilize the Blue Cross and
Blue Shield trademarks and tradenames with our products. For UWS, which will
operate under the name "American Medical Security Group, Inc." after the
Distribution, this move will allow them to concentrate their efforts on
continuing to develop, market and administer small group insurance products,
small group specialty group insurance products and administrative services for
small groups.
We are excited about Newco's prospects as an independent company. Newco,
through our wholly owned subsidiaries and joint venture arrangements, will be a
leading managed care company with the oldest and, in terms of membership,
largest health maintenance organization in Wisconsin and substantial operations
in specialty managed care and other products, including a large dental HMO, as
well as life, workers' compensation, mental health and other businesses. Newco
will possess a strong and highly motivated management team, outstanding
employees and a leading managed care and employee benefits business offering a
broad range of group medical and related benefit products. Operating as an
independent company, we believe Newco will be well positioned to serve its
customers, capitalize on exciting growth opportunities, utilize the Blue Cross
and Blue Shield trademarks and tradenames with our products and provide new
opportunities for our employees. We look forward to your participation in our
future.
Sincerely yours,
Thomas R. Hefty
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
[AMSG NAME AND LOGO]
, 1998
Dear Shareholder:
As you know, the Board of Directors of United Wisconsin Services, Inc.
("UWS") has approved the distribution ("DISTRIBUTION") to UWS shareholders of
all of the outstanding shares of common stock of Newco/UWS, Inc. ("NEWCO"), a
newly formed corporation. Newco will own and operate the managed care companies
and the management business of UWS, and after the Distribution, will be known as
"United Wisconsin Services, Inc." UWS will continue to own and operate its small
group business, and after the Distribution, will be known as "American Medical
Security Group, Inc." ("AMSG"). In the Distribution, you will receive one share
of Newco common stock for every share of UWS common stock held as of the close
of business on , 1998. The Distribution will not change the number
of shares of UWS common stock you hold. UWS has submitted a letter to the
Internal Revenue Service for a ruling as to the tax-free status of the
Distribution.
THE ENCLOSED INFORMATION STATEMENT EXPLAINS THE DISTRIBUTION IN DETAIL AND
PROVIDES IMPORTANT FINANCIAL AND OTHER INFORMATION REGARDING NEWCO. A
SHAREHOLDER VOTE IS NOT REQUIRED TO APPROVE THE DISTRIBUTION, AND, ACCORDINGLY,
YOUR PROXY IS NOT BEING SOUGHT. HOLDERS OF SHARES OF UWS COMMON STOCK ARE NOT
REQUIRED TO TAKE ANY ACTION TO PARTICIPATE IN THE DISTRIBUTION; HOWEVER, YOU
WILL BE ASKED TO DELIVER YOUR EXISTING STOCK CERTIFICATES REPRESENTING SHARES OF
UWS COMMON STOCK AFTER THE DISTRIBUTION TO AMSG'S TRANSFER AGENT SO THAT YOU CAN
BE RE-ISSUED STOCK CERTIFICATES IN THE NAME OF AMSG. INSTRUCTIONS ON EXCHANGING
YOUR STOCK CERTIFICATES WILL BE SENT TO YOU SHORTLY AFTER THE DISTRIBUTION.
After the Distribution, UWS will operate under the name "American Medical
Security Group, Inc." and trade on the New York Stock Exchange under the symbol
"AMZ." We intend to concentrate our efforts on continuing to develop, market and
administer small group medical and specialty insurance products and
administrative services for small groups. We look forward to continuing AMSG's
growth and achieving the full potential of our small group products business.
Sincerely yours,
Samuel V. Miller
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
[NOTE: INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT ON FORM 10 RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS INFORMATION
STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY THESE SECURITIES.]
INFORMATION STATEMENT
NEWCO/UWS, INC.
(TO BE RENAMED "UNITED WISCONSIN SERVICES, INC.")
COMMON STOCK
This Information Statement is being furnished in connection with the
distribution (the "DISTRIBUTION") by United Wisconsin Services, Inc. ("UWS"), a
Wisconsin corporation, of shares of common stock, no par value per share (the
"DISTRIBUTED SHARES" or the "NEWCO COMMON STOCK"), of its wholly owned
subsidiary, Newco/ UWS, Inc. ("NEWCO"), a Wisconsin corporation, to UWS
shareholders. The distribution ratio will be one share of Newco Common Stock for
every one share of common stock of UWS ("UWS COMMON STOCK") owned at the close
of business on , 1998 (the "RECORD DATE"). The Distribution will
result in all of the issued and outstanding shares of Newco Common Stock being
distributed to holders of shares of UWS Common Stock on a pro rata basis. The
Distribution is expected to occur on or about , 1998 (the
"DISTRIBUTION DATE"). Certificates evidencing shares of Newco Common Stock will
be mailed to holders of shares of UWS Common Stock on or about the Distribution
Date. The Distribution is conditioned on receiving a ruling from the Internal
Revenue Service ("IRS") to the effect that the Distribution will qualify as a
tax-free distribution to UWS, Newco and the UWS shareholders for federal income
tax purposes. No consideration will be required of holders of shares of UWS
Common Stock in return for the shares of Newco Common Stock issued pursuant to
the Distribution.
On the effective date of the Distribution, UWS will be renamed "American
Medical Security Group, Inc." ("AMSG"), and Newco will be renamed "United
Wisconsin Services, Inc." Newco is a newly formed corporation which, as a result
of the transactions entered into in connection with the Distribution, will own
the businesses and assets of, and be responsible for the liabilities associated
with, UWS's managed care and specialty products businesses and management
business. AMSG will continue to own the businesses and assets of, and be
responsible for the liabilities associated with, its small group business.
Following the Distribution, AMSG will not own any shares of Newco Common
Stock, nor will Newco own any shares of AMSG Common Stock. There is currently no
public market for the shares of Newco Common Stock, although a "when-issued"
trading market is expected to develop prior to the Distribution Date. The shares
of Newco Common Stock have been approved for listing, subject to official notice
of issuance, on the New York Stock Exchange ("NYSE") under the symbol "UWZ." The
shares of UWS Common Stock will continue to be listed on the NYSE but on and
after the Distribution Date, will be listed under the symbol "AMZ."
NO VOTE OF SHAREHOLDERS IS REQUIRED TO APPROVE THE DISTRIBUTION.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO
SEND
US A PROXY. IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE
CAPTION "RISK FACTORS" ON PAGE 19.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS INFORMATION STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES.
The date of this Information Statement is , 1998.
<PAGE>
Graphic chart illustrating VWS's subsidiaries and joint ventures grouped
according to products and services offered.
1. HMO and POS Products
- Compcare Health Services Insurance Corporation--Wisconsin's most
experienced HMO having Southeastern Wisconsin's largest provider network
with HMO and POS plans.
- Valley Health Plan, Inc.--A joint venture with Midelfort Clinic, Ltd, a
Mayo Regional Health System, providing HMO and POS plans and consistently
achieves high marks for service.
- Northwoods Health Plans--A joint venture with Howard Young Health Care,
Inc., offering an integrated health care system serving HMO and POS plans.
- Unity Health Plans Insurance Corporation--One of the nation's first
rural-based HMOs providing HMO and POS plans with services through
community physicians and the University of Wisconsin Hospital and Clinics.
- Compcare Northwest--A provider association with local physicians and
clinics providing HMO and POS plans.
2. Specialty Managed Care Products and Services
- Meridian Resource Corporation--Provides managed care consulting, cost
containment subrogation and EAP.
- United Wisconsin Proservices, Inc.--Provides electronic claims processing
and software.
- CNR Health, Inc.--Provides managed mental health care.
- United Wisconsin Group (comprised of United Wisconsin Insurance Company
and United Heartland Life Insurance Company)--Provides life, disability
and dental products.
- RxCel--Provides prescription drug and pharmacy management.
- Heartland Dental Plan, Inc.--Wisconsin's largest dental HMO.
- United Heartland, Inc.--Provides managed care workers' compensation.
3. Small Group Managed Care Products
- American Medical Security (comprised of American Medical Security
Holdings, Inc. and subsidiaries including United Wisconsin Insurance
Company)--Managed care products marketed nationally. Has experienced
management team and creative product design with sophisticated
underwriting.
ii
<PAGE>
ADDITIONAL INFORMATION
UWS is (and following the Distribution, Newco will be) subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
("EXCHANGE ACT"), and in accordance therewith files (and Newco will file)
reports, proxy statements and other information with the Securities and Exchange
Commission ("SEC"). The reports, proxy statements and other information filed by
UWS (and to be filed by Newco) with the SEC may be inspected and copied at the
public reference facilities maintained by the SEC at Judiciary Plaza, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, as well as the Regional Offices
of the SEC at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The SEC also maintains an Internet site on the World Wide Web
at http://www.sec.gov that contains reports, proxy statements and other
information regarding public companies. Shares of UWS Common Stock are listed,
and shares of Newco Common Stock have been approved for listing upon official
notice of issuance, on the NYSE and reports, proxy statements and other
information regarding UWS and Newco also can be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
Newco has filed with the SEC a Registration Statement on Form 10 (the
"REGISTRATION STATEMENT") under the Exchange Act with respect to the shares of
Newco Common Stock received by UWS shareholders in the Distribution. This
Information Statement does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Information Statement as to
the contents of any contract, agreement or other document referred to herein are
not necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the related exhibits filed by Newco may be inspected
at the public reference facilities of the SEC listed above.
Questions concerning the Distribution should be directed to Thomas L.
Luljak, Director of Corporate Communications, United Wisconsin Services, Inc.,
401 West Michigan Street, Milwaukee, Wisconsin 53203, (414) 226-6900. After the
Distribution, holders of shares of Newco Common Stock having inquiries related
to their investment in Newco should contact Thomas L. Luljak, Director of
Corporate Communications, 401 West Michigan Street, Milwaukee, Wisconsin 53203,
(414) 226-6900, and holders of shares of AMSG Common Stock having inquiries
related to their investment in AMSG should contact Cliff A. Bowers, Vice
President of Corporate Communications, 3100 AMS Boulevard, Green Bay, Wisconsin
54313, (920) 661-2440.
No person is authorized by UWS or Newco to give any information or to make
any representations other than those contained in this Information Statement,
and if given or made, such information or representations must not be relied
upon as having been authorized.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION............................................................... 1
SUMMARY.................................................................................................... 5
SUMMARY COMBINED FINANCIAL DATA FOR NEWCO.................................................................. 10
FORWARD-LOOKING STATEMENTS................................................................................. 11
INTRODUCTION............................................................................................... 11
THE DISTRIBUTION........................................................................................... 11
Background and Reasons for the Distribution.............................................................. 11
Restructuring Prior to the Distribution.................................................................. 12
Manner of Effecting the Distribution..................................................................... 13
Results of the Distribution.............................................................................. 13
Certain Federal Income Tax Consequences of the Distribution.............................................. 13
Reasons for Furnishing the Information Statement......................................................... 15
Future Management of Newco............................................................................... 15
Dividend Reinvestment Plans.............................................................................. 15
UWS and Company Benefit Plans............................................................................ 15
Listing and Trading of Shares of UWS Common Stock........................................................ 16
Listing and Trading of Shares of Newco Common Stock...................................................... 16
Accounting Treatment..................................................................................... 17
Financial Advisor........................................................................................ 17
Treatment of Options in the Distribution................................................................. 17
Interests of Certain Persons in the Distribution......................................................... 18
Bank Credit Facilities and Treatment of Indebtedness..................................................... 18
Conditions; Termination.................................................................................. 18
RISK FACTORS............................................................................................... 19
Operating History and Future Prospects................................................................... 19
Limited Relevance of Historical Combined Financial Information of Newco.................................. 19
Health Care Costs and Health Care Industry............................................................... 19
Dependence Upon Health Care Providers and Employer Groups................................................ 20
Joint Venture Arrangements............................................................................... 20
Pharmaceutical Costs..................................................................................... 21
Government Programs and Regulation....................................................................... 21
Health Care Reform Laws.................................................................................. 22
Competition.............................................................................................. 22
Administration and Management............................................................................ 23
Control by Shareholders; Effects of BCBSUW Intended Purchases;
Defensive Measures; Potential Conflicts of Interest.................................................... 23
Newco Conflicts with AMSG After the Distribution......................................................... 24
Certain Federal Income Tax Considerations................................................................ 24
No Prior Trading Market for Newco Common Stock;
Likely Volatile Newco Common Stock Price............................................................... 25
The Year 2000 Issue...................................................................................... 25
REGULATORY APPROVALS....................................................................................... 26
Tax Matters.............................................................................................. 26
Insurance Regulatory Matters............................................................................. 26
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
PRO FORMA CAPITALIZATION................................................................................... 27
DIVIDEND POLICY............................................................................................ 27
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF NEWCO................................................ 28
SELECTED COMBINED FINANCIAL INFORMATION OF NEWCO........................................................... 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 33
BUSINESS OF NEWCO.......................................................................................... 40
General.................................................................................................. 40
Newco's Strategy......................................................................................... 41
HMO Products............................................................................................. 41
Specialty Managed Care Products and Services............................................................. 45
Competition.............................................................................................. 48
Reinsurance.............................................................................................. 48
Service Agreements....................................................................................... 49
Investments.............................................................................................. 49
Regulation............................................................................................... 50
Employees................................................................................................ 53
Trademarks............................................................................................... 53
Properties............................................................................................... 53
Legal Proceedings........................................................................................ 53
MANAGEMENT OF NEWCO........................................................................................ 54
Directors of Newco....................................................................................... 54
Executive Officers of Newco.............................................................................. 57
EXECUTIVE COMPENSATION..................................................................................... 59
Historical Compensation.................................................................................. 59
Summary Compensation Table............................................................................... 59
Option/SAR Grants in Last Fiscal Year.................................................................... 60
Aggregated Option/SAR Exercises in the Last Fiscal Year and FY-End Option/SAR Values..................... 60
Long-Term Incentive Plans-Awards in Last Fiscal Year..................................................... 61
Pension Plan Table....................................................................................... 62
Chief Executive Officer Supplemental Compensation Agreement.............................................. 62
Treatment of UWS Options and SARs as a Result of the Distribution........................................ 62
NEWCO BENEFIT PLANS FOLLOWING THE DISTRIBUTION............................................................. 63
Newco Equity Incentive Plan.............................................................................. 63
Nonqualified Compensation Plans.......................................................................... 66
Retirement Plans......................................................................................... 67
Supplemental Retirement Plan............................................................................. 67
Deferred Compensation Plans.............................................................................. 68
Other Benefit Plans...................................................................................... 68
AGREEMENTS BETWEEN UWS AND NEWCO........................................................................... 68
Distribution Agreement................................................................................... 68
Employee Benefits Agreement.............................................................................. 70
Tax Allocation Agreement................................................................................. 71
AMSG Service Agreement................................................................................... 72
Reinsurance Agreements................................................................................... 72
Intellectual Property Agreement.......................................................................... 72
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS....................................................... 73
BCBSUW Service Agreements................................................................................ 73
AMSG Service Agreement................................................................................... 73
Supplemental Compensation Agreement...................................................................... 73
BCBSUW Loan.............................................................................................. 73
BCBSUW Intended Purchase of Additional Shares of Newco Common Stock...................................... 74
BCBSUW Tax Allocation Agreement and Certain Tax Matters.................................................. 74
Registration Rights and Voting Agreements................................................................ 74
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 76
DESCRIPTION OF CAPITAL STOCK OF NEWCO...................................................................... 77
Common Stock............................................................................................. 77
Preferred Stock.......................................................................................... 77
Certain Articles of Incorporation and By-Laws Provisions of Newco........................................ 77
Certain WBCL Provisions.................................................................................. 78
Transfer Agent and Registrar............................................................................. 79
Number of Directors; Filling Vacancies; Removal.......................................................... 79
Shareholder Action by Written Consent.................................................................... 79
Special Meetings......................................................................................... 79
Advance Notice Provisions For Shareholder Nominations and Shareholder Proposals.......................... 79
No Preemptive Rights..................................................................................... 81
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF NEWCO........................................... 81
SHAREHOLDER PROPOSALS...................................................................................... 82
INDEPENDENT AUDITORS....................................................................................... 82
NEWCO/UWS, INC. INDEX TO COMBINED FINANCIAL STATEMENTS..................................................... F-1
</TABLE>
vi
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION
<TABLE>
<S> <C>
Q. What is the Distribution and when will it occur?
A. The Distribution is the series of transactions whereby UWS will transfer the stock,
assets and liabilities relating to its managed care companies and management business
to its wholly owned subsidiary, Newco in exchange for shares of Newco Common
Stock. UWS then will distribute all of the shares of Newco Common Stock to its Record
Date shareholders who continue to hold their shares of UWS Common Stock through the
Distribution Date. The Record Date is , and the Distribution will
occur at the close of business on , 1998.
Q. What will I receive in the Distribution?
A. For every share of UWS Common Stock owned by you on the Distribution Date, you will
receive one share of Newco Common Stock.
Q. How will I benefit from the Distribution?
A. The Distribution will give you a direct investment and ownership interest in two
separate companies. The Distribution will allow each company to be managed and operated
more effectively as independent publicly owned companies. UWS believes that as separate
companies, each one will have additional and increased marketing, joint venture and
acquisition opportunities. The Distribution will allow Newco to concentrate on
developing its managed care and specialty products business and management business and
utilize the Blue Cross and Blue Shield trademarks and tradenames with its products.
Furthermore, separate incentive compensation plans for key employees will provide
incentives more directly related to the performance of the individual companies. The
Distribution also will give each company direct access to capital markets and the
ability to issue stock to finance expansion and growth opportunities.
Q. What do I have to do to participate in the Distribution?
A. Nothing. No proxy or vote is necessary to approve the Distribution. However, UWS
shareholders did approve an amendment to its Articles of Incorporation to change its
name to "American Medical Security Group, Inc.," in July 1998, with the name change to
be effective on the Effective Date of the Distribution. The UWS entity after the
Distribution will be referred to herein as "AMSG."
If you own shares of UWS Common Stock on the Record Date, and you continue to hold such
shares of UWS Common Stock on the Distribution Date, shares of Newco Common Stock will
be credited to your brokerage account or certificates representing shares of Newco
Common Stock will be mailed to you. You do not need to mail in UWS Common Stock
certificates to receive Newco Common Stock certificates, and the Distribution will not
change the number of shares of UWS Common Stock that you own. However, you will be
asked to deliver your stock certificates representing shares of UWS Common Stock after
the Distribution to Firstar Trust Company, AMSG's transfer agent, so that you can be
re-issued stock certificates in the name of "American Medical Security Group, Inc.,"
the new name of UWS after the Distribution. Shortly after the Distribution Date,
Firstar Trust Company will mail to all AMSG shareholders a notice to this effect, along
with letters of instruction to effectuate this exchange.
Q. Will shares of Newco Common Stock be listed on any exchange?
A. Yes. The shares of Newco Common Stock have been approved for listing on the NYSE and
will trade under the symbol "UWZ". The shares of UWS Common Stock will continue to be
listed on the NYSE, but on and after the Distribution Date, will be listed under the
symbol "AMZ."
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Q. What will happen to the trading of shares of Newco Common Stock and UWS Common Stock?
A. A regular public market for the shares of Newco Common Stock will not exist prior to
the Distribution Date. We expect, however, that "when-issued" trading for shares of
Newco Common Stock will develop prior to the Distribution Date. "When-issued" trading
means that shares can be traded prior to the time certificates are actually available
or issued and reflects the assumed value of a security as if it had already been
issued. When-issued trading would occur to develop an orderly market and trading price
for the shares of Newco Common Stock after the Distribution.
If when-issued trading develops, you may buy and sell shares of Newco Common Stock
before the Distribution Date. None of these trades, however, would settle until after
the Distribution Date, after regular trading in shares of Newco Common Stock has begun.
If the Distribution does not occur, all when-issued trading would be null and void. If
and as long as when-issued trading in shares of Newco Common Stock occurs, the symbol
on the NYSE will be "UWZwi."
We expect that the shares of UWS Common Stock will continue to trade on a regular basis
through the Distribution Date, but beginning on or about , 1998, and
continuing through , 1998, your shares of UWS Common Stock will have a
due bill attached for shares of Newco Common Stock. This means that you will give up
your right to receive shares of Newco Common Stock if you sell your shares of UWS
Common Stock during this time. In addition, shares of UWS Common Stock may trade on an
ex-distribution when-issued basis before the Distribution Date, reflecting an assumed
value for the shares of UWS Common Stock as if the Distribution had already occurred.
If and as long as when-issued trading in the shares of UWS Common Stock occurs, the
symbol on the NYSE will be "AMZwi."
You should consult your broker if you intend to sell your shares of UWS Common Stock
after , 1998 and before you receive shares of Newco Common Stock in
the Distribution and make sure that your broker understands your intentions with
respect to such sales.
Q. How will the Distribution affect the trading price of the shares of UWS Common Stock?
A. Prior to the Distribution, the trading price of the shares of UWS Common Stock will
reflect the operations and performance of both Newco and AMSG as a combined entity.
After the Distribution, the trading price of the shares of AMSG Common Stock will
likely be lower than the trading price of UWS Common Stock prior to the Distribution,
because it will only reflect the operations and performance of AMSG, without the
operations and performance of Newco. Furthermore, the combined trading prices of the
shares of AMSG Common Stock and Newco Common Stock after the Distribution may not equal
the trading price of the shares of UWS Common Stock prior to the Distribution.
Q. What will happen to existing options to purchase shares of UWS Common Stock?
A. Depending on the status of each option holder, outstanding options to purchase shares
of UWS Common Stock will be converted into options to purchase (a) shares of Newco
Common Stock, (b) an equal number of shares of Newco Common Stock and AMSG Common
Stock, or (c) shares of AMSG Common Stock. Based on the market value of shares of Newco
Common Stock and AMSG Common Stock at the close of business on the day immediately
following the Distribution Date and on the market value of shares of UWS Common Stock
at the close of business on the Distribution Date, the options will be adjusted to
provide equivalent value to each option holder by increasing the number of shares of
Newco Common Stock or AMSG Common Stock, as the case may be, subject to each option and
decreasing the exercise price per share for each option; however, options converted
into options to purchase an equal number of shares of Newco Common Stock and AMSG
Common Stock will be adjusted to provide equivalent value by only decreasing the
exercise price per share for each option.
</TABLE>
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<S> <C>
Q. What will happen to shares of UWS Common Stock owned through the UWS Dividend Reinvest-
ment and Direct Stock Purchase Plan?
A. They will be treated the same as all other shares of UWS Common Stock. You will
continue to own the shares of UWS Common Stock that you owned through the UWS Dividend
Reinvestment and Direct Stock Purchase Plan prior to the Distribution. In the
Distribution, you will receive one share of Newco Common Stock for every share of UWS
Common Stock that you owned on the Record Date through the UWS Dividend Reinvestment
and Direct Stock Purchase Plan. A comparable service will be established for Newco
which will provide for reinvestment of dividends on the shares of Newco Common Stock
and the direct purchase of shares of Newco Common Stock, under which accounts will be
established for participants in the UWS Dividend Reinvestment and Direct Stock Purchase
Plan. Shares of Newco Common Stock credited as a result of the Distribution to
participants in the UWS Dividend Reinvestment and Direct Stock Purchase Plan will be
transferred to the participants' accounts in the new service.
Q. Is the Distribution taxable for federal income tax purposes?
A. No. The Distribution is conditioned upon the receipt of a private letter ruling from
the IRS that the Distribution will be tax-free to UWS, Newco and UWS shareholders for
federal income tax purposes. Shortly after the Distribution, AMSG will send a letter to
its Record Date shareholders that will explain how they should allocate tax basis
between the shares of AMSG Common Stock and Newco Common Stock.
Q. Will AMSG and Newco be related in any way after the Distribution?
A. AMSG will no longer own any shares of Newco Common Stock after the Distribution.
However, AMSG and Newco will have four common Board members, and each will have Blue
Cross & Blue Shield United of Wisconsin as a significant shareholder. AMSG and Newco
also have entered into various agreements to define their continuing business
relationship, consisting principally of certain reinsurance arrangements between the
companies, and certain investment management and other ancillary services to be
provided by Newco to AMSG after the Distribution.
Q. Will Newco pay dividends?
A. The Board of Directors of Newco expects initially to pay an annual cash dividend of
$0.05 per share on the Newco Common Stock following the Distribution.
</TABLE>
3
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<TABLE>
<S> <C>
Q. Who can assist me if I have questions?
A. Before the Distribution, UWS shareholders with inquiries relating to the Distribution
may contact:
Thomas L. Luljak, Director of Corporate Communications
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
(414) 226-6900
After the Distribution, shareholders of Newco with inquiries relating to Newco or their
investment in shares of Newco Common Stock may contact:
Thomas L. Luljak, Director of Corporate Communications
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
(414) 226-6900
The Distribution Agent responsible for the distribution of shares of Newco Common Stock
in the Distribution and acting as transfer agent and registrar for the shares of Newco
Common Stock after the Distribution is:
Firstar Trust Company
Corporate Trust Department
1555 North RiverCenter Drive, Suite 301
Milwaukee, Wisconsin 53212
(414) 905-5000
After the Distribution, shareholders of AMSG with inquiries relating to AMSG or their
investment in shares of AMSG Common Stock may contact:
Cliff A. Bowers, Vice President of Corporate Communications
American Medical Security Group, Inc.
3100 AMS Boulevard
Green Bay, Wisconsin 54313
(920) 661-2440
</TABLE>
4
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT. IT MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO BETTER UNDERSTAND
THE DISTRIBUTION AND FOR A MORE COMPLETE DESCRIPTION OF THE TERMS OF THE
DISTRIBUTION, YOU SHOULD READ CAREFULLY THIS ENTIRE INFORMATION STATEMENT AND
THE OTHER DOCUMENTS REFERRED TO IN THIS INFORMATION STATEMENT. EXCEPT AS THE
CONTEXT OTHERWISE REQUIRES, THE TERM "NEWCO" MEANS NEWCO/UWS, INC. AND ITS
WHOLLY OWNED SUBSIDIARIES, THE TERM "UWS" MEANS UNITED WISCONSIN SERVICES, INC.
AND ITS WHOLLY OWNED SUBSIDIARIES PRIOR TO THE EFFECTIVE DATE OF THE
DISTRIBUTION, THE TERM "AMSG" MEANS UWS AFTER THE EFFECTIVE DATE OF THE
DISTRIBUTION AND THE TERM "AMSG COMMON STOCK" MEANS THE UWS COMMON STOCK AFTER
THE EFFECTIVE DATE OF THE DISTRIBUTION.
THE DISTRIBUTION
<TABLE>
<S> <C>
Distributing Corporation..... United Wisconsin Services, Inc. On and after the Effective
Date, UWS will be renamed, and will be known as American
Medical Security Group, Inc. ("AMSG").
Distributed Corporation...... Newco/UWS, Inc. On and after the Effective Date, Newco will
be renamed, and will be known as United Wisconsin Services,
Inc.
Shares to Be Distributed..... UWS will distribute shares of Newco Common
Stock, representing 100% of the issued and outstanding
shares of Newco Common Stock.
Distribution Ratio........... One share of Newco Common Stock for each share of UWS Common
Stock.
Record Date.................. The Record Date is , 1998 (close of
business).
Effective Date............... The Effective Date is , 1998.
Distribution Date............ The Distribution Date is expected to be on or about the
close of business on , 1998.
Mailing Date................. On the Distribution Date, the Distribution Agent will
commence mailing certificates representing shares of Newco
Common Stock to holders of shares of UWS Common Stock.
Eligibility for Receipt of
Distributed Shares......... UWS shareholders of record on the Record Date who continue
to own shares of UWS Common Stock on the Distribution Date
will receive Distributed Shares. UWS shareholders of record
on the Record Date who sell their shares of UWS Common Stock
after the Record Date but before the Distribution Date will
not receive Distributed Shares. Persons who purchase shares
of UWS Common Stock between the Record Date and the
Distribution Date and who continue to hold the shares of UWS
Common Stock on the Distribution Date will receive
Distributed Shares.
Distribution Agent........... Firstar Trust Company.
Trading Market............... There is currently no public market for the shares of Newco
Common Stock, although a "when-issued" trading market is
expected to develop prior to the Distribution Date. The
shares of Newco Common Stock have been approved for listing,
subject to official notice of issuance, on the NYSE under
the symbol "UWZ." On and after the Distribution Date, AMSG
will continue to be listed on the NYSE, but under the symbol
"AMZ."
</TABLE>
5
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<S> <C>
Transfer Agent and
Registrar.................. Firstar Trust Company will be the transfer agent and
registrar for both Newco and AMSG after the Distribution
Date.
Distribution-Related
Inquiries.................. If you have questions about UWS before the Distribution
Date, please contact Thomas L. Luljak, Director of Corporate
Communications, at (414) 226-6900.
If you have questions about Newco, also contact Thomas L.
Luljak, Director of Corporate Communications, at (414)
226-6900.
If you have questions about UWS, to be renamed "American
Medical Security Group, Inc." and to be known as AMSG after
the Distribution Date, please contact Cliff A. Bowers, Vice
President of Corporate Communications, at (920) 661-2440.
Principal Business
of Newco................... After the Effective Date, Newco, through its wholly owned
subsidiaries and joint venture arrangements, will be a
leading managed care company with the largest health
maintenance organization ("HMO") membership in Wisconsin and
substantial operations in specialty managed care and other
products, including a large dental HMO, as well as life,
workers' compensation, mental health and other businesses
(collectively, the "MANAGED CARE COMPANIES"), and will
perform management and operational services for companies
engaged in managed care and related services (the
"MANAGEMENT BUSINESS"). The principal corporate offices of
Newco after the Distribution will be 401 West Michigan
Street, Milwaukee, Wisconsin 53203, and its telephone num-
ber will be (414) 226-6900.
Management of Newco.......... After the Effective Date, all of the executive officers of
Newco are expected to be persons who currently serve as
executive officers or other key employees of UWS. All such
persons will resign from their positions as executives of
UWS, so that Newco and AMSG will have no executive officers
in common and none of the executive officers of Newco will
be employees of AMSG. The Board of Directors of Newco will
consist of nine individuals, all of whom currently serve on
the Board of Directors of UWS. Four persons who will be
directors of Newco will continue as directors of AMSG.
Principal Business to be
Retained by AMSG........... After the Effective Date, AMSG's principal business will be
to continue to develop, market and administer small group
insurance products, small group specialty insurance products
and administrative services for small groups ("SMALL GROUP
BUSINESS"). The principal corporate offices of AMSG after
the Distribution will be 3100 AMS Boulevard, Green Bay,
Wisconsin 54313, and its telephone number will be (920)
661-2440.
Management of AMSG........... After the Effective Date, AMSG will be managed by
substantially the same senior management that currently
manages American Medical Security Holdings, Inc., a wholly
owned subsidiary of UWS. After the Effective Date, the AMSG
Board of Directors will consist of four individuals who
currently serve on the Board of Directors of UWS and five
additional individuals.
</TABLE>
6
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<S> <C>
Reasons For the
Distribution............... The Board of Directors of UWS believes that the distribution
of shares of Newco Common Stock will allow Newco's business
and AMSG's business each to be managed and operated more
effectively as independent publicly owned companies. After
the Distribution, the Managed Care Companies will be able to
license Blue Cross and Blue Shield trademarks and
tradenames, and the Managed Care Companies will be better
able to participate in potentially significant joint
ventures and acquisitions. In addition, each of Newco and
AMSG will be able to compensate its management with
Newco-based awards, or AMSG-based awards, as the case may
be, the value of which will depend upon the operating
results of Newco alone, or AMSG alone, as the case may be.
The Board of Directors and management of UWS also believe
that the separation into two public companies will provide
each company with better access to the equity capital
markets and improve each company's capital-raising
efficiency since investors will be better able to assess the
different risk profiles and operating characteristics of
both companies.
Federal Income Tax
Consequences............... The Distribution is conditioned upon the receipt of a
private letter ruling from the IRS ("TAX RULING") to the
effect that, for federal income tax purposes, no gain or
loss will be recognized by (i) UWS upon distribution of the
Distributed Shares, and (ii) holders of shares of UWS Common
Stock upon receipt of Distributed Shares in the
Distribution. [Although the conditions to the Distribution
may be waived by the Board of Directors of UWS, UWS does not
presently intend to waive the Tax Ruling receipt condition.]
Nevertheless, if UWS engages in the Distribution and the
Distribution is held to be taxable, both UWS and UWS
shareholders could recognize income or gain and thus become
liable for the payment of a material amount of income tax.
Conditions to the
Distribution............... The Distribution is subject to the satisfaction or waiver of
certain conditions, including receipt of the Tax Ruling, all
necessary regulatory approvals and all material consents
required to consummate the Distribution. Regardless of
whether the conditions are satisfied, the Distribution may
be abandoned by the Board of Directors of UWS, in its sole
discretion, without the approval of the UWS shareholders, at
any time prior to the Distribution Date.
Restructuring Prior to
the Distribution........... On the Effective Date, UWS will contribute to Newco all of
the stock of the Managed Care Companies, the Management
Business and working capital to support the Management
Business, in exchange for shares of Newco Common
Stock and the assumption by Newco of certain unfunded
employee post-retirement health benefit liabilities, certain
accrued expenses, a $70.0 million loan from Blue Cross &
Blue Shield United of Wisconsin ("BCBSUW") and all other
liabilities relating to the Managed Care Companies and the
Management Business. Immediately thereafter, UWS will own
100% of the issued and outstanding shares of Newco Common
Stock. UWS then will distribute all of the issued and
outstanding shares of Newco Common Stock to its shareholders
on a one-for-one basis.
</TABLE>
7
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<S> <C>
Relationship with AMSG after
the Distribution........... AMSG will not own any shares of Newco Common Stock after the
Distribution, nor will Newco own any shares of AMSG Common
Stock after the Distribution. Newco and UWS have entered
into a Distribution and Indemnity Agreement dated
, 1998 (the "DISTRIBUTION AGREEMENT"), a
Tax Allocation Agreement dated , 1998 (the
"TAX ALLOCATION AGREEMENT") and an Employee Benefits
Agreement dated , 1998 (the "EMPLOYEE
BENEFITS AGREEMENT"), and various other agreements with
respect to employee benefits, management and corporate and
administrative services, reinsurance arrangements and
intellectual property transfers, for the purpose of giving
effect to the Distribution and related matters. The
Distribution Agreement provides for, among other things, (i)
the separation of Newco's business from UWS's other
business; (ii) the terms of mutual non-solicitation
covenants between Newco and AMSG; (iii) indemnification,
subject to certain exceptions, by UWS of Newco against
liabilities arising out of all UWS operations, other than
the operations of Newco; and (iv) indemnification, subject
to certain exceptions, by Newco of UWS against liabilities
arising out of the operations of Newco.
The Tax Allocation Agreement provides for indemnification of
UWS for taxes attributable to Newco prior to the
Distribution. The Employee Benefits Agreement generally
provides that (i) Newco will offer employment to each
employee of UWS (parent company only), and all employees of
UWS's subsidiaries will remain employed by such
subsidiaries; (ii) Newco will assume liability for all
employment-related claims applicable to its employees after
the Effective Date; (iii) Newco will assume sponsorship of,
and all liabilities under, the UWS benefit plans and all
benefit plans at the UWS subsidiary level will remain at
that subsidiary; and (iv) depending on the status of each
option holder, outstanding options to purchase shares of UWS
Common Stock will be converted into options to purchase (a)
shares of Newco Common Stock adjusted to provide equivalent
value, (b) an equal number of shares of Newco Common Stock
and AMSG Common Stock adjusted to provide equivalent value,
or (c) shares of AMSG Common Stock adjusted to provide
equivalent value. In addition, Newco and AMSG will enter
into various agreements to define their continuing business
relationship, consisting principally of certain reinsurance
arrangements between the companies and certain investment
management and other ancillary services to be provided by
Newco to AMSG after the Distribution.
Certain Relationships and
Related Transactions....... Upon completion of the Distribution, BCBSUW will own [37.9%]
of the issued and outstanding shares of UWS Common Stock and
[37.9%] of the issued and outstanding shares of Newco Common
Stock. BCBSUW intends to purchase additional shares of Newco
Common Stock to bring its overall direct and indirect
ownership of Newco to approximately 51% within one year
after the Distribution Date. The purchase price for the
shares of Newco Common Stock
</TABLE>
8
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<S> <C>
which are purchased directly from Newco will be based on an
independent third party appraisal, and may be paid through
the cancellation of a portion or all of the $70.0 million
Newco indebtedness to BCBSUW or in cash. To the extent
BCBSUW purchases shares of Newco Common Stock from Newco,
these purchases may have an adverse effect on Newco's
shareholders, including potential dilution of earnings per
share.
BCBSUW and Newco have entered into Service Agreements
covering sales and marketing services, rental of office
space, computerized data processing, claims processing,
legal, investment, actuarial and other management services.
The company receiving a service is obligated to pay the
provider an amount which varies depending upon the particu-
lar service rendered, determined on either an allocated cost
basis or based upon direct costs. Furthermore, Newco and
AMSG will enter into various agreements to define their
continuing business relationship, consisting principally of
certain reinsurance arrangements between the companies and
certain investment management and other ancillary services
to be provided by Newco to AMSG after the Distribution.
Newco and UWS have agreed to grant registration rights with
respect to shares of Newco Common Stock to two shareholders
who will receive shares of Newco Common Stock in the
Distribution, which rights are identical to registration
rights they have with respect to their shares of UWS Common
Stock. These shareholders also have agreed to voting and
standstill provisions identical to their existing provisions
with respect to shares of UWS Common Stock.
Post-Distribution
Dividend Policy............ The Board of Directors of Newco expects initially to pay an
annual cash dividend of $0.05 per share on the Newco Common
Stock following the Distribution. However, the payment and
level of cash dividends by Newco after the Distribution will
be subject to the discretion of its Board of Directors.
Dividend decisions will be based upon a number of factors,
including the operating results and financial requirements
of Newco.
Anti-Takeover Effects........ Certain provisions of Newco's Articles of Incorporation and
By-Laws, as well as certain provisions of the Wisconsin
Business Corporation Law ("WBCL"), may have the effect of
making more difficult an acquisition of control of Newco in
a transaction not approved by Newco's Board of Directors.
Furthermore, within one year after the Distribution Date,
BCBSUW intends to purchase additional shares of Newco Common
Stock to bring its overall direct and indirect ownership of
Newco to approximately 51%, and therefore an acquisition of
control of Newco in a transaction not approved by BCBSUW
would be difficult.
Risk Factors................. Newco shareholders should carefully consider the matters
discussed under the section entitled "Risk Factors" in this
Information Statement.
</TABLE>
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SUMMARY COMBINED FINANCIAL DATA FOR NEWCO
The following summary combined pro forma and historical financial data of
Newco highlights certain pro forma and historical combined financial data which
should be read in conjunction with the Combined Financial Statements and the pro
forma financial statements included elsewhere in this document. The historical
combined financial information presents information for Newco for the periods in
which it would have operated the Managed Care Companies and the Management
Business of UWS. The historical and pro forma combined financial information
presented below is not necessarily indicative of the results of operations or
financial position that Newco would have reported if it had operated as an
independent company during the periods presented, nor is it indicative of
Newco's future performance as an independent company.
<TABLE>
<CAPTION>
AS OF AND FOR THE
PRO FORMA THREE MONTHS ENDED
AS OF AND FOR THE YEARS ENDED DECEMBER 31, DECEMBER 31, MARCH 31,
----------------------------------------------------- ------------- --------------------
1993 1994 1995 1996 1997 1997 1997 1998
--------- --------- --------- --------- --------- ------------- --------- ---------
(IN THOUSANDS, EXCEPT OPERATING STATISTICS)
STATEMENT OF INCOME DATA: (UNAUDITED) (UNAUDITED)
-------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Premium revenue............ $ 310,503 $ 355,025 $ 466,929 $ 493,092 $ 560,825 $ 560,825 $ 135,433 $ 148,076
Other revenue.............. 7,515 15,997 24,222 27,632 26,046 26,046 6,790 7,121
Investment results......... 10,697 12,050 9,665 19,040 22,238 22,238 4,770 3,961
--------- --------- --------- --------- --------- ------------- --------- ---------
Total revenues......... 328,715 383,072 500,816 539,764 609,109 609,109 146,993 159,158
--------- --------- --------- --------- --------- ------------- --------- ---------
Expenses:
Medical and other
benefits................. 265,446 306,056 416,167 425,258 485,735 485,735 115,441 126,153
Selling, general and
administrative
expenses................. 42,712 57,140 71,434 82,902 92,663 94,283(2) 23,336 24,033
Interest expense........... -- -- -- -- -- 4,892(3) -- --
Other expenses............. 1,040 1,711 3,412 3,709 4,198 4,198 1,285 1,240
--------- --------- --------- --------- --------- ------------- --------- ---------
Total expenses......... 309,198 364,907 491,013 511,869 582,596 589,108 140,062 151,426
--------- --------- --------- --------- --------- ------------- --------- ---------
Income tax expense......... 6,174 5,332 3,709 10,986 9,918 7,482(4) 2,730 2,892
--------- --------- --------- --------- --------- ------------- --------- ---------
Net income................... $ 13,343 $ 12,833 $ 6,094 $ 16,909 $ 16,595 $ 12,519 $ 4,201 $ 4,840
--------- --------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- --------- ------------- --------- ---------
OPERATING STATISTICS:
Medical loss ratio(1)...... 85.8% 86.2% 89.1% 86.2% 86.6% 86.6% 85.7% 85.2%
Selling, general and
administrative expense
ratio(1)................. 10.9% 11.8% 11.0% 11.1% 11.2% 11.2% 11.5% 11.0%
BALANCE SHEET DATA:
Cash and investments....... $ 162,421 $ 154,201 $ 178,926 $ 182,431 $ 176,579 $ 176,579 $ 173,607 $ 190,117
Total assets............... 197,294 216,954 261,523 269,478 266,256 266,256 259,843 279,492
Long-term debt............. -- -- -- -- -- 70,000(5) -- --
Total shareholders'
equity................... 124,536 101,465 120,277 123,882 123,616 53,616(5) 118,850 129,252
<CAPTION>
PRO FORMA
MARCH 31,
-----------
1998
-----------
STATEMENT OF INCOME DATA:
<S> <C>
Revenues:
Premium revenue............ $ 148,076
Other revenue.............. 7,121
Investment results......... 3,961
-----------
Total revenues......... 159,158
-----------
Expenses:
Medical and other
benefits................. 126,153
Selling, general and
administrative
expenses................. 24,438(2)
Interest expense........... 1,219(3)
Other expenses............. 1,240
-----------
Total expenses......... 153,050
-----------
Income tax expense......... 2,285(4)
-----------
Net income................... $ 3,823
-----------
-----------
OPERATING STATISTICS:
Medical loss ratio(1)...... 85.2%
Selling, general and
administrative expense
ratio(1)................. 11.0%
BALANCE SHEET DATA:
Cash and investments....... $ 190,117
Total assets............... 279,492
Long-term debt............. 70,000(5)
Total shareholders'
equity................... 59,252(5)
</TABLE>
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(1) Ratios are based on premium revenues and premium revenue-related selling,
general and administrative expenses of $33,996,000, $42,022,000 $51,133,000,
$54,861,000 $62,808,000, $15,580,000 and $16,336,000 for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 and the three months ended
March 31, 1997 and 1998, respectively.
(2) Reflects pro forma adjustment for administrative expenses associated with
staffing and registration fees. See "Pro Forma Combined Financial
Information of Newco."
(3) Reflects pro forma adjustment for interest expense on assumed debt. See "Pro
Forma Combined Financial Information of Newco."
(4) Reflects pro forma adjustment for the tax effect of adjustments described in
(2) and (3), above. See "Pro Forma Combined Financial Information of Newco."
(5) Reflects pro forma adjustment for assumed debt. See "Pro Forma Combined
Financial Information of Newco."
10
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this Information
Statement are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The forward-looking statements may be
significantly impacted by risks and uncertainties and are made pursuant to the
safe harbor provisions of such Act. There can be no assurance that either UWS or
Newco can duplicate each of its respective past performance or that expected
future results will be achieved. Readers are cautioned that a number of factors
could adversely affect Newco's and/or AMSG's ability to achieve results,
including the effects of health care reform, the continuation and renewal of
joint ventures, and the effects of other general business conditions, including
competition, medical cost trends, changes in reserve estimates, terms of
provider contracts, premium rate changes, government regulation, capital
requirements, administrative costs, general economic conditions and the
retention of key employees.
INTRODUCTION
On , 1998, the Board of Directors of UWS declared a
dividend, payable to holders of record of UWS Common Stock at the close of
business on , 1998 (the "RECORD DATE"), of one share of Newco
Common Stock for each share of UWS Common Stock. The Distribution will occur on
or about , 1998 (the "DISTRIBUTION DATE"). It is expected that
certificates representing shares of Newco/UWS Common Stock will be mailed to
holders of shares of UWS Common Stock on or about the Distribution Date. As a
result of the Distribution, all of the shares of Newco Common Stock owned by UWS
will be distributed by UWS to holders of shares of UWS Common Stock. UWS will be
renamed "American Medical Security Group, Inc.," on the Effective Date, and will
be traded on the NYSE under the symbol "AMZ" after the Distribution Date, and
Newco will be renamed "United Wisconsin Services, Inc." on the Effective Date
and will be traded on the NYSE under the symbol "UWZ" after the Distribution
Date.
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
The Board of Directors of UWS has determined that it is in the best interest
of UWS, Newco and the holders of UWS Common Stock to undertake the Distribution,
thereby separating Newco's business from UWS's other businesses. The
Distribution will allow the Managed Care Companies to license the Blue Cross and
Blue Shield trademarks and tradenames ("BLUE SERVICE MARKS"), which are owned by
BlueCross and BlueShield Association. None of the Managed Care Companies
currently are eligible to license the Blue Service Marks, because two of the
licensing requirements are not met under the current UWS structure. The
applicable BlueCross and BlueShield Association rules provide that a company can
license the Blue Service Marks only if (i) a Blue Cross and Blue Shield Plan
("BLUE PLAN") "controls" the company (meaning that a Blue Plan must directly or
indirectly own more than 50% of the stock of the company and must have
operational control over the company), and (ii) 80% of the total licensable
combined dollar volume of health insurance sold by a Blue Plan and its
controlled affiliates in a defined geographic area actually is licensed. Under
the current ownership structure, the 50% control requirement is not met because
BCBSUW only owns [37.9%] of the shares of UWS Common Stock (and thus,
indirectly, [37.9%] of the Managed Care Companies). After the Distribution, the
50% test will be met because BCBSUW intends to purchase additional shares of
Newco Common Stock so that BCBSUW directly or indirectly owns approximately 51%
of Newco. Furthermore, since BCBSUW will continue to own less than 50% of UWS,
the Small Group Business will not have to be considered in applying the 80%
test. Accordingly, the 80% test will be met after the Distribution and after the
Compcare Health Services Insurance Corporation ("COMPCARE")products are licensed
because the combined licensed products of BCBSUW and the Managed Care Companies
will exceed 80% of the total volume of medical business of BCBSUW and all of its
controlled affiliates.
11
<PAGE>
The Distribution also should enhance the ability of the Managed Care
Companies to participate in joint ventures and acquisitions currently
unavailable to them. The presence of the Small Group Business within the UWS
group has had a material adverse effect on the ability of the Managed Care
Companies to pursue joint ventures with third parties, primarily due to
competitive concerns of the proposed joint venture partners and acquisition
targets. The Distribution, by separating the Managed Care Companies from the
Small Group Business, would eliminate many of these concerns.
UWS also believes the Distribution will achieve a more favorable valuation
of the businesses of AMSG and Newco for the current holders of shares of UWS
Common Stock and the future holders of shares of Newco Common Stock. The
Distribution will permit the financial community to evaluate better the separate
strengths of each company and to compare the performance of each company with
comparable companies in similar lines of business, which is expected to increase
each company's access to equity and debt markets. In addition, the Distribution
will allow current holders of shares of UWS Common Stock and potential investors
to direct their investment decisions to each of the two separate lines of
business.
The Board of Directors of UWS also believes that Newco's growth and AMSG's
growth will be better facilitated in several ways as separate public companies.
Among the anticipated benefits is the expectation that, as separate public
companies, each of Newco and AMSG will be able to obtain needed financing on
more favorable terms than its businesses now together. In addition, UWS believes
that it will be better able to attract and motivate existing and new key
employees by providing stock-based incentive compensation tied directly to the
results of their efforts as reflected in the market price of the shares of Newco
Common Stock or the AMSG Common Stock, as the case may be. The establishment of
the shares of Newco Common Stock as a separate, publicly traded equity security
should provide both Newco and AMSG enhanced acquisition opportunities by using
shares of Newco Common Stock or AMSG Common Stock, as the case may be, as
consideration. Finally, the Board of Directors of UWS expects that the
Distribution will enable capital markets to better recognize and evaluate the
merits of each of Newco and AMSG as separate public companies, enhancing the
likelihood that each will achieve appropriate market recognition of its
performance and prospects.
For the reasons stated above, the UWS Board of Directors believes that the
Distribution is in the best interests of UWS and its shareholders.
RESTRUCTURING PRIOR TO THE DISTRIBUTION
In order to effect the Distribution, pursuant to the Distribution Agreement
and subject to the terms and conditions thereof, on the Effective Date (i) UWS
will contribute all of the outstanding capital stock of the Managed Care
Companies to Newco; (ii) UWS will contribute certain other assets utilized by
UWS and its subsidiaries in the Management Business to Newco; (iii) UWS will
contribute working capital to Newco to support the Management Business; (iv)
Newco will issue shares of Newco Common Stock to UWS; (v) Newco will
assume certain employee benefit plan liabilities associated with the operation
of such contributed businesses; (vi) Newco will assume a $70.0 million note
obligation of UWS to BCBSUW; and (vii) Newco will assume certain accrued
liabilities of UWS. The "MANAGED CARE COMPANIES" means the following companies
and their subsidiaries: Compcare; Valley Health Plan, Inc. ("VALLEY"); HMO-W,
Inc.; Hometown Insurance Services, Inc.; United Wisconsin Insurance Company;
United Heartland Life Insurance Company; Meridian Resource Corporation; Meridian
Managed Care, Inc.; Meridian Marketing Services, Inc.; United Wisconsin
Proservices, Inc.; United Heartland, Inc.; CNR Health, Inc.; Unity Health Plans
Insurance Corporation ("UNITY"); and Heartland Dental Plan, Inc. The "MANAGEMENT
BUSINESS" means the management and operational services performed by UWS for
companies engaged in managed care and related services, including product
development, actuarial, legal, marketing, finance, accounting, tax, public
relations, executive management and human resources services.
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MANNER OF EFFECTING THE DISTRIBUTION
UWS will effect the Distribution by delivering all of the shares of Newco
Common Stock it owns (approximately shares) to the Distribution
Agent, Firstar Trust Company, on the Distribution Date for distribution to the
holders of UWS Common Stock as of the close of business on the Distribution
Date. The Distribution will be made on the basis of one share of Newco Common
Stock for each share of UWS Common Stock held as of the close of business on the
Distribution Date. The shares of Newco Common Stock will be fully paid and
nonassessable (except for certain statutory liabilities which may be imposed by
Section 180.0622 of the WBCL for unpaid employee wages) and the holders thereof
will not be entitled to preemptive rights. Upon completion of the Distribution,
there will be approximately shares of Newco Common Stock
outstanding. No portion of the shares that will be issued and outstanding upon
completion of the Distribution is being, or has been proposed to be, publicly
offered by Newco. All of the shares of Newco Common Stock will be immediately
eligible for sale in the public market without restriction under the Securities
Act, except that any shares owned by affiliates of Newco generally may only be
sold in compliance with the applicable provisions of Rule 144 promulgated under
the Securities Act of 1933, as amended ("SECURITIES ACT").
It is expected that certificates representing shares of Newco Common Stock
will be mailed to holders of shares of UWS Common Stock beginning on or about
, 1998, or if appropriate, the Distribution Agent will credit
the brokerage accounts of UWS shareholders on or about , 1998.
UWS shareholders will not be required to pay for shares of Newco Common Stock
received in the Distribution or to surrender shares of UWS Common Stock to
receive shares of Newco Common Stock. However, UWS shareholders will be asked to
deliver their stock certificates representing shares of AMSG Common Stock after
the Distribution to Firstar Trust Company, so that the AMSG shareholders can be
re-issued stock certificates in the name of "American Medical Security Group,
Inc.," the new name of AMSG after the Distribution. Shortly after the
Distribution Date, Firstar Trust Company will mail to all AMSG shareholders a
notice to this effect, along with letters of instruction to effectuate this
exchange. No vote of UWS shareholders is required to approve the Distribution,
and UWS shareholders have no dissenters' rights in connection with the
Distribution; however, the UWS shareholders did approve an amendment to its
Articles of Incorporation to change its name to "American Medical Security
Group, Inc.," effective on the Effective Date.
RESULTS OF THE DISTRIBUTION
After the Distribution, Newco and AMSG will be separate public companies.
Immediately after the Distribution, shareholders of UWS will own all of the
outstanding shares of Newco Common Stock, and Newco expects to have
approximately holders of record of shares of Newco Common Stock and
shares of Newco Common Stock outstanding. The Distribution will not
affect the number of outstanding shares of AMSG Common Stock or any rights of
holders of shares of AMSG Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The Distribution is intended to qualify as a tax-free distribution under
Section 355 of the Internal Revenue Code of 1986, as amended (the "CODE") and is
conditioned upon receipt of the Tax Ruling to that effect from the IRS. UWS has
applied to the IRS for the Tax Ruling in which it has requested a ruling
generally to the effect that, among other things:
1. No gain or loss will be recognized by (and no amount will otherwise be
included in the income of) UWS, Newco or UWS shareholders on their
receipt of Distributed Shares.
2. The holding period of the Distributed Shares received by UWS
shareholders will include the holding period of the shares of UWS Common
Stock with respect to which the Distribution will
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be made, provided that such shares of UWS Common Stock are held as a
capital asset on the Distribution Date.
3. The basis of the shares of AMSG Common Stock and the Distributed Shares
in the hands of AMSG shareholders after the Distribution will be the same
as the aggregate basis of the shares of UWS Common Stock in the hands of
UWS shareholders immediately before the Distribution. Such basis will be
allocated among the shares of AMSG Common Stock and the Distributed
Shares in proportion to the fair market value of each at the close of
trading on the day after the Distribution Date.
Treasury regulations under Section 355 of the Code require that each UWS
shareholder who receives Distributed Shares pursuant to the Distribution attach
a statement to such shareholder's federal income tax return for the taxable year
in which such stock is received, which statement shows the applicability of
Section 355 of the Code to the Distribution. UWS will provide its shareholders
with the information necessary to comply with this requirement.
The Tax Ruling will be based on certain factual representations and
assumptions by UWS and Newco. Neither UWS nor Newco is aware of any present
facts or circumstances which should cause such representations and assumptions
to be untrue. However, certain extraordinary purchases of shares of UWS Common
Stock (events which are not within the control of UWS or Newco) could cause the
Distribution not to qualify as tax-free. Under the Tax Allocation Agreement, if
as a result of the acquisition of all or a portion of the capital stock or
assets of either company the Distribution fails to qualify as a tax-free
distribution under Section 355 of the Code, then UWS or Newco, as the case may
be, will be liable for any and all increases in Tax (as defined in the Tax
Allocation Agreement) attributable thereto. See "Agreements Between UWS and
Newco."
If the Distribution fails to qualify as a tax-free distribution for federal
income tax purposes, a holder of shares of AMSG Common Stock who receives shares
of Newco Common Stock pursuant to the Distribution would be treated as having
received a distribution equal to the fair market value of the shares of Newco
Common Stock received on the Distribution Date. Such distribution would be
taxable to such shareholder as a dividend to the extent of UWS's current and
accumulated earnings and profits. Any excess first would be treated as a
non-taxable reduction in the tax basis in the shares of UWS Common Stock held by
the shareholder and thereafter as capital gain from the sale or exchange of such
shares of UWS Common Stock (assuming that the shares of UWS Common Stock are
held as a capital asset). The determination of a corporation's earnings and
profits requires complex factual and legal analyses; moreover, the amount of a
corporation's current earnings and profits cannot be determined until the close
of its taxable year. UWS believes, based upon present estimates of its current
and accumulated earnings and profits, that the entire distribution would be
treated as a dividend. In addition, a holder's tax basis in the shares of Newco
Common Stock received pursuant to such a taxable distribution would equal its
fair market value on the Distribution Date, and the holding period of such stock
would begin the day after the Distribution Date. A holder's tax basis and
holding period of shares of UWS Common Stock would be unaffected by the
Distribution. UWS would recognize a gain upon the Distribution equal to the
excess of the fair market value of the Distributed Shares over UWS's tax basis
in the Distributed Shares.
THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTION IS FOR GENERAL INFORMATION ONLY AND MAY NOT APPLY TO UWS
SHAREHOLDERS WHO ACQUIRED THEIR SHARES IN CONNECTION WITH THE GRANT OF
RESTRICTED STOCK OR OTHERWISE AS COMPENSATION, WHO ARE NOT CITIZENS OR RESIDENTS
OF THE UNITED STATES, OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER
THE CODE. ALL UWS SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE
APPLICATION OF LOCAL, STATE AND FOREIGN TAX LAWS.
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FUTURE MANAGEMENT OF NEWCO
Following the Effective Date, Newco intends to operate its businesses
substantially in the manner in which it has been operated by UWS in the past.
All of the executive officers of Newco are expected to be persons who currently
serve as officers or other key employees of UWS. See "Management of Newco."
LISTING AND TRADING OF SHARES OF UWS COMMON STOCK
Between the Effective Date and the Distribution Date, shares of UWS Common
Stock will continue to trade on a regular basis and shares of AMSG Common Stock
may trade on a when-issued basis before the Distribution Date, reflecting an
assumed value for the shares of AMSG Common Stock as if the Distribution had
already occurred. When-issued trading in the shares of AMSG Common Stock, if
available, could last from approximately the Effective Date through the
Distribution Date. If a shareholder trades in the when-issued market, he or she
will have no obligation to transfer to a purchaser of shares of UWS Common Stock
the shares of Newco Common Stock such shareholder receives in the Distribution.
If a shareholder trades in the regular market, the shares of UWS Common Stock
traded will be accompanied by due bills representing the shares of Newco Common
Stock to be distributed in the Distribution.
If a when-issued market for shares of AMSG Common Stock develops, an
additional listing for shares of AMSG Common Stock, identifiable by the trading
symbol "AMZwi," will appear on the NYSE. Differences may exist between the
combined value of when-issued shares of Newco Common Stock plus when-issued
shares of AMSG Common Stock and the price of the shares of UWS Common Stock
during this period. Until the market has fully analyzed the operations of UWS
without the operations of Newco, the prices at which the shares of UWS Common
Stock trade may fluctuate significantly.
LISTING AND TRADING OF SHARES OF NEWCO COMMON STOCK
There is not currently a public market for the shares of Newco Common Stock.
However, the shares of Newco Common Stock have been approved for listing on the
NYSE, upon official notice of issuance, under the symbol "UWZ." A when-issued
trading market for the shares of Newco Common Stock is expected to develop on or
about the Effective Date. In "when-issued" trading, contracts for the purchase
and sale of shares of stock are made prior to the issuance of such shares in the
same manner as currently issued shares, except that when-issued contracts are
settled by delivery of and payment for the shares on a date chosen by the
particular exchange on which such shares are to be listed. Ordinarily, in
connection with a distribution of stock such as described in this Information
Statement, the date fixed for settlement of when-issued contracts relating to
such stock is the third business day after distribution of such stock.
Shareholders who may wish to effect a when-issued trade in shares of Newco
Common Stock should consult their brokers for additional details. Prices at
which shares of Newco Common Stock may trade prior to the Distribution on a
"when-issued" basis or after the Distribution cannot be predicted. Until shares
of Newco Common Stock are fully distributed and an orderly market develops, the
prices at which trading in such stock occurs may fluctuate significantly. The
prices at which shares of Newco Common Stock trade will be determined by the
marketplace and may be influenced by many factors, including, among others, the
depth and liquidity of the market for shares of Newco Common Stock, investor
perception of Newco and of the industries in which Newco operates, Newco's
dividend policy and general economic and market conditions. During the period
when the shares of Newco Common Stock is subject to when-issued trading, its
symbol on the NYSE will be "UWZwi." Even though when-issued trading may develop,
none of these trades would settle prior to the Distribution Date, and if the
Distribution does not occur, all when-issued trading will be null and void.
Newco initially will have approximately shareholders of record
and an additional beneficial holders, based on the number of record
holders and the estimated number of beneficial holders of shares of UWS Common
Stock at , 1998, and approximately shares of Newco
Common Stock will be outstanding. See "Management of Newco" and "Newco Benefit
Plans Following the Distribution."
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It is anticipated that certain investment banking firms will make a market
in shares of Newco Common Stock following the Distribution. Any such market
making activity may be discontinued at any time, without notice. There can be no
assurance that an active trading market in shares of Newco Common Stock will
develop, or, if a market does develop, at what prices shares of Newco Common
Stock will trade.
Except for securities received by persons who may be deemed to be
"affiliates" of Newco under the Securities Act, the shares of Newco Common Stock
distributed to holders of shares of UWS Common Stock in the Distribution will be
freely transferable. Persons who may be deemed to be affiliates of Newco after
the Distribution generally include individuals or entities that control, are
controlled by, or are under common control with Newco and may include certain
officers and directors of Newco as well as principal shareholders of Newco.
Persons who are affiliates of Newco will be permitted to sell their shares of
Newco Common Stock only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemption afforded by Rule 144 promulgated under the
Securities Act. See also "Certain Relationships and Related Party Transactions"
for a description of certain registration rights which have been granted
relating to the shares of Newco Common Stock.
The Transfer Agent and Registrar for the shares of Newco Common Stock will
be Firstar Trust Company, Milwaukee, Wisconsin.
ACCOUNTING TREATMENT
Newco will account for the assets and liabilities contributed by UWS at the
historical values at which they were carried by UWS prior to the Distribution.
FINANCIAL ADVISOR
UWS has retained Smith Barney Inc. and Salomon Brothers Inc. (together,
"SALOMON SMITH BARNEY"), to act as its financial advisor in connection with the
Distribution. Pursuant to an engagement letter dated February 9, 1998, Salomon
Smith Barney has been paid a retainer fee of $100,000, and will be paid a fee of
$2.0 million upon consummation of the Distribution. UWS has agreed to reimburse
Salomon Smith Barney for its out-of-pocket expenses (including legal fees)
incurred in connection with its engagement, up to $75,000. UWS also has agreed
to indemnify Salomon Smith Barney, their affiliates and their directors,
officers, employees, agents and controlling persons against certain liabilities
relating to or arising out of its engagement, including liabilities under the
federal securities laws. Finally, UWS has agreed that Salomon Smith Barney shall
have a right of first refusal until February 9, 1999, to act as lead underwriter
or exclusive agent in connection with any underwritten public offering, private
placement or other financing after the Distribution involving AMSG.
DIVIDEND REINVESTMENT PLANS
UWS has a dividend reinvestment and direct stock purchase plan ("UWS
DIVIDEND REINVESTMENT PLAN") pursuant to which shareholders may invest in shares
of UWS Common Stock by reinvesting quarterly cash dividends or by direct cash
investments. Shareholder accounts in the UWS Dividend Reinvestment Plan also
include fractional interests in shares of UWS Common Stock. Shares of Newco
Common Stock will be distributed to participants in the UWS Dividend
Reinvestment Plan on the same basis as other beneficial owners. Fractional
interests in Distributed Shares will be issued in respect of fractional
interests in shares of UWS Common Stock held under the UWS Dividend Reinvestment
Plan. A comparable service will be established for Newco which will provide for
reinvestment of dividends on the shares of Newco Common Stock and the direct
purchase of shares of Newco Common Stock, under which accounts will be
established for participants in the UWS Dividend Reinvestment Plan. Shares of
Newco Common Stock credited as a result of the Distribution to participants in
the UWS Dividend Reinvestment Plan will be transferred to the participants'
accounts in the new service.
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UWS AND NEWCO BENEFIT PLANS
On the Effective Date, Newco generally will assume sponsorship of, and all
liabilities under, all nonqualified compensation plans, retirement plans,
supplemental retirement plans, deferred compensation plans (except for
liabilities relating to Mr. Samuel V. Miller), welfare plans, benefit plans and
all other plans, programs, policies and arrangements sponsored by UWS (or
jointly sponsored by UWS and BCBSUW) and in effect prior to the Effective Date,
and UWS will cease to have any liability or obligation to individuals who are or
become employees of Newco or one of its subsidiaries under any UWS benefit
plans, programs or practices. All benefit plans sponsored by UWS subsidiaries
before the Effective Date will remain sponsored by such subsidiaries after the
Effective Date. Outstanding options to purchase shares of UWS Common Stock will
be converted as set forth under "--Treatment of Options in the Distribution,"
below. Converted options to purchase shares of Newco Common Stock held by
persons who will be executive officers, directors or employees of Newco will be
assumed by Newco under a newly established equity incentive plan which will be
similar to UWS's Equity Incentive Plan. See "Executive Compensation," "Newco
Benefit Plans Following the Distribution" and "Agreements Between UWS and
Newco."
TREATMENT OF OPTIONS IN THE DISTRIBUTION
Holders of vested stock options to purchase UWS Common Stock ("VESTED
OPTIONS") will be entitled to exercise such Vested Options prior to the Record
Date and thereafter to receive shares of Newco Common Stock as part of the
Distribution. Holders of Vested Options who do not exercise such options prior
to the Record Date, together with holders of unvested stock options to purchase
shares of UWS Common Stock ("UNVESTED OPTIONS"), and who will be executive
officers, directors or employees of Newco following the Distribution generally
will have such unexercised Vested Options and such Unvested Options converted to
equivalent vested and unvested stock options to purchase shares of Newco Common
Stock issued under the Newco/UWS, Inc. Equity Incentive Plan. As a result of the
conversion to vested and unvested stock options to purchase shares of Newco
Common Stock, the Vested Options and Unvested Options to purchase shares of UWS
Common Stock will be cancelled. The Newco stock options will have the same ratio
of exercise price per option to the market value per share, the same aggregate
difference between market value and exercise price and the same vesting
provisions, option periods and other terms and conditions as the UWS options
they replace. Only the number of options and the exercise price will be
adjusted. Holders of Vested and Unvested Options held by persons who will be
employees of AMSG following the Distribution will have such options converted to
equivalent vested and unvested stock options to purchase shares of AMSG Common
Stock.
Vested Options and Unvested Options held by certain individuals will be
treated differently than set forth above. Each option held by Messrs. Hilliard,
Weyers, Hefty and Mordy and Ms. Hanson to purchase one share of UWS Common Stock
will be converted into an option to purchase one share of AMSG Common Stock and
an option to purchase one share of Newco Common Stock, with adjustments to the
exercise prices of each to provide equivalent value. Options held by Mr. Miller
granted in December 1995 will be converted into options to purchase shares of
AMSG Common Stock and Newco Common Stock, with the exercise prices for the
converted options adjusted in the same manner as noted above to provide
equivalent value. All remaining options held by Mr. Miller will be converted
into equivalent options to purchase shares of AMSG Common Stock and adjusted by
increasing the number of shares of AMSG Common Stock subject to the option and
decreasing the exercise price per share of the option to provide equivalent
value. See "Executive Compensation--Treatment of UWS Options and SARs as a
Result of the Distribution."
INTERESTS OF CERTAIN PERSONS IN THE DISTRIBUTION
Individuals who are directors or executive officers of UWS, directors or
executive officers of AMSG after the Distribution and directors or executive
officers of Newco who currently own shares of UWS
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Common Stock will receive shares of Newco Common Stock in connection with the
Distribution on the same terms and conditions as all of the other shareholders
of UWS. In addition, such individuals who hold options to purchase shares of UWS
Common Stock will receive options to purchase shares of Newco Common Stock,
shares of AMSG Common Stock, or shares of Newco Common Stock and AMSG Common
Stock, as the case may be. For certain information concerning the management and
executive compensation arrangements of Newco after the Distribution, see
"Management of Newco" and "Newco Benefit Plans Following the Distribution."
BANK CREDIT FACILITIES AND ASSUMPTION OF CERTAIN INDEBTEDNESS
After the Distribution, Newco and several of its subsidiaries will
participate with BCBSUW in a bank line of credit which permits aggregate
borrowings of up to $30.0 million. Interest on borrowings under the line of
credit will be based upon the London Interbank Offered Rate ("LIBOR") of M&I
Marshall & Ilsley Bank, N.A.
In connection with the Distribution, Newco will assume a debt obligation of
UWS to BCBSUW in the principal amount of $70.0 million. On October 30, 1996, UWS
borrowed $70.0 million from BCBSUW to fund the cash portion of the merger
consideration in connection with the merger of American Medical Security Group,
Inc. into UWS. UWS pledged the common stock of certain of its subsidiaries as
collateral for the loan. Interest is payable quarterly at a rate equal to LIBOR
plus 125 basis points, adjusted quarterly. The entire principal balance is due
October 30, 1999.
CONDITIONS; TERMINATION
The Distribution is subject to the satisfaction or waiver of certain
conditions as set forth in the Distribution Agreement. Regardless of whether the
conditions are satisfied, the UWS Board of Directors, in its sole discretion,
without approval of the UWS shareholders, may abandon the Distribution at any
time prior to the Effective Date of the Distribution. See "Agreements Between
UWS and Newco."
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by UWS solely to provide
information to holders of shares of UWS Common Stock who will receive shares of
Newco Common Stock in the Distribution. It is not, and is not to be construed
as, an inducement or encouragement to buy or sell any securities of UWS or
Newco. The information contained in this Information Statement is believed by
UWS to be accurate as of the date set forth on its cover. Changes may occur
after that date, and neither UWS nor Newco will update the information except in
the normal course of its respective public disclosure practices.
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RISK FACTORS
Shareholders should carefully consider and evaluate all of the information
set forth in this Information Statement, including the risk factors listed below
relating to Newco and its operations. This section does not discuss risk factors
which may be applicable to AMSG or its business or operations after the
Distribution, or to an investment in shares of AMSG Common Stock.
OPERATING HISTORY AND FUTURE PROSPECTS
Newco was formed for the purpose of effecting the Distribution. Newco does
not have an operating history as an independent public company, but will own and
conduct the operations of the Managed Care Companies and the Management Business
of UWS. On an historical basis, in each of the three years ended December 31,
1997, Newco's businesses were profitable. There can be no assurance, however,
that Newco's operations will be profitable in 1998 or future years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITED RELEVANCE OF HISTORICAL COMBINED FINANCIAL INFORMATION OF NEWCO
The historical combined financial information may not necessarily reflect
the results of operations, financial position and cash flows of Newco in the
future or the results of operations, financial position and cash flows had Newco
operated as an independent company during the periods presented. The combined
financial information included herein does not reflect any changes that may
occur in the funding or operations of Newco as a result of the Distribution.
HEALTH CARE COSTS AND HEALTH CARE INDUSTRY
Newco's profitability will depend in part on accurately predicting health
care costs and controlling future health care costs through underwriting
criteria, utilization management, product design and negotiation of favorable
provider and hospital contracts. Changes in utilization rates, demographic
characteristics, health care practices, inflation, new technologies, clusters of
high-cost cases, continued consolidation of physician, hospital and other
provider groups, the regulatory environment and numerous other factors affecting
health care costs may adversely affect Newco's ability to predict and control
health care costs as well as Newco's financial condition or results of
operations. Periodic renegotiation of hospital contracts and continued
consolidation of physician, hospital and other provider groups may result in
increased health care costs or limit Newco's ability to control such costs.
A large portion of the revenue received by Newco is, in turn, expended by
Newco to pay the costs of health care services or supplies delivered to its
members. The total health care costs incurred by Newco are affected by the
number and scope of individual services rendered and the cost of each service.
Much of Newco's premium revenue is set in advance of the actual delivery of
services and the related incurring of the cost, usually on a prospective annual
basis. While Newco attempts to base the premiums it charges at least in part on
its estimate of expected health care costs over the fixed premium period,
competition, regulations and other circumstances may limit Newco's ability to
fully base premiums on estimated costs. In addition, many factors may and often
do cause actual health care costs to exceed those costs estimated and reflected
in premiums. These factors may include increased utilization of services,
increased cost of individual services, catastrophes, epidemics, seasonality, new
mandated benefits or other regulatory changes and insured population
characteristics.
In addition to the challenge of controlling health care costs, Newco faces
competitive pressure to contain premium prices. While managed health plans
compete on the basis of many factors, including service and the quality and
depth of provider networks, Newco expects that price will continue to be a
significant basis of competition. Fiscal concerns regarding the continued
viability of programs such as Medicare and Medicaid may cause decreasing
reimbursement rates for government-sponsored programs. Newco's financial
condition or results of operations would be adversely affected by significant
premium
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decreases by any of its major competitors or by any limitation on Newco's
ability to increase or maintain its premium levels.
Newco, like HMOs and health insurers generally, excludes certain health care
services from coverage under its managed care benefit plans. In the ordinary
course of business, Newco is subject to the claims of its members from decisions
to restrict reimbursement for certain treatments. The loss of even one such
claim, if it were to result in a significant punitive damage award, could have a
material adverse effect on Newco's financial condition or results of operations.
In addition, the risk of potential liability under punitive damage theories may
significantly increase the difficulty of obtaining reasonable settlements of
coverage claims. The financial and operational impact that such evolving
theories of recovery may have on the managed care industry generally, or Newco
in particular, is presently unknown.
The managed care industry is labor intensive and its profit margin is low.
Hence, it is 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 Newco.
Competitive price pressures in the group health insurance industry, which
generally result from the entry and exit of health care companies in the
marketplace, historically have resulted in pricing and profitability cycles. The
extent to which recent structural changes in the managed health care and health
insurance industry have altered cyclical patterns is uncertain. There can be no
assurance that cyclical patterns will not adversely affect Newco in the future.
DEPENDENCE UPON HEALTH CARE PROVIDERS AND EMPLOYER GROUPS
One of the significant techniques Newco uses to manage health care costs and
utilization and monitor the quality of care being delivered to its customers and
members is contracting with physicians, hospitals and other providers. In any
particular market, providers could refuse to contract with Newco, demand higher
payments or take other actions which could result in higher health care costs or
less desirable products for customers and members.
In some markets, certain providers, particularly hospitals,
physician/hospital organizations or multi-specialty physician groups, may have
significant market positions or even monopolies. Many of these providers may
compete directly with Newco. If such providers refuse to contract with Newco or
utilize their market position to negotiate favorable contracts or place Newco at
a competitive disadvantage, Newco's ability to market its products and services
or to be profitable in those markets could be adversely affected.
The Managed Care Companies' contracts with its health care providers and
employer groups are renewable periodically. There can be no assurance Newco will
be able to continue to renew these contracts on acceptable terms, nor can there
be any assurance Newco will not experience a decline in enrollment within its
employer groups. The Managed Care Companies' profitability and its ability to
expand will be dependent upon its ability to attract and retain qualified
physicians, hospitals and other health care providers at competitive rates. For
the year ended December 31, 1997, four medical groups and hospitals accounted
for 23.9% of claims and capitation expense.
The Managed Care Companies' business is dependent upon its ability to obtain
and maintain group benefit agreements with employer groups. As of December 31,
1997, the Managed Care Companies had contractual relationships with 3,574 groups
for medical coverage, seven of which accounted for approximately 40.6% of the
Managed Care Companies' total earned premiums.
JOINT VENTURE ARRANGEMENTS
Approximately 33.4% of Newco's total earned premiums in 1997 and 14.4% of
Newco's 1997 net income were attributable to the business sold through Newco's
joint venture arrangements relating to Valley and Unity. Newco's joint venture
agreement relating to Valley was renewed through January 1,
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2000, and can be renewed for up to an additional three-year term, and Newco's
joint venture agreements relating to Unity has a ten year term through November
1, 2004; however, these agreements contain certain buyback options. The
continued success of Newco's joint ventures will depend to a significant degree
on the mutuality of interest between Newco and its joint venture partners. The
termination or a material modification of Newco's current joint venture
relationships or changes in the business of its joint venture arrangements could
have a material adverse effect on Newco's profitability.
One of Newco's joint venture partners in Valley, Midelfort Clinic, Ltd.
("MIDELFORT"), has an option to purchase Valley on December 31, 1999 for
Valley's net equity plus $400,000. If Midelfort exercises this repurchase
option, Newco would thereafter have no ongoing interest in Valley, and would
lose all of the earned premiums associated therewith. One of Newco's joint
venture partners in Unity, Community Health Systems, LLC ("CHS"), has the right
to repurchase a portion of the Unity business and the Unity legal entity for the
book value of such business plus $500,000 on either November 1, 1999 or November
1, 2004. If CHS exercises this repurchase option, Newco would need to transfer
the remaining Unity business to one of its other managed care companies. The
other joint venture partner, University Health Care, Inc. ("UHC"), has the
option to repurchase the remainder of the Unity business for the book value of
such business plus $500,000 on either November 1, 1999 or November 1, 2004. Any
exercise of either or both of these repurchase options relating to Unity would
result in Newco losing the premium revenues attributable to that business. In
addition, the exercise of any of these repurchase options would be deemed a
taxable event to Newco.
PHARMACEUTICAL COSTS
The costs of pharmaceutical products and services are increasing faster than
the costs of other medical products and services. Thus, the Managed Care
Companies face ever higher pharmaceutical expenses. Though Newco's managed care
operations endeavor to keep pharmaceutical costs low for the Managed Care
Companies, there can be no assurances that Newco will be able to do so in the
face of rapidly rising prices. Also, statutory and regulatory changes may
significantly alter Newco's ability to manage pharmaceutical costs through
restricted formularies of products available to Newco's health plan members.
GOVERNMENT PROGRAMS AND REGULATION
Newco's business is subject to extensive federal and state laws and
regulations, including financial requirements, licensing requirements,
enrollment requirements and periodic examinations by governmental agencies. The
laws and rules governing Newco's business and interpretations of those laws and
rules are subject to frequent change. Existing or future laws and rules could
force Newco to change how it does business and may restrict Newco's revenue
and/or enrollment growth and/or increase its health care and administrative
costs. In particular, the Managed Care Companies are subject to regulations
relating to cash reserves, minimum net worth, premium rates, approval of policy
language and benefits, restrictions on the amount of dividends and other
distributions that can be paid by certain of Newco's subsidiaries without prior
approval or notification, the granting and revoking of licenses to transact
business, trade practices, premium rate regulation, underwriting standards,
policy forms, claims payment, licensing of agents and brokers, the amount and
type of investments that Newco may hold, minimum reserve and surplus
requirements, risk-based capital requirements and compelled participation in,
and assessments in connection with, risk-sharing pools and guaranty funds. Such
regulation is intended primarily to protect policyholders rather than investors.
Although such regulations have not significantly impeded the growth of Newco's
business to date, there can be no assurance that Newco will be able to continue
to obtain or maintain required governmental approvals or licenses or that
regulatory changes will not have a material adverse effect on Newco's business.
Delays in obtaining or failure to obtain or maintain such approvals could
adversely affect Newco's revenue or the number of its members or could increase
costs.
A portion of Newco's revenues relate to federal, state and local government
health care coverage programs, such as the Medicaid program. Such contracts
carry certain risks such as higher comparative
21
<PAGE>
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. Such risk contracts generally are subject to
frequent change, including changes which may reduce the number of persons
enrolled or eligible, reduce the revenue received by Newco or increase Newco's
administrative or health care costs under such programs. In the event government
reimbursement were to decline from projected amounts, Newco's failure to reduce
the health care costs associated with such programs could have a material
adverse effect upon Newco's business. Changes to such government programs in the
future may also affect Newco's willingness to participate in such programs.
Statutory capital and surplus requirements vary based upon the types of
risks underwritten and the nature of the provider contracts. The premiums
written by HMOs and insurance companies are limited by the amount of their
statutory capital and surplus. Statutory capital and surplus requirements for
workers' compensation coverage are greater than those for Newco's other
businesses. In addition, risk-based capital formulas, which are currently in
effect or may be adopted, affect Newco's statutory capital and surplus
requirements. In order to maintain its recent rate of growth in premium revenue,
to underwrite workers' compensation coverage and to continue to meet risk-based
capital requirements, Newco may have to obtain additional statutory capital or
utilize reinsurance agreements to cede a greater percentage of premium revenue.
Should additional resources be necessary, Newco may be required to obtain
additional financing. There can be no assurance such financing could be obtained
upon terms acceptable to Newco.
HEALTH CARE REFORM LAWS
In 1996, Congress enacted H.R. 3103, the Kennedy-Kassebaum bill, which
provides for guaranteed issue, group-to-individual portability and pre-existing
condition limitations for certain insurance coverages. It also requires states
to evaluate and potentially rewrite their laws to conform to new guidelines.
Legislation adopted during 1996 also included maternity mandates and mental
health parity. Continuing compliance with this legislation could have an adverse
effect on Newco or Newco's results of operations.
Also in recent years, both the Clinton Administration and several members of
Congress and various state legislators and state regulators have proposed
numerous other health care reform measures. Newco is unable to predict when or
whether any federal or state proposals, or some combination thereof, will be
enacted or, if enacted, the likely impact on Newco. It is possible, however,
that enactment of such health care reform legislation could adversely affect
Newco's results of operations.
COMPETITION
Newco competes with a number of other entities in the geographic and product
markets in which it operates, some of which other entities may have certain
characteristics or capabilities which give them an advantage in competing with
Newco. Certain of Newco's customers may decide to perform for themselves
functions or services formerly provided by Newco, which could result in a
decrease in Newco's revenues. Certain of Newco's providers may decide to market
products and services to Newco customers in competition with Newco. In addition,
significant merger and acquisition activity has occurred in the industry in
which Newco operates as well as in industries which act as suppliers to Newco
such as the hospital, physician, pharmaceutical and medical device industries.
This activity may create stronger competitors and/or result in higher health
care costs. Provider service organizations may be created by health care
providers to offer competing managed care products. To the extent that there is
strong competition or that competition intensifies in any market, Newco'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.
Newco faces competition from other regional and national managed health care
companies, including Humana, Inc. and United HealthCare Corp., and Dean Health
Plan, Inc. in the Madison, Wisconsin area,
22
<PAGE>
many of which have significantly greater financial and other resources than
Newco. If competition were to further increase in any of its markets, Newco's
financial condition or results of operations could be materially adversely
affected.
ADMINISTRATION AND MANAGEMENT
The level of administrative expenses is a partial determination of Newco's
profitability. While Newco attempts to effectively manage such expenses,
increases in staff-related and other administrative expenses may occur from time
to time due to business or product start-ups or expansions, growth or changes in
business, acquisition regulatory requirements or other reasons. Such expense
increases are not clearly predictable and could adversely affect Newco's results
of operations and financial condition.
The future success of Newco is dependent on a number of key management
employees. Competition for highly skilled people with extensive experience in
the health care industry is intense. Newco will be dependent on the continued
services and management experience of its executive officers. If such executive
officers were to leave, the operating results of Newco could be adversely
affected. The future success of Newco also will be dependent on its ability to
continue to attract key managerial and technical personnel. Newco does not have
key man life insurance covering any of its executive officers, nor does Newco
have employment agreements with any of its executive officers.
CONTROL BY CERTAIN SHAREHOLDERS; EFFECTS OF BCBSUW INTENDED PURCHASES;
DEFENSIVE MEASURES; POTENTIAL CONFLICTS OF INTEREST
Following the Distribution, BCBSUW and executive officers and directors of
Newco will own approximately % of the outstanding shares of Newco Common
Stock and, thus, will have significant influence over all matters requiring a
shareholder vote. Furthermore, within a year after the Distribution Date, BCBSUW
intends to purchase additional shares of Newco Common Stock from Newco to bring
its direct and indirect ownership of Newco to approximately 51%. At and after
this time, BCBSUW will have the power to significantly affect the outcome of
shareholder votes on all corporate actions requiring majority approval. This
will limit the ability of a third party to acquire control of Newco and could
adversely affect the market price of the shares of Newco Common Stock. Issuance
of new shares of Newco Common Stock by Newco will require approval by the Newco
Board of Directors and the Office of the Commissioner of Insurance for the State
of Wisconsin ("OCI") and may require approval by Newco's shareholders. Issuance
of new shares of Newco Common Stock by Newco may have adverse effects on Newco's
shareholders, including potential dilution of earnings per share.
Newco's Articles of Incorporation ("ARTICLES OF INCORPORATION") and By-Laws
("BY-LAWS") and certain sections of the WBCL may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Board of Directors (including takeovers which some shareholders may deem to
be in their best interest). These provisions could delay or frustrate the
removal of incumbent directors or the assumption of control by an acquiror, even
if such removal or assumption of control would be beneficial to shareholders.
These provisions also could discourage or make more difficult a merger, tender
offer or proxy contest, even if such events would be beneficial, in the short
term, to the interest of shareholders. Such provisions include, among other
things, a classified Board of Directors serving staggered three-year terms and
provisions in the WBCL which may discourage certain types of transactions
involving an actual or potential change of control of Newco.
Newco and certain of its subsidiaries and BCBSUW have entered into service
agreements (the "SERVICE AGREEMENTS") with respect to the provision of certain
services, including sales and marketing, computerized data processing, legal,
investment, actuarial and other management services. Under the Service
Agreements, the company receiving a service pays the company providing the
service an amount which Newco and BCBSUW believe approximates cost. Newco and
certain of its subsidiaries also have entered into reinsurance agreements with
BCBSUW in the past, and may do so in the future, on terms that
23
<PAGE>
are believed to be reasonable at the time but that may not in retrospect be
beneficial to Newco. Pursuant to Wisconsin statutory and regulatory
requirements, such reinsurance agreements and the Service Agreements are
required to be filed with the OCI for its review to determine whether the
"transaction at the time it is entered into is reasonable and fair to the
interest of the insurer." In addition, BCBSUW's sales force markets and sells
some of Newco's products. Also, certain of Newco's products may compete with
managed health care products offered by BCBSUW in Wisconsin. If BCBSUW were to
discontinue providing or receiving services, negotiate for material changes to
the Service Agreements or stop marketing and selling certain of Newco's
products, Newco's business and operations could be adversely affected. Several
of Newco's executive officers devote portions of their time to the operations of
BCBSUW. Three of the nine directors of Newco also are directors of BCBSUW.
NEWCO CONFLICTS OF INTEREST WITH AMSG AFTER THE DISTRIBUTION
After the Distribution, the interests of AMSG and Newco may conflict. Such
sources of conflict may include competition for each company's products and the
reinsurance and service agreements between the parties. With respect to the
reinsurance and service agreements, the potential exists for disagreements as to
the quality of the services provided by the parties and as to contract
compliance. However, UWS believes that each of AMSG and Newco will benefit from
a strategic relationship with the other entity created by the reinsurance and
service agreements. Despite the anticipated mutuality of interest, each of AMSG
and Newco will have unique shareholder groups whose interests may differ from
one another. Furthermore, after the Distribution, several of AMSG's products may
compete with health care insurance products offered by Newco, particularly in
Wisconsin.
AMSG and Newco will have four common directors, Messrs. Hefty, Menden,
Hickman and Johnson. Messrs. Hefty, Menden, Hickman and Johnson, as well as
certain other officers and directors of AMSG and Newco, also will own shares in
both companies following the Distribution. Appropriate policies and procedures
will be followed by the Board of Directors of each company to limit the
involvement of the overlapping directors (and if appropriate, relevant officers
of such companies) in conflict situations, including requiring them to abstain
from voting as directors of either AMSG or Newco. Such procedures will include
requiring Messrs. Hefty, Menden, Hickman and Johnson (or such other executive
officers or directors having a significant ownership interest in both companies)
to abstain from voting as directors of either company, with respect to matters
that present a significant conflict of interest between the companies. Whether
or not a significant conflict of interest situation exists will be determined on
a case-by-case basis depending on such factors as the dollar value of the
matter, the degree of personal interest of Messrs. Hefty, Menden, Hickman or
Johnson (or such other executive officers or directors having a significant
ownership interest in both companies) in the matter, the respective interests of
the shareholders of AMSG and Newco and the likelihood that resolution of the
matter will have significant strategic, operational or financial implications
for the business of the respective companies.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
UWS has applied for a Tax Ruling from the IRS to the effect that, among
other things, for federal income tax purposes, the Distribution will qualify as
a tax-free distribution under Section 355 of the Code. The Tax Ruling will be
based on certain factual representations and assumptions, and the continued
validity of the Tax Ruling will be subject to the continued validity of these
representations and assumptions. Neither UWS nor Newco is aware of any facts or
circumstances which should cause such representations and assumptions to be
untrue. The Tax Allocation Agreement provides that neither UWS nor Newco is to
take any action inconsistent with, or fail to take any action required by, the
request for the Tax Ruling or the Tax Ruling unless required to do so by law or
the other party has given its prior written consent or, in certain
circumstances, a supplemental ruling permitting such action is obtained. UWS and
Newco have agreed to indemnify each other with respect to any tax liability
resulting from their respective failure to comply with such provisions. See
"Agreements Between UWS and Newco."
24
<PAGE>
If the Distribution were taxable, then (i) corporate level income taxes
would be payable by the consolidated group of which UWS is the common parent,
based upon the amount by which the fair market value of the shares of Newco
Common Stock distributed in the Distribution exceeds UWS's basis therein, and
(ii) each holder of shares of UWS Common Stock who receives shares of Newco
Common Stock in the Distribution would be treated as if such shareholder
received a taxable distribution, taxed as a dividend to the extent of such
shareholder's pro rata share of UWS's current and accumulated earnings and
profits, and the holding period of such stock would begin the day after the
Distribution Date. Newco has agreed to indemnify AMSG if its actions or the
actions of any of its affiliates result in such tax liability. AMSG has agreed
to indemnify Newco for any losses which it may incur in the event that AMSG or
any of its affiliates take any action which adversely impacts the tax-free
nature of the Distribution.
The potential corporate tax liability which could arise from an acquisition
of Newco for a period of time following the Distribution, together with the
foregoing indemnification arrangements, could have an anti-takeover effect on
the acquisition of control of either Newco or AMSG after the Distribution.
NO PRIOR TRADING MARKET FOR NEWCO COMMON STOCK;
LIKELY VOLATILE NEWCO COMMON STOCK PRICE
There is not currently a public market for the shares of Newco Common Stock,
and while a "when-issued" trading market is expected to develop prior to the
Distribution Date, there can be no assurance as to the prices at which the
shares of Newco Common Stock will trade after the Distribution Date. The shares
of Newco Common Stock have been approved for listing on the NYSE, subject to
official notice of issuance. Until the shares of Newco Common Stock are fully
distributed and an orderly trading market develops, the prices at which the
shares of Newco Common Stock trade may fluctuate significantly. Prices for
shares of Newco Common Stock will be determined in the marketplace and may be
influenced by many factors, including, among others, the depth and liquidity of
the market for shares of Newco/UWS Common Stock, investor perception of Newco
and its industry and general economic and market conditions.
Shares of Newco Common Stock distributed to shareholders of UWS Common Stock
in the Distribution will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of Newco under the Securities Act.
Persons who may be deemed to be affiliates of Newco after the Distribution
generally include individuals or entities that control, are controlled by, or
are under common control with, Newco, and may include certain officers and
directors of Newco as well as principal shareholders of Newco. Persons who are
affiliates of Newco will be permitted to sell their shares of Newco Common Stock
only pursuant to an effective registration statement under the Securities Act or
an exemption from the registration requirements of the Securities Act, such as
the exemption afforded by Rule 144. Certain UWS shareholders have been granted
registration rights with respect to the shares of Newco Common Stock. See
"Certain Relationships and Related Party Transactions." Any sales of substantial
amounts of shares of Newco Common Stock in the public market, or the perception
that such sales might occur, whether as a result of the Distribution or
otherwise, could materially adversely affect the market price of the shares of
Newco Common Stock.
THE YEAR 2000 ISSUE
Newco has assessed and continues to assess the potential impact of the
situation commonly referred to as the "Year 2000 Issue." The Year 2000 Issue,
which affects most corporations, concerns the inability of information systems,
primarily computer software programs, to properly recognize and process date-
sensitive information relating to the Year 2000 and beyond. The Year 2000 Issue
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of Newco's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
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<PAGE>
Based on a recent assessment, Newco determined that it will be required to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. Newco
has estimated that it will incur costs totalling approximately $2.5 million in
1998 and 1999 to make such modifications or replacements. Newco presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of Newco.
REGULATORY APPROVALS
TAX MATTERS
Consummation of the Distribution is conditioned upon receipt of the Tax
Ruling to the effect that the Distribution is a tax-free distribution under
Section 355 of the Code. UWS has applied to the IRS for the Tax Ruling, but
there can be no assurance UWS will receive it. See "The Distribution--Certain
Federal Income Tax Consequences of the Distribution."
INSURANCE REGULATORY MATTERS
The Distribution will be subject to the prior approval of OCI. OCI has been
contacted concerning the Distribution and has indicated that the Distribution
constitutes an acquisition of control within the meaning of Wis. Admin. Code
Section INS Ch. 40. Accordingly, prior to effectuating the Distribution, BCBSUW
will need to file a Form A with OCI and receive the approval of the Commissioner
pursuant to Wis. Admin. Code Section 40.02(1)(b)(2).
Under the applicable statutes, the Commissioner shall approve the
Distribution unless he finds, after a hearing, that it would violate the law or
be contrary to the interests of the insureds of any participating domestic
corporation or of the Wisconsin insureds of any participating non-domestic
corporation. The Commissioner may disapprove the Distribution if he finds after
the change of control that (i) the domestic stock insurance company would not be
able to satisfy the requirements for the issuance of a license, (ii) the effect
of the Distribution would be to create a monopoly or substantially lessen
competition in the state, (iii) the financial condition of any acquiring party
would jeopardize the financial stability of the domestic stock insurance
company, (iv) any proposals to liquidate the domestic stock insurance company
are not fair and reasonable to policyholders of the domestic stock insurance
company, or (v) the competence and integrity of those persons who would be in
control of the company are such that it would not be in the interest of the
policyholders of the company and of the public to permit the Distribution.
BCBSUW anticipates filing the Form A promptly and will work with OCI to obtain
the requisite approval in a timely manner.
In addition to the foregoing, certain transactions contemplated in
conjunction with the Distribution also may be subject to prior reporting to OCI.
Included in this would be amendments to and creation of inter-company agreements
and the transfer of the $70.0 million note from UWS to Newco. These transactions
and similar transactions will be reported to OCI on a Form D and OCI will have
30 days to review said transactions. OCI may disapprove the transactions if the
Commissioner finds that they would violate the law or be contrary to the
interest of insureds, shareholders or the public.
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<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of
Newco at March 31, 1998. The pro forma capitalization table has been derived
from Newco's Combined Financial Statements and reflects certain pro forma
adjustments as if the Distribution had been consummated as of March 31, 1998.
This data should be read in conjunction with the pro forma balance sheet, the
introduction to the pro forma financial statements appearing elsewhere in this
Information Statement, and Newco's Combined Financial Statements appearing
elsewhere in this Information Statement.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt............................................................ -- $ 70,000(1) $ 70,000
Shareholders' equity:
Preferred Stock, no par value per share;
1,000,000 shares authorized;
none issued or outstanding............................................ -- -- --
Common Stock, no par value per share;
50,000,000 shares authorized;
none issued and outstanding;
(16,544,047 shares pro forma)......................................... -- 13,673(2) 13,673
Investments by and advances from UWS.................................... 125,114 (125,114) --
Unrealized gains on investments......................................... 4,138 -- 4,138
Retained earnings....................................................... -- 41,441(2) 41,441
---------- ----------- ----------
Total shareholders' equity.......................................... 129,252 (70,000) 59,252
---------- ----------- ----------
Total capitalization................................................ $ 129,252 $ 0 $ 129,252
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
- ------------------------
(1) Reflects the assumption of $70.0 million of affiliated debt UWS owed to
BCBSUW. The principal balance is due on October 30, 1999.
(2) Reflects issuances of Newco Common Stock in connection with the
Distribution.
DIVIDEND POLICY
Newco has not paid any cash dividends to date, but plans to pay an annual
dividend beginning in December 1998. The initial annual dividend is expected to
be approximately $0.05 per share. However, the payment of dividends in the
future is subject to the discretion of the Board of Directors of Newco and will
depend upon Newco's operating results, financial condition and capital
requirements, general business conditions, legal restrictions on the payment of
dividends and other factors Newco's Board of Directors deems relevant. There can
be no assurance that dividends will be paid in the future. As a holding company,
Newco depends on dividends from its subsidiaries to pay cash dividends and to
meet expenses. Applicable Wisconsin law limits the amount of dividends that may
be paid by certain of Newco's subsidiaries in any year.
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<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION OF NEWCO
The pro forma combined condensed statements of income for the year ended
December 31, 1997 and the three months ended March 31, 1998 give effect to the
additional cost of $1.6 million for the year ended December 31, 1997, and $0.4
million for the three months ended March 31, 1998, associated with staffing of
finance, legal and accounting personnel, and SEC registration fees and filing
costs. The pro forma statements of income also reflect interest expense of $4.9
million for the year ended December 31, 1997, and $1.2 million for the three
months ended March 31, 1998, associated with the $70.0 million of affiliated
debt UWS borrowed from BCBSUW on October 30, 1996, as if such debt was recorded
on the books of Newco. The pro forma combined condensed balance sheet at
December 31, 1997 and March 31, 1998 give effect to the $70.0 million of
affiliated debt UWS borrowed from BCBSUW on October 30, 1996, as if such debt
was recorded on the books of Newco. The pro forma financial statements should be
read in conjunction with the financial data presented elsewhere in this
Information Statement. The pro forma financial data are presented for
informational purposes only and may not reflect the future results of operations
or financial position of Newco.
NEWCO/UWS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Premium revenue........................................................... $ 560,825 $ 560,825
Other revenue............................................................. 26,046 26,046
Investment results........................................................ 22,238 22,238
---------- -----------
Total revenues........................................................ 609,109 609,109
---------- -----------
EXPENSES:
Medical and other benefits................................................ 485,735 485,735
Selling, general and administrative expenses.............................. 92,663 1,620(a) 94,283
Interest expense.......................................................... -- 4,892(b) 4,892
Profit sharing on joint ventures.......................................... 3,380 3,380
Amortization of goodwill and other intangibles............................ 818 818
---------- ----------- -----------
Total expenses........................................................ 582,596 6,512 589,108
---------- ----------- -----------
Income before income tax expense.......................................... 26,513 (6,512) 20,001
Income tax expense........................................................ 9,918 (2,436)(c) 7,482
---------- ----------- -----------
Net income.................................................................. $ 16,595 $ (4,076) $ 12,519
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(a) Reflects the additional cost of $1.6 million for the year ended December 31,
1997, and $0.4 million for the three months ended March 31, 1998, associated
with staffing of finance, legal and accounting personnel, and SEC
registration fees and filing costs. Costs are based on actual amounts
incurred by UWS for the year ended December 31, 1997.
(b) Reflects interest expense of $4.9 million for the year ended December 31,
1997, and $1.2 million for the three months ended March 31, 1998, associated
with the $70.0 million of affiliated debt UWS borrowed from BCBSUW on
October 30, 1996. Interest is payable quarterly at a rate equal to LIBOR
plus 1.25%, adjusted quarterly.
(c) Reflects the application of the Newco effective tax rate to adjustments made
pursuant to notes (a) and (b).
28
<PAGE>
NEWCO/UWS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Premium revenue........................................................... $ 148,076 -- $ 148,076
Other revenue............................................................. 7,121 -- 7,121
Investment results........................................................ 3,961 -- 3,961
---------- ----------- -----------
Total revenues........................................................ 159,158 -- 159,158
---------- ----------- -----------
EXPENSES:
Medical and other benefits................................................ 126,153 -- 126,153
Selling, general and administrative expenses.............................. 24,033 $ 405(a) 24,438
Interest expense.......................................................... -- 1,219(b) 1,219
Profit sharing on joint ventures.......................................... 1,124 -- 1,124
Amortization of goodwill and other intangibles............................ 116 -- 116
---------- ----------- -----------
Total expenses........................................................ 151,426 1,624 153,050
---------- ----------- -----------
Income before income tax expense.......................................... 7,732 (1,624) 6,108
Income tax expense........................................................ 2,892 (607)(c) 2,285
---------- ----------- -----------
Net income.................................................................. $ 4,840 $ (1,017) $ 3,823
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(a) Reflects the additional cost of $1.6 million for the year ended December 31,
1997, and $0.4 million for the three months ended March 31, 1998, associated
with staffing of finance, legal and accounting personnel, and SEC
registration fees and filing costs. Costs are based on actual amounts
incurred by UWS for the year ended December 31, 1997.
(b) Reflects interest expense of $4.9 million for the year ended December 31,
1997, and $1.2 million for the three months ended March 31, 1998, associated
with the $70.0 million of affiliated debt UWS borrowed from BCBSUW on
October 30, 1996. Interest is payable quarterly at a rate equal to LIBOR
plus 1.25%, adjusted quarterly.
(c) Reflects the application of the Newco effective tax rate to adjustments made
pursuant to notes (a) and (b).
29
<PAGE>
NEWCO/UWS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 17,033 -- $ 17,033
Investments-available for sale............................................ 151,653 -- 151,653
Other current assets...................................................... 62,370 -- 62,370
---------- ----------- -----------
Total current assets........................................................ 231,056 -- 231,056
---------- ----------- -----------
Non-current assets.......................................................... 35,200 -- 35,200
---------- ----------- -----------
Total assets................................................................ $ 266,256 -- $ 266,256
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES
Current liabilities:
Medical and other benefits payable........................................ $ 60,724 -- $ 60,724
Other current liabilities................................................. 56,598 -- 56,598
---------- ----------- -----------
Total current liabilities................................................... 117,322 -- 117,322
---------- ----------- -----------
Other non-current liabilities............................................... 25,318 -- 25,318
Notes payable............................................................... -- $ 70,000(a) 70,000
---------- ----------- -----------
Total liabilities........................................................... 142,640 70,000 212,640
---------- ----------- -----------
Shareholder's equity:
Investments by and advances from UWS...................................... 120,405 (70,000)(a) 50,405
Unrealized gains on investments........................................... 3,211 -- 3,211
---------- ----------- -----------
Total shareholder's equity.................................................. 123,616 (70,000) 53,616
---------- ----------- -----------
Total liabilities and shareholder's equity.................................. $ 266,256 $ -- $ 266,256
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTE TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) Reflects the assumption of $70.0 million of affiliated debt UWS owed to
BCBSUW. The principal balance is due on October 30, 1999.
30
<PAGE>
NEWCO/UWS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 23,415 -- $ 23,415
Investments-available for sale............................................ 158,851 -- 158,851
Other current assets...................................................... 60,254 -- 60,254
---------- ----------- -----------
Total current assets........................................................ 242,520 -- 242,520
---------- ----------- -----------
Other non-current assets.................................................... 36,972 -- 36,972
---------- ----------- -----------
Total assets................................................................ $ 279,492 -- $ 279,492
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES
Current liabilities:
Medical and other benefits payable........................................ $ 60,480 -- $ 60,480
Other current liabilities................................................. 63,602 -- 63,602
---------- ----------- -----------
Total current liabilities................................................... 124,082 -- 124,082
---------- ----------- -----------
Other non-current liabilities............................................... 26,158 -- 26,158
Notes payable............................................................... -- $ 70,000(a) 70,000
---------- ----------- -----------
Total liabilities........................................................... 150,240 70,000 220,240
Shareholder's equity:
Investments by and advances from UWS...................................... 125,114 (70,000)(a) 55,114
Unrealized gains on investments........................................... 4,138 -- 4,138
---------- ----------- -----------
Total shareholder's equity.................................................. 129,252 (70,000) 59,252
---------- ----------- -----------
Total liabilities and shareholder's equity.................................. $ 279,492 $ -- $ 279,492
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
NOTE TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) Reflects the assumption of $70.0 million of affiliated debt UWS owed to
BCBSUW. The principal balance is due on October 30, 1999.
31
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION OF NEWCO
The following table presents selected financial information with respect to
Newco. The statement of income and balance sheet data as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997,
has been derived from the audited combined financial statements and notes
thereto of Newco. The statement of income and balance sheet data as of December
31, 1995, 1994 and 1993 and for the years ended December 31, 1994 and 1993 and
for the three months ended March 31, 1998 and 1997 have been derived from
unaudited financial statements which, in the opinion of Newco's management,
include all adjustments necessary, consisting only of normal recurring accruals,
for a fair presentation of financial position and results of operations for the
periods presented. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the full fiscal year. The
combined financial statements of Newco do not necessarily reflect the results of
operations or financial position that would have resulted had Newco been a
separate, independent company and are not necessarily indicative of the results
to be expected for any other interim period or any future fiscal year. The
information set forth below should be read in conjunction with Newco's combined
financial statements, including the notes thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," which are
included elsewhere in this Information Statement.
<TABLE>
<CAPTION>
AS OF AND FOR THE
PRO FORMA THREE MONTHS ENDED
AS OF AND FOR THE YEARS ENDED DECEMBER 31, DECEMBER 31, MARCH 31,
----------------------------------------------------- ------------- --------------------
1993 1994 1995 1996 1997 1997 1997 1998
--------- --------- --------- --------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT OPERATING STATISTICS)
<CAPTION>
STATEMENT OF INCOME DATA: (UNAUDITED) (UNAUDITED)
-------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Premium revenue.............. $ 310,503 $ 355,025 $ 466,929 $ 493,092 $ 560,825 $ 560,825 $ 135,433 $ 148,076
Other revenue................ 7,515 15,997 24,222 27,632 26,046 26,046 6,790 7,121
Investment results........... 10,697 12,050 9,665 19,040 22,238 22,238 4,770 3,961
--------- --------- --------- --------- --------- ------------- --------- ---------
Total revenues............... 328,715 383,072 500,816 539,764 609,109 609,109 146,993 159,158
--------- --------- --------- --------- --------- ------------- --------- ---------
EXPENSES:
Medical and other benefits... 265,446 306,056 416,167 425,258 485,735 485,735 115,441 126,153
Selling, general and
administrative expenses.... 42,712 57,140 71,434 82,902 92,663 94,283(2) 23,336 24,033
Interest Expense............. -- -- -- -- -- 4,892(3) -- --
Profit sharing on joint
ventures................... 960 1,516 2,734 2,868 3,380 3,380 845 1,124
Amortization of goodwill and
other intangibles.......... 80 195 678 841 818 818 440 116
Total expenses............... 309,198 364,907 491,013 511,869 582,596 589,108 140,062 151,426
--------- --------- --------- --------- --------- ------------- --------- ---------
Income before income tax
expense.................... 19,517 18,165 9,803 27,895 26,513 20,001 6,931 7,732
Income tax expense........... 6,174 5,332 3,709 10,986 9,918 7,482(4) 2,730 2,892
--------- --------- --------- --------- --------- ------------- --------- ---------
Net income................... $ 13,343 $ 12,833 $ 6,094 $ 16,909 $ 16,595 $ 12,519 $ 4,201 $ 4,840
--------- --------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- --------- ------------- --------- ---------
OPERATING STATISTICS:
Medical loss ratio(1)........ 85.8% 86.2% 89.1% 86.2% 86.6% 86.6% 85.7% 85.2%
Selling, general and
administrative expense
ratio(1)................... 10.9% 11.8% 11.0% 11.1% 11.2% 11.2% 11.5% 11.0%
BALANCE SHEET DATA:
Cash and investments......... $ 162,421 $ 154,201 $ 178,926 $ 182,431 $ 176,579 $ 176,579 $ 173,607 $ 190,117
Total assets................. 197,294 216,954 261,523 269,478 266,256 266,256 259,843 279,492
Long-term debt............... -- -- -- -- -- 70,000(5) -- --
Total shareholders' equity... 124,536 101,465 120,277 123,882 123,616 53,616(5) 118,850 129,252
<CAPTION>
PRO FORMA
MARCH 31,
-----------
1998
-----------
<S> <C>
STATEMENT OF INCOME DATA:
<S> <C>
REVENUES:
Premium revenue.............. $ 148,076
Other revenue................ 7,121
Investment results........... 3,961
-----------
Total revenues............... 159,158
-----------
EXPENSES:
Medical and other benefits... 126,153
Selling, general and
administrative expenses.... 24,438(2)
Interest Expense............. 1,219(3)
Profit sharing on joint
ventures................... 1,124
Amortization of goodwill and
other intangibles.......... 116
Total expenses............... 153,050
-----------
Income before income tax
expense.................... 6,108
Income tax expense........... 2,285(4)
-----------
Net income................... $ 3,823
-----------
-----------
OPERATING STATISTICS:
Medical loss ratio(1)........ 85.2%
Selling, general and
administrative expense
ratio(1)................... 11.0%
BALANCE SHEET DATA:
Cash and investments......... $ 190,117
Total assets................. 279,492
Long-term debt............... 70,000(5)
Total shareholders' equity... 59,252(5)
</TABLE>
- ----------------------------------
(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 $15,580,000 and $16,336,000 for the
years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the three
months ended March 31, 1997 and 1998, respectively.
(2) Reflects pro forma adjustment for administrative expenses associated with
staffing and registration fees. See "Pro Forma Combined Financial
Information of Newco."
(3) Reflects pro forma adjustment for interest expense on assumed debt. See "Pro
Forma Combined Financial Information of Newco."
(4) Reflects pro forma adjustment for tax effect of adjustments described in (2)
and (3), above. See "Pro Forma Combined Financial Information of Newco."
(5) Reflects pro forma adjustment for assumed debt. See "Pro Forma Combined
Financial Information of Newco."
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Newco is a leading provider of managed health care services and employee
benefit products. Newco's two primary product lines are (i) Health Maintenance
Organization ("HMO") products, including Compcare Health Services Insurance
Corporation ("COMPCARE"), Valley Health Plan, Inc. ("VALLEY"), Unity Health
Plans Insurance Corporation ("UNITY") and certain point-of-service ("POS") and
other related products managed by Compcare, Valley and Unity; and (ii) specialty
managed care products and services, including dental, life, disability and
workers' compensation products, managed care consulting, electronic claim
submission, and managed behavioral health services. Operating results and
statistics for these product groups are presented below for the periods noted.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Membership at end of year:
HMO products:
Compcare..................................... 161,372 149,636 173,241 163,844 169,532
Valley....................................... 27,476 33,434 37,906 34,755 40,319
Unity........................................ 66,623 79,147 85,117 80,497 84,294
---------- ---------- ---------- ---------- ----------
Total HMO products membership.............. 255,471 262,217 296,264 279,096 294,145
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Specialty managed care products and services:
Life/AD&D.................................... 118,812 116,390 129,406 118,175 142,079
Dental HMO................................... 167,592 169,063 169,823 168,278 167,901
Behavioral Health............................ 645,883 826,153 863,538 803,206 898,222
Workers' compensation........................ 55,845 53,574 54,928 55,487 53,280
Disability and other......................... 68,233 81,462 97,727 84,454 103,590
---------- ---------- ---------- ---------- ----------
Total specialty managed care products and
services membership...................... 1,056,315 1,246,642 1,315,422 1,229,500 1,365,072
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
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% 85.5% 85.5%
Specialty managed care products and services................. 14.4 15.0 14.7 14.9 14.9
Intercompany eliminations.................................... (0.6) (0.4) (0.4) (0.4) (0.4)
--------- --------- --------- --------- ---------
Total...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
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% 88.2% 88.5%
Selling, general and administrative expense ratio(2).............. 9.2 9.3 9.2 9.7 9.0
Specialty managed care products and services:
Loss ratio(1)..................................................... 77.1 69.8 74.1 72.8 71.0
Combined:
Loss ratio(1)..................................................... 89.1 86.8 87.3 85.9 85.9
Net income margin(3).............................................. 1.2 3.1 2.7 2.8 3.0
</TABLE>
- ------------------------
(1) Medical and other benefits as a percentage of premium revenue prime to
intercompany eliminations.
(2) Premium revenue related selling, general and administrative expenses as a
percentage of premium revenue prime to intercompany eliminations.
(3) Net income as a percentage of total revenues.
Newco's revenues are derived primarily from premiums, while medical benefits
constitute the majority of expenses. Profitability is directly affected by many
factors including, among others, premium rate adequacy, estimates of medical
benefits, health care utilization, effective administration of benefit payments,
operating efficiency, investment returns and federal and state laws and
regulations.
RESULTS OF OPERATIONS
All financial data in the Results of Operations section are gross numbers
and, therefore, are not net of intercompany eliminations. For this reason, some
of the financial data does not precisely match the data in the financial tables.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
TOTAL REVENUES
Total revenues for the three months ended March 31, 1998 increased 8.2% to
$159.1 million from $147.0 million for the three months ended March 31, 1997.
These increases were due primarily to increases in HMO premium revenue partially
offset by lower investment results.
PREMIUM REVENUE--HMO premium revenue for the three months ended March 31,
1998 increased 9.4% to $126.7 million from $115.8 million for the three months
ended March 31, 1997, as a result of increased average HMO medical premium per
member and increased average number of medical members. Average HMO medical
premium per member for the three months ended March 31, 1998 increased 3.3% from
the same period in the prior year due to premium increases, partially offset by
benefit buy downs. The average number of HMO medical members for the three
months ended March 31, 1998 increased 5.8% to 293,149 from 277,066 for the three
months ended March 31, 1997.
Premium revenue for specialty managed care products and services for the
three months ended March 31, 1998 increased 9.1% to $22.0 million from $20.2
million for the three months ended March 31, 1997. This increase was due
primarily to new sales in the life and disability lines of business.
OTHER REVENUE--Other revenue for the three months ended March 31, 1998
increased 1.0% to $10.4 million from $10.3 million for the three months ended
March 31, 1997.
34
<PAGE>
INVESTMENT RESULTS--Investment results include investment income and
realized gains (losses) on investments. Investment results for the three months
ended March 31, 1998 decreased 16.7% to $4.0 million from $4.8 million for the
three months ended March 31, 1997. Average annual investment yields, excluding
net realized gains, were 5.63% and 5.50% for the three months ended March 31,
1998 and 1997, respectively. Investment gains are realized in the normal
investment process in response to market opportunities. In addition, during 1997
Newco reduced its exposure to equity investments resulting in above average
realized gains. Net realized investment gains decreased to $1.4 million from
$2.3 million for the three months ended March 31, 1997. Average invested assets
for the three months ended March 31, 1998 increased $5.3 million to $183.3
million from $178.0 million for the three months ended March 31, 1997.
EXPENSE RATIOS
LOSS RATIO--The combined loss ratio represents the ratio of medical and
other benefits to premium revenue for Newco on a combined basis, and is a
blended ratio for medical, life, dental, disability and other product lines. The
combined loss ratio was 85.9% for the first quarter of 1998 and 85.9% for the
first quarter of 1997. The combined loss ratio is influenced by the component
loss ratio for each of Newco's primary product lines, as discussed below.
The medical loss ratio for HMO products for the three months ended March 31,
1998 was 88.5%, compared with 88.2% for the three months ended March 31, 1997.
The increase in the medical loss ratio in 1998 for HMO products is due primarily
to higher loss experience in the southeastern Wisconsin HMO market, due in part
to certain high-cost claims, continuing increase in the drug cost component and
an increase in outpatient utilization.
The loss ratio for specialty managed care products and services for the
three months ended March 31, 1998 was 71.0% compared with 72.8% for the three
months ended March 31, 1997. The decrease is primarily attributable to improved
results in the United Heartland worker's compensation block of business.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE RATIO--The selling, general and
administrative ("SGA") expense ratio includes commissions, administrative
expenses, and premium taxes and other assessments. The SGA expense ratio for HMO
products for the first quarter of 1998 was 9.0%, compared with 9.7% for the
first quarter of 1997. The decrease was due to improved management efficiencies
at each of Newco's HMOs, as well as a decline in assessments related to
Wisconsin's Health Insurance Risk Sharing Plan.
SGA expenses related to specialty managed care products and services
increased 6.3% for the three months ended March 31, 1998 to $15.3 million from
$14.5 million for the same period in the prior year. SGA expenses are tied to
premium and other revenues, which increased 6.5% for the three months ended
March 31, 1998 over the same period in 1997.
OTHER EXPENSES
Profit sharing on joint ventures was $1.1 million for the three months ended
March 31, 1998, compared with $0.8 million for the three months ended March 31,
1997. These balances represent payment to providers for profit sharing expenses
related to the Unity and Valley joint ventures.
NET INCOME
Combined net income for the three months ended March 31, 1998 increased
14.3% to $4.8 million from $4.2 million for the three months ended March 31,
1997. The increase in net income was due primarily to increased premium revenues
coupled with a stable loss ratio and a decrease in the SGA expense ratio.
35
<PAGE>
Newco's effective tax rate was 37.4% for the three months ended March 31,
1998 compared with 39.4% for the three months ended March 31, 1997. Newco's
effective tax rate fluctuates based upon the relative profitability of Newco's
product lines and the differing effective tax rates for each of those product
lines.
1997 COMPARED WITH 1996 AND 1996 COMPARED WITH 1995
TOTAL REVENUES
Total revenues in 1997 increased 12.8% to $609.1 million from $539.8 million
in 1996. Total revenues in 1996 increased 7.8% from $500.8 million in 1995.
These increases were due primarily to increased premium and other revenue as a
result of membership increases and increased net investment gains.
PREMIUM REVENUE--HMO premium revenue in 1997 increased 14.1% to $480.7
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 11.7% to $82.3 million from $73.7 million in 1996. Premium revenue in
1996 increased 9.7% from $67.2 million in 1995. The increase was due primarily
to an increase in life and disability premiums in both years and an increase in
workers' compensation premiums in 1997. The increases in life and disability
premiums were driven by membership increases, while the increase in workers'
compensation premiums was due primarily to a change in the reinsurance agreement
related to this business. In 1996, Newco ceded 50% of the workers' compensation
premiums written by United Heartland, Inc. to a third-party reinsurer. In 1997,
the percentage ceded to the outside reinsurer was reduced to 40%.
OTHER REVENUE--Other revenue in 1997 increased 1.3% to $40.0 million from
$39.5 million in 1996. Included in other revenue in 1996 is a $1.5 million gain
on the sale of the vision line of business which is non-recurring. Other revenue
in 1996 increased 32.1% from $29.9 million in 1995. In addition to the gain on
the sale of the vision line of business, this increase is 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 during 1997 were realized as part of a portfolio
restructuring to reduce the overall level of equity investments. 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.
36
<PAGE>
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 the Company'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 attributed 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 and services in 1997 was
74.1%, compared with 69.8% in 1996 and 77.1% in 1995. The higher loss ratio in
1997 and 1995 was due primarily to higher loss experience on the life and
disability products marketed by United Wisconsin Group.
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
Profit sharing on joint ventures 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 joint
ventures and income from the workers' compensation joint venture. Profit sharing
expenses related to the Unity and Valley joint ventures were $4.0 million, $3.0
million and $2.7 million in 1997, 1996 and 1995, respectively. Income from the
workers' compensation joint venture was $0.6 million and $0.1 million in 1997
and 1996, respectively.
NET INCOME
Combined net income in 1997 decreased 1.8% to $16.6 million from $16.9
million in 1996. Combined net income in 1996 increased 177.0% from $6.1 million
in 1995 due primarily to increased investment results.
The Company's effective tax rate was 37.4% in 1997, compared with 37.4% in
1996 and 34.8% in 1995. The Company's effective tax rate fluctuates based upon
the relative profitability of the Company's three product lines and the
differing effective tax rates for each of those product lines.
LIQUIDITY AND CAPITAL RESOURCES
Newco's sources of cash flow consist primarily of premium and other revenues
and investment income. The primary uses of cash include medical and other
benefits and operating expense payments. Positive cash flows are invested
pending future payments of medical and other benefits and other operating
expenses. Newco's investment policies are designed to maximize yield, preserve
principal and provide liquidity to meet anticipated payment obligations.
37
<PAGE>
Historically, Newco has generated positive cash flow from operations. For
the three months ended March 31, 1998, net cash provided by operations amounted
to $12.6 million compared to a use of $1.3 million for the three months ended
March 31, 1997. Net cash provided by operating activities amounted to $3.6
million, $7.2 million and $12.1 million in 1997, 1996 and 1995, respectively.
The fluctuations in cash flow from operations related to net income as well as
levels in intercompany balances, advanced premiums and claims payable. Due to
periodic cash flow requirements of certain subsidiaries, Newco made borrowings
under its bank line of credit ranging up to $8.5 million during 1997 and up to
$10.0 million for the three months ended March 31, 1998 to meet short-term cash
needs. No balance was outstanding at December 31, 1997 or March 31, 1998.
Newco's investment portfolio consists primarily of investment grade
corporate bonds. Government securities and common stock. At March 31, 1998,
$123.1 million or 73.9% of Newco's total investment portfolio was invested in
bonds compared to $127.9 million or 80.1% at December 31, 1997 and $123.8
million or 75.8% at December 31, 1996. The bond portfolio had an average quality
rating of Aa3 at March 31, 1998, December 31, 1997, and December 31, 1996 by
Moody's Investor Service, and the majority of the bond portfolio was classified
as available for sale. In accordance with Statement of Financial Accounting
Standards No. 115, bonds classified as available for sale are recorded on
Newco's balance sheet at market value. Newco's equity holdings consist of a
diversified portfolio of publicly traded domestic common stocks. The market
value of the total investment portfolio, which includes stocks and bonds,
exceeded amortized cost by $6.6 million, $4.8 million and $6.3 million at March
31, 1998, December 31, 1997 and 1996, respectively. Unrealized holding gains and
losses on bonds classified as available for sale are included as a component of
shareholders' equity, net of applicable deferred taxes. Newco has no investments
in mortgage loans, non-publicly traded securities, real estate held for
investment or financial derivatives.
From time to time, Newco makes capital contributions to its subsidiaries to
assist them in maintaining appropriate levels of capital and surplus for
regulatory and rating purposes. Insurance subsidiaries are required to maintain
certain levels of statutory capital and surplus. In Wisconsin, where a large
percentage of Newco's premium is written, these levels are based upon the amount
and type of premiums written and are calculated separately for each subsidiary.
As of the balance sheet date presented, statutory capital and surplus for each
of these insurance subsidiaries exceeded required levels.
In addition to internally generated funds and periodic borrowings on its
bank line of credit, Newco believes that additional financing to facilitate
long-term growth could be obtained through equity offerings, debt offerings,
financings from BCBSUW or bank borrowings, as market conditions may permit or
dictate. Immediately after the Distribution Newco recognizes that its debt to
equity ratio will be high, primarily as a result of its assumption of the $70.0
million loan from BCBSUW to UWS. However, Newco believes that this ratio should
improve within a year following the Distribution Date, as a result of BCBSUW's
intended purchases of shares of Newco Common Stock to bring its direct and
indirect ownership of Newco from [37.9%] to approximately 51%. The purchase
price for the shares of Newco Common Stock which are purchased directly from
Newco will be paid through either the cancellation of a corresponding portion or
all of the $70.0 million debt obligation or in cash. BCBSUW may purchase some of
the shares of Newco Common Stock in the open market.
INFLATION
Health care costs have been rising and are expected to continue to rise at a
rate that exceeds the consumer price index. Newco's cost control measures,
risk-sharing incentive arrangements with medical care providers, and premium
rate increases are designed to reduce the adverse effect of medical cost
inflation on its operations. In addition, Newco utilizes its ability to apply
appropriate underwriting criteria in selecting groups and individuals and in
controlling the utilization of health care services. However, there can be no
assurance that Newco's efforts will fully offset the impact of inflation or that
premium revenue increases will equal or exceed increasing health care costs.
38
<PAGE>
YEAR 2000 SOFTWARE COMPATIBILITY
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of Newco's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, Newco determined that it will be required to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. Newco
has estimated that it will have costs totalling approximately $2.5 million in
1998 and 1999 to make such modifications or replacements. Newco presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of Newco.
Newco has initiated formal communications with its systems processing vendor
and all large customers using electronic interfaces to determine the extent to
which Newco's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 Issues.
Newco will utilize both internal and external resources to reprogram, or
replace, and test the software for the Year 2000 modifications. Newco
anticipates completing the Year 2000 project within one year but not later than
December 31, 1998, which is prior to any anticipated impact on its operating
systems. A number of repairs to current systems are covered by existing
maintenance agreements and by normal operational upgrades and do not present
incremental additional expense. Costs related to modification of existing
computer hardware and software are expensed as incurred. Purchases of new
hardware or software in replacement of non-compliant hardware or software is
being capitalized in accordance with Newco's standard accounting practices.
39
<PAGE>
BUSINESS OF NEWCO
GENERAL
Newco is a Wisconsin corporation organized in May 1998 as a wholly owned
subsidiary of UWS, and will continue to be a wholly owned subsidiary of UWS
until the Effective Date. Newco's principal executive offices are located at 401
West Michigan Street, Milwaukee, Wisconsin 53203.
On the Effective Date, UWS will contribute to Newco all of the stock of the
Managed Care Companies, the Management Business and working capital for the
Management Business, in exchange for shares of Newco Common Stock and
the assumption by Newco of certain unfunded employee post-retirement health
benefit liabilities, certain accrued expenses, a $70.0 million loan from BCBSUW
and all other liabilities relating to the Managed Care Companies and the
Management Business. Immediately thereafter, UWS will own 100% of the issued and
outstanding shares of Newco Common Stock. On the Distribution Date, UWS then
will distribute all of the outstanding shares of Newco Common Stock to its
shareholders on a one-for-one basis.
On and after the Effective Date, Newco will be a leading managed care and
employee benefits company serving markets in 39 states. The products and
services offered by Newco will comprise a broad range of group medical and
related benefit products which provide employers with cost effective solutions
to their employee benefits needs. The medical products are delivered through
health maintenance organizations that encourage or require use of contracting
providers. HMOs help control health care costs by various means, including
utilization controls such as pre-admission approval for hospital inpatient
services, pre-authorization of outpatient surgical procedures, and capitated or
discounted fee arrangements. Newco also will offer various specialty products
and services including group life, dental, disability income, workers'
compensation, and electronic claim transmission services.
Since its acquisition by Newco in 1992, Valley, an HMO in Northwestern
Wisconsin, has operated as a joint venture with Midelfort, its main provider.
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"), which were purchased by Newco
effective October 1, 1994. Unity is operated as a joint venture among Newco, CHS
and UHC, which through their affiliates, Community Physicians' Network, Inc.
("CPN") and the University of Wisconsin-Madison Medical Center, constitute the
provider networks for Unity.
Newco's HMO products are sold primarily by a salaried sales force to
employers and other groups, including Medicaid-eligible individuals, throughout
Wisconsin. Specialty products and services are sold through a variety of
distribution channels to employer groups and providers in Wisconsin and
throughout the United States.
The following table lists earned premiums and other revenue for Newco's
various lines of business for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HMO products earned premiums......................... $ 402,354 $ 421,248 $ 480,727 $ 115,769 $ 126,675
Specialty managed care products and services......... 67,204 73,740 82,284 20,173 22,005
Other revenue........................................ 29,934 39,537 40,030 10,270 10,423
Eliminations....................................... (8,341) (13,801) (16,170) (3,989) (3,906)
---------- ---------- ---------- ---------- ----------
Total earned premiums and other
revenue........................................ $ 491,151 $ 520,724 $ 586,871 $ 142,223 $ 155,197
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
40
<PAGE>
NEWCO'S STRATEGY
Newco believes current market conditions in health care favor companies that
provide quality health care products and services, while ensuring meaningful
cost containment for the buyer. Newco further believes there are significant
niches offering opportunities for companies that are responsive to consumer
demand for affordable health care. Newco is a managed care leader in Wisconsin
due to the quality and extent of its provider network, the number of members,
the breadth of its managed care product offerings and the pricing of those
products. Newco also believes there are opportunities to develop or enhance
specialty managed care products and services which leverage Newco's expertise in
the health care market. To take advantage of market opportunities, Newco has
developed the following business strategy:
- EMPHASIZE COST-EFFECTIVE ACCESS TO QUALITY HEALTH CARE OPTIONS. Newco
believes that rising health care costs continue to cause buyers to seek
cost-effective quality health care options for employees. Newco plans to
focus on this demand through its HMO and specialty managed care products
by offering a full range of products coupled with state-of-the-art managed
care techniques and competitive administrative costs. Newco recently began
marketing its "United 24" product in selected Wisconsin counties which
combines health, disability and workers' compensation coverage into a
single lower premium product.
- PURSUE ACQUISITIONS AND DEVELOP STRATEGIC ALLIANCES. Newco intends to
continue to pursue strategic acquisitions and alliances, including
agreements with providers that it believes will complement or enhance its
existing products and/or markets. Since 1996, Newco has expanded its HMO
operations through two new start-up HMO's in the northern half of
Wisconsin in a partnership arrangement with two major providers. Newco
also recently completed the acquisition of the remaining interest in CNR.
Further, Newco believes that additional strategic alliances will enable
Newco to provide additional products and services in its existing markets.
- EXPAND GEOGRAPHICALLY. Newco intends to continue to expand its activities
outside of its traditional areas of operation both inside and outside of
Wisconsin. Compcare continues to increase its market share in southeastern
Wisconsin by expanding its provider networks in counties surrounding
Milwaukee. Newco has recently initiated a plan to expand Heartland Dental,
its dental HMO product, to selected market territories in a number of
states in the upper midwest. Newco continues to expand its life and
disability products through a brokerage sales effort in the upper Midwest.
The workers' compensation product is now being actively marketed in Iowa
and Illinois, and Newco seeks additional opportunities to expand the
workers' compensation business through acquisitions or strategic joint
ventures. In addition, Newco may acquire other managed care companies or
related lines of business in order to enter new markets both inside and
outside of Wisconsin.
- LEVERAGE BCBSUW RELATIONSHIP. When BCBSUW increases its direct or
indirect ownership of Newco to approximately 51%, Compcare intends to
license and use the Blue Service Marks with its products. Newco believes
this licensing and use will give Compcare a marketing and sales advantage
over its other managed care competitors in its markets. In addition, as a
result of its affiliation with BCBSUW, including through the Service
Agreements, Newco has access to BCBSUW's extensive database of health care
claims information. Newco believes this database provides it with a
competitive advantage since it is able to utilize the database to design,
underwrite, price and administer its products more effectively.
HMO PRODUCTS
PRODUCTS
Compcare, a wholly owned subsidiary of Newco, offers a variety of HMO and
POS products throughout Wisconsin. POS products have become the coverage of
choice for a number of employers as they provide a complete replacement for
programs which include a PPO plan or both traditional indemnity
41
<PAGE>
and HMO coverages. Compcare offers its members a broad network of providers
which include all three of the major physician hospital organizations in
Southeastern Wisconsin.
Valley, Newco's joint venture with Midelfort, 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
combined a traditional HMO plan with an out-of-network benefit with deductible
and coinsurance; (iv) a Medicare Supplement product, an individual product
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, Newco's joint venture with CHS and UHC, offers a comprehensive group
plan which incorporates some co-payments and deductibles and a modified
comprehensive group plan which incorporates co-payments and deductibles as well
as coinsurance on certain benefits such as hospitalization and specialty care.
Unity also offers an individual plan, including an in-area conversion plan, and
a Medicare Supplement plan. In addition, Unity markets POS products with a wide
variety of benefit options.
The POS plans provide significant incentives for their members to utilize
the plans' managed care benefits and provide reduced benefits and increased
deductibles and co-payments when services are rendered by providers outside of
the HMO networks. In order to receive the higher level of benefits available
within the network, a member must receive care from a primary care physician or
be referred to a specialist by the primary care physician. These incentives
lower the overall premium for the group, even though the POS premiums tend to be
slightly higher than comparable traditional HMO products. POS plans provide a
greater level of health care cost control than a traditional HMO and an
indemnity plan. POS plans are sold generally as a complete replacement for an
employer's HMO and indemnity offerings.
MARKETING AND CUSTOMERS
Marketing HMO products generally is a two-step process. Presentations are
made first to employers. Once selected by an employer, Newco then directly
solicits members from the employee base. During periodic "open enrollments,"
when employees are permitted to change health care programs, Newco uses
advertising and work site presentations to attract new members. Virtually all of
the HMO employer group contracts are renewable annually.
Significant factors in HMO selection by employers and employees include the
composition of provider networks, quality of services, price, choice and scope
of benefits and market presence. To the extent permitted by OCI and the federal
government, Newco can offer an employer a wide spectrum of benefit options,
including federally qualified and non-federally qualified products. To address
rising health care costs, some employers now consider a variety of health care
options to encourage employees to use the most cost-effective form of health
care services. These options, which include HMO and POS plans, may either be
self-funded or provided by third parties.
As of March 31, 1998, HMO membership consisted of the following (in numbers
of individuals):
<TABLE>
<CAPTION>
COMMERCIAL
--------------------
HMO POS MEDICAID TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Compcare........................................... 105,076 34,839 29,617 169,532
Valley............................................. 24,002 12,252 4,065 40,319
Unity.............................................. 62,698 16,343 5,253 84,294
--------- --------- ----------- ---------
191,776 63,434 38,935 294,145
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
Trends in membership over the last several years have shown that there is
strong growth in Newco's POS and Medicaid products, with slower growth in HMO
membership.
42
<PAGE>
Compcare's operations in the seven counties in Southeastern Wisconsin
account for approximately 90% of its medical membership. The remainder of
Compcare's membership is spread throughout Wisconsin. Valley operates in a 15
county area in Western Wisconsin, and Unity operates in a 31 county area in
Southwestern and Central Wisconsin. During 1996, Newco entered into two
strategic partnerships to offer HMO products in Northern Wisconsin. Compcare
Northwest is a partnership with the Duluth Clinic to bring managed care
operations to the underserved rural market. Northwoods Health Plans, LLC is a
joint venture formed with Howard Young Health Care, Inc., a leading provider of
health care services in North Central Wisconsin. Newco believes that expansion
efforts should contribute to increased enrollment by attracting new employer
groups, by increasing penetration in existing employer groups, and by broadening
its access to the Medicaid population.
The following table identifies the seven group contracts with the largest
HMO earned premium for 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
EARNED PREMIUMS IN 1997
-------------------------
<S> <C>
Medicaid............................................................ 12.5%
State of Wisconsin.................................................. 11.7
Federal Employee Health Benefits Program............................ 4.5
Briggs & Stratton Corporation....................................... 3.1
City of Milwaukee................................................... 3.0
General Motors Corporation.......................................... 3.0
Milwaukee County.................................................... 2.8
-----
Subtotal........................................................ 40.6
Other employer groups (3,567 in number)............................. 59.4
-----
100.0%
-----
-----
</TABLE>
The HMOs have significant enrollment among federal, state and municipal
government employees, as well as employees represented by collective bargaining
units. Newco believes that health care will continue to be an important
negotiating issue with organized labor groups and the reputation of Newco's HMOs
are advantageous to its future marketing efforts.
Through one of the Service Agreements, Newco utilizes BCBSUW's salaried
sales force, that as of December 31, 1997, consisted of 20 account
representatives and customer relations personnel, 36 account executives, one
agency manager, four agency consultants, and five sales directors, to market HMO
products. Newco directly employs a sales staff of seven account executives, one
sales director, one agency manager and two agency consultants who market
products for Unity as well as BCBSUW.
PROVIDERS
Compcare, Valley and Unity contract with physicians and hospitals to provide
medical services to their members. Members designate one physician in the
network as their primary care provider and are required to seek non-emergency
care from this physician.
Compcare has an extensive provider network in Southeastern Wisconsin, which
included 2,702 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
43
<PAGE>
relationship in Compcare's provider network. Compcare's contracts with providers
renew annually. Compcare considers its relationships with its provider networks
to be good and has been able to renew its provider contracts on acceptable
terms.
Approximately 57.6% of Valley's medical and other benefits are provided
under an arrangement with Midelfort and its affiliate Luther Hospital, which
Newco believes is the leading medical services provider in Eau Claire,
Wisconsin. Arrangements with three smaller area clinics and five other hospitals
comprise the majority of the other Valley medical and other benefits provided.
As of December 31, 1997, Valley's provider network consisted of 321 physicians.
Approximately 86% 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 accounted for the majority of Valley's
hospital services. The relationship with Midelfort is established through the
Valley joint venture agreement, which is renewable by the parties through
December 31, 2002. Valley's contracts with its other providers renew annually.
Newco considers its relationships with Midelfort and its other providers for
Valley to be good and has been able to renew provider contracts on acceptable
terms.
Unity contracts with CPN, an Independent Physician Association ("IPA"), and
UHC, an affiliate of the University of Wisconsin Hospital and Clinics, which
together provide all of the physician services for Unity's membership throughout
its 31 county service area. The contracts with CPN and UHC are renewable through
October 1, 2004. CPN and UHC collectively contract with approximately 400
primary care providers and 2,100 specialists and ancillary health care
providers. In addition, Unity contracts directly with approximately 50 acute
care and specialty care hospitals. Newco believes its CPN and UHC provider
relationships are good, and CPN and UHC have been able to renew their provider
contracts on acceptable terms.
Compcare, Valley and Unity manage the cost of health care provided to their
members through the method of payment and risk-sharing programs with physician
groups and hospitals and with their utilization management program. The method
of payment consists of a mixture of capitation, fee schedules and discounted
fee-for-service arrangements. Capitation allows the payment of a fixed amount
per member per month to providers, regardless of services provided, which
stabilizes medical and dental costs. Capitation encourages providers to avoid
unnecessary utilization of hospital, physician and ancillary health care
services. For the three months ended March 31, 1998, approximately 37%, 24% and
96% of Compcare's, Valley's and Unity's medical benefits, respectively, were
provided under capitated arrangements.
For certain medical providers, compensation for services is calculated on a
discounted fee-for-service basis. Under this arrangement, Newco will reimburse
physician groups for services rendered based upon negotiated fee schedules or
usual and customary charges less an agreed upon discount. Hospitals may be
reimbursed at a set per diem rate for each inpatient day, on a flat rate per
procedure basis, or on a discounted charge basis. In fee-for-service
arrangements, risks associated with utilization are retained by Compcare and
Valley. However, such arrangements provide Compcare and Valley with greater
pricing flexibility and opportunities to benefit by application of underwriting
on a group specific or individual basis. Furthermore, fee schedule-based
compensation allows Compcare and Valley to better target improvement in loss
ratios through product development and benefit modification. Such changes are
more difficult in a capitated system since capitation levels must be
renegotiated before any effective changes can be made to benefits or products.
Some of the capitated physician groups and hospitals in Compcare's provider
network elect to participate in stop-loss arrangements with Newco. 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.
44
<PAGE>
OPERATIONS OF JOINT VENTURE ARRANGEMENTS
Valley is operated as a joint venture with Midelfort. The joint venture
began in 1992 and had an initial five year term. The joint venture was renewed
for an additional three year term 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, 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 $1.7 million, $1.0 million and $1.0
million during 1997, 1996 and 1995, respectively, and $0.5 million for the three
months ended March 31, 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
under the terms of the joint venture agreement, Newco would have no ongoing
interest in Valley.
Unity is operated as a joint venture among Newco and its partners, CHS and
UHC. The joint venture agreements have a ten year term which run through
November 1, 2004. During the term of the joint venture, 50% of the pre-tax
profits are shared with the joint venture partners, 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 $0.6 million for the three months ended March 31, 1998. The
partners have the option to repurchase the businesses originally sold to Newco
and the increased membership related to their respective provider networks on
November 1, 1999 or November 1, 2004. CHS has the right to repurchase the former
HMO-W business related to the rural provider networks and the Unity legal entity
for the book value of Unity related to the business being repurchased plus
$500,000. If CHS exercises this repurchase option, Newco would need to transfer
the remaining Unity business to one of its other Managed Care Companies. UHC has
the option to repurchase the former U-Care business related to the University of
Wisconsin provider network for the value of the net worth of Unity related to
the business being repurchased plus $500,000. Exercise of the repurchase option
ends the joint venture with respect to that partner but the venture would
continue with the others.
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 joint venture partners.
MANAGEMENT INFORMATION SERVICES
Each of Newco's HMOs utilizes information systems developed and/or
customized specifically to meet the needs of the HMO. The information systems
support marketing, sales, underwriting, contract administration, billing,
financial and other administrative functions as well as provider capitation and
claims administration, provider management, quality management and utilization
review.
Newco continually evaluates, upgrades and enhances the information systems
which support its operations. Information systems utilized by Compcare and
Valley are outsourced to a third party. Compcare is in the process of changing
its outsourcing vendor to upgrade its capabilities.
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES
Newco has been focusing on the growth of the specialty products and services
it offers. Such products and services include prepaid dental care, life and
disability insurance, workers' compensation, managed behavioral health, 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.
45
<PAGE>
DENTAL
At year end 1997, a separate corporate entity, Heartland Dental Plan, Inc.
("HEARTLAND DENTAL") was established to manage Newco's dental HMO operations
previously known as Dentacare. Prepaid dental services are provided to 167,901
members as of March 31, 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 245 dental providers as of December 31, 1997.
Heartland Dental competes with other regional and national managed care dental
plans, indemnity dental insurance, self funded dental plans and direct
reimbursement dental programs.
Heartland Dental offers ten different products with varying benefit options,
most of which cover all preventive and diagnostic services. Other services are
offered at various levels of coverage. All products cover pre-existing
conditions and the full range of dental services, including orthodontics.
Heartland Dental was established as a separate entity to facilitate growth of
prepaid dental business outside of Wisconsin.
LIFE AND DISABILITY
Newco offers group term life and AD&D coverages as well as dependent life
and accelerated death benefits. Short and long-term disability products have
been designed to provide income replacement for an employee who becomes disabled
through a non-work related situation. Newco's Rapid Pay plan is a unique
short-term disability product by which claimants receive benefits on a timely
basis with minimal up-front paperwork. As of December 31, 1997, Newco had a
total of 233,221 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, which is licensed to do
business in 39 states and the District of Columbia, and ceded to United
Heartland Life Insurance Company ("UHLIC"), which is licensed in Ohio and
Wisconsin. United Wisconsin Insurance Company ("UWIC"), which sells disability
products, is licensed in 35 states and the District of Columbia. Newco competes
with national providers of group life and disability coverage.
An insurance company's rating is an important factor in establishing its
competitive position. In 1997, UWIC, UWLIC and UHLIC were assigned ratings of
"A-" "(Excellent)" by A.M. Best Company, Inc. ("BEST"). The "A-" "(Excellent)"
rating is the fourth highest rating given to insurance companies.
MANAGED CARE WORKERS' COMPENSATION
Through United Heartland, Inc. ("UNITED HEARTLAND"), Newco applies managed
care techniques to the workers' compensation market in Wisconsin. United
Heartland is a managing general agent that until January 1, 1995 was owned
equally by Newco and Aon Corporation ("AON"). On January 1, 1995, Newco
exercised its option to acquire Aon's interest in United Heartland, thereby
making United Heartland a wholly owned subsidiary of Newco. The workers'
compensation coverage sold through United Heartland is underwritten by UWIC in
those states where UWIC is licensed to provide such coverage. A reinsurer
underwrites risk for coverage in those states where UWIC is not licensed to
provide workers' compensation coverage. Premium revenue produced by United
Heartland approximated $21.0 million during 1997. During 1997 and the first
quarter of 1998, Newco retained 60% of the workers' compensation risk and ceded
the other 40% to a reinsurer. The workers' compensation market, both nationally
and in the state of Wisconsin, is extremely competitive. Competition has
primarily come from the large, national multi-line property and casualty
insurance companies.
46
<PAGE>
Newco believes the key elements to success in the workers' compensation
insurance business are service to employers and control of workers' compensation
costs through comprehensive loss control and claims management procedures. As
part of its underwriting process, United Heartland performs a loss control
review of each prospective insured prior to making a commitment to provide
coverage. It also scrutinizes 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.
In claims management, United Heartland utilizes medical management resources
to assist in the adjustment of its claims, which include: (i) access to BCBSUW's
usual and customary charges database; (ii) the PPO network established by Newco
for United Heartland clients; and (iii) access to the hospital bill audit and
medical staff of Newco as needed in claims handling. Newco believes this managed
care capability, combined with a commitment to communicating with employers,
employees and medical providers, assists United Heartland in monitoring the
major cost factors of workers' compensation claims. Cost savings have been
demonstrated as United Heartland's customers over the six year period ended
December 31, 1997 have experienced a 16% drop in the cost of their workers'
compensation claims.
MANAGED CARE CONSULTING
Through Meridian Resource Corporation ("MERIDIAN"), Newco specializes in
providing consulting and technical services to insurance companies, employers,
providers, government agencies, coalitions and other organizations to make
decisions regarding health care benefits and more effective health care
delivery. Consulting services include health care data analysis, hospital cost
indexing and analysis, feasibility studies and economic analysis. Technical
services include hospital bill audit, data analysis and reporting, claims audit
and subrogation recovery services. Meridian also has established a niche in
collecting salvage and subrogation recoveries for self-insured groups and other
health insurers. Newco competes against other stand-alone companies that provide
similar cost reduction strategies and other large insurance companies that have
these functions.
Newco's combined medical management functions are conducted through Meridian
Managed Care, Inc. ("MMC"). MMC primarily serves the population of Compcare and
BCBSUW but also markets its programs to non-affiliated organizations. MMC
controls costs by promoting quality and efficiency. Central to its effectiveness
is promoting and developing partnerships with providers.
MMC's utilization management program provides comprehensive, custom-designed
strategies which protect its members and control costs by ensuring
cost-effective, quality care. MMC's traditional utilization management program
offers inpatient prior authorization, admission review, continued stay review,
discharge planning, patient education, appropriateness review, and outpatient
procedure review. Case management identifies high risk and/or high cost care. By
focusing on these cases, case managers can negotiate cost effective alternatives
to care, decrease hospitalization, and reduce health care costs.
MMC's nurseline triage programs is designed to reduce an expensive
inefficiency in today's health care delivery system. Nurses are available 24
hours a day, seven days a week, to help make informed health care decisions. The
nurses use clinically developed algorithms to provide primary care assessment,
decision counseling, self-care information and referrals.
Newco's disease management programs are designed to limit or slow the
progression of the disease process while improving or maintaining the patient's
health. Such programs include asthma, diabetes, congestive heart failure and
prenatal programs. MMC has been able to demonstrate significant cost savings,
improved satisfaction and improved outcomes in these small, high cost,
vulnerable populations.
Revenues from managed care consulting services amounted to $10.7 million for
the year ended December 31, 1997.
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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, TPAs and re-pricers. Proservices competes
with other hospital software vendors and national suppliers of electric claims
processing.
MANAGED BEHAVIORAL HEALTH
CNR Health, Inc. ("CNR") is a multifaceted managed care organization that
provides cost-effective behavioral health care management solutions to a variety
of customers. In December 1997, Newco increased its ownership of CNR from 53% to
100%. CNR's primary products include behavioral health management, provider
networks, employee assistance programs, medical management, 24-hour triage,
disability management, claims administration and Healthy Additions, its prenatal
program. Additionally, 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.
Through this array of products, CNR customers include insurance companies,
self-funded employers, third party administrators, Medicaid, and other
governmental entities. Through its managed care programs, CNR managed
approximately 898,000 lives as of March 31, 1998, while its revenues for the
year ended December 31, 1997 were $18.8 million.
COMPETITION
The managed care industry is highly competitive. During the past few years,
the managed care industry in Wisconsin and the upper Midwest has experienced
consolidation. Newco believes the principal competitive features affecting its
ability to retain and increase membership include the price of benefit plans
offered, the composition of provider networks, quality of service,
responsiveness to user demands, financial stability, comprehensiveness of
coverage, diversity of product offerings and market presence and reputation.
Although Newco is a leading provider of managed care services in Wisconsin,
Newco may experience increased competition in the future. Newco competes with
national competitors for its HMO products including Humana, Inc. and United
HealthCare Corp. The Unity HMO competes with Dean Health Plan, Inc. in the
Madison area and surrounding counties. Many of Newco's competitors are larger,
have considerably greater financial resources and distribution capabilities and
offer more diversified types of insurance coverage than Newco.
REINSURANCE
Newco manages the risk it retains through the use of reinsurance. Newco
maintains in force both "quota share" and "excess of loss" reinsurance treaties.
Quota share reinsurance is a contractual arrangement whereby the reinsurer
assumes an agreed percentage of certain risks insured by the ceding insurer and
shares premium revenue and losses proportionately. Newco's quota share
reinsurance treaties allocate the total amount of business subject to the
treaties between Newco and the respective parties to the treaties. Through quota
share reinsurance, UHLIC assumes 100% of certain life coverages underwritten by
UWLIC and cedes to BCBSUW 100% of certain medical coverages underwritten by
UWIC. 40% of the workers' compensation business is ceded to an independent
reinsurer. Excess of loss reinsurance is used to cap the amount of loss retained
by Newco on individual claims or a series of claims. Excess of loss reinsurance
is utilized by the HMOs to limit their exposure to inpatient hospital claims or,
in the case of
48
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Compcare, to organ transplants. On the life and disability business, the Company
limits its retention per claim to $75,000. For workers' compensation claims,
Newco limits its retention per claim to $75,000, retains the first $250,000 of a
loss, which it shares with its quota share reinsurer, and cedes losses between
$250,000 and $10,000,000 on an excess of loss basis to third party reinsurers.
Except for affiliates of Newco, all reinsurers with which Newco contracts are
rated "A-" "(Excellent)" or better by Best.
SERVICE AGREEMENTS
Newco and various of its subsidiaries purchase services from, or provide
services to, BCBSUW pursuant to written agreements (the "SERVICE AGREEMENTS").
Services covered by these agreements include marketing, information systems,
legal, investment, actuarial, accounting, underwriting and other administrative
and management services. Fees under the Service Agreements are calculated on a
cost basis. Costs directly attributable to a particular company are paid by such
company. Costs that are not specific to any 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, the OCI reviews the Service Agreements to ensure that the
agreements are reasonable and fair to the interests of the insurance companies
that are parties to the agreements. For the year ended December 31, 1997, Newco
paid approximately $9.3 million for such services, and received approximately
$14.6 millon from BCBSUW for the provision of such services.
After the Distribution, Newco may provide certain services to AMSG pursuant
to a written agreement (the "AMSG SERVICE AGREEMENT"). Services that AMSG may
utilize pursuant to the AMSG Service Agreement include investment management,
investment accounting, risk management, accounting and financial audit and
corporate communications. Fees under the AMSG Service Agreement for investment
management and investment accounting will be based on a percentage of the
portfolio plus a flat rate for each company whose investments are being handled
by Newco. Fees for risk management will be based on a percent of the annual
premiums for risk management insurance. Fees for accounting and financial audit
and corporate communications will be based on an hourly rate. The AMSG Service
Agreement will terminate on December 31, 1999 unless terminated earlier upon
appropriate notice. The AMSG Service Agreement will be submitted to OCI for its
review and lack of disapproval.
INVESTMENTS
Newco attempts to minimize its business risk through conservative investment
policies. Investment guidelines set quality, concentration and return
parameters. Newco's investment guidelines permit investment 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, mutual funds and equity securities. Up to 10% of Newco's fixed
income portfolio (at the time of purchase) may be invested in issues rated BB by
Standard & Poor's Corporation or an equivalent rating from another nationally
recognized securities rating organization. The remainder of the individual fixed
income issues must carry an investment grade rating at the time of purchase, and
the ongoing average portfolio rating must be "A-" or better, based on ratings of
Standard & Poor's Corporation or another nationally recognized securities rating
organization. Newco invests in securities authorized by applicable state laws
and regulations and follows investment policies designed to maximize yield,
preserve principal and provide liquidity. Newco's portfolio contains no
investments in mortgage loans or non-publicly traded securities except for
investments in affiliates. However, at December 31, 1997, $21.8 million of
Newco's investment portfolio was invested in investment grade government agency
mortgage-backed securities.
49
<PAGE>
With the exception of short-term investments and securities on deposit with
various state regulators, investment responsibilities have been delegated to
external investment managers. Such investment responsibilities, however, must be
carried out within the investment parameters established by Newco, which are
amended from time to time.
Securities which may be sold prior to maturity to support Newco's investment
strategies, such as in response to changes in interest rates, the yield curve
concentration or sector concentration, are classified as available for sale and
are stated at market value with unrealized holding gains and losses reported as
a component of shareholders' equity in accordance with Statement of Financial
Accounting Standard No. 115. Securities for which Newco has both the positive
intent and ability to hold to maturity are recorded at amortized cost. Bonds
which are held to meet deposit requirements of the various states are classified
as held to maturity. All other bonds are classified as available for sale.
The table below reflects investment results for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Average invested assets(1)........................... $ 166,564 $ 180,679 $ 179,505 $ 178,019 $ 183,348
Net investment income(2)............................. 8,571 10,659 10,317 2,448 2,582
Average yield........................................ 5.15% 5.90% 5.75% 5.50% 5.63%
Net realized gain (losses)........................... 1,094 8,381 11,921 2,322 1,379
Net unrealized gains (losses) on stocks & bonds...... 3,511 3,959 3,211 338 4,138
</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 adjusting
for other interest income and expense.
REGULATION
Government regulation of employee benefit plans, including health care
coverage, health plans and Newco's specialty managed care products, is a
changing area of law that varies from jurisdiction to jurisdiction and generally
gives responsible administrative agencies broad discretion. Newco believes that
it is in compliance in all material respects with the various federal and state
regulations applicable to its current operations. To maintain such compliance,
it may be necessary for Newco or a subsidiary to make changes from time to time
in its services, products, structure or operations. Additional governmental
regulation or future interpretation of existing regulations could increase the
cost of Newco's compliance or otherwise affect Newco's operations, products,
profitability or business prospects.
Newco is unable to predict what additional government regulations, if any,
affecting its business may be enacted in the future or how existing or future
regulations might be interpreted. A number of jurisdictions have enacted small
group insurance and rating reforms which generally limit the ability of insurers
and health plans to use risk selection as a method of controlling costs for
small group business. These laws may generally limit or eliminate use of
pre-existing conditions exclusions, experience rating and industry class rating
and limit the amount of rate increases from year to year. Under these laws, cost
control through provider contracting and managing care may become more
important, and Newco believes its experience in these areas will allow it to
compete effectively.
Recently, federal legislation significantly expanded regulation of group
health plans and health care coverage. The new laws place restrictions on the
use of pre-existing conditions and eligibility restrictions based upon health
status and prohibit cancellation of coverage due to claims experience or health
status. Federal reform also prohibits insurance companies from declining
coverage to small employers. Additional
50
<PAGE>
federal laws which take effect in 1998 include prohibitions against separate,
lower, dollar maximums for mental health benefits and requirements relating to
minimum coverage for maternity inpatient hospitalization. Newco does not
anticipate that these new laws will affect its comparable profitability or
business prospects because all insurance companies across the country are
subject to the same requirements. Furthermore, many requirements of the federal
legislation are similar to small group reforms that have been in place for many
years. Newco will be able to utilize and expand upon the cost control measures
initiated as a result of a small group reform.
Increasingly, states are considering various health care reform measures and
are adopting laws or regulations, which may limit Newco's health plans' and
insurance operations' ability to control which providers are part of their
networks and may hinder their ability to effectively manage utilization and
cost. Newco is unable to predict what reforms, if any, may be enacted or how
these reforms would affect Newco's operations.
HMOS. Wisconsin and the other states in which Newco offers HMO products
have enacted statutes regulating the activities of those health plans. Most
states require periodic financial reports from HMOs licensed to operate in their
states and impose minimum capital or reserve requirements. In addition, certain
of Newco's subsidiaries are required by state regulatory agencies to maintain
restricted cash reserves represented by interest-bearing instruments which are
held by trustees or state regulatory agencies to ensure that adequate financial
resources are maintained or to act as a fund for insolvencies of other HMOs in
the state.
As a federally qualified HMO, Compcare must file periodic reports with, and
is subject to periodic review by, the Department of Health and Human Services,
the Health Care Financing Administration and the Office of Prepaid Health Care.
Newco's other HMOs are only subject to state regulation because they are not
federally qualified HMOs.
Newco's HMOs which have Medicaid contracts are subject to both federal and
state regulation regarding services to be provided to Medicaid enrollees,
payment for those services and other aspects of the Medicaid program. Medicaid
has in force and/or has proposed regulations relating to fraud and abuse,
physician incentive plans and provider referrals which may affect Newco's
operations.
Several of Newco's health plans have contracts with the Federal Employees
Health Benefit Plan ("FEHBP"). These contracts are subject to extensive
regulation, including complex rules relating to the premiums charged. FEHBP has
the authority to retroactively audit the rates charged and may seek premium
refunds and other sanctions against health plans participating in the program.
Newco's health plans which have contracted with FEHBP are subject to such audits
and may be requested to make such refunds.
INSURANCE REGULATION. Newco's insurance subsidiaries are subject to
regulation by the Department of Insurance in each state in which the entity is
licensed. Regulatory authorities exercise extensive supervisory power over
insurance companies in regard to the licensing of insurance companies; the
amount of reserves which must be maintained; the approval of forms and insurance
policies used; the nature of, and limitation on, an insurance company's
investments; periodic examination of the operations of insurance companies; the
form and content of annual statements and other reports required to be filed on
the financial condition of insurance companies; and the establishment of capital
requirements for insurance companies. Newco's insurance company subsidiaries are
required to file periodic statutory financial statements in each jurisdiction in
which they are licensed. Additionally, such companies are periodically examined
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
51
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(iv) other business factors. The RBC Model Act formula is used by the states to
monitor trends in statutory capital and surplus for the purpose of initiating
regulatory action. The NAIC adopted similar RBC requirements for property and
casualty insurance companies effective December 31, 1994, and for health
organizations including HMOs, effective December 31, 1998. Newco has calculated
the risk-based capital for its life and property and casualty subsidiaries as of
December 31, 1997 using the applicable RBC formula. These calculations produced
risk-based capital levels which exceed the levels at which the RBC formulas
recommends intervention by regulatory authorities. The RBC requirements for HMOs
are not expected to have a significant effect on Newco's capital requirements.
Under Wisconsin law, insurance companies must provide OCI with advance
notice of any dividend that is more than 15% larger than any dividend for the
corresponding period of the previous year. In addition, OCI may disapprove any
"extraordinary" dividend; that is, 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; or (ii) with respect to a life insurer, net income less realized gains for
the calendar year preceding the date of the dividend; or (iii) with respect to a
non-life insurer, the greater of (ii) above or the aggregate net income less
realized gains for the three calendar years preceding the date of the dividend
less distributions made within the first two of those three years.
Based upon the financial results of Newco's combined insurance entities for
the year ended December 31, 1997, $4.2 million is available for 1998 dividend
payments to their parent without regulatory approval.
INSURANCE HOLDING COMPANY REGULATIONS. Newco is a holding company which
conducts all of its business through combined entities and is subject to
insurance holding company laws and regulations. Under Wisconsin law, acquisition
of control of Newco, and thereby indirect control of its insurance subsidiaries,
requires the prior approval of OCI. "Control" is defined as the direct or
indirect power to direct or cause the direction of the management and policies
of a person. Any purchaser of 10% or more of the outstanding voting stock of a
corporation is presumed to have acquired control of the corporation and its
subsidiaries unless OCI, upon application, determines otherwise.
Each of Newco's combined insurance entities is subject to regulation under
state insurance holding company regulations. Such insurance holding company laws
and regulations generally require registration with the state Department of
Insurance and the filing of certain reports describing capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations. Various notice and reporting requirements generally apply
to transactions between companies within an insurance holding company system,
depending on the size and nature of the transactions. Certain state insurance
holding company laws and regulations require prior regulatory approval or, in
certain circumstances, prior notice of, certain material intercompany transfers
of assets as well as certain transactions between the regulated companies, their
parent holding companies and affiliates, and acquisitions.
UTILIZATION REVIEW REGULATIONS. A number of states have enacted laws and/or
adopted regulations governing the provision of utilization review activities.
Generally, these laws and regulations require compliance with specific standards
for the delivery of services, confidentiality, staffing, and policies and
procedures of private review entities, including the credentials required of
personnel. Some of these laws and regulations may affect certain operations of
Newco's business units.
A few jurisdictions have enacted laws which hold managed care organizations
liable for damages resulting from wrongful denial of care or payment for care.
Newco provides utilization review services through CNR in at least one state
that has passed such legislation. The liability law encompasses entities which
do not provide insurance coverage, but merely provide utilization review
services. CNR is developing risk management procedures and believes that it will
be able to minimize potential liability for coverage decisions.
52
<PAGE>
ERISA. The provision of goods and services to or through certain types of
employee health benefit plans is subject to ERISA. ERISA is a complex set of
laws and regulations that are subject to periodic interpretation by the United
States Department of Labor. ERISA places certain controls on how Newco's
business units may do business with employers covered by ERISA, particularly
employers that maintain self-funded plans. The Department of Labor is engaged in
an ongoing ERISA enforcement program which may result in additional constraints
on how ERISA-governed benefit plans conduct their activities. There recently
have been legislative attempts to limit ERISA's preemptive effect on state laws.
If such limitations were to be enacted, they might increase Newco's liability
exposure under state law-based suits relating to employee health benefits
offered by Newco's health plans and specialty businesses and may permit greater
state regulation of other aspects of those businesses' operations.
EMPLOYEES
As of June 30, 1998, Newco had [1,234] full-time and [45] part-time
employees, of whom [202] were managerial and supervisory personnel. Of these
employees, [89] were represented by a union. Newco considers its relations with
its employees to be good.
TRADEMARKS
"Compcare" is a federally registered service mark of Newco. Newco has filed
for and maintains various other trademarks and trade names at the federal level
and in the State of Wisconsin. Although Newco considers its registered service
marks, trademarks and trade names important in the operation of its business,
the business of Newco is not dependent on any individual service mark, trademark
or tradename.
PROPERTIES
Newco occupies common facilities with BCBSUW and is charged a proportionate
share of the cost of such facilities under the Service Agreements. Newco's
corporate headquarters are located in Milwaukee, Wisconsin in a 235,000 square
foot building leased by BCBSUW. Newco also utilizes space in a Milwaukee
regional office leased by BCBSUW, which has approximately 299,000 square feet of
office and warehouse space. In addition, Newco's business is sold and serviced
in four other Wisconsin regional offices leased by BCBSUW and a 40,000 square
foot facility in Sauk City, Wisconsin owned by Unity.
LEGAL PROCEEDINGS
Newco is currently, and is from time to time, subject to claims and suits
arising in the ordinary course of its business. Although the results of
litigation proceedings cannot be predicted with certainty, Newco believes that
the ultimate resolution of these proceedings will not have a material adverse
effect on its financial condition or results of operations.
53
<PAGE>
MANAGEMENT OF NEWCO
DIRECTORS OF NEWCO
Newco's Board of Directors is classified into three classes, designated
Class I, Class II and Class III, each class to be as nearly equal in number of
directors as possible. The term of office of the Class I directors expires at
the 1999 annual meeting of shareholders, the term of office of the Class II
directors expires at the 2000 annual meeting of shareholders, and the term of
office of the Class III directors expires at the 2001 annual meeting of
shareholders. In May 1998, UWS, as the sole shareholder of Newco at that time,
elected the following directors to the Newco Board of Directors: Messrs. Forbes,
Hickman, Hefty, Abdoo, Johnson, Dunham and Menden, Dr. Rupp and Ms. Skornicka.
The Class I directors consist of Messrs. Dunham and Forbes and Dr. Rupp; the
Class II directors consist of Messrs. Abdoo, Johnson and Menden; and the Class
III directors consist of Messrs. Hefty and Hickman and Ms. Skornicka. Directors
elected to succeed those directors whose terms expire will be elected to a
three-year term of office. All directors hold office until the next annual
meeting of shareholders at which their terms expire and until their successors
have been duly elected and qualified. Directors are not eligible to stand for
re-election after the age of 70. Newly created directorships resulting from any
increase in the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, retirement, disqualification, removal or
other cause will be filled solely by the affirmative vote of a majority of the
remaining directors then in office. Increases or decreases in the number of
directors will be apportioned among the classes as nearly equal as possible, and
any additional director of any class elected to fill a vacancy resulting from an
increase in such class will hold office for a term that will coincide with the
remaining term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director.
The name, age (as of the Effective Date), class of directorship and business
background of each of the persons who serve and will serve as directors of Newco
are set forth below. Messrs. Forbes, Abdoo and Dunham, Dr. Rupp and Ms.
Skornicka will resign as directors of UWS as of the Effective Date of the
Distribution, while Messrs. Hefty, Hickman, Johnson and Menden will remain as
directors of UWS following the Effective Date.
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- --------------------------------------------------------------------------------------
<S> <C>
CLASS I DIRECTORS
Michael D. Dunham Director of UWS from 1997 to 1998; Director of BCBSUW from August 1996 until May 1997;
Age: 53 President 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 UWS from 1991 to 1998; Director of BCBSUW since 1974; President and Chief
Age: 66 Executive Officer and Director of Badger Meter, Inc., a manufacturer of products using
flow measurement technology, since 1985; Director of Universal Foods Corporation,
Firstar Corporation and Firstar Trust Company, a subsidiary of Firstar Corporation.
William C. Rupp, M.D. Director of UWS from 1997 to 1998; President and Chief Executive Officer of
Age: 52 Luther/Midelfort Mayo Health System since 1994; President of Midelfort Clinic since
1991; practicing physician in oncology since 1982.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- --------------------------------------------------------------------------------------
<S> <C>
CLASS II DIRECTORS
Richard A. Abdoo Director of UWS from 1991 to 1998; Director of BCBSUW from 1991 until May 1997;
Age: 54 Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy
Corporation, a diversified energy services holding company, since May 1991; Chairman
of the Board and Chief Executive Officer of Wisconsin Electric Power Company since
1990; Director of Wisconsin Energy Corporation since 1988; Director of Wisconsin
Electric Power Company since 1989; Chairman of the Board and Chief Executive Officer
of Wisconsin Natural Gas Company from 1990 to 1995; Director of Wisconsin Natural Gas
Company from 1989 to 1995; Director of Marshall & Ilsley Corporation, a bank holding
company, and Sundstrand Corporation.
William R. Johnson Director of UWS since 1993; Chairman of Johansen Capital Investment and Financial
Age: 71 Consulting since 1986; President of Johansen Capital Associates, Inc., a financial and
investment consultant to corporations and individuals, since 1984; Chairman, President
and Chief Executive Officer of National Investment Services of America, Inc., an
investment manager of pension, profit sharing and other funds, from 1968 to 1984.
Eugene A. Menden Director of UWS since 1991; Director of BCBSUW from January 1987 until 1992. Prior to
Age: 67 his 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 June 1996.
CLASS III DIRECTORS
Thomas R. Hefty Director of UWS since 1983; President of UWS from 1986 to 1998 and Chairman of the
Age: 51 Board and Chief Executive Officer of UWS from 1991 to 1998; Chairman of the Board and
Director of BCBSUW since 1988; President of BCBSUW since 1986; Executive Vice
President of BCBSUW from 1982 to 1986; Deputy Insurance Commissioner for OCI from 1979
to 1982; Director of Artisan Funds, Inc., an investment company registered under the
Investment Company Act of 1940, as amended.
James C. Hickman Director of UWS since 1991; Director of BCBSUW since December 1986; Century Investment
Age: 70 Management Company; Emeritus Professor and Emeritus Dean of the School of Business of
the University of Wisconsin-Madison since July 1993; Professor in the UW School of
Business from 1990 to 1993; Dean of the UW School of Business from 1985 to 1990.
Carol N. Skornicka Director of UWS from 1997 to 1998; Senior Vice President - Corporate Development,
Age: 56 Secretary and General Counsel of Midwest Express Holdings, Inc. and Midwest Express
Airlines, Inc. since March 1998; Vice President, Secretary and General Counsel of
Midwest Express Holdings, Inc. and Midwest Express Airlines, Inc. since May 1996;
Secretary of the Wisconsin Department of Industry, Labor and Human Relations from 1991
to May 1996; Director of Astral Aviation, Inc. since May 1996.
</TABLE>
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DIRECTORS' MEETINGS AND COMMITTEES
Newco's Board of Directors expects to have four regularly scheduled meetings
per year and will hold such special meetings as it deems advisable, to review
significant matters affecting Newco and to act upon matters requiring Board
approval. The Board of Directors will have standing Executive, Finance,
Management Review and Audit Committees.
The Executive Committee will discharge certain of the responsibilities of
the Board of Directors when so instructed by the Board and will study proposals
and make recommendations to the Board. Specifically, the Executive Committee
will have the authority to approve long range corporate and strategic plans,
advise and consult with management on corporate policies, approve the annual
operating plan and approve major changes in policy affecting new services and
programs. It is anticipated that the Executive Committee will not meet regularly
but instead will meet only when the entire Board of Directors is unable to do
so. The members of the Executive Committee will be Messrs. Forbes (Chairman),
Abdoo and Hickman.
The Finance Committee will approve investment policies and plans and approve
the investment of funds of Newco, consult with management regarding real estate,
accounts receivable and other assets, determine the amounts and types of
insurance carried by Newco, advise and consult with management regarding
selection of insurance carriers and corporate tax policies and discharge certain
other responsibilities of the Board of Directors when so instructed by the
Board. The members of the Finance Committee will be Messrs. Hefty, Rupp and
Johnson and Ms. Skornicka.
The Management Review Committee will evaluate the performance of Newco's
executive officers, approve executive officer development programs, determine
the compensation of the executive officers and review management's
recommendations as to the compensation of other key personnel, act as the
nominating committee for officers and directors and make recommendations to the
Board of Directors regarding the types, methods and levels of director
compensation, administer the compensation plans for the officers, directors and
key employees, and discharge certain other responsibilities of the Board of
Directors when so instructed by the Board. The Management Review Committee will
consider a nominee for election to the Board of Directors recommended by a
shareholder if the shareholder submits the nomination in compliance with the
requirements of Newco's By-Laws relating to nominations by shareholders. The
members of the Management Review Committee will be Messrs. Forbes, Abdoo, Dunham
and Hickman.
The Audit Committee will review the scope and timing of the audit of Newco's
financial statements by Newco's independent public accountants and review with
these accountants Newco's management policies and procedures with respect to
auditing and accounting controls. The Audit Committee also will review with the
independent accountants the financial statements for Newco and the auditors'
reports and management letter. The Audit Committee will select and engage
Newco's accountants and review and approve all related party transactions. In
addition, it will review and evaluate Conflict of Interest statements and
discharge certain other responsibilities of the Board of Directors when so
instructed by the Board. The members of the Audit Committee will be Messrs.
Menden, Abdoo, Dunham and Hickman.
COMPENSATION OF DIRECTORS
Directors who are officers or employees of Newco will receive no
compensation as such for service as members of the Board of Directors or
Committees of the Board. A director who is not an officer or employee of Newco
will receive a fee of $1,100 for each Board or Committee meeting attended, and a
monthly retainer of $750. In addition, each Committee Chairman receives a
monthly fee of $250.
Newco also will maintain a Deferred Compensation Plan for Directors under
which members of Newco's Board of Directors may elect to defer receipt of all or
a portion of their directors' fees. Under such plan, Newco will be obligated to
repay the deferred fees, in either a lump sum or installments as
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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 Newco's Board of Directors.
EXECUTIVE OFFICERS OF NEWCO
The name, age, proposed title as of the Effective Date of the Distribution
and business background of each of the persons who are expected to become on the
Effective Date the executive officers of Newco are set forth below. The
individuals named below are currently officers of UWS and various of its
subsidiaries, but will resign from all positions held at UWS or its remaining
subsidiaries as of the Effective Date of the Distribution. The business address
of each of the prospective 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 the
Company.
THOMAS R. HEFTY is the Chairman of the Board, President and Chief Executive
Officer of Newco. Mr. Hefty was elected President of UWS in December 1986 and
Chairman of the Board and Chief Executive Officer of UWS in July 1991. Since
1987, he has served in various capacities with UWS's subsidiaries and joint
ventures. Mr. Hefty has been Chairman of the Board and a director of BCBSUW
since 1988, having joined BCBSUW in 1982 and later serving as President. From
1979 to 1982, Mr. Hefty was Deputy Insurance Commissioner for OCI.
STEPHEN E. BABLITCH will be Vice President, General Counsel and Secretary of
Newco. Mr. Bablitch joined UWS in October 1996 as General Counsel, Vice
President and Secretary. He has been General Counsel, Vice President and
Secretary of BCBSUW since October 1996 as well. Prior to joining UWS and BCBSUW,
Mr. Bablitch was an attorney with Dewitt, Ross and Stevens, Madison, Wisconsin
from 1991 to 1996.
DEVON W. BARRIX will be Vice President of Newco. He was elected a Vice
President of UWS in December 1994 following UWS's acquisition of Unity and its
parent, HMO-W. Mr. Barrix was the Chief Executive Officer of Unity (f/k/a HMO of
Wisconsin Insurance Corporation) from 1985 until November 1994 and was the
President of Unity until August 1996.
ROGER A. FORMISANO will be Executive Vice President and Chief Operating
Officer of Newco. Mr. Formisano was elected Executive Vice President and Chief
Operating Officer of UWS in August 1995. He had been a Vice President of UWS
since February 1992. He serves as President of Compcare and Meridian. Mr.
Formisano was a Professor in the School of Business of the University of
Wisconsin-
57
<PAGE>
Madison from 1978 to 1993. He also serves in various capacities with UWS's
subsidiaries and joint ventures, and is a director of Integrity Mutual Insurance
Company and Wisconsin Sports Authority, Inc., both privately held companies.
MARK H. GRANOFF will be Vice President of Newco. Mr. Granoff was elected a
Vice President of UWS in August 1991 and was elected President of UWIC in July
1991 and UHLIC in March 1997. He has served in various capacities with some of
UWS's other subsidiaries since April 1991. Mr. Granoff has been a Vice President
of BCBSUW since 1990. Prior to joining BCBSUW, from 1988 to 1990 Mr. Granoff
served as Employee Benefits Marketing Vice President for Business Men's
Assurance Company of America, an insurance company.
GAIL L. HANSON will be Vice President and Treasurer of Newco. Ms. Hanson has
been Treasurer of UWS since 1987 and was elected Vice President in August 1996.
She has served in various capacities with UWS's subsidiaries since 1984. Ms.
Hanson was elected Vice President and Treasurer of BCBSUW in August 1996 and had
been Assistant Vice President and Treasurer since 1987, having joined BCBSUW in
1984 as the Controller of UWIC.
C. EDWARD MORDY will be Chief Financial Officer of Newco. Mr. Mordy has been
a Vice President and the Chief Financial Officer of UWS since 1987. He has
served in various capacities with UWS's subsidiaries since 1987. Mr. Mordy has
been a Vice President and Corporate Controller of BCBSUW since 1986.
EMIL E. PFENNINGER will be Vice President of Newco. Mr. Pfenninger was
elected a Vice President of UWS in February 1995 and President of United
Heartland in September 1990. Mr. Pfenninger was the Underwriting Manager with
CNA Insurance Companies from December 1987 to September 1990.
PENNY J. SIEWERT will be Vice President of Regional Services of Newco. Ms.
Siewert was elected Vice President of Regional Services of UWS in August 1995.
Ms. Siewert joined BCBSUW in 1977 and has served in various capacities. Ms.
Siewert was elected Vice President of Operations for BCBSUW in 1990, Vice
President of Special Markets for BCBSUW in 1992, and Vice President of Regional
Services for BCBSUW in 1995.
MARY TRAVER will be Vice President of Newco. Ms. Traver has been a Vice
President of UWS since 1988. Ms. Traver was Vice President and General Counsel
of UWS from 1988 to 1996 and Secretary from January 1992 to 1996. She has served
in various capacities with some of UWS's subsidiaries and joint ventures 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.
58
<PAGE>
EXECUTIVE COMPENSATION
HISTORICAL COMPENSATION
The following table summarizes the total compensation paid by UWS or its
subsidiaries to Newco's Chief Executive Officer and each of the other four
individuals initially expected to be the most highly compensated executive
officers of Newco for services rendered to UWS and BCBSUW for the years ended
December 31, 1997, 1996 and 1995. Pursuant to the Service Agreements (as
hereinafter described), certain executive officers of Newco provide services to
BCBSUW. Costs and expenses associated therewith are shared in accordance with
the terms of Service Agreements. See "Certain Relationships and Related
Transactions." On and after the Effective Date, each executive officer and
employee of Newco will be paid at the same salary or rate he or she was
receiving at UWS immediately prior to the Effective Date.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------------------- ----------------------------------
AWARDS PAYOUTS
------------------- -------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING LTIP
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1,2) COMPENSATION($)(3) OPTIONS/SARS(#) PAYOUTS($)(1)
- ---------------------------- --------- ----------- -------------- --------------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas R. Hefty ............ 1997 $ 475,008 $ 97,377 $ 7,885 35,000 $ 5,294
CHAIRMAN OF THE BOARD, 1996 410,028 177,542 9,355 30,000 --
PRESIDENT & CHIEF EXECUTIVE 1995 390,024 91,265 6,693 -- 10,832
OFFICER
Roger A. Formisano ......... 1997 244,536 22,008 904 25,000 2,894
EXECUTIVE VICE PRESIDENT & 1996 235,128 61,604 3,424 15,000 --
CHIEF OPERATING OFFICER; 1995 179,840 41,004 4,999 -- 4,406
PRESIDENT OF COMPCARE
HEALTH SERVICES INSURANCE
CORPORATION AND MERIDIAN
RESOURCE CORPORATION
Mark H. Granoff ............ 1997 154,260 53,837 2,839 7,000 1,571
PRESIDENT, UNITED WISCONSIN 1996 147,612 49,243 4,380 4,000 --
GROUP 1995 139,512 34,161 2,898 -- 3,955
C. Edward Mordy ............ 1997 184,848 20,333 3,385 18,000 2,370
VICE PRESIDENT & CHIEF 1996 176,040 55,805 3,106 10,000 --
FINANCIAL OFFICER 1995 161,496 18,734 2,567 -- 5,502
Penny J. Siewert(5) ........ 1997 174,576 18,180 -- 15,000 2,061
VICE PRESIDENT OF REGIONAL 1996 163,152 53,677 1,737 7,000 --
SERVICES 1995 117,388 33,808 -- 7,500 --
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION($)(4)
- ---------------------------- ---------------------
<S> <C>
Thomas R. Hefty ............ $ 4,000
CHAIRMAN OF THE BOARD, 3,750
PRESIDENT & CHIEF EXECUTIVE 3,750
OFFICER
Roger A. Formisano ......... 4,000
EXECUTIVE VICE PRESIDENT & 3,750
CHIEF OPERATING OFFICER; 3,750
PRESIDENT OF COMPCARE
HEALTH SERVICES INSURANCE
CORPORATION AND MERIDIAN
RESOURCE CORPORATION
Mark H. Granoff ............ 3,857
PRESIDENT, UNITED WISCONSIN 3,690
GROUP 3,488
C. Edward Mordy ............ 4,000
VICE PRESIDENT & CHIEF 3,750
FINANCIAL OFFICER 3,750
Penny J. Siewert(5) ........ 4,000
VICE PRESIDENT OF REGIONAL 3,017
SERVICES 2,935
</TABLE>
- ------------------------------
(1) Amounts include compensation earned and deferred at the election of the
named executive officer during the fiscal years indicated and paid
subsequent to the end of each fiscal year.
(2) Amounts represent bonuses earned under each of UWS's Profit Sharing Plan and
Management Incentive Plan.
(3) Amounts represent reimbursement for the payment of taxes and the payout for
unused personal days. The amounts indicated do not include perquisites and
other personal benefits to the named executive officers which for each such
officer did not exceed the lesser of $50,000 or 10% of the officer's total
annual salary and bonus.
(4) Amounts represent UWS's matching contributions to the UWSI/BCBSUW 401(k)
Plan.
(5) Ms. Siewert was promoted to an executive officer of UWS on September 1,
1995.
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<PAGE>
The following table indicates all grants by UWS of options to purchase
shares of UWS Common Stock to the executive officers listed in the Summary
Compensation Table during 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
---------------------------------------------------------------- STOCK PRICE
# OF SECURITIES % OF TOTAL OPTION/ APPRECIATION FOR
UNDERLYING SARS GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/ EMPLOYEES IN FISCAL BASE PRICE EXPIRATION --------------------
EXECUTIVE SARS GRANTED(1) YEAR ($/SHARE) DATE 5% 10%
- ------------------------------ ----------------- ------------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas R. Hefty............... 35,000 19.60% $ 25.625 01/01/09 $ 713,784 $1,917,903
Roger A. Formisano............ 25,000 14.00 25.625 01/01/09 509,845 1,369,931
Mark H. Granoff............... 7,000 3.90 37.125 06/12/09 206,823 555,724
C. Edward Mordy............... 18,000 10.10 25.625 01/01/09 367,089 986,350
Penny J. Siewert.............. 15,000 8.40 25.625 01/01/09 305,907 821,958
</TABLE>
- ------------------------------
(1) All options granted vest at the rate of 25% each year on the anniversary of
the grant date. All options listed for Messrs. Hefty, Formisano, Mordy and
Ms. Siewert were granted on 1/2/97. The options listed for Mr. Granoff were
granted on 6/12/97.
As set forth in the Employee Benefits Agreement, options to purchase UWS
Common Stock held by individuals who will be executive officers, directors or
employees of Newco will be converted into options to purchase shares of Newco
Common Stock and the number and exercise price of the options will be adjusted
to provide equivalent value to each option holder; provided, however, that
options held by Messrs. Hefty and Mordy will be converted into options to
purchase shares of AMSG Common Stock and Newco Common Stock and the exercise
price of the options will be adjusted to provide equivalent value. See
"--Treatment of UWS Options and SARs as a Result of the Distribution" and
"Agreements Between UWS and Newco."
No Stock Appreciation Rights ("SARs") or options to purchase shares of UWS
Common Stock were exercised by any of the executive officers listed in the
Summary Compensation Table during 1997. The number of unexercised SARs and
options and the total value of unexercised in-the-money SARs and options to
purchase shares of UWS Common Stock at December 31, 1997 are shown in the table
below. See "--Treatment of UWS Options and SARs as a Result of the Distribution"
and "Agreements Between UWS and Newco."
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END (#) AT FY-END ($)
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
- -------------------------------------------------------- -------------------------- ----------------------------
<S> <C> <C>
Thomas R. Hefty......................................... 66,657 / 83,886 $262,763 / $310,263
Roger A. Formisano...................................... 24,018 / 44,256 71,081 / 95,769
Mark H. Granoff......................................... 21,268 / 18,006 64,300 / 72,300
C. Edward Mordy......................................... 32,112 / 38,704 127,788 / 144,412
Penny J. Siewert........................................ 5,500 / 24,000 17,688 / 29,625
</TABLE>
- ------------------------
(1) Options become immediately exercisable upon a change in control of UWS. A
change in control includes: the acquisition by certain persons or groups of
25% or more of the outstanding Common Stock; a change in the membership of a
majority of the Board of Directors, if not approved by the incumbent
Directors; or the approval by UWS's shareholders of a plan of liquidation,
an agreement to sell substantially all of UWS's assets, or certain mergers,
consolidations or reorganizations. Newco does not believe that the
Distribution constitutes a change in control of UWS.
60
<PAGE>
LONG-TERM INCENTIVE PLAN
UWS adopted a Long-Term Incentive Plan ("LTIP") for, among others, the
executive officers of UWS. The LTIP is administered by UWS's Management Review
Committee. Awards are based on the achievement of certain growth objectives
established at the beginning of each three-year plan cycle by the Management
Review Committee. Goals are set at minimum, target and maximum levels for each
objective. Payout awards are determined at the end of each three-year plan cycle
and are prorated when actual results for any objective lie between the minimum
and maximum goal levels. Payout awards are based on a percentage of each
participant's average base salary range midpoint during the applicable
three-year cycle. The components and maximum payout potential for the 1997-1999
Plan for Messrs. Hefty, Formisano, Granoff and Mordy and Ms. Siewert are:
Average Annual Increase in Combined Surplus of BCBSUW and Newco calculated in
accordance with generally accepted accounting principles, 10.00%; Average Annual
Increase in Government Programs Reimbursement, 2.50%; Increase in Combined
Revenue for BCBSUW and Newco, 4.16%. The potential value of payouts under the
1997-1999 LTIP to the listed executive officers is shown in the following table:
LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE OR NON-STOCK PRICE-BASED PLANS(2)
OTHER PERIOD UNTIL ----------------------------------
NAME MATURATION OR PAYOUT(1) THRESHOLD TARGET MAXIMUM
- ------------------------------------------------------ ----------------------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Thomas R. Hefty....................................... 3 Years $ 42,944 $ 64,383 $ 107,263
Roger A. Formisano.................................... 3 Years 23,038 24,540 57,544
Mark H. Granoff....................................... 3 Years 9,070 13,598 22,654
C. Edward Mordy....................................... 3 Years 18,643 27,950 56,565
Penny J. Siewart...................................... 3 Years 17,809 26,700 44,482
</TABLE>
- ------------------------
(1) The 1997-1999 LTIP has been discontinued and a pro rata payout was made in
June 1998 as follows: Mr. Hefty--$ ; Mr. Formisano--$ ; Mr. Mordy--$ ;
Ms. Siewert--$ ; and Mr. Granoff-- $ .
(2) The average midpoint of the named executive's annual base salary range for
the three-year term is calculated using the actual 1996 and 1997 base salary
range midpoint and the estimated 1998 base salary range midpoint. The
estimated 1998 midpoint is 4% higher than the 1997 actual base salary range
midpoint.
DEFINED BENEFIT PENSION PLANS
UWS has provided a non-contributory defined benefit plan to its salaried
employees pursuant to the UWSI/BCBSUW Salaried Pension Plan (the "SALARIED
PLAN"). The Salaried Plan utilizes a cash balance formula which provides annual
pay credits of 4% plus transition credits of 4% for the number of years of
service on December 31, 1996 (up to 15 years). Interest is credited on the cash
balance account based on the yield on ten-year Treasury securities for the month
of October of the previous year. Newco will assume sponsorship (with BCBSUW) of
the Salaried Plan and the related trust and will continue to provide benefits
for all individuals who, immediately prior to the Effective Date of the
Distribution, were participants in the Salaried Plan.
In addition, UWS provides to executive officers defined benefits from the
UWSI/BCBSUW Supplemental Executive Retirement Plan (the "SERP"). The SERP
provides a total benefit (taking into account Salaried Plan benefits and Social
Security benefits) of 2% of final five-year average pay per year of service (up
to 30 years). Newco will assume sponsorship of the SERP and all liabilities with
respect thereto. The
61
<PAGE>
approximate annual benefits for the following pay classifications and years of
service are expected to be as follows:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEAR OF SERVICE
-----------------------------------------------
REMUNERATION 15 20 25 30 OR MORE
- --------------------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
$125,000..................................... $ 37,500 $ 50,000 $ 62,500 $ 75,000
$150,000..................................... $ 45,000 $ 60,000 $ 75,000 $ 90,000
$175,000..................................... $ 52,500 $ 70,000 $ 87,500 $ 105,000
$200,000..................................... $ 60,000 $ 80,000 $ 100,000 $ 120,000
$225,000..................................... $ 67,500 $ 90,000 $ 112,500 $ 135,000
$250,000..................................... $ 75,000 $ 100,000 $ 125,000 $ 150,000
$275,000..................................... $ 82,500 $ 110,000 $ 137,500 $ 165,000
$300,000..................................... $ 90,000 $ 120,000 $ 150,000 $ 180,000
$400,000..................................... $ 120,000 $ 160,000 $ 200,000 $ 240,000
$500,000..................................... $ 150,000 $ 200,000 $ 250,000 $ 300,000
$600,000..................................... $ 180,000 $ 240,000 $ 300,000 $ 360,000
</TABLE>
The persons named in the Summary Compensation Table have the following years
of credited service: Mr. Hefty--15 years; Mr. Formisano--6 years; Mr. Granoff--7
years; Mr. Mordy--12 years; Ms. Siewert-- 21 years.
CHIEF EXECUTIVE OFFICER SUPPLEMENTAL COMPENSATION AGREEMENT
In September 1997, UWS entered into a Supplemental Compensation Agreement
with Mr. Hefty, President, Chairman and Chief Executive Officer, as incentive
for continued employment, and to reward Mr. Hefty for activities that result in
an increase in the shareholder value of UWS as a result of ownership of AMS.
Under the terms of the agreement, Mr. Hefty will be awarded phantom shares of
UWS Common Stock, upon the occurrence of specific triggering events. The
Distribution is not a specific triggering event under the Supplemental
Compensation Agreement, and the parties to such Agreement have agreed that the
Supplemental Compensation Agreement shall terminate upon completion of the
Distribution. Another such event is continued employment by Mr. Hefty until his
attainment of age 55. Phantom shares earned by Mr. Hefty will be paid out in
cash on the date that he ceases to be an employee of UWS. However, if Mr.
Hefty's employment terminates prior to age 55, the number of phantom shares to
which he is entitled will be reduced for each full or partial year between his
termination date and the date he would have reached age 55.
TREATMENT OF UWS OPTIONS AND SARS AS A RESULT OF THE DISTRIBUTION
UWS has granted options ("UWS OPTIONS") to purchase UWS Common Stock under
the United Wisconsin Services, Inc. Equity Incentive Plan and the 1995 Director
Stock Option Plan (collectively, the "UWS EQUITY INCENTIVE PLANS") to persons
who are or will be executive officers, non-employee directors and employees of
Newco. On the Effective Date, each UWS Option held by the executive officers,
directors and employees of Newco, other than Messrs. Hefty and Mordy and Ms.
Hanson, will be converted into options to purchase shares of Newco Common Stock
and adjusted to provide equivalent by value (i) multiplying the number of shares
of UWS Common Stock subject to the option by the Newco Adjustment Factor, and
(ii) dividing the exercise price per share of the option by the Newco Adjustment
Factor. The "NEWCO ADJUSTMENT FACTOR" is defined as the quotient obtained by
dividing (x) the closing market price of the shares of UWS Common Stock on the
Distribution Date by (y) the closing market price of the shares of Newco Common
Stock on the day immediately following the Distribution Date. The converted
options will be assumed by Newco under the Newco/UWS, Inc. Equity Incentive
Plan. In addition, the converted options will provide that (i) for purposes of
the vesting, exercisability and duration
62
<PAGE>
of these options, service with UWS as an executive officer, director or employee
shall be deemed to be service with Newco, and (ii) upon the occurrence of
certain events resulting in a change of control of Newco, these options will
become immediately vested and exercisable to the extent not previously vested
and exercisable.
UWS Options held by persons who will be employees and directors of AMSG
after the Distribution, other than certain UWS options held by Mr. Miller, will
be adjusted to provide equivalent value by (i) multiplying the number of shares
of UWS Common Stock subject to the option by the AMSG Adjustment Factor, and
(ii) dividing the exercise price per share of the option by the AMSG Adjustment
Factor. The "AMSG ADJUSTMENT FACTOR" is defined as the quotient obtained by
dividing (x) the closing market price of the shares of UWS Common Stock on the
Distribution Date by (y) the closing market price of the shares of AMSG Common
Stock on the day immediately following the Distribution Date.
UWS Options held by certain other individuals will be treated differently
than set forth above. Each option to purchase one share of UWS Common Stock held
by Messrs. Hilliard, Weyers, Hefty and Mordy and Ms. Hanson, and UWS options
held by Mr. Miller which were granted in December 1995, will be converted into
an option to purchase one share of AMSG Common Stock and an option to purchase
one share of Newco Common Stock. In order to provide equivalent value to each
option holder, the exercise price of each option to purchase shares of AMSG
Common Stock will be adjusted to equal the exercise price of the option prior to
the Distribution divided by the AMSG Adjustment Factor, and the exercise price
of each option to purchase shares of Newco Common Stock will be adjusted to
equal the exercise price of the option prior to the Distribution divided by the
Newco Adjustment Factor. All remaining options held by Mr. Miller will be
adjusted to provide equivalent value by (i) multiplying the number of shares of
UWS Common Stock subject to the option by the AMSG Adjustment Factor, and (ii)
dividing the exercise price per share of the option by the AMSG Adjustment
Factor.
UWS has awarded SARs ("UWS SARS") under the United Wisconsin Services, Inc.
1992 Stock Appreciation Rights Plan (the "UWS SAR PLAN") to executive officers
and employees of Newco. Upon the Distribution, each UWS SAR awarded to these
executive officers and employees will be assumed by Newco under a newly
established Newco SAR Plan, which will be substantially similar to the UWS SAR
Plan, and converted into SARs with respect to shares of Newco Common Stock. UWS
SARs awarded to executive officers and employees of Newco will be converted by
multiplying the number of SARs by the Newco Adjustment Factor and dividing the
grant price of the SARs by the Newco Adjustment Factor.
NEWCO BENEFIT PLANS FOLLOWING THE DISTRIBUTION
NEWCO EQUITY INCENTIVE PLAN
Prior to the Distribution, the Newco Board of Directors and UWS, as sole
shareholder of Newco, approved the Newco/UWS, Inc. Equity Incentive Plan (the
"NEWCO EQUITY INCENTIVE PLAN"). The Newco Equity Incentive Plan provides for the
granting of stock options, restricted stock awards and other awards of shares of
Newco Common Stock or Newco Common Stock equivalents payable to Newco employees,
including executive officers, and to Newco Directors. All outstanding awards
granted under the UWS Equity Incentive Plans and the UWS SAR Plan to expected
executive officers, directors and employees of Newco will be assumed by Newco
under the Newco Equity Incentive Plan.
PURPOSE. The purpose of the Newco Equity Incentive Plan is to promote the
success and enhance the value of Newco by linking the personal interests of the
participants with an incentive for outstanding performance. The Newco Equity
Incentive Plan further is intended to provide flexibility to Newco in its
ability to motivate, attract and retain the services of participants upon whose
judgment, interest and special effort the successful conduct of its operation is
dependent.
ADMINISTRATION. The Newco Equity Incentive Plan will be administered by the
Management Review Committee of the Board of Directors. The Management Review
Committee is authorized to determine the
63
<PAGE>
size and types of employee awards under the Newco Equity Incentive Plan, the
employees to whom they will be granted, the terms and conditions of such awards,
including the date or dates on which awards become exercisable either in whole
or in part, their expiration date and other matters in their discretion.
ELIGIBILITY AND SHARES SUBJECT TO PLAN. Any key employee of Newco or any
key employee of its subsidiaries is eligible for an award under the Newco Equity
Incentive Plan if selected by the Management Review Committee. Subject to the
provisions of the Newco Equity Incentive Plan, the Management Review Committee
would have full authority and discretion to determine the employees to whom
awards will be granted and the amount and form of such awards. It is estimated
that there are approximately persons will be employed by Newco and its
subsidiaries who would be eligible for selection for participation by the
Management Review Committee. Newly elected directors also will receive awards
under the Newco Equity Incentive Plan.
Under the Newco Equity Incentive Plan, the maximum number of shares of Newco
Common Stock granted or subject to awards will be 4.5 million (approximately
% of the issued and outstanding shares of Newco Common Stock as of the
Effective Date). The Newco Equity Incentive Plan will assume the outstanding
awards granted under the UWS Equity Incentive Plans and the UWS SAR Plan and
approximately shares of Newco Common Stock will be subject to such awards.
Upon the cancellation or expiration of an award, the unissued shares of Newco
Common Stock subject to such awards will again be available for additional
awards under the Newco Equity Incentive Plan.
TYPE OF AWARDS. Under the Newco Equity Incentive Plan, the Management
Review Committee is authorized to grant to employees: (i) stock options that
qualify as incentive stock options under Section 422 of the Code ("INCENTIVE
STOCK OPTIONS"); (ii) stock options that do not so qualify ("NONQUALIFIED STOCK
OPTIONS"); (iii) shares of Newco Common Stock, subject to such restrictions as
determined under the Newco Equity Incentive Plan ("RESTRICTED STOCK"); (iv)
SARs; and (v) Performance Units or Performance Shares. The Management Review
Committee is entitled to set the option price of stock options issued to
employees at any price it determines is equal to or in excess of the fair market
value of Newco Common Stock on the date of grant. Stock options entitle the
recipient to purchase a specific number of shares of Newco Common Stock after a
specified period of time at an option price set by the Management Review
Committee. No stock option can be exercised more than twelve years after the
date such option is granted. In the case of Incentive Stock Options, the
aggregate fair market value of the shares of stock with respect to which options
are exercisable for the first time by any recipient during any calendar year
cannot, under present tax rules, exceed $100,000. Newly elected directors will
receive Nonqualified Stock Options.
TERMS AND CONDITIONS. The term of any Incentive Stock Option or
Nonqualified Stock Option granted to an employee pursuant to the Newco Equity
Incentive Plan shall not exceed ten or twelve years, respectively (five years in
the case of a 10% or greater shareholder who is granted Incentive Stock
Options), and the option price per share therefor shall not be less than the
fair market value of the shares of Newco Common Stock on the date the option is
granted (110% of the fair market value in the case of a 10% or greater
shareholder who is granted Incentive Stock Options). Options are not exercisable
in any event prior to six months following the date of grant. Newly elected
directors shall receive, as of their date of election, Nonqualified Stock
Options with respect to 6,000 shares of Newco Common Stock, exercisable at 100%
of fair market value.
SARs shall have a grant price at least equal to 100% of the fair market
value of the shares of Newco Common Stock if granted independently of any stock
option, or equal to the option price of the related stock option if granted in
connection with a stock option. The term of an SAR granted pursuant to the Newco
Equity Incentive Plan shall not exceed twelve years. SARs are not exercisable in
any event prior to six months following the date of grant.
Restricted Stock may be granted to employees in such amounts as the
Management Review Committee shall determine subject to the terms and provisions
of the Newco Equity Incentive Plan. Restricted
64
<PAGE>
Stock generally may not be sold or otherwise transferred for a certain period
(based on the passage of time, the achievement of performance goals or the
occurrence of other events as determined by the Management Review Committee).
During that period, however, participants may exercise full voting rights and
shall be entitled to receive all dividends and other distributions with respect
to shares of Restricted Stock. Restricted Stock shall not vest in any event
prior to six months following the date of grant.
The number and/or value of Performance Units or Performance Shares that will
be paid to participants shall be based on the extent to which performance goals,
as determined by the Management Review Committee, have been met. The performance
goals must be determined over a period of at least six months. At the time of
grant, each Performance Unit must have an initial value established by the
Management Review Committee and each Performance Share shall have an initial
value equal to the fair market value of the shares of Newco Common Stock on the
date of grant.
Awards under the Newco Equity Incentive Plan shall immediately vest and/or
be exercisable upon the occurrence of death, disability or retirement, or a
Change in Control (as defined in the Newco Equity Incentive Plan). Subject to
the terms of the Newco Equity Incentive Plan, awards may be exercised within
three months after termination of employment for any reason except death,
disability or retirement (but any awards held by a participant dismissed for
cause will immediately expire), within one year after the date of death (by the
participant's personal representative, legatees or heirs) if employed by Newco
at such date, within one year after a participant's employment with Newco is
terminated by disability, and within three years after a participant retires (as
defined in Newco's "tax qualified pension plan"). The Management Review
Committee may permit a participant to defer such participant's receipt of the
payment of cash or the delivery of shares of Newco Common Stock that would
otherwise be due.
FEDERAL INCOME TAX CONSEQUENCES OF ISSUANCES AND EXERCISES OF OPTIONS. An
optionee will not be deemed to have received taxable income upon the grant or
exercise of any Incentive Stock Option, provided that such shares of Newco
Common Stock are held for at least one year after the date of exercise and two
years after the date of grant. No gain or loss will be recognized by Newco as a
result of the grant or exercise of Incentive Stock Options. An optionee will be
deemed to receive ordinary income upon exercise of Nonqualified Stock Options in
an amount equal to the amount by which the fair market value of the shares of
Newco Common Stock on the exercise date exceeds the exercise price. The amount
of any ordinary income deemed to be received by an optionee due to a premature
disposition of the shares of Newco Common Stock acquired upon the exercise of an
Incentive Stock Option or upon the exercise of a Nonqualified Stock Option will
be a deductible expense for tax purposes for Newco.
In general, a recipient of other stock awards, including Newco Common Stock
equivalents, but excluding restricted stock awards (see below), will have
ordinary income equal to the cash or fair market value of the shares of Newco
Common Stock on the date received in the year in which the award is actually
paid. Newco will have a corresponding deductible expense in the same year in an
amount equal to that reported by the recipient as ordinary income. The
recipient's basis in the shares of Newco Common Stock received will be equal to
the fair market value of the stock when received and the recipient's holding
period will begin on that date. With respect to restricted stock awards, such
awards do not constitute taxable income under existing federal tax law until
such time as restrictions lapse with respect to the total award or any
installment. When any installment of securities are released from restriction,
the market value of such shares on the date of the lapse constitutes income to
the recipient in that year and is taxable at ordinary income rates, and Newco
will have a corresponding deductible expense in an amount equal to that reported
by the recipient as ordinary income and in the same year.
The Code, however, permits a recipient of a restricted stock award to elect
to have the award treated as taxable income in the year of the award and to be
subject to tax at ordinary income rates on the fair market value of all of the
shares awarded, based on the price of the shares on the date the recipient
receives a beneficial interest in such shares. The election must be made
promptly within time limits prescribed by the Code and the regulations
thereunder. Any appreciation in value thereafter would be
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taxed at capital gain rates when the restrictions lapse and the stock is
subsequently sold. However, should the market value of the stock at the time the
restrictions lapse and the stock is sold, be lower than at the date the award
was acquired, the recipient would have a capital loss, to the extent of the
difference. In addition, if after electing to pay tax on the award in the year
the award was received the recipient subsequently forfeits the award for any
reason, the tax previously paid is not recoverable.
Since the lapse of restrictions on restricted stock awards is accelerated in
the event of a change of control of Newco, such an acceleration may result in an
excess parachute payment, as defined in Section 280 (G) of the Code. In such
event, Newco's deduction with respect to such payment is denied and the
recipient is subject to a nondeductible 20% excise tax on such excess parachute
payment.
ADJUSTMENTS IN THE EVENT OF CAPITAL CHANGES. The Management Review
Committee may make appropriate adjustments to the number of shares available for
awards and the terms of outstanding awards under the Newco Equity Incentive Plan
to reflect any change in capital stock of Newco, issuance of any targeted stock,
split-up, stock dividend, exercisability of stock purchase rights, special
distribution to shareholders, combinations or reclassifications with respect to
any outstanding series or class of stock, or consolidation, merger or sale of
all or substantially all of the assets of Newco.
DURATION AND AMENDMENT OF THE NEWCO EQUITY INCENTIVE PLAN. No options,
Restricted Stock, SARs, Performance Units or Performance Shares will be awarded
under the Newco Equity Incentive Plan following the tenth anniversary of
approval of such plan. The Management Review Committee may terminate, amend or
modify the Newco Equity Incentive Plan with the approval of the Board of
Directors.
NONQUALIFIED COMPENSATION PLANS
Upon the Effective Date, Newco will assume sponsorship of the 1998
Nonqualified Profit Sharing Plan and the Management Incentive Plan
(collectively, the "NONQUALIFIED COMPENSATION PLANS"). Eligible employees of
Newco and its subsidiaries may receive a cash payment under the 1998
Nonqualified Profit Sharing Plan (the "PROFIT SHARING PLAN") based on Newco's
profitability as well as the profitability and customer satisfaction of the
employee's business unit or regional area, measured against targets set at the
beginning of the year (and adjusted as of the Effective Date). To be eligible to
receive a Profit Sharing Plan payment for the year, an employee must be employed
at the beginning of the year and remain employed through the date benefits are
paid (generally March of the following year), unless the termination is due to
retirement, death or disability. Payments can be up to 21% of the employee's
base pay, with an employee able to earn up to 7% of base pay based on Newco's
profitability, 7% of base pay based on the profitability of the employee's
business unit or regional area, and 7% of base pay based on the employee's
business unit or regional area achieving certain customer satisfaction
objectives. Generally, no payment will be made based on business unit or
regional area profitability or customer satisfaction if no payment is made based
on Newco's profitability.
Newco's executive officers and certain other employees also are eligible to
receive an annual performance bonus under the Management Incentive Plan. To be
eligible to receive a Management Incentive Plan bonus, the executive officer
must be employed at the beginning of the year and remain employed through the
date benefits are paid (by April 1 of the following year), unless the
termination is due to retirement, death or disability. The percentage of base
earnings paid is based on achievement of various performance levels and is
established separately for each executive officer. Payment under the Management
Incentive Plan is based one-third on achievement of business unit or regional
area financial results and two-thirds on achievement of individual or local area
performance objectives. Generally, no payment will be made under the Management
Incentive Plan if no payment is made under the Profit Sharing Plan.
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RETIREMENT PLANS
Upon the Effective Date, Newco will assume sponsorship (with BCBSUW) of the
UWSI/BCBSUW Salaried Pension Plan, the UWSI/BCBSUW Hourly Pension Plan, the
UWSI/BCBSUW 401(k) Plan and the UWSI/BCBSUW Union Employees' 401(k) Plan
(collectively, the "RETIREMENT PLANS"). Participants in the UWSI/BCBSUW 401(k)
Plan will be permitted to hold UWS Common Stock, as an investment option,
through the 1999 plan year. For purposes of eligibility, vesting, benefit
accrued and other matters, participants in the Retirement Plans prior to the
Effective Date will be credited with the compensation and term of service
credited to such participants as of the Effective Date as if the service had
been rendered to Newco. Participants in the Retirement Plans will have the same
accrued benefit following the Effective Date as was accrued under the Retirement
Plans as of the Effective Date.
Employees of Newco who are not covered under a collective bargaining
agreement will participate in the UWSI/BCBSUW 401(k) Plan after completing one
year of service. Contributions are based on compensation up to $160,000 (in
1998). Participants may make salary reduction contributions between 2% and 16%
of compensation up to a maximum, in 1998, of $10,000 per year. A matching
contribution of 50% of the first 5% of compensation is made by Newco. The salary
reduction contributions and matching contributions of highly compensated
employees may be reduced to comply with certain discrimination requirements of
the Code. The matching contribution will be made in shares of Newco Common
Stock. The salary reduction contributions are invested, at the discretion of the
participant, in mutual funds, collective funds or in shares of Newco Common
Stock. Salary reduction contributions are fully vested when made, while matching
contributions are vested ratably over a five-year period.
Bargaining unit employees of Newco will participate in the UWSI/BCBSUW Union
Employees 401(k) Plan after completing one year of service. Participants may
make salary reduction contributions between 1% and 16% of compensation up to a
maximum, in 1998, of $10,000 per year. A matching contribution of 50% of the
first 5% of compensation is made by Newco. Contributions are invested, at the
discretion of the participant, in mutual and collective funds. Salary reduction
contributions are fully vested when made while matching contributions are vested
over a six-year period.
Salaried employees of Newco will participate in the UWSI/BCBSUW Salaried
Pension Plan after completing one year of service. The benefit payable under
this plan is based on the participant's cash balance account. The cash balance
account was credited with an initial balance based on the participant's accrued
benefit as of December 31, 1996. The initial cash balance is increased by (i) an
annual credit of 4% of the participant's earnings up to $160,000 (in 1998); (ii)
an annual interest credit based on the interest rate on ten-year treasury
securities; and (iii) an annual transition credit equal to 4% of the
participant's earnings up to $160,000 (in 1998) with such annual transition
credit payable with respect to the cash balance account of any participant for
the lesser of 15 years or the participant's years of service as of December 31,
1996. A Participant is not vested in his retirement benefits until he completes
five years of service, at which time the participant becomes fully-vested. A
participant's retirement benefit is the actuarial equivalent of his cash balance
account and is generally paid in the form of a life annuity if the participant
is single or in the form of a joint and survivor annuity if the participant is
married. The retirement benefit may also be paid in other actuarial equivalent
forms, including a single sum.
SUPPLEMENTAL RETIREMENT PLAN
Upon the Effective Date, Newco will assume sponsorship of the SERP and all
liabilities with respect thereto. Participants in the SERP prior to the
Effective Date will be credited with the compensation and term of service
credited to such participants as of the Effective Date as if the service had
been rendered to Newco.
Executive officers of Newco may become participants in the SERP if they are
employed as a vice president or officer of Newco or its subsidiaries and are
designated as a participant by Newco's Employee Benefits Committee. A
participant who has completed five years of service with Newco or its
subsidiaries is
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eligible for a retirement benefit at age 65 equal to 2% of the participant's
final average earnings multiplied by the participant's years of service, less
both the participant's social security benefit and benefit under the UWSI/BCBSUW
Salary and Hourly Pension Plans. Benefits are paid in the form of a life annuity
with ten years certain at 70% to a single participant and in the form of an
actuarial equivalent joint and 50% survivor annuity for a married participant. A
reduced benefit is payable at any age.
DEFERRED COMPENSATION PLANS
Upon the Effective Date, Newco will create new deferred compensation plans
which will assume all liabilities (except liabilities relating to Mr. Miller)
with respect the United Wisconsin Services, Inc. Voluntary Deferred Compensation
Plan and the UWSI Deferred Compensation Plan for Directors (the "DEFERRED
COMPENSATION PLANS"). All assets in the Deferred Compensation Trust (other than
assets attributable to Mr. Miller's deferred compensation) will be transferred
to a new trust established by Newco.
Selected executive officers and directors of Newco may participate in the
Deferred Compensation Plan. Participants may elect in December of each year to
defer compensation earned in the following year. Amounts deferred will be
credited to an account. Upon termination of employment or termination of service
as a director, the participant will receive a distribution of the amount
credited such account in the form of a lump-sum of installments.
OTHER BENEFIT PLANS
Pursuant to the Employee Benefits Agreement, Newco will create plans for
management and other employees of Newco that generally are comparable to the
existing UWS benefit plans covering the expected employees of Newco.
AGREEMENTS BETWEEN UWS AND NEWCO
For purposes of governing certain of the ongoing relationships between AMSG
and Newco after the Distribution and to provide for an orderly transition on the
Effective Date to the status of two separate, independent companies, UWS and
Newco are entering into the various agreements described below. The discussion
below is a summary of the principal provisions of the Distribution and Indemnity
Agreement, the Employee Benefits Agreement, the Tax Allocation Agreement, the
AMSG Service Agreement and the Reinsurance Agreements. This summary does not
purport to be complete. Reference is made to the complete provisions of, and
such summary is qualified in its entirety by reference to, the forms of such
agreements, copies of which are filed as exhibits to the Registration Statement
of which this Information Statement forms a part.
DISTRIBUTION AGREEMENT
UWS and Newco will enter into the Distribution Agreement as of the Effective
Date providing for, among other things, the principal corporate transactions
required to effect the Distribution, the allocation between UWS and Newco of
assets and liabilities and certain other agreements governing the relationship
between UWS and Newco with respect to or in consequence of the Distribution.
THE REORGANIZATION. The Distribution Agreement will effect the following
transactions as of the Effective Date: (i) the contribution by UWS to Newco of
the outstanding shares of the Managed Care Companies; (ii) the contribution by
UWS to Newco of all assets utilized by UWS in its management and operations of
the Managed Care Companies; (iii) the contribution by UWS to Newco of working
capital to support the Management Business; (iv) the issuance by Newco to UWS of
shares of Newco Common Stock; (v) the assumption by Newco of certain
employee benefit plan liabilities associated with the operation of such
contributed businesses; (vi) the assumption by Newco of $70.0 million in a note
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obligation of UWS to BCBSUW; and (vii) the assumption by Newco of certain
accrued liabilities of UWS. [The items described in (v)--(vii) above are herein
referred to as "NEWCO LIABILITIES"].
The Distribution Agreement provides that Newco will hire all employees of
UWS and its subsidiaries (other than AMS and its subsidiaries). UWS will have no
further responsibility or liability with respect to the employment relationship
of such employees upon the Effective Date.
ASSUMPTION OF LIABILITIES AND INDEMNIFICATION. UWS and Newco will each be
responsible for all claims and liabilities relating to their respective
businesses, whether or not such claims and liabilities are asserted prior to the
Effective Date. All liabilities of the Managed Care Companies will be
transferred to Newco by operation of law. All liabilities of UWS, other than the
Newco Liabilities, will remain exclusively the liabilities of UWS, except as set
forth in the Tax Allocation Agreement, the Employee Benefits Agreement, the AMSG
Service Agreement or the Intellectual Property Agreement.
Subject to certain exceptions, the Distribution Agreement also provides for
certain indemnification by the parties. UWS has agreed to indemnify Newco
against any liabilities assumed or retained by UWS pursuant to the Distribution
Agreement and liabilities relating to (i) any breach by UWS or any of its
subsidiaries of the Distribution Agreement or any other agreement referred to
therein (the "ANCILLARY AGREEMENTS"); (ii) the operation of the businesses
conducted, or to be conducted, by UWS and its subsidiaries or the ownership of
its assets (other than businesses and assets to be contributed to Newco) both
prior to and following the Effective Date; (iii) with respect to employee
benefit plans sponsored by UWS, the failure of UWS to comply with provisions of
ERISA or of the Code, and (iv) any violations of the Code, or of federal or
state securities laws, in connection with the Distribution or with any filings
made with governmental agencies with respect thereto, or in connection with
operations of UWS's business after the Effective Date, except to the extent that
such violations, or allegations of violations, result from, or are related to,
the disclosure, or failure to disclose, information to Newco's corporate staff
by officers, directors, employees, agents, consultants and representatives of
UWS.
Newco has agreed to indemnify UWS against any liabilities assumed by Newco
or its subsidiaries pursuant to the Distribution Agreement, and liabilities
relating to (i) any breach by Newco or any of its subsidiaries of the
Distribution Agreement or any Ancillary Agreement, (ii) the operation of the
business conducted, or to be conducted, by Newco or its subsidiaries or the
ownership of its assets both prior to and after the Effective Date, (iii) with
respect to employee benefit plans sponsored by Newco, the failure of Newco to
comply with the provisions of ERISA or the Code, and (iv) any violations, or
allegations of violations, of the Code or federal or state securities laws in
connection with the Distribution or with any filings made with governmental
agencies with respect thereto, to the extent that such violations, or
allegations of violations, result from, or are related to, the disclosure, or
failure to disclose, information to UWS's corporate staff by officers,
directors, employees, agents, consultants and representatives of Newco.
The indemnities described above will be limited to the amount of the loss,
less insurance proceeds, net of deductibles and allocated paid loss
retro-premiums received by the indemnified party. The Distribution Agreement
also includes procedures for notice and payment of indemnification claims and
provides that the indemnifying party may assume the defense of a claim or suit
brought by a third party.
NONSOLICITATION. The Distribution Agreement provides that, for a period of
twelve months following the Distribution, UWS and its subsidiaries will not
employ or attempt to employ any Newco employee or attempt to induce any Newco
employee to leave his or her employment, and Newco and its subsidiaries will not
employ or attempt to employ any UWS employee or attempt to induce any UWS
employee to leave his or her employment.
ADDITIONAL COVENANTS. The Distribution Agreement provides that each of UWS
and Newco will be granted access to certain records and information in the
possession of the other party and requires retention for a period of seven years
following the Distribution of all such information in its possession, and
thereafter requires that each party give the other party prior notice of the
intention to dispose of such
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information. From and after the Effective Date, both Newco and UWS will promptly
transfer to the other, from time to time, any property received that is an asset
of the other. Funds received by one upon the payment of accounts receivable that
belong to the other will be transferred to the other by wire transfer not more
than five business days after receipt of such payment.
Except as stated in the Distribution Agreement, no party to such agreements
or any other agreement or document contemplated by the Distribution Agreement
has or shall be deemed to have under any representation or warranty as to: (i)
the assets, businesses or liabilities retained, transferred or assumed as
contemplated thereby; (ii) any consents or approvals required in connection with
the transfer or assumption by such party of any asset or liability contemplated
by the Distribution Agreement; (iii) the value or freedom from any lien, claim,
equity or other encumbrance of, or any other matter concerning, any assets of
such party; or (iv) the absence of any defenses or right of set off or freedom
from counterclaim with respect to any claim or other asset of any party. Except
as may expressly be set forth in the Distribution Agreement, all such assets
were, or are being, transferred, or are being retained, on an "as is," "where
is" basis and the respective transferees will bear the economic and legal risks
that any conveyance will prove to be insufficient to vest in the transferee a
title that is free and clear of any lien, claim, equity or other encumbrance.
Any disputes arising from or in connection with the Distribution Agreement
must be resolved in accordance with the dispute resolution procedures set forth
in the Distribution Agreement.
UWS has agreed to use its best efforts to maintain directors' and officers'
liability insurance coverage at least equal to the amount of UWS's current
directors' and officers' liability insurance coverage for a period of five years
with respect to the directors and officers of UWS who will become directors and
officers of Newco as of the Effective Date for acts as directors and officers of
UWS or one of its affiliates during periods prior to the Effective Date.
EMPLOYEE BENEFITS AGREEMENT
UWS and Newco have entered into the Employee Benefits Agreement providing
for the treatment of employee benefit matters and other compensation
arrangements in connection with the Distribution. On or prior to the
Distribution, Newco will offer to employ each active and inactive employee
employed by UWS (parent company only) immediately prior to the Effective Date,
including all employees laid-off, disabled or on leave of absence, unless such
employment has been terminated by UWS prior to the Effective Date. Employees at
UWS's subsidiaries will remain employed at such subsidiary. Generally, except as
noted herein, as of the Effective Date, Newco will assume sponsorship of, and
all liabilities under, all benefit plans, and all other plans, programs,
policies and arrangements sponsored by UWS (or jointly sponsored by UWS and
BCBSUW) and in effect prior to the Effective Date, and UWS will cease to have
any liability or obligation to individuals who become employees of Newco or one
of its subsidiaries ("NEWCO EMPLOYEES") under any UWS benefit plans, programs or
practices. All benefit plans sponsored by UWS's subsidiaries will remain
sponsored by such subsidiaries after the Effective Date. Newco will assume
liability for employment-related claims (including harassment and
discrimination) regardless of when filed with respect to all Newco Employees,
regardless of whether the claimant was, prior to the Effective Date, a UWS
employee.
Subject to local laws or regulations, UWS and Newco have agreed that, with
respect to individuals who, in connection with the Distribution, cease to be
employees of UWS or one of its subsidiaries and become Newco Employees, such
cessation will not be deemed a severance of employment for purposes of any plan
providing for the payment of severance or salary continuation, and UWS and Newco
will, in connection with the Distribution, if and to the extent appropriate,
obtain waivers from individuals against any such assertion.
The Employee Benefits Agreement provides that Newco will assume sponsorship
(in some cases with BCBSUW) of the following benefit plans of UWS: (i) the
Nonqualified Compensation Plan; (ii) the
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Retirement Plans; (iii) the SERP; (iv) the Deferred Compensation Plans; (v) all
welfare plans which provide medical, health, disability, accident, life
insurance, death, dental or other welfare benefits, including any
post-employment benefits or retiree medical, life insurance or other such
benefits; and (vi) any other benefit plan. Newco will be responsible for the
payment of all liabilities for the benefits due and payable under such plans,
except that liabilities relating to Mr. Samuel V. Miller will be retained by
AMSG. See "Newco Benefit Plans Following the Distribution."
Pursuant to the Employee Benefits Agreement, Newco will establish the Newco
Equity Incentive Plan which will be substantially similar to the UWS Equity
Incentive Plans in place prior to the Distribution, except that directors of
Newco will be eligible for awards under the plan. All outstanding UWS Options
and SARs relating to shares of UWS Common Stock to be converted into options and
SARs relating to shares of Newco Common Stock will be assumed by Newco under the
Newco Equity Incentive Plan. Generally, all options and SARs held by persons who
will become Newco Employees or directors of Newco will be converted into options
and SARs relating to shares of Newco Common Stock and adjusted by increasing the
number of shares of Newco Common Stock subject to each option and decreasing the
exercise price per share for each option and SAR to provide equivalent value;
provided, however, that options held by Messrs. Hefty and Mordy and Ms. Hanson
will be converted into options to purchase an equal number of shares of AMSG
Common Stock and Newco Common Stock, and adjusted by decreasing the exercise
price per share for each option to provide equivalent value. For options held by
employees, former employees and directors of UWS who will remain with UWS after
the Distribution, all options generally will be converted into options to
purchase shares of AMSG Common Stock and adjusted by increasing the number of
shares of AMSG Common Stock subject to each option and decreasing the exercise
price per share for each option to provide equivalent value; provided, however,
that options held by Messrs. Hilliard, Weyers and Miller will be either
converted into options to purchase an equal number of shares of Newco Common
Stock and AMSG Common Stock and adjusted by decreasing the exercise price per
share for each option to provide equivalent value, or converted into options to
purchase shares of AMSG Common Stock and adjusted by increasing the number of
shares of AMSG Common Stock subject to each option and decreasing the exercise
price of each option to provide equivalent value. See "Newco Benefit Plans
Following the Distribution" and "Management of Newco--Treatment of UWS Options
and SARs as a Result of the Distribution."
In general, the Employee Benefits Agreement provides that for purposes of
eligibility, vesting, benefit accrued and others, participants in UWS's benefit
plans prior to the Effective Date will be credited with the compensation and
term of service credited to such participants as of the Effective Date as if the
service had been rendered to Newco. In addition, for any benefits accrued under
any UWS benefit plan prior to the Distribution, such participants will have the
same accrued benefit following the Effective Date.
TAX ALLOCATION AGREEMENT
Prior to the Distribution, an agreement will be entered into that reflects
each of Newco's and UWS's rights and obligations with respect to deficiencies
and refunds of federal, state or other income taxes relating to the business of
UWS that are attributable to periods ending prior to or on the Effective Date.
The Tax Allocation Agreement also expresses each party's intention with respect
to certain tax attributes of UWS after the Distribution. The Tax Allocation
Agreement provides that UWS shall only be responsible for federal, state and
local income taxes relating to the Small Group Business of UWS for the period up
to and including the Effective Date. The Tax Allocation Agreement provides for
payments between the two companies for certain audit adjustments made after the
Distribution that cover pre-Distribution tax liabilities. Other provisions cover
the handling of audits, settlements, stock options, elections, accounting
methods, and return filings in cases where both companies have an interest in
the results of these activities. In addition, the Tax Allocation Agreement
requires UWS and Newco to cooperate in preparing those filings that cover
overlapping taxable periods that include the Effective Date.
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Pursuant to the Tax Allocation Agreement, Newco and UWS will agree to
refrain from engaging in certain transactions for three years following the
Effective Date unless the party proposing to engage in such transaction obtains
a ruling from the IRS or an unqualified opinion of tax counsel that the
transaction will not cause the Distribution to become taxable. Transactions
subject to these restrictions will include, among other things, the liquidation,
merger, or consolidation with another company, the redemption of UWS Common
Stock or Newco Common Stock, the sale, distribution or other disposition of
assets out of the ordinary course of business, and the discontinuation of
certain businesses. Newco and UWS will each agree to indemnify the other from
liabilities arising as a result of the breach by Newco or UWS, as the case may
be, of the Tax Allocation Agreement. In addition, Newco and UWS have each agreed
that neither party will take any action inconsistent with the information
furnished to the IRS in connection with the Tax Ruling.
AMSG SERVICE AGREEMENT
Newco may provide certain services to AMSG, at AMSG's option, pursuant to
the AMSG Service Agreement. Services that AMSG may utilize pursuant to the AMSG
Service Agreement include investment management, investment accounting, risk
management, accounting and financial audit and corporate communications. Fees
under the AMSG Service Agreement for investment management and investment
accounting will be based on a percentage of the portfolio plus a flat rate for
each company held by AMSG whose investments are being handled by Newco. Fees for
risk management will be based on a percent of the annual premiums for such risk
management insurance. Fees for accounting and financial audit and corporate
communications will be based on an hourly rate. The AMSG Service Agreement will
terminate on December 31, 1999, unless terminated earlier upon appropriate
notice. The AMSG Service Agreement will be submitted to OCI for its review and
lack of disapproval.
REINSURANCE AGREEMENTS
AMSG and Newco will enter into various quota share reinsurance agreements
pursuant to which each company will cede to the other certain risks related to
life insurance, health insurance, dental insurance, point-of-service and other
insurance plans. In addition, each company acting as the reinsurer will provide
administrative services to the other company acting as the ceding company. As
consideration for such reinsurance, the ceding company shall receive a ceding
commission of approximately % of the gross premiums reinsured under each
applicable agreement.
INTELLECTUAL PROPERTY AGREEMENT
UWS and Newco will enter into the Intellectual Property Agreement pursuant
to which UWS will assign to Newco or one or more of its subsidiaries all of
UWS's rights in certain trademarks, trade secrets and other intellectual
property associated with the Managed Care Companies and the Management Business
(the "INTELLECTUAL PROPERTY"). The Intellectual Property Agreement will provide
that UWS will transfer to Newco, without charge, title to the Intellectual
Property used solely or primarily in the business of Newco, effective on the
Effective Date. UWS will retain title to any of the Intellectual Property it
uses solely or primarily in connection with the Small Group Business. UWS and
Newco will agree to cooperate with each other after the Effective Date to effect
the purposes of the Intellectual Property Agreement.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
SERVICE AGREEMENTS WITH BCBSUW
Newco and various of its subsidiaries purchase services from, or provide
services to, BCBSUW through the Service Agreements. Services covered by these
agreements include marketing, information systems, legal, investment, actuarial,
accounting, underwriting and other administrative and management services. Fees
under the Service Agreements are calculated on a cost basis. Costs directly
attributable to a
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particular company are paid by such company. Costs that are not specific to any
particular company are allocated based on utilization and allocation methods
agreed to by the parties to the agreements. If the recipient can obtain any of
the services under more favorable terms by performing the services itself or by
procuring them from a third party, it is not obligated to renew the Service
Agreement for those services if the provider is unwilling to substantially match
such terms. The Service Agreements automatically renew annually unless otherwise
terminated. In addition, pursuant to Wisconsin law, OCI reviews the Service
Agreements to ensure that the agreements are reasonable and fair to the
interests of the insurance companies that are parties to the agreements. For the
year ended December 31, 1997, Newco paid approximately $14.6 million for such
services, and received approximately $9.3 millon from BCBSUW for the provision
of such services.
AMSG SERVICE AGREEMENT
Newco may provide certain services to AMSG, at AMSG's option, pursuant to
the AMSG Service Agreement. Services that AMSG may utilize pursuant to the AMSG
Service Agreement include investment management, investment accounting, risk
management, accounting and financial audit and corporate communications. Fees
under the AMSG Service Agreement for investment management and investment
accounting will be based on a percentage of the portfolio plus a flat rate for
each company held by AMSG whose investments are being handled by Newco. Fees for
risk management will be based on a percent of the annual premiums for such risk
management insurance. Fees for accounting and financial audit and corporate
communications will be based on an hourly rate. The AMSG Service Agreement will
terminate on December 31, 1999 unless terminated earlier upon appropriate
notice. The AMSG Service Agreement will be submitted to OCI for its review and
lack of disapproval.
SUPPLEMENTAL COMPENSATION AGREEMENT
In September 1997, Newco entered into a Supplemental Compensation Agreement
with Thomas R. Hefty, President, Chairman and Chief Executive Officer of UWS, as
incentive for continued employment, and to reward Mr. Hefty for activities
resulting in an increase in shareholder value as a result of Newco's interest in
AMS. The Distribution is not a specific triggering event under the Supplemental
Compensation Agreement, and the parties have agreed that the Supplemental
Compensation Agreement shall terminate upon completion of the Distribution.
BCBSUW LOAN
In connection with the Distribution, Newco will assume a debt obligation of
UWS to BCBSUW in the principal amount of $70.0 million. On October 30, 1996, UWS
borrowed $70.0 million from BCBSUW to fund the cash portion of the merger
consideration in connection with the merger of American Medical Security Group,
Inc. into UWS. UWS pledged the common stock of certain of its subsidiaries as
collateral for the loan. Interest only is payable quarterly at a rate equal to
LIBOR plus 125 basis points, adjusted quarterly. The entire principal balance is
due October 30, 1999.
BCBSUW INTENDED PURCHASE OF ADDITIONAL SHARES OF NEWCO COMMON STOCK
Upon completion of the Distribution, BCBSUW will own [37.9%] of the issued
and outstanding shares of UWS Common Stock and [37.9%] of the issued and
outstanding shares of Newco Common Stock. One of the primary reasons for
effectuating the Distribution is so that the Managed Care Companies can use the
Blue Service Marks in connection with their products and services. In order to
use the Blue Service Marks, one of the requirements is that a Blue Plan must
"control" the company (meaning that a Blue Plan must directly or indirectly own
more than 50% of the stock of the company and must have operational control over
the company). Therefore, within a year after the Distribution Date, BCBSUW
intends to purchase additional shares of Newco Common Stock to bring its overall
direct and indirect ownership of Newco to approximately 51%. The purchase price
for the shares of Newco Common Stock to
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be purchased directly from Newco will be based on an independent third party
valuation, and will be paid through the cancellation of a corresponding portion
or all of the $70.0 million Newco indebtedness to BCBSUW or in cash. BCBSUW may
purchase some of the shares of Newco Common Stock in the open market. The
intended purchases are subject to the receipt of OCI approval and may be subject
to the receipt of Newco shareholder approval.
SETTLEMENT AGREEMENT; CERTAIN REGISTRATION RIGHTS AND VOTING AGREEMENTS RELATING
TO NEWCO COMMON STOCK
In April 1998, UWS, Newco and Messrs. Hilliard and Weyers entered into a
Settlement Agreement ("SETTLEMENT AGREEMENT") relating to matters arising out of
UWS's acquisition of American Medical Security Group, Inc. in December 1996.
Under the terms of the merger agreement, $8.0 million of the purchase price was
deposited into escrow as security for any indemnification payments to be made to
UWS for breaches of certain representations, warranties, covenants and other
agreements contained in the merger agreement. In the Settlement Agreement, the
parties agreed to settle all claims against the escrow for $500,000, and release
the remaining escrow amount to the shareholders of American Medical Security
Group, Inc., and agreed to amend the employment agreements of Messrs. Hilliard
and Weyers. The Settlement Agreement also contained provisions relating to the
treatment of options to purchase shares of UWS Common Stock held by Messrs.
Hilliard and Weyers in connection with the Distribution. In addition, in
connection with the acquisition by UWS of American Medical Security Group, Inc.
in December 1996, UWS entered into an agreement with two of that corporation's
shareholders, Messrs. Hilliard and Weyers, providing for registration rights for
the UWS Common Stock they received in that transaction and containing certain
voting and standstill agreements (the "REGISTRATION AGREEMENT"). In the
Settlement Agreement, UWS and Messrs. Hilliard and Weyers agreed to extend those
terms to the shares of Newco Common Stock they will receive in the Distribution
as follows:
(i) Messrs. Hilliard and Weyers will be entitled to make up to two
requests that Newco register at least 50% of the then outstanding shares of
Newco Common Stock held by them, which Newco is obligated to use its best
efforts to do unless (a) the request comes during the period 45 days prior
to the estimated date of filing and 180 days following the effective date of
Newco's own registration of shares of Newco Common Stock pertaining to an
underwritten public offering; (b) Newco has already effected two such
registrations pursuant to Messrs. Hilliard's and Weyers' requests; (c) the
filing of the registration statement could jeopardize or delay a material
transaction contemplated by Newco or would require the disclosure of
material information that Newco needs to preserve as confidential; or (d)
Newco is unable to comply with the requirements of the SEC; and
(ii) Messrs. Hilliard and Weyers will be entitled to make up to two
requests that Newco include Messrs. Hilliard's and Weyers' shares of Newco
Common Stock in an offering of shares of Newco Common Stock otherwise being
registered upon being notified by Newco that Newco is registering shares of
Newco Common Stock in connection with a public offering for cash on a form
that also would permit the registration of Messrs. Hilliard's and Weyers'
shares of Newco Common Stock (which notice Newco is obligated to give).
These registration rights expire upon the earlier of April 1, 2001 or upon
the date on which Messrs. Hilliard and Weyers in the aggregate own less than
three percent of the outstanding shares of UWS Common Stock.
Pursuant to the Registration Agreement, Messrs. Hilliard and Weyers will
agree that, until December 3, 2006 they will not acquire, or propose to acquire
(i) any Newco securities (other than pursuant to the exercise of stock options)
with the power to vote for the election of directors of Newco (the "VOTING
SECURITIES") or (ii) any rights or options to acquire any Voting Securities,
only 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 will each agree that, until December 3, 1999, they will not
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(i) make or participate in any solicitation of proxies (within the meaning of
Rule 14a-1 of the Exchange Act) or initiate any shareholder proposals with
respect to Newco; (ii) make any proposals with respect to a merger or other
business combination, sale or transfer of assets, liquidation or other
extraordinary corporate transaction of Newco; or (iii) form, join or participate
in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) with
respect to Newco securities or seek to exercise control or influence over
management, the Newco board of directors, or the corporate policies of Newco.
Finally, Messrs. Hilliard and Weyers will each agree that, until December 3,
2006, they will vote their shares of Newco Common Stock in accordance with
BCBSUW directions on matters submitted to a Newco shareholder vote which pertain
to, or are a result of, BlueCross and BlueShield Association rules, regulations
or marketing issues.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the expected beneficial ownership of shares
of Newco Common Stock by each shareholder expected to own beneficially more than
5% of the shares of Newco Common Stock (as disclosed in certain reports
regarding such ownership filed with UWS and the SEC in accordance with Sections
13(d) and 13(g) of the Exchange Act), by each director of Newco, each of the
executive officers of Newco who appear in the Summary Compensation Table, and
all directors and officers of Newco as a group, based upon the beneficial
ownership of such shareholders of UWS Common Stock as of March 31, 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)................................. 6,284,362 38.0%
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 6.7
Thomas R. Hefty(4)(5)........................................................... 90,792 *
Roger A. Formisano(4)(5)........................................................ 36,965 *
C. Edward Mordy(5).............................................................. 52,025 *
Mark H. Granoff(5).............................................................. 29,441 *
Penny J. Siewert(5)............................................................. 15,970 *
Richard A. Abdoo................................................................ 2,800 *
Michael D. Dunham............................................................... -0- *
James L. Forbes................................................................. 3,500 *
James C. Hickman................................................................ 2,200 *
William R. Johnson.............................................................. 6,500 *
Eugene A. Menden................................................................ 3,500 *
William C. Rupp, M.D............................................................ -0- *
Carol N. Skornicka.............................................................. 300 *
All directors and executive officers as a group (18 persons)(4)................. 295,963 1.9%
</TABLE>
- ------------------------
* Amount represents less than 1% of the total shares of Newco Common Stock
expected to be issued and outstanding.
(1) BCBSUW's address is 1515 North River Center Drive, Milwaukee, Wisconsin
53212. Within one year of the Distribution Date, BCBSUW intends to purchase
additional shares of Newco Common Stock such that its direct and indirect
ownership of Newco is approximately 51%.
(2) Based on Amendments to Schedules 13G filed with UWS pursuant to the Exchange
Act by such beneficial owner. Mr. Hilliard's address is P.O. Box 12146,
Green Bay, Wisconsin 54307-2146; Mr. Weyer's address is 500 AMS Court, Green
Bay, Wisconsin 54313; and Heartland Advisors, Inc.'s address is 790 North
Milwaukee Street, Milwaukee, Wisconsin 53202.
(3) Includes the following number of shares of UWS Common Stock which the named
individuals and certain executive officers have the right to acquire within
60 days of March 31, 1998: Mr. Hefty, 69,293; Mr. Formisano, 30,774; Mr.
Mordy 32,316; Mr. Granoff, 18,024; Ms. Siewert, 11,000; Mr. Abdoo, 2,000;
Mr. Johnson, 2,000; Mr. Forbes, 2,000; Mr. Hickman, 2,000; Mr. Menden,
2,000; and all directors and officers as a group, 209,681.
(4) Includes the following shares owned jointly with such person's spouse, with
respect to which such person shares voting power and dispositive power: Mr.
Hefty, 2,000 shares; and Mr. Formisano, 3,750 shares.
(5) Includes the following shares held under UWS's 401(k) plan, as to which such
person has dispositive power: Mr. Hefty, 7,999; Mr. Formisano, 2,441; Mr.
Mordy, 5,609; Mr. Granoff, 1,207; Ms. Siewert, 4,320; and all directors and
officers as a group, 37,069.
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DESCRIPTION OF CAPITAL STOCK OF NEWCO
The authorized capital stock of Newco consists of 50,0000,000 shares of
Newco Common Stock, no par value per share, and 1,000,000 shares of Preferred
Stock, no par value per share, issuable in series. Based on the number of shares
of UWS Common Stock currently outstanding, shares of Newco Common
Stock will be issued to shareholders of UWS in the Distribution. No shares of
Preferred Stock will be issued in connection with the Distribution. The
following summary description of the capital stock of Newco is qualified in its
entirety by reference to the Articles of Incorporation and By-Laws.
COMMON STOCK
Holders of shares of Newco Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of shareholders. Holders of shares
of Newco Common Stock do not have cumulative voting rights in the election of
directors and have no preemptive, subscription or redemption rights. After the
Distribution, all outstanding shares of Newco Common Stock will be validly
issued, fully paid and non-assessable, except for certain statutory liabilities
which may be imposed by Section 180.0622 of the WBCL for unpaid employee wages.
Section 180.0622 of the WBCL provides that shares held by shareholders of
corporations incorporated in Wisconsin may be assessed up to their par value to
satisfy obligations to employees for services rendered, but not exceeding six
months' service in the case of any individual employee. Wisconsin courts have
interpreted "par value" to mean the full amount paid by the original subscriber
for the shares upon the original issuance thereof. Holders of shares of Newco
Common Stock are entitled to such dividends as may be declared by the Board of
Directors out of funds legally available therefor. Upon liquidation, dissolution
or winding-up of Newco, the assets legally available for distribution to
shareholders are distributable ratably among the holders of shares of Newco
Common Stock at that time outstanding subject to prior distribution rights of
creditors of Newco.
PREFERRED STOCK
The Articles of Incorporation provide that the Board of Directors of Newco
is authorized, subject to certain limitations prescribed by law, without further
shareholder approval, to issue from time to time up to an aggregate of 1,000,000
shares of Preferred Stock in one or more series and to fix or alter the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of shares
of Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of Newco. The rights, preferences and privileges of holders of
shares of Newco Common Stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of Preferred Stock which Newco
may designate and issue in the future. Newco has no present plans to issue any
shares of Preferred Stock.
CERTAIN ARTICLES OF INCORPORATION AND BY-LAWS PROVISIONS OF NEWCO
Certain provisions of the Articles of Incorporation and By-Laws could have
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
shareholder might consider in the shareholder's best interest. These provisions
are intended to enhance the likelihood of continuity and stability in the
composition of and in the policies formulated by the Board of Directors of
Newco. In addition, these provisions also are intended to ensure that the Board
of Directors will have sufficient time to act in what the Board of Directors
believes to be the best interests of Newco and its shareholders.
CLASSIFIED BOARD OF DIRECTORS. The Articles of Incorporation provide for a
Board of Directors divided into three classes of directors serving staggered
three-year terms. The classification of directors has the effect of making it
more difficult for shareholders to change the composition of the Board of
Directors in a
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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.
SHAREHOLDER NOTICE REQUIREMENTS. The By-Laws provide that for nominations
for the Board of Directors or for other business to be properly brought by a
shareholder before an annual meeting of shareholders, the shareholder must first
have given adequate notice thereof in writing to the Secretary of Newco. To be
adequate, a shareholder's notice generally must be delivered not later than 90
days nor more than 120 days in advance of the date of the meeting. The notice
must contain, among other things, certain information about the shareholder
delivering the notice and, as applicable, background information about each
nominee or a description of the proposed business to be brought before the
meeting.
CERTAIN WBCL PROVISIONS
RESTRICTIONS ON BUSINESS COMBINATIONS. Sections 180.1130 to 180.1134 of the
WBCL provide generally that in addition to the vote otherwise required by law or
the articles of incorporation of an "issuing public corporation," such as Newco,
certain business combinations not meeting certain fair price standards specified
in the statute must be approved by the affirmative vote of at least (i) 80% of
the votes entitled to be cast by the outstanding voting shares of the
corporation, and (ii) two-thirds of the votes entitled to be cast by the holders
of voting shares other than voting shares beneficially owned by a "significant
shareholder" or an affiliate or associate thereof who is a party to the
transaction. The term "business combination" is defined to include, subject to
certain exceptions, a merger or share exchange of the issuing public corporation
(or any subsidiary thereof) with, or the sale or other disposition of
substantially all of the property and assets of the issuing public corporation
to, any significant shareholder or affiliate thereof. "Significant shareholder"
is defined generally to mean a person that is the beneficial owner of 10% or
more of the voting power of the outstanding voting shares of the issuing public
corporation. These statute sections also restrict the repurchase of shares and
the sale of corporate assets by an issuing public corporation in response to a
takeover offer.
Sections 180.1140 to 180.1144 of the WBCL prohibit certain "business
combinations" between a "resident domestic corporation," such as Newco, and a
person beneficially owning 10% or more of the voting power of the outstanding
voting stock of such corporation (an "interested shareholder") within three
years after the date such person became a 10% beneficial owner, unless the
business combination or the acquisition of such stock has been approved before
the stock acquisition date by the corporation's board of directors. After such
three-year period, a business combination with the interested shareholder may be
consummated only with the approval of the holders of a majority of the voting
stock not beneficially owned by the interested shareholder at a meeting called
for that purpose, unless the business combination satisfies certain
adequacy-of-price standards intended to provide a fair price for shares held by
disinterested shareholders. BCBSUW will be an interested shareholder of Newco
due to its expected ownership of [37.9%] of the outstanding shares of Newco
Common Stock following the Distribution. The acquisition of shares of Newco
Common Stock by BCBSUW was approved by Newco's Board of Directors prior to such
acquisition, and therefore, the three-year restriction on business combinations
with an interested shareholder will not apply to BCBSUW.
CONTROL SHARE VOTING RESTRICTIONS. Under Section 180.1150(2) of the WBCL,
the voting power of shares of an "issuing public corporation," such as Newco,
which are held by any person in excess of 20% of the voting power in the
election of directors shall be limited (in voting on any matter) to 10% of the
full voting power of such excess shares, unless otherwise provided in the
articles of incorporation or unless full
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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
Newco and shares acquired in a merger or share exchange to which Newco is a
party. The Articles of Incorporation provide that shares of Newco Common Stock
held by BCBSUW are not subject to the voting power restrictions provided by
Section 180.1150(2) of the WBCL.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Newco Common Stock will be Firstar
Trust Company.
NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL
The Articles of Incorporation provide that, subject to any rights of holders
of shares of Preferred Stock to elect additional directors under specified
circumstances, the number of directors will be fixed from time to time
exclusively pursuant to a resolution adopted by the Board of Directors. In
addition, the By-Laws provide that vacancies, including those created by an
increase in the number of directors, may be filled by the remaining directors
then in office. Accordingly, the Board of Directors could prevent any
shareholder from enlarging the Board and filling the new directorships with such
shareholder's own nominees.
Under the WBCL, shareholders may remove one or more directors with or
without cause unless the Articles or By-Laws provide that a director may be
removed only for cause. The By-Laws provide that directors may be removed with
or without cause and only upon the affirmative vote of holders of at least a
majority of the voting power of all the then outstanding shares of stock
entitles to vote generally in the election of directors ("VOTING STOCK"), voting
together as a single class.
SHAREHOLDER ACTION BY WRITTEN CONSENT
The Articles of Incorporation and By-Laws provide that any action required
or permitted to be taken at a meeting of Newco's shareholders may be taken
without a meeting by shareholders who would be entitled to vote at a meeting the
minimum number of votes necessary to authorize or take such action at a meeting
at which all shares entitled to vote were present and voted. Any action so taken
must be done by written consent signed by the number of shareholders necessary
to take such action. Newco will give notice of such action to shareholders who
were entitled to vote on such action and whose shares were not represented on
the written consent within ten days of the action. These provisions allow the
holders of a majority of the Voting Stock to unilaterally use the written
consent procedure to take shareholder action.
SPECIAL MEETINGS
The By-Laws provide that special meetings of shareholders may be called by
the Chairman of the Board of Directors, a majority of the Board of Directors or
holders of at least 10% of all the votes entitled to be cast on any issue
proposed to be considered at the proposed special meeting. The business
permitted to be conducted at any special meeting of shareholders is limited to
the business brought before the meeting pursuant to the notice of meeting given
by Newco.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
The By-Laws establish an advance notice procedure for shareholders to make
nominations of candidates for election as directors, or bring other business
before an annual or special meeting of shareholders of Newco (the "SHAREHOLDER
NOTICE PROCEDURE").
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The Shareholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Board, or by a shareholder who has
given adequate written notice to the Secretary of Newco prior to the meeting at
which directors are to be elected, will be eligible for election as directors of
Newco. The Shareholder Notice Procedure provides that at an annual or special
meeting only such business may be conducted as has been brought before the
meeting by, or at the direction of, the Board or by a shareholder who has given
adequate written notice to the Secretary of Newco of such shareholder's
intention to bring such business before such meeting. Under the Shareholder
Notice Procedure, for notice of shareholder nominations or other business
proposals to be made at an annual meeting to be adequate, such notice must be
received by Newco not less than 90 days nor more than 120 days prior to the last
Tuesday in May; provided, however, than in the event the annual meeting is
changed by more than 30 days from the last Tuesday in May, notice by a
shareholder, to be adequate, must be received not earlier than the 120th day
prior to such meeting and not later than the close of business of the later of
(x) the 90th day prior to such annual meeting, or (y) the tenth day after public
announcement of the date of such annual meeting is first made. In connection
with a special meeting of shareholders, in order for a notice of shareholder
nominations or other business proposals to be adequate, notice by such
shareholder must be received not earlier than the 90th day prior to such meeting
and not later than the close of business of the later of (x) the 60th day prior
to such special meeting, or (y) the tenth day after public announcement of the
date of such special meeting is first made.
Under the Shareholder Notice Procedure, a shareholder's notice to Newco
proposing to nominate a person for election as a director must contain certain
information, including; the name and address of the nominating shareholder and
the beneficial owners on whose behalf the nomination or proposal is made; the
class and number of shares of Newco beneficially owned by such shareholder or
beneficial owners; a representation that such shareholder is a holder of record
of shares of Newco entitled to vote at such meeting and that such shareholder
intends to appear in person or by proxy at the meeting to make the nomination
specified in the notice; the name, age and residence address of such nominee; a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nominations are to be made by the shareholder; the
principal occupation or employment of the nominee, the class and number of
shares of Newco which are beneficially owned by the nominee, and any other
information regarding the proposed nominee that would be required to be included
in a proxy statement soliciting proxies for the proposed nominee; and a written
consent of each nominee to be named in a proxy statement and to serve as a
director is 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 of whose behalf the nomination or proposal
is made; the class and number of shares of stock of Newco beneficially owned by
such shareholder; a representation that such shareholder is a holder of record
of shares of Newco entitled to vote at such meeting and that such shareholder
intends to appear in person or by proxy at the meeting to introduce the other
business specified in the notice; a brief description of the business the
shareholder proposes to bring before the meeting, and, if the business includes
a proposal to amend the By-Laws, the language of the proposed amendment; the
reasons for conducting such business at such meeting; any material interest of
such shareholder in the business so proposed; and any other information required
to be provided by the shareholder pursuant to Regulation 14A under the Exchange
Act in his capacity as a proponent to a shareholder proposal. If the chairman of
the meeting determines that a person was not nominated, or other business was
not brought before the meeting, in accordance with the Shareholder Notice
Procedure, such person will not be eligible for election as a director, or such
business will not be conducted at such meeting, as the case may be.
By requiring advance notice of nominations by shareholders, the Shareholder
Notice Procedure will afford the Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent
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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 recommendations as to the Board's position
regarding action to be taken with respect to such business, so that shareholders
can better decide whether to attend such a meeting or to grant a proxy regarding
the disposition of any such business.
Although the By-Laws do not give the Board any power to approve or
disapprove shareholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of shareholder proposals if the proper procedures
are not followed, and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to Newco and its shareholders.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of Newco authorized at the time of the
Distribution will have any preemptive right to subscribe for or purchase any
kind or class of securities of Newco.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF NEWCO
Under the By-Laws and the WBCL, directors and officers of Newco are entitled
to mandatory indemnification from Newco against certain liabilities and expenses
(a) to the extent such officers or directors are successful in the defense of a
proceeding, and (b) in proceedings in which the director or officer is not
successful in the defense thereof, unless it is determined the director or
officer breached or failed to perform such person's duties to Newco and such
breach or failure constituted: (i) a willful failure to deal fairly with Newco
or its shareholders in connection with a matter in which the director or officer
had a material conflict of interest; (ii) a violation of criminal law, unless
the director or officer had reasonable cause to believe his or her conduct was
lawful or had no reasonable cause to believe his or her conduct was unlawful;
(iii) a transaction from which the director or officer derived an improper
personal profit; or (iv) willful misconduct. The WBCL specifically states that
it is the public policy of Wisconsin to require or permit indemnification,
allowance of expenses and insurance in connection with a proceeding involving
securities regulation, as described therein, to the extent required or permitted
as described above.
Under the WBCL, unless the Articles of Incorporation provide otherwise,
directors of Newco are not subject to personal liability to Newco, its
shareholders, or any person asserting rights on behalf thereof for certain
breaches or failures to perform any duty resulting solely from their status as
directors, unless the person asserting liability proves that the breach or
failure constituted: (i) a willful failure to deal fairly with the corporation
or its shareholders in connection with a matter in which the director had a
material conflict of interest, (ii) a violation of criminal law, unless the
director had reasonable cause to believe his or her conduct was lawful or had no
reasonable cause to profit, 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.
81
<PAGE>
SHAREHOLDER PROPOSALS
Article II of the By-Laws provides that shareholders desiring to nominate
candidates for directors or to present a proposal or bring other business before
a Newco shareholders' meeting must give advance written notice not less than 90
days nor more than 120 days prior to the meeting. In each case the notice must
be given to the Secretary of Newco, Mr. Steven E. Bablitch, 401 West Michigan
Street, Milwaukee, Wisconsin 53203-2896. The 1999 Annual Meeting of Shareholders
of Newco is expected to be held on May 25, 1999. To be considered, notice of any
such nomination or proposal must be received by February 25, 1999 and no earlier
than January 26, 1999. To be included in Newco's proxy statement and form of
proxy for that meeting, any such proposal also must comply in all respects with
the rules and regulations of the SEC.
INDEPENDENT AUDITORS
Ernst & Young LLP has audited the combined balance sheets of Newco as of
December 31, 1996 and 1997 and the related combined statements of income,
changes in shareholder's equity and comprehensive income and cash flows for each
of the three years in the period ended December 31, 1997, included in this
Information Statement, and the Board of Directors of Newco has appointed Ernst &
Young LLP as Newco's auditors for the year ending December 31, 1998.
82
<PAGE>
NEWCO/UWS, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors............................................................................. F-2
Combined Balance Sheets at December 31, 1997 and 1996 and March 31, 1998 (unaudited)....................... F-3
Combined Statements of Income for the years ended December 31, 1997, 1996 and 1995 and the three months
ended March 31, 1998 and 1997 (unaudited)................................................................ F-4
Combined Statements of Changes in Shareholder's Equity and Comprehensive Income for the years ended
December 31, 1997, 1996 and 1995 and the three months ended March 31, 1998 (unaudited)................... F-5
Combined Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 and the three months
ended March 31, 1998 and 1997 (unaudited)................................................................ F-6
Notes to Combined Financial Statements..................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
United Wisconsin Services, Inc. and
The Board of Directors of Newco/UWS, Inc.
We have audited the accompanying combined balance sheets of Newco/UWS, Inc.
(the Company) (see Note 1 to the combined financial statements) as of December
31, 1996 and 1997, and the related combined statements of income, changes in
shareholder's equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Company as of
December 31, 1996 and 1997, and the combined results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Milwaukee, Wisconsin
May 29, 1998
F-2
<PAGE>
NEWCO/UWS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ---------- MARCH 31,
-----------
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 19,147 $ 17,033 $ 23,415
Investments--available for sale........................................... 156,392 151,653 158,851
Due from affiliates....................................................... 7,966 313 255
Other receivables......................................................... 47,027 53,753 52,892
Prepaid and other current assets.......................................... 5,660 8,304 7,107
---------- ---------- -----------
Total current assets.................................................. 236,192 231,056 242,520
Investments--held to maturity............................................... 6,892 7,893 7,851
Property and equipment, net................................................. 7,091 6,978 7,561
Goodwill and other intangibles, net......................................... 2,966 5,005 4,860
Other noncurrent assets..................................................... 16,337 15,324 16,700
---------- ---------- -----------
Total assets.......................................................... $ 269,478 $ 266,256 $ 279,492
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Medical and other benefits payable........................................ $ 54,724 $ 60,724 $ 60,480
Advance premiums.......................................................... 26,043 24,060 29,402
Due to affiliates......................................................... 3,738 3,867 5,224
Payables and accrued expenses............................................. 25,427 20,926 20,758
Other current liabilities................................................. 10,425 7,745 8,218
---------- ---------- -----------
Total current liabilities............................................. 120,357 117,322 124,082
Medical and other benefits payable--noncurrent.............................. 20,417 20,918 21,352
Other noncurrent liabilities................................................ 4,822 4,400 4,806
---------- ---------- -----------
Total liabilities..................................................... 145,596 142,640 150,240
Shareholder's equity:
Investments by and advances from United Wisconsin Services................ 119,923 120,405 125,114
Unrealized gains on investments........................................... 3,959 3,211 4,138
---------- ---------- -----------
Total shareholder's equity............................................ 123,882 123,616 129,252
---------- ---------- -----------
Total liabilities and shareholder's equity............................ $ 269,478 $ 266,256 $ 279,492
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
NEWCO/UWS, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Health services revenues:
Premium revenue.................................. $ 466,929 $ 493,092 $ 560,825 $ 135,433 $ 148,076
Other revenue.................................... 24,222 27,632 26,046 6,790 7,121
Investment results................................. 9,665 19,040 22,238 4,770 3,961
---------- ---------- ---------- ---------- ----------
Total revenues................................. 500,816 539,764 609,109 146,993 159,158
Expenses:
Medical and other benefits......................... 416,167 425,258 485,735 115,441 126,153
Selling, general and administrative expenses....... 71,434 82,902 92,663 23,336 24,033
Profit sharing on joint ventures................... 2,734 2,868 3,380 845 1,124
Amortization of goodwill and other intangibles..... 678 841 818 440 116
---------- ---------- ---------- ---------- ----------
Total expenses................................. 491,013 511,869 582,596 140,062 151,426
---------- ---------- ---------- ---------- ----------
Income before income tax expense..................... 9,803 27,895 26,513 6,931 7,732
Income tax expense................................... 3,709 10,986 9,918 2,730 2,892
---------- ---------- ---------- ---------- ----------
Net income........................................... $ 6,094 $ 16,909 $ 16,595 $ 4,201 $ 4,840
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma earnings per common share:
Basic.............................................. $1.01 $0.29
---------- ----------
---------- ----------
Diluted............................................ $1.00 $0.29
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
NEWCO/UWS, INC.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
INVESTMENTS BY AND
ADVANCES FROM (TO) UNREALIZED GAINS TOTAL
UNITED WISCONSIN (LOSSES) ON COMPREHENSIVE SHAREHOLDER'S
SERVICES INVESTMENTS INCOME EQUITY
------------------------ ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994........... $ 107,839 $ (6,374) $ 101,465
Net income........................... 6,094 -- $ 6,094 6,094
Net investments by and advances from
(to) United Wisconsin Services..... 2,833 -- -- 2,833
Change in unrealized gains (losses)
on investments..................... -- 9,885 9,885 9,885
-------
Comprehensive Income -- -- $ 15,979 --
-------- ------- ------- -------------
-------
Balance at December 31, 1995........... 116,766 3,511 120,277
Net income........................... 16,909 -- $ 16,909 16,909
Net investments by and advances from
(to) United Wisconsin Services..... (13,752) -- -- (13,752)
Change in unrealized gains (losses)
on investments..................... -- 448 448 448
-------
Comprehensive Income -- -- $ 17,357 --
-------- ------- ------- -------------
-------
Balance at December 31, 1996........... 119,923 3,959 123,882
Net income........................... 16,595 -- $ 16,595 16,595
Net investments by and advances from
(to) United Wisconsin Services..... (16,113) -- -- (16,113)
Change in unrealized gains (losses)
on investments..................... -- (748) (748) (748)
-------
Comprehensive Income -- -- $ 15,847 --
-------- ------- ------- -------------
-------
Balance at December 31, 1997........... 120,405 3,211 123,616
(1998 AMOUNTS UNAUDITED)
Net income........................... 4,840 -- $ 4,840 4,840
Net investments by and advances from
(to) United Wisconsin Services..... (131) -- -- (131)
Change in unrealized gains (losses)
on investments..................... -- 927 927 927
-------
Comprehensive Income -- -- $ 5,767 --
-------- ------- ------- -------------
-------
Balance at March 31, 1998.............. $ 125,114 $ 4,138 $ 129,252
-------- ------- -------------
-------- ------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
NEWCO/UWS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income............................................. $ 6,094 $ 16,909 $ 16,595 $ 4,201 $ 4,840
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 1,550 2,341 1,964 1,060 764
Realized investment gains............................ (1,094) (8,381) (11,921) (2,448) (1,379)
Deferred income tax expense (benefit)................ 190 (901) (1,023) (270) (310)
Changes in other operating accounts:
Other receivables.................................. (26,969) 2,802 (5,584) (4,707) 636
Medical and other benefits payable................. 20,882 1,415 6,501 (827) 190
Advance premiums................................... (365) 4,062 (1,983) (2,168) 5,342
Due to/from affiliates............................. 10,247 (10,327) 7,782 10,605 1,415
Other, net......................................... 1,575 (763) (8,701) (6,776) 1,067
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) operating activities.... 12,110 7,157 3,630 (1,330) 12,565
INVESTING ACTIVITIES
Purchases of available for sale investments............ (351,731) (413,648) (452,906) (56,059) (51,966)
Proceeds from sale of available for sale investments... 314,529 364,321 433,012 66,800 47,056
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) (300) (338)
Proceeds from maturity of held to maturity
investments.......................................... 2,266 2,171 3,567 70 195
Purchase of minority interest in subsidiary............ -- -- (2,218) -- --
Other, net............................................. (1,344) 1,528 (1,244) (916) (999)
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) investing activities.... 1,900 (5,170) 11,569 9,595 (6,052)
FINANCING ACTIVITIES
Repayment of debt...................................... -- -- (1,200) -- --
Increase (decrease) in investments by and advances from
(to) United Wisconsin Services....................... 2,833 (15,920) (16,113) (6,477) (131)
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) financing activities.... 2,833 (15,920) (17,313) (6,477) (131)
----------- ----------- ----------- ---------- ----------
Cash and cash equivalents:
Increase (decrease) during year...................... 16,843 (13,933) (2,114) 1,788 6,382
Balance at beginning of year......................... 16,237 33,080 19,147 19,147 17,033
----------- ----------- ----------- ---------- ----------
Balance at end of year............................... $ 33,080 $ 19,147 $ 17,033 $ 20,935 $ 23,415
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
1. STRUCTURE AND PLAN OF DISTRIBUTION
United Wisconsin Services, Inc. ("UWS") has previously announced its
intention to contribute its Health Maintenance Organization, ("HMO") and
specialty managed care products and services businesses and management business
to a wholly owned subsidiary, Newco/UWS, Inc. which was formed on May 26, 1998.
The common stock of Newco/UWS, Inc. will be distributed on a share for share
basis to UWS common shareholders. Completion of the contribution and
distribution is subject to final approval by UWS's Board of Directors and
various third parties and government agencies. A private letter ruling has been
requested from the Internal Revenue Service with respect to the tax free nature
of the transaction.
The accompanying combined financial statements of Newco/UWS, Inc.
essentially comprise the HMO and specialty managed care products and services
business operations of UWS including dental, life, disability, workers'
compensation, managed care consulting, electronic claims processing,
pharmaceutical services and managed mental health services. The following UWS
wholly owned subsidiaries will be contributed to Newco/UWS, Inc. in conjunction
with the spin-off and are included in the combined financial statements of
Newco/UWS, Inc.: Compcare Health Services Insurance Corporation; Valley Health
Plan, Inc.; HMO-W, Inc.; Hometown Insurance Service, Inc.; United Wisconsin
Insurance Company ("UWIC"); United Heartland Life Insurance Company ("UHLIC");
Meridian Resource Corporation; Meridian Managed Care, Inc.; Meridian Marketing
Services, Inc.; United Wisconsin Proservices, Inc.; United Heartland, Inc.; CNR
Health, Inc.; Unity Health Plans Insurance Corporation; and Heartland Dental
Plan, Inc. The above businesses included in these combined financial statements
are herein collectively referred to as the "Company." Significant intercompany
accounts have been eliminated.
The Company's HMO products are sold primarily in Wisconsin and the specialty
managed care products and services are sold throughout the United States.
The authorized capital stock of Newco/UWS, Inc. consists of 1,000,000 shares
of no par value preferred stock and 50,000,000 shares of no par value common
stock of which 100 shares are issued and outstanding at May 28, 1998.
Certain officers and directors of the Company are also officers and
directors of UWS.
The Company is affiliated with Blue Cross & Blue Shield United of Wisconsin,
"BCBSUW," through certain common officers and directors. At December 31, 1997,
BCBSUW owned approximately 38% of the issued and outstanding UWS common stock.
The combined financial statements included herein may not necessarily be
indicative of the results of operations, financial position and cash flows of
the Company in the future or had it operated as a separate, independent company
during the periods presented. The combined financial statements included herein
do not reflect any changes that may occur in the financing and operations of the
Company as a result of the distribution.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The accompanying combined financial statements have been prepared in
accordance with generally accepted accounting principles, "GAAP." The
preparation of financial statements in conformity with
F-7
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the combined financial statements and accompanying notes.
Actual results could differ from those estimates.
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 40 years or less. 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 December 31, 1997, the Company's
management believed that no material impairment of goodwill or other intangible
assets existed.
REVENUE RECOGNITION
Health services premiums are recognized as revenue in the period in which
enrollees are entitled to care.
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. Processing costs are
accrued as operating expenses based on an estimate of the costs necessary to
process these claims. These unpaid claim estimates are based on historical
payment patterns using actuarial techniques. The Company's year-end claim
liabilities are substantially satisfied through claim payments in the subsequent
year. Any adjustments to prior period
F-8
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and bonus arrangements with certain providers.
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.
REINSURANCE
The Company limits the maximum net loss that can arise from certain lines of
business by reinsuring (ceding) a portion of these risks with other insurance
organizations (reinsurers) on an excess of loss or quota share basis. The ceding
company is contingently liable on reinsurance ceded in the event that the
reinsurers do not meet their contractual obligations.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives,
which are 20 to 30 years for land improvements, 10 to 40 years for buildings and
building improvements, 3 to 5 years for computer equipment and software and 3 to
10 years for furniture and other equipment.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. A valuation allowance is
recorded on deferred tax assets that more likely than not will not be realized.
PRO FORMA EARNINGS PER COMMON SHARE
Pro forma earnings per share, "EPS," are based on the pro forma weighted
average number of shares of outstanding Company common stock and dilutive common
equivalent shares from stock options, giving effect to the planned distribution
of one share of the Company's common stock for each share of UWS common stock.
Pro forma dilutive common equivalent shares from stock options are stated at the
historical UWS dilutive common equivalent share level. The Company cannot
currently determine the number of shares of its common stock that will be
subject to substitute awards after the distribution. See Note 10.
F-9
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the pro forma computation of basic and
diluted EPS:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1997 MARCH 31, 1998
-------------- ---------------
(IN THOUSANDS,
<S> <C> <C>
EXCEPT SHARE AND PER SHARE
DATA)
Numerator:
Net income allocable to common
shareholders........................... $ 16,595 $ 4,840
-------------- ---------------
-------------- ---------------
Denominator:
Denominator for basic EPS--weighted
average shares......................... 16,423,270 16,515,874
Effect of dilutive securities--employee
stock options.......................... 147,715 245,946
-------------- ---------------
Denominator for diluted EPS................ 16,570,985 16,761,820
-------------- ---------------
-------------- ---------------
Pro forma basic EPS........................ $1.01 $0.29
Pro forma diluted EPS...................... $1.00 $0.29
</TABLE>
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or shareholder's
equity. Statement 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, and the three months ended
March 31, 1997 and 1998, total comprehensive income amounted to $15,979,000,
$17,357,000, $15,847,000, $1,940,000 and $5,767,000, respectively.
INTERIM FINANCIAL DATA
The interim financial data presented is unaudited. In management's opinion,
the interim financial data includes all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of the interim periods.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with GAAP have been omitted. The Company
believes that disclosures made are adequate to make the interim information
presented not misleading. Interim results are not necessarily indicative of
fiscal year performance because of the impact of seasonal variations.
3. JOINT VENTURE ARRANGEMENTS
The Company is a party to certain HMO joint venture arrangements which
include profit-sharing payments to certain providers and repurchase provisions
with certain joint venture participants. Profit-sharing expense related to these
acquisitions totaled $2,754,000, $3,002,000 and $3,960,000, in 1995, 1996 and
1997, respectively. 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. 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.
In addition, the Company is a party to a workers' compensation joint venture
arrangement whereby profit sharing income totaled $20,000, $134,000 and $580,000
in 1995, 1996 and 1997, respectively.
F-10
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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-11
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED 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-12
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED 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 provides office space to the
Company. These activities are reimbursed at amounts approximating cost,
F-13
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
which resulted in receipts to the Company of $10,028,000, $13,315,000 and
$14,564,000 in 1995, 1996 and 1997, respectively, and payments to BCBSUW of
$4,368,000, $7,474,000 and $9,278,000 in 1995, 1996 and 1997, respectively.
These amounts are included in selling, general and administrative expenses.
Certain subsidiaries of the Company provide health, life and other insurance
benefits to the employees of BCBSUW. Premium revenue received from BCBSUW
totalled $4,568,000, $4,370,000 and $4,537,000 in 1995, 1996 and 1997,
respectively.
The Company has an agreement with a subsidiary of UWS not included in these
combined financial statements, United Wisconsin Life Insurance Company
("UWLIC"), whereby UWIC underwrites certain small group health care products and
life, dental, drug and disability products in Minnesota as UWLIC products have
not yet been approved for sale in Minnesota. The Company ceded to UWLIC 100% of
the premium revenue of these products sold in Minnesota. The ceded premium
revenue approximated $20,430,000, $24,739,000 and $27,014,000 in 1995, 1996 and
1997, respectively.
Management believes the above-stated related party activity was entered into
on a reasonable basis; however, it does not necessarily reflect the results of
operations which would have occurred had the Company been an independent entity
nor is it necessarily indicative of future expenses or income.
The Company's operations have been financed through its operating cash flows
and investments by and advances from UWS.
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 UWS. UHLIC has filed
separate federal income tax returns due to specific provisions of the Internal
Revenue Code of 1986, as amended related to consolidation of life insurance
entities. The entities included in these combined financial statements file
separate state franchise, income and premium tax returns as applicable.
The Company had a net federal income tax receivable of $337,000 and $436,000
included in other current assets at December 31, 1996 and 1997, respectively.
Federal and state income tax payments, net of refunds, totaled $477,000,
$1,545,000 and $3,243,000 in 1995, 1996 and 1997, respectively.
F-14
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED 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..................................................... $ 3,161 $ 9,946 $ 9,294
State....................................................... 358 1,941 1,647
--------- --------- ---------
3,519 11,887 10,941
--------- --------- ---------
Deferred:
Federal..................................................... 50 (222) (651)
State....................................................... 140 (679) (372)
--------- --------- ---------
190 (901) (1,023)
--------- --------- ---------
$ 3,709 $ 10,986 $ 9,918
--------- --------- ---------
--------- --------- ---------
</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................................. $ 3,431 $ 9,763 $ 9,279
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.................................................... (73) 395 (112)
--------- --------- ---------
$ 3,709 $ 10,986 $ 9,918
--------- --------- ---------
--------- --------- ---------
</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-15
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED 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 combined financial statements.
The Company participates with BCBSUW in a bank line of credit, which permits
aggregate borrowings to $30,000,000. Periodic borrowings have been made on this
line of credit. The outstanding line of credit balance was $1,200,000 at
December 31, 1996 and is included in other current liabilities. There was no
balance outstanding at December 31, 1997.
F-16
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED 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 combined financial statements as of December 31, 1997, as filed with the
insurance regulators, the aggregate amount available for dividends in 1998
without regulatory approval is $4,209,000.
10. EMPLOYEE BENEFIT PLANS
PENSION BENEFITS
Certain of the entities included in these combined financial statements
participate with BCBSUW in two multiple-employer defined benefit pension plans.
The salaried plan, covering salaried employees, provides benefits based on
compensation, years of service, year of birth and date of retirement. The hourly
plan, covering hourly employees, provides for benefit payments of stated
amounts, based on number of hours worked and years of credited service. Since
both plans were overfunded, no contributions were made in 1995, 1996 or 1997,
and a pension credit was recorded in each year.
Effective January 1, 1997, the salaried pension plan and the hourly pension
plan with respect to non-union participants were amended to include expansion of
the lump-sum payment provisions and changes in the methods and formulae used for
the calculation of benefit accruals (a cash balance formula). The resulting
reduction in the projected benefit obligation is included in the funded status
of the pension plans at December 31, 1996 and 1997, and was also considered in
the calculation of the 1996 pension credit.
F-17
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED 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 combined balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits..................................................... $ (12,806) $ (15,644)
Nonvested benefits.................................................. (2,923) (1,870)
---------- ----------
Total accumulated benefit obligations................................. (15,729) (17,514)
Adjustment for projected benefit obligations.......................... (52) (54)
---------- ----------
Projected benefit obligations......................................... (15,781) (17,568)
Assets, at fair market value.......................................... 29,309 36,082
---------- ----------
Excess of assets over projected benefit obligations................... 13,528 18,514
Unrecognized net gains................................................ (122) (5,151)
Unrecognized net asset................................................ (1,326) (1,051)
Unrecognized prior service credit..................................... (6,836) (6,146)
---------- ----------
Prepaid pension expense in combined balance sheets.................... $ 5,244 $ 6,166
---------- ----------
---------- ----------
</TABLE>
The pension plans' assets consist primarily of debt, equity and other
marketable securities.
Assumptions used in developing the projected benefit obligation are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Discount rate................................................................ 8.00% 8.00%
Rate of increase in compensation............................................. 4.75 4.75
Rate of return on plan assets................................................ 9.00 9.00
</TABLE>
The unrecognized net asset is being amortized over the remaining estimated
service lives of participating employees at January 1, 1986: 15.4 years for
salaried employees and 16.9 years for hourly employees.
The components of the pension credit, which is included in selling, general
and administrative expenses, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period............... $ 1,117 $ 829 $ 1,335
Interest cost on benefit obligations.......................... 1,116 1,034 1,259
Actual return on plan assets.................................. (4,136) (2,866) (7,475)
Net amortization and deferrals................................ 1,503 (432) 3,958
--------- --------- ---------
$ (400) $ (1,435) $ (923)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED 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.
POSTRETIREMENT BENEFITS
Certain of the entities included in these combined financial statements
participate with BCBSUW in postretirement benefit plans to provide certain
medical, dental and vision benefits and life insurance for certain groups of
retired employees. Such plans were amended in 1997 to limit the financial
contribution in future periods. No benefit will be provided for individuals
hired after the effective dates of these amendments.
The postretirement benefit plans are funded principally on a pay-as-you-go
basis.
After giving effect to all administrative expense allocations between the
Company and BCBSUW, plan expense, including amortization of the transition
obligation and interest cost, was $351,000, $224,000 and $261,000 in 1995, 1996
and 1997, respectively. The unfunded accrued postretirement benefit liability at
December 31, 1996 and 1997 was $3,728,000 and $3,994,000, respectively.
DEFINED CONTRIBUTION AND BONUS PLANS
Certain of the entities included in these combined financial statements
participate in defined contribution plans whereby the employer contributes a
percentage of participants' qualifying compensation up to certain limits, as
defined by the plans. The entities also participate with BCBSUW in various other
profit sharing and bonus programs. Expenses related to all of these plans, after
giving effect to all administrative expense allocations between the Company and
BCBSUW, totaled $1,838,000, $2,932,000 and $1,978,000 in 1995, 1996 and 1997,
respectively.
STOCK-BASED COMPENSATION
Newco/UWS, Inc. intends to establish a stock-based compensation plan that
will allow for granting of options for up to 4,500,000 shares of common stock as
incentive or nonqualified stock options. Certain executive officers,
non-employee directors and employees were granted stock options under UWS stock-
based compensation plans. Also, certain individuals hold UWS stock options
related to an acquisition. At December 31, 1997, there were outstanding options
to purchase approximately 2,217,307 shares of UWS common stock of which
1,369,842 were exercisable. Immediately following the distribution, options to
purchase 257,322 shares of UWS common stock with a weighted average exercise
price of $26.09 per share will be converted into options to purchase shares of
common stock of Newco/UWS, Inc. The number of options and exercise prices will
be adjusted to provide equivalent value. In addition, options to purchase
1,386,378 shares of UWS common stock with a weighted average exercise price of
$30.87 per share will be converted, on a share for share basis, into options to
purchase shares of Newco/UWS, Inc. and UWS common stock. The exercise prices
will be adjusted to provide equivalent value of the respective companies'
shares. The Company cannot currently determine the number of shares of common
stock of Newco/UWS, Inc. that will be subject to equivalent awards after the
distribution.
In 1992, certain executive officers of UWS were awarded stock appreciation
rights (SARs) in UWS. At December 31, 1997 67,500 SARs are outstanding at $9.67
per share. Immediately following the distribution, the UWS SARs will be assumed
by Newco/UWS, Inc. and converted into SARs of Newco/ UWS, Inc. to provide
equivalent value.
F-19
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company follows Accounting Principles Board Opinion No. 25 under which
no compensation expense is recorded when the number of shares is fixed and the
exercise price of UWS stock option grants to Company employees equals the market
price of the underlying stock on the date of grant. If the Company had measured
compensation cost for the UWS stock options granted to Company employees in 1996
and 1997 under the fair value based method prescribed by Statement of Financial
Accounting Standards No. 123, the pro forma net income would have been
$16,732,000 and $16,208,000 in 1996 and 1997, respectively.
The fair values of UWS stock options granted to Company employees used to
compute pro forma net income disclosures were estimated on the date of grant
using the Black-Scholes option-pricing model based on the following
weighted-average assumptions used by UWS:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Risk free interest rate........................... 5.68% 5.71%
Expected life..................................... 6.22 years 6.04 years
Expected volatility............................... 0.34 0.38
Expected dividend yield........................... 2.09% 1.77%
</TABLE>
The weighted-average fair value of UWS stock options granted to Company
employees during 1996 and 1997 was $8.11 and $10.79, respectively.
The pro forma amounts above are not necessarily representative of the
effects of stock-based awards on future pro forma net income because (1) future
grants of employee stock options by Company management may not be comparable to
awards made to employees while the Company was a part of UWS, (2) the
assumptions used to compute the fair value of any stock option awards will be
specific to the Company and therefore may not be comparable to the UWS
assumptions used.
F-20
<PAGE>
NEWCO/UWS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1996 and
1997 and the three months ended March 31, 1998 are as follows:
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
Total revenues................... $ 133,056 $ 134,190 $ 134,145 $ 138,373 $ 539,764
Income before income tax
expense........................ 6,287 7,350 7,014 7,244 27,895
Net income....................... 3,701 4,614 4,262 4,332 16,909
1997
Total revenues................... $ 146,993 $ 150,790 $ 154,479 $ 156,847 $ 609,109
Income before income tax
expense........................ 6,931 6,465 6,415 6,702 26,513
Net income....................... 4,311 4,056 4,025 4,203 16,595
1998
Total revenues................... $ 159,158
Income before income tax
expense........................ 7,732
Net income....................... 4,840
</TABLE>
F-21
