<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Period Ended June 30, 1999
Commission File Number 1-14177
UNITED WISCONSIN SERVICES, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1931212
(State of incorporation) (I.R.S. Employer
Identification No.)
401 WEST MICHIGAN STREET, MILWAUKEE, WISCONSIN 53203-2896
(Address of principal executive offices) (Zip Code)
(414) 226-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all documents and
reports required to be filed by Section 13, or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock outstanding as of July 31, 1999 was 16,845,275.
<PAGE>
UNITED WISCONSIN SERVICES, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
For the Period Ended June 30, 1999
<TABLE>
<S> <C>
PART I
Financial Statements and Supplementary Data....................................... 3
Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................... 11
Quantitative and Qualitative Disclosures about Market Risk........................ 19
PART II
Other Information................................................................. 21
Signature Page.................................................................... 23
</TABLE>
2
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,686 $ 26,385
Investments--available for sale 148,428 158,463
Other receivables 65,957 65,464
Prepaid and other current assets 18,482 6,778
--------------- ---------------
Total Current Assets 237,553 257,090
Investments--held to maturity 8,161 7,710
Property and equipment, net 9,110 8,963
Goodwill and other intangible assets, net 10,612 7,751
Other noncurrent assets 22,470 16,694
--------------- ---------------
Total Assets $ 287,906 $ 298,208
=============== ===============
</TABLE>
See Notes to Interim Consolidated Financial Statements.
3
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Medical and other benefits payable $ 50,941 $ 70,659
Advance premiums 31,651 30,584
Note payable to affiliate 70,000 70,000
Due to affiliates - other 6,850 7,513
Payables and accrued expenses 21,350 19,129
Other current liabilities 17,555 10,527
--------------- ---------------
Total Current Liabilities 198,347 208,412
Other noncurrent liabilities 31,888 25,337
--------------- ---------------
Total Liabilities 230,235 233,749
Shareholders' Equity:
Preferred stock (no par value, 1,000,000 shares authorized) - -
Common stock (no par value, no stated value,
50,000,000 shares authorized, 16,845,067 and 16,812,081
issued and outstanding at June 30, 1999
and December 31, 1998, respectively) 13,660 13,378
Retained earnings 44,775 50,088
Unrealized gains (losses) on investments, net of taxes (764) 993
--------------- ---------------
Total Shareholders' Equity 57,671 64,459
--------------- ---------------
Total Liabilities and Shareholders' Equity $ 287,906 $ 298,208
=============== ===============
</TABLE>
See Notes to Interim Consolidated Financial Statements.
4
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Health services revenue:
Premium revenue $ 160,879 $ 150,526 $ 321,200 $ 298,602
Other revenue 10,940 7,257 20,265 14,378
Investment results 3,124 5,999 6,487 9,960
--------- --------- --------- ---------
Total Revenues 174,943 163,782 347,952 322,940
Expenses:
Medical and other benefits 153,050 127,641 291,986 253,708
Selling, general and administrative expenses 34,088 26,282 62,784 50,674
Profit (loss) sharing on provider arrangements (150) 289 (280) 1,413
Interest expense 1,241 - 2,425 -
Amortization of goodwill and other intangibles 195 99 360 215
--------- --------- --------- ---------
Total Expenses 188,424 154,311 357,275 306,010
--------- --------- --------- ---------
Income (Loss) before Income Taxes (13,481) 9,471 (9,323) 16,930
Income Tax Expense (Benefit) (5,496) 3,772 (4,010) 6,515
--------- --------- --------- ---------
Net Income (Loss) $ (7,985) $ 5,699 $ (5,313) $ 10,415
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and Diluted Earnings (Loss) Per Common
Share (1998 pro forma) $ (0.47) $ 0.30 $ (0.32) $ 0.53
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See Notes to Interim Consolidated Financial Statements.
5
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Operating Activities:
Net Income (Loss) $ (5,313) $ 10,415
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,764 1,278
Realized investment gains (1,789) (5,023)
Deferred income tax expense (benefit) (596) 116
Changes in operating accounts:
Other receivables (505) 1,375
Medical and other benefits payable (18,145) (6,006)
Advance premiums 1,067 5,705
Due to/from affiliates (679) 717
Other, net (7,220) (4,492)
------------ ------------
Net Cash Provided by (Used in) Operating Activities (31,416) 4,085
Investing Activities:
Acquisition of subsidiaries (net of cash and cash equivalents
acquired of $253,000) (3,168) -
Purchases of available for sale investments (80,890) (102,367)
Proceeds from sale of available for sale investments 80,496 98,291
Proceeds from maturity of available for sale investments 8,650 5,575
Purchases of held to maturity investments (459) (313)
Proceeds from maturity of held to maturity investments - 265
Additions to property and equipment (1,104) (1,946)
------------ ------------
Net Cash Provided by (Used in) Investing Activities 3,525 (495)
Financing Activities:
Issuances of common stock 2 -
Proceeds from line of credit 6,715 -
Repayment of debt (525) -
Decrease in investments by and advances from AMSG - (5,873)
------------ ------------
Net Cash Provided by (Used in) Financing Activities 6,192 (5,873)
Cash and Cash Equivalents:
Decrease during period (21,699) (2,283)
Balance at beginning of year 26,385 17,033
------------ ------------
Balance at End of Period $ 4,686 $ 14,750
============ ============
</TABLE>
See Notes to Interim Consolidated Financial Statements.
6
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
Note A. Basis of Presentation
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of only normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the three-month and six-month periods ended June 30, 1999 and 1998 are not
necessarily indicative of the results that may be expected for the years
ending December 31, 1999 and 1998. These interim consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1998 and footnotes
thereto included in United Wisconsin Services, Inc. (the "Company") Form
10-K, as filed with the Securities and Exchange Commission.
The accompanying unaudited interim consolidated financial statements present
the consolidated financial position, consolidated results of operations and
cash flows as if the Company had been an independent, publicly owned company
for all periods presented prior to the spin off ("Spin off" or
"Distribution") from American Medical Security Group, Inc. ("AMSG", formerly
United Wisconsin Services, Inc.) on September 25, 1998 ("Spin off date").
Certain estimates, assumptions and allocations were made to facilitate the
preparation of the unaudited interim consolidated financial statements.
Note B. Net Income (Loss) Per Share
Basic earnings per common share are computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings
per common share are computed by dividing net income by the weighted average
number of common shares outstanding, adjusted for the effect of dilutive
securities for employee and board of director stock options. When the Company
reports a net loss, potentially dilutive securities are not included in the
calculation of Earnings Per Share ("EPS") because their inclusion would have
an antidilutive effect.
The weighted average number of common shares outstanding used in the
calculation of both basic and diluted EPS are 16,845,043 and 16,834,275 for
the three months and six months ended June 30, 1999, respectively.
Options to purchase 2,349,235 and 2,549,331 common shares during the three
months and six months ended June 30, 1999, respectively, were not included in
the computation of diluted earnings per common share since the options'
exercise prices were greater than the average market price of the outstanding
common shares. In addition, 400,900 and 432,267 potentially dilutive common
shares for the three months and six months ended June 30, 1999, respectively,
were not included because the Company had a net loss in the periods presented
for 1999 and their inclusion would have been antidilutive.
7
<PAGE>
Note C. Pro Forma Financial Information
In conjunction with the distribution of assets pursuant to the Spin off, the
Company assumed a $70 million note obligation to Blue Cross & Blue Shield
United of Wisconsin ("BCBSUW"). The assumption of debt was effective
September 11, 1998. The unaudited pro forma results presented on the interim
consolidated statement of income and below, have been prepared for
informational purposes only. These results include the adjustment to
historical results, based on additional interest expense for the three month
and six month periods ended June 30, 1998, net of related income tax. Pro
forma calculations for dilutive securities for the second quarter and
year-to-date of 1998, assume that the price of the common shares and the
strike price of the options is the same during the periods.
The following unaudited pro forma information presents a summary of the
effect on net income as if the Spin off had occurred at the beginning of the
period:
<TABLE>
<CAPTION>
Three months Six months
ended ended
June 30, 1998 June 30, 1998
--------------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Net income as reported $ 5,699 $ 10,415
Pro forma adjustment - interest expense, net of taxes 789 1,581
--------------- ---------------
Pro forma net income $ 4,910 $ 8,834
--------------- ---------------
--------------- ---------------
Pro forma basic and diluted weighted average common shares 16,546,176 16,531,108
Pro forma basic and diluted earnings per common share $ 0.30 $ 0.53
--------------- ---------------
--------------- ---------------
</TABLE>
The unaudited pro forma financial information presented on the consolidated
statement of income and above, do not purport to be indicative of the results
of operations which actually would have resulted had the transactions
occurred at the beginning of the periods presented or of the future results
of operations.
Note D. Related Party
The Company and BCBSUW have discontinued negotiations for a private purchase
by BCBSUW of newly issued shares of the Company's common stock. BCBSUW
instead, is in the process of purchasing approximately 1.4 million of the
Company's shares in the market as a result of the previously disclosed plan
for BCBSUW to increase its ownership in the Company. The majority ownership
by BCBSUW will allow Compcare Health Services Insurance Corporation, a wholly
owned subsidiary of the Company, to use the Blue Cross and Blue Shield brand
on its products.
BCBSUW's Board of Directors announced in June of 1999 its intention to
convert BCBSUW from a service insurance corporation to a stockholder-owned
corporation. The conversion is authorized under existing state law and would
occur following the required approval by Wisconsin regulators, including the
Office of the Commissioner of Insurance. In conjunction with the planned
change in corporate structure of BCBSUW, the Company plans to pursue
opportunities for a possible merger or other business combination with
BCBSUW. Any merger or other business combination is not expected to occur
before October of 2000.
8
<PAGE>
Note E. Comprehensive Income
A reconciliation from net income (loss) reported in the Consolidated
Statements of Income to comprehensive income (loss) is stated below:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- -----------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss) per Consolidated Statements
of Income $(7,985) $ 5,699 $(5,313) $10,415
Unrealized gains (losses) on investments,
net of taxes (523) (2,891) (1,757) (1,964)
----------- ------------ ----------- -----------
Comprehensive income (loss) $(8,508) $ 2,808 $(7,070) $ 8,451
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
Comprehensive income (loss) is defined as all changes in equity during the
period except those resulting from shareholder equity contributions and
distributions. The accumulated effect of comprehensive income (loss) was a
reduction of $0.8 million and an increase of $1.0 million as of June 30, 1999
and December 31, 1998, respectively.
Note F. Segment Reporting
The Company has two reportable business segments: Health Maintenance
Organization ("HMO") products sold primarily in Wisconsin, and specialty
managed care products and services, including dental, life, disability and
workers' compensation products, managed care consulting, electronic claim
submission, pharmaceutical management, managed behavioral health services,
case management and receivables management sold throughout the United States.
"Other Operations" includes operations not directly related to the business
segments, unallocated corporate items (i.e. interest expense on corporate
debt, amortization of goodwill and intangibles, unallocated overhead expenses
and one-time transaction and reorganization costs) and intercompany
eliminations. The Company evaluates segment performance based on profit or
loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the December 31, 1998
audited financial statements in the summary of significant accounting
policies.
Financial data by segment is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------- --------------- --------------- --------------
1999 1998 1999 1998
--------------- --------------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Health services revenue:
HMO products $138,017 $128,066 $274,915 $254,702
Specialty managed care products and services 37,931 33,723 74,640 66,191
Other operations (4,129) (4,006) (8,090) (7,913)
--------------- --------------- --------------- --------------
Total consolidated $171,819 $157,783 $341,465 $312,980
--------------- --------------- --------------- --------------
--------------- --------------- --------------- --------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------- ----------- ----------- ----------
1999 1998 1999 1998
------------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment results:
HMO products $1,478 $2,445 $3,460 $4,038
Specialty managed care products and services 1,623 3,470 2,986 5,702
Other operations 23 84 41 220
------------- ----------- ----------- ----------
Total consolidated $3,124 $5,999 $6,487 $9,960
------------- ----------- ----------- ----------
------------- ----------- ----------- ----------
Income (loss) before income tax expense:
HMO products $(11,222) $4,621 $(8,719) $8,396
Specialty managed care products and services 1,998 5,229 5,187 9,235
Other operations (4,257) (379) (5,791) (701)
------------- ----------- ----------- ----------
Total consolidated $(13,481) $9,471 $(9,323) $16,930
------------- ----------- ----------- ----------
------------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Total assets:
HMO products $115,662 $138,272
Specialty managed care products and services 159,338 151,845
Other operations 12,906 8,091
----------------- --------------
Total consolidated $287,906 $298,208
----------------- --------------
----------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ----------------------
1999 1998 1999 1998
----------- ------------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Health services revenue from transactions
with other operating segments:
HMO products $ 528 $ 485 $ 988 $ 966
Specialty managed care products and
services 3,035 3,184 6,704 6,950
</TABLE>
Note G. Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1998 to conform with the 1999 presentation.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS11
OVERVIEW
United Wisconsin Services, Inc. (the "Company") is a Wisconsin
corporation organized in May of 1998 for the purpose of owning and operating
the managed care companies and specialty businesses of the Company's
predecessor, American Medical Security Group, Inc. ("AMSG") (formerly United
Wisconsin Services, Inc.). On September 25, 1998, the Company was spun off
(the "Spin off") from its former parent AMSG.
The Company is a leading provider of managed health care services and
employee benefit products. The Company's two primary product lines are: (i)
Health Maintenance Organization ("HMO") products, including Compcare Health
Services Insurance Corporation ("Compcare"), Valley Health Plan, Inc.
("Valley"), Unity Health Plans Insurance Corporation ("Unity") and certain
point-of-service ("POS") and other related products managed by Compcare,
Valley and Unity, and (ii) specialty managed care products and services,
including dental, life, disability and workers' compensation products,
managed care consulting, electronic claim submission, pharmaceutical
management, managed behavioral health services, case management and
receivables management, sold throughout the United States. Operating results
and statistics for these product groups are presented below for the periods
indicated.
The following Management's Discussion and Analysis should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1998 and footnotes thereto included in the Company's Form
10-K.
RESULTS OF OPERATIONS
TOTAL REVENUES
Total revenues for the three months ended June 30, 1999 increased 6.8%
to $174.9 million from $163.8 million for the three months ended June 30,
1998. For the six months ended June 30, 1999, total revenues increased 7.8%
to $348.0 million from $322.9 million for the six months ended June 30, 1998.
These increases were due primarily to increased membership in most of the
major product lines, general premium and rate increases and acquisitions of
specialty businesses since July of 1998.
HEALTH SERVICES REVENUES -- HMO health services revenues for the three
months ended June 30, 1999 increased 7.7% to $138.0 million from $128.1
million for the three months ended June 30, 1998. Average insured HMO medical
premium per member for the three months ended June 30, 1999 increased 5.4%
from the same period in the prior year. The average number of insured HMO
medical members for the three months ended June 30, 1999 increased 2.3% to
296,878 from 290,335 for the three months ended June 30, 1998.
HMO health services revenues for the six months ended June 30, 1999
increased 7.9% to $274.9 million from $254.7 million for the six months ended
June 30, 1998. Average insured HMO medical premium per member for the six
months ended June 30, 1999 increased 4.8% from the same period in the prior
year. The average number of insured HMO medical members for the six months
ended June 30, 1999 increased 3.0% to 297,245 from 288,614 for the six months
ended June 30, 1998.
Health services revenues for specialty managed care products and
services for the three months ended June 30, 1999 increased 12.5% to $37.9
million from $33.7 million for the three months ended June 30, 1998. Health
services revenues for specialty managed care products and services for the
six months ended June 30, 1999 increased 12.7% to $74.6 million from $66.2
million for the six months ended June 30, 1998. These increases were due
primarily to an increase in covered lives, premium rate increases on
insurance products and additional revenue of $3.6 million for the six months
ended June 30, 1999 from recent acquisitions. The Company acquired Intercare
Network, Inc. ("Intercare") and Ladd Enterprises, Inc. ("Ladd") during the
second half of 1998, and Allegro, Ltd. ("Allegro"), a case management
company, and the managed care assets of HCX, Inc. ("HCX") and Comprehensive
Collection Services ("CCS") in the second quarter of 1999. The
11
<PAGE>
increase for the six month period was partially offset by the Company's exit
from the vision business in the first quarter of 1998. Premium revenues for
the vision business were $0.6 million in the first quarter of 1998.
NET INVESTMENT RESULTS -- Investment results include investment income
and realized gains on investments. Investment results for the three months
ended June 30, 1999 decreased 48.3% to $3.1 million from $6.0 million for the
three months ended June 30, 1998. Average annual investment yields, excluding
net realized gains, were 5.5% for both the three months ended June 30, 1999
and 1998. Investment results for the six months ended June 30, 1999 decreased
35.0% to $6.5 million from $10.0 million for the six months ended June 30,
1998. Average annual investment yields, excluding net realized gains, were
5.4% for the six months ended June 30, 1999 and 5.7% for the six months ended
June 30, 1998. The lower investment yields during 1999 are primarily the
result of an increase in the percentage of lower yielding municipal and
international bonds to the total bond portfolio.
Average invested assets for the three months ended June 30, 1999
decreased 6.8% to $168.9 million from $181.2 million for the three months
ended June 30, 1998. Average invested assets for the six months ended June
30, 1999 decreased 2.0% to $177.2 million from $180.9 million for the six
months ended June 30, 1998. The decrease in the average invested assets
during 1999 is the result of cash requirements necessary to fund operating
losses, advances to providers and a reduction in medical and other benefits
payable.
Investment gains are realized in the normal investment process in
response to market opportunities. Realized gains for the three months ended
June 30, 1999 were $0.8 million, compared to $3.6 million for the three
months ended June 30, 1998. Realized gains for the six months ended June 30,
1999 were $1.8 million, compared to $5.0 million for the six months ended
June 30, 1998.
EXPENSE RATIOS
LOSS RATIO -- The consolidated loss ratio represents the ratio of
medical and other benefits to premium revenue on a consolidated basis, and is
therefore a blended ratio for medical, life, dental, disability and other
product lines. The consolidated loss ratio was 95.1% for the three months
ended June 30, 1999, compared with 84.8% for the three months ended June 30,
1998. The consolidated loss ratio was 90.9% for the six months ended June 30,
1999, compared with 85.0% for the six months ended June 30, 1998. The 1999
consolidated loss ratios were influenced by increases in the component loss
ratios for each of the Company's primary product lines, as discussed below.
The medical loss ratio for HMO products for the three months ended June
30, 1999 was 98.8%, compared with 88.3% for the three months ended June 30,
1998. The medical loss ratio for HMO products for the six months ended June
30, 1999 was 94.1%, compared with 88.4% for the six months ended June 30,
1998. The increase in both periods ending June 30, 1999 is primarily the
result of adverse reserve development in the amount of $11.8 million
related to 1998 and prior. Excluding the adverse reserve development, the
loss ratio for the three and six months ended June 30, 1999 would have been
90.2% and 89.8%, respectively. Compcare had an increased claim backlog as a
result of processing issues following a system conversion. The level of paid
claims for Compcare increased significantly during the second quarter of
1999, as Compcare reduced its claim backlog to preconversion levels.
Increased claim costs affected periods both prior to and subsequent to the
system conversion in August 1998. It appears that a significant portion of
the unfavorable 1998 claims impact was attributable to a reduction in the
identification and processing of claim recoveries. Claim recoveries were also
impacted by system implementation issues; however, efforts are being undertaken
in 1999 to maximize potential claim recoveries. The remaining increase was due
in part to increased claims on out-of-area health services provided to
Compcare and Valley members during 1999. This out-of-area component had
premium and incurred claims of $4.3 million and $7.1 million, respectively,
for the first six months of June 1999, compared to $4.7 million and $4.4
million for the same period in 1998, respectively.
12
<PAGE>
The loss ratio for the risk products within specialty managed care
products and services for the three months ended June 30, 1999 was 77.7%,
compared with 69.4% for the three months ended June 30, 1998. The loss ratio
for the risk products within specialty managed care products and services for
the six months ended June 30, 1999 was 75.9%, compared with 70.3% for the six
months ended June 30, 1998. The loss ratios principally relate to the life,
disability, workers' compensation and dental product lines of business. These
products represent relatively small blocks of business, and as a result, the
loss ratio can exhibit significant volatility due to varying levels of claim
frequency and severity. Generally, the anticipated aggregate loss ratio for
specialty risk products should range between 70% and 75%. The higher loss
ratios in 1999 are attributable to an increase in the life and disability
claims, along with lower premium and rate increases in 1999 given the
competitive marketplace conditions for disability and workers' compensation
products. In addition, United Heartland, Inc. workers' compensation block of
business had achieved better than expected results during 1998, while the
1999 results represent an increased loss ratio that is more in line with
industry and targeted results.
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 three months ended June 30, 1999 was
10.5%, compared with 9.8% for the three months ended June 30, 1998. The SGA
expense ratio for HMO products for the six months ended June 30, 1999 was
10.4%, compared with 9.3% for the six months ended June 30, 1998. The
majority of the increase in the SGA expense ratio relates to costs incurred
to reduce Compcare's claim backlog, which was attributed to the system
conversion as part of the Company's implementation of its Year 2000 readiness
program and to increase customer service demands. Any remaining incremental
costs associated with the upgraded computer system are expected to decline
during the remainder of the year.
SGA expense ratio related to the risk products within specialty managed
care products and services for the three months ended June 30, 1999 was
26.8%, compared with 27.0% for the three months ended June 30, 1998. SGA
expense ratio related to the risk products within specialty managed care
products and services for the six months ended June 30, 1999 was 25.1%,
compared with 25.7% for the six months ended June 30, 1998. This decrease was
primarily due to an expense credit of approximately $0.2 million during the
first six months of 1999, related to the Company's participation in a
reinsurance pool for the State of Wisconsin group life insurance program.
Such expense credits or offsetting expense charges may continue throughout
1999. The Company does not expect such credits to continue beyond 1999.
The operating expense ratio related to the service products within
specialty managed care products and services for the three months ended June
30, 1999 was 89.6%, compared with 92.1% for the three months ended June 30,
1998. The operating expense ratio related to the service products within
specialty managed care products and services for the six months ended June
30, 1999 was 89.3%, compared with 91.6% for the six months ended June 30,
1998. The improvements in both periods in 1999 are due to several factors.
The receipt of additional profit sharing from Virginia Surety Company has
increased revenue in the Company's workers' compensation block of business
during 1999, thereby lowering the ratio of expense to revenue. The
acquisitions of Ladd and Intercare, which have historically had lower than
average operating expense ratios, during the second half of 1998 and the
integration of the acquired audit services division of HCX into Meridian
Resource Corporation during the second quarter of 1999 also contributed
favorably to the reduction in the overall operating expense ratio.
The Company recorded one-time charges of approximately $2.8 million for
various transaction and reorganization costs in the second quarter of 1999.
These charges consist primarily of expenses associated with the proposed debt
for equity swap transaction with BCBSUW (which was discontinued by BCBSUW in
favor of market purchases), an unfavorable appellate court judgment in a
dissenter's lawsuit relating to the 1994 acquisition of Unity, costs
associated with the startup of a new regional office and the combination of
various specialty managed care service businesses into a single operating
unit.
13
<PAGE>
OTHER EXPENSES
Profit (loss) sharing on joint ventures was $(0.2) million for the
three months ended June 30, 1999 compared with $0.3 million for the three
months ended June 30, 1998. Profit (loss) sharing on joint ventures was
$(0.3) million for the six months ended June 30, 1999, compared with $1.4
million for the six months ended June 30, 1998. These balances are related to
the Unity and Valley provider arrangements and reflect the relative
profitability of these entities.
Amortization of goodwill and other intangibles for the three months
ended June 30, 1999 was $0.2 million, compared with $0.1 million for the
three months ended June 30, 1998. Amortization of goodwill and other
intangibles for the six months ended June 30, 1999 was $0.4 million, compared
with $0.2 million for the six months ended June 30, 1998. The increase is due
to goodwill arising from the acquisitions of Intercare and Ladd during the
second half of 1998, and the acquisitions of Allegro, HCX and CCS in the
second quarter of 1999.
Interest expense in 1999 was related primarily to the $70 million note
obligation to BCBSUW which was assumed on September 11, 1998 in conjunction
with the Spin off.
NET INCOME FROM OPERATIONS
Net income (loss) from operations for the three months ended June 30,
1999 decreased to $(8.0) million from $5.7 million for the three months ended
June 30, 1998. Net income (loss) from operations for the six months ended
June 30, 1999 decreased to $(5.3) million from $10.4 million for the six
months ended June 30, 1998.
The Company's effective tax rate was 40.8% for the three months ended
June 30, 1999, compared with 39.8% for the three months ended June 30, 1998.
The Company's effective tax rate was 43.0% for the six months ended June 30,
1999, compared with 38.5% for the six months ended June 30, 1998. This rate
fluctuates based upon the relative profitability of the Company's two product
lines and the differing effective tax rate for each of those product lines.
The effective tax rate by product line ranges from 33% to 44%. In addition to
the impact from the mix of earnings, favorable adjustments relating to prior
periods totaling approximately $0.2 million were recorded during the first
quarter of 1999.
SUMMARY OF OPERATING RESULTS AND STATISTICS
Operating results and statistics for the two primary product groups are
presented below for the periods indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Members at end of period:
HMO MEMBERS BY BUSINESS UNIT:
Compcare 174,898 172,825
Valley 42,225 40,203
Unity 87,099 84,880
-------------- --------------
Total HMO members 304,222 297,908
-------------- --------------
-------------- --------------
HMO MEMBERS BY PRODUCT TYPE:
Commercial 183,191 185,544
Point of Service 74,528 65,551
Medicaid 39,885 41,029
-------------- --------------
Total insured members 297,604 292,124
Self-insured members 6,618 5,784
-------------- --------------
Total HMO members 304,222 297,908
-------------- --------------
-------------- --------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
June 30,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES:
UWG Life/AD&D 158,933 152,045
Dental - HMO 175,500 168,044
UWG Dental 13,368 12,094
Disability 114,024 99,457
Behavioral Health 978,781 913,479
Workers' Compensation 54,115 53,509
-------------- --------------
Total Specialty managed care
products and services members 1,494,721 1,398,628
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Health services revenues (as a percentage of the total):
HMO products 80.3% 81.2% 80.5% 81.4%
Specialty managed care products and services
Service Products 8.4 6.5 8.0 6.7
Risk Products 13.7 14.9 13.9 14.5
Intercompany eliminations (2.4) (2.6) (2.4) (2.6)
---------- ----------- ---------- -----------
Total 100.0% 100.0% 100.0% 100.0%
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Operating statistics:
HMO products:
Medical loss ratio (1) 98.8% 88.3% 94.1% 88.4%
Selling, general, & administrative
expense ratio (2) 10.5 9.8 10.4 9.3
Combined loss and expense ratio 109.3 98.1 104.5 97.7
Specialty managed care products and services:
Service products:
Operating expense ratio* 89.6% 92.1% 89.3% 91.6%
Risk products:
Loss ratio (1) 77.7 69.4 75.9 70.3
Selling, general, & administrative
expense ratio (2) 26.8 27.0 25.1 25.7
Combined loss and expense ratio 104.5 96.4 101.0 96.0
Consolidated:
Loss ratio (1) 95.1% 84.8% 90.9% 85.0%
Net income (loss) margin (3) (4.6) 3.5 (1.5) 3.2
</TABLE>
(1) Medical and other benefits as a percentage of premium revenue.
(2) Selling, general and administrative expenses as a percentage of
premium revenue.
(3) Net income (loss) as a percentage of total revenues.
* This business does not have insurance related risk associated with it.
15
<PAGE>
The Company's revenues are derived primarily from premiums, while
medical benefits constitute the majority of expenses. Profitability is
directly affected by many factors including, among others, premium rate
adequacy, estimates of medical benefits, health care utilization, effective
administration of benefit payments, operating efficiency, investment returns
and federal and state laws and regulations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of health services
revenues and investment income. The primary uses of cash include medical and
other benefits and operating expense payments. Positive cash flows are
invested pending future payments of medical and other benefits and other
operating expenses. The Company's investment policies are designed to
maximize yield, preserve principal and provide liquidity to meet anticipated
payment obligations.
The Company has generated positive cash flow from operations in prior
years. However, for the six months ended June 30, 1999, net cash was used in
operating activities in the amount of $31.4 million, compared with net cash
provided by operating activities of $4.1 million for the six months ended
June 30, 1998. In addition to the net loss from operations, the decrease in
cash flows from operations in 1999 was due primarily to the significant
reductions in medical and other benefits payable. Due to periodic cash flow
requirements of certain subsidiaries, the Company made borrowings under its
bank line of credit ranging up to $14.8 million during the first six months
of 1999 and $10.0 million during the first six months of 1998 to meet
short-term cash needs. The outstanding balance on the line of credit at June
30, 1999 was $6.7 million compared with no outstanding balance at December
31, 1998.
The Company's investment portfolio consists primarily of investment
grade bonds and Government securities, and has a limited exposure to equity
securities. At June 30, 1999, $127.4 million or 81.4% of the Company's total
investment portfolio was invested in bonds compared with $132.8 million or
79.9% at December 31, 1998. The bond portfolio had an average quality rating
by Moody's Investor Service of A1 and Aa3 at June 30, 1999 and December 31,
1998, respectively. The majority of the bond portfolio was classified as
available for sale. The market value of the total investment portfolio, which
includes stocks and bonds, was less than amortized cost by $1.6 million at
June 30, 1999 and greater than amortized cost by $1.9 million at December 31,
1998. The Company has no investments in mortgage loans, non-publicly traded
securities (except for principal-only strips of U. S. Government securities),
real estate held for investment or financial derivatives.
From time to time, capital contributions are made to the subsidiaries
to assist them in maintaining appropriate levels of capital and surplus for
regulatory and rating purposes. Insurance subsidiaries are required to
maintain certain levels of statutory capital and surplus. In Wisconsin, where
a large percentage of the Company's premium is written, these levels are
based upon the amount and type of premiums written and are calculated
separately for each subsidiary. As of the balance sheet dates presented,
statutory capital and surplus for each of these insurance subsidiaries
exceeded required levels.
In conjunction with the Spin off, the Company assumed a $70 million
note obligation to BCBSUW that matures on October 30, 1999. The assumption of
debt was effective September 11, 1998. The Company expects to extend the
maturity of the note obligation to at least October 30, 2000.
In addition to internally generated funds and periodic borrowings on
its bank line of credit, the Company believes that additional financing to
facilitate long-term growth could be obtained through equity offerings, debt
offerings, financings from BCBSUW or bank borrowings, as market conditions
may permit or dictate.
16
<PAGE>
YEAR 2000 ISSUES
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company has identified required modifications or replacements of
its software and certain hardware so that those systems will properly utilize
dates beyond December 31, 1999. The Company presently believes that with
these modifications or replacements of existing software and certain
hardware, the Year 2000 Issue can be mitigated and will not pose significant
operational problems. However, if such modifications and conversions are not
made or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing, and implementation.
To date, the Company has fully completed its assessment of all systems that
could be significantly affected by the Year 2000 Issue. The completed
assessment indicated that most of the Company's significant information
technology systems could be affected, particularly the general ledger,
billing and processing of medical claims. That assessment also indicated that
software and hardware (embedded chips) used in building operations and office
equipment (hereafter referred to as non-IT systems) are at risk. The Company
does not believe that the Year 2000 Issue presents a material exposure as it
relates to the Company's non-IT systems. In addition, the Company has
inquired and gathered information about the Year 2000 readiness status of its
significant suppliers and vendors and continues to monitor their readiness.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE
As of June 30, 1999, all of the Company's subsidiaries except United
Wisconsin Group ("UWG") are complete with the remediation phase for its
information technology exposures. Software for all systems have been
reprogrammed or replaced and the subsidiaries have completed all testing and
implementation phases as they relate to Year 2000 Issues.
UWG is approximately 50% complete in the remediation, testing and
implementation phases of its administrative, claims and billing systems. At
the completion of the remaining remediation phase, UWG will then complete the
testing and implementation phases. UWG expects to complete the remediation,
testing and implementation by November 30, 1999.
The remediation, testing and implementation phases of a majority of
the non-IT systems are complete and ready for immediate use. The remediation,
testing and implementation for the security systems at two locations are in
process and are expected to be completed by August 31, 1999.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
YEAR 2000
The Company outsources and relies extensively on third party systems
to process selected payroll, membership and claims processing functions,
among others. The Company has worked with third party vendors to ensure that
their systems are Year 2000 ready. Third party systems have been upgraded and
tested and are Year 2000 ready. UWG, which includes the Company's wholly
owned subsidiaries of United Wisconsin Insurance Company and United Heartland
Life Insurance Company, continues to work to resolve the Year 2000 Issue by
November 30, 1999 for its administrative, claims and billing systems. Based
on
17
<PAGE>
discussions with external consultants and vendors, the Company is of the
understanding that all vendor systems utilized, including UWG, will be Year
2000 ready.
The Company has initiated formal communications with its systems
processing vendors, government agencies and all large customers and providers
using electronic interfaces to determine the extent to which the Company's
interface systems are vulnerable to the failure of third parties to remediate
Year 2000 Issues. The Company is not aware of any significant interface
issues.
The Company has surveyed its significant suppliers and subcontractors
(external agents) that do not share information systems with the Company. To
date, the Company is not aware of any external agent with a Year 2000 Issue
that would materially impact the Company's results of operations, liquidity
or capital resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external
agents is not determinable.
COST OF THE YEAR 2000 PROJECT
The Company has utilized both internal and external resources to
assess, remediate, test and implement the software and non-IT systems for the
Year 2000 modifications. The total estimated direct costs of the Year 2000
project increased during the past quarter as a result of additional
consulting costs deemed necessary to ensure Year 2000 readiness for the
administrative, claims and billing systems of UWG. The estimate was increased
to $3.1 million and is being funded through operating cash flows. To date,
the Company has incurred $1.8 million of identifiable costs related to all
phases of the Year 2000 project. Remaining costs to be incurred to complete
the Year 2000 project are estimated to approximate $1.3 million.
The Company has capitalized $2.6 million related to other functionality
enhancing system upgrades or new systems that also provide Year 2000
readiness. A number of other modifications to current systems are covered by
existing maintenance agreements and by normal upgrades and do not present
incremental additional expense.
BCBSUW leases the claims, membership and general ledger software
programs, and subleases the use of these systems to the Company under a
service agreement. BCBSUW capitalized $16.5 million of implementation and
system enhancement costs that were incurred to replace these systems,
primarily as a result of a service agreement expiration and for improved
functionality. These replacements also included Year 2000 readiness but were
not the result of acceleration due to Year 2000 Issues. Approximately 24% of
the amortized costs were allocated to the Company.
Costs related to maintenance of existing computer hardware and software
are expensed as incurred. Purchases of new hardware or software in
replacement of non-compliant hardware or software and reprogramming costs are
being capitalized in accordance with the Company's standard accounting
practices.
RISKS ASSOCIATED WITH YEAR 2000
Company management believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program. In the
event that the Company is unable to complete the remaining phases, the
Company would selectively be unable to bill and collect premiums, adjudicate
medical and other claims, manage the utilization of medical services or
perform actuarial determinations. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely
affect the Company. The Company could be subject to litigation on a loss of
business in the event it failed to complete certain of the remaining
remediation and implementation steps. The amount of any potential liability
and lost revenue cannot be reasonably estimated at this time. No provision
for any such liability or lost revenue has been recorded.
18
<PAGE>
CONTINGENCY PLANS
The Company is developing contingency plans for certain critical
applications and is working on such plans with internal staff, external
consultants and major data center vendors. These contingency plans are being
developed in the event the system conversions and their functionality or
their readiness for Year 2000 are not completed on a timely basis. These
contingency plans involve, among other actions, manual workarounds, reducing
claim inventories prior to December 31, 1999, and adjusting staffing
strategies.
FORWARD LOOKING STATEMENTS
This report contains certain forward looking statements with respect to
the financial condition, results of operation and business of the Company.
Such forward looking statements are subject to inherent risks and
uncertainties that may cause actual results or events to differ materially
from those contemplated by such forward looking statements. Forward-looking
statements may include, but are not limited to, projections of revenues,
income or losses, capital expenditures, plans for future operations,
financing needs or plans, compliance with financial covenants in loan
agreements, plans relating to products or services of the Company,
assessments of materiality, predictions of future events, the ability to
obtain additional financing, the Company's ability to meet obligations as
they become due, as well as assumptions relating to the foregoing. In
addition, when used in this discussion, the words "anticipates," "believes,"
"estimates," "expects," "intends," "plans" and similar expressions are
intended to identify forward-looking statements. Factors that may cause
actual results to differ materially from those contemplated by such forward
looking statements include, among others, rising health care costs, economic
and business conditions and competition in the managed care industry,
development of claims reserves, developments in health care reform and other
regulatory issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption
`Liquidity and Capital Resources' under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Because of the Company's investment policies, the primary market risks
associated with the Company's portfolio are interest rate risk, credit risk,
and the risk related to fluctuations in equity prices. With respect to
interest rate risk, a reasonably near-term rise in interest rates could
negatively affect the fair value of the Company's bond portfolio; however,
because the Company considers it unlikely that the Company would need to
choose to substantially liquidate its portfolio, the Company believes that
such an increase in interest rates would not have a material impact on future
earnings or cash flows. In addition, the Company is exposed to the risk of
loss related to changes in credit spreads. Credit spread risk arises from the
potential that changes in an issuer's credit rating or credit perception may
affect the value of financial instruments.
The overall goal of the investment portfolios is to support the ongoing
operations of the Company's business units. The Company's philosophy is to
actively manage assets to maximize total return over a multiple-year time
horizon, subject to appropriate levels of risk. The Company manages these
risks by establishing gain and loss tolerances, targeting asset-class
allocations, diversifying among asset classes and segments within various
asset classes, and using performance measurement and reporting.
19
<PAGE>
The Company uses a sensitivity model to assess the inherent rate risk
of its fixed income investments. The model includes all fixed income
securities held as of June 30, 1999 and incorporates assumptions regarding
the impact of changing interest rates on expected cash flows for certain
financial assets with prepayment features, such as callable bonds and
mortgage-backed securities. The reduction in the fair value of the Company's
modeled financial assets resulting from a hypothetical instantaneous 100
basis point increase in the U.S. Treasury yield curve is estimated at $4.5
million as of June 30, 1999 and $3.9 million as of December 31, 1998.
20
<PAGE>
PART II. OTHER INFORMATION
UNITED WISCONSIN SERVICES, INC.
ITEM 1. LEGAL PROCEEDINGS
Following the merger in 1994 between the Company and HMO-Wisconsin,
Inc. ("HMOW"), certain minority shareholders of HMOW filed a demand for
payment under the dissenter's rights statute. HMOW brought a special
proceeding in Sauk County Circuit Court to determine the fair value of the
shares. The court accepted HMOW's valuation, and further applied a minority
discount to the amount allocable to the dissenting shareholders. A dissenting
shareholder filed an appeal, HMO-W INCORPORATED V. SSM HEALTH CARE SYSTEM AND
NEILLSVILLE CLINIC, S.C., No. 98-2834 in the Wisconsin Court of Appeals,
District IV. On June 17, 1999, the Court of Appeals upheld the trial court's
determination of fair value, but reversed the application of the discount.
The Company believes the application of a minority discount is appropriate,
and filed a petition for review of the Appellate Court's decision with the
Wisconsin Supreme Court on July 16, 1999. The value of the minority discount
is approximately $600,000.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May
26, 1999, at which the following matters were voted upon:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
------------ -------- --------- -----------
<S> <C> <C> <C> <C>
Nominees for Director for Class I
Directors, Three-Year Term
Expiring 2002
Michael P. Dunham 16,619,242 19,741 -- --
James L. Forbes 16,619,192 19,791 -- --
William C. Rupp, M.D. 16,619,242 19,741 -- --
</TABLE>
The term of office of the following other Directors continued after the
meeting: Richard A. Abdoo, William R. Johnson, Eugene A. Menden, Thomas R.
Hefty, James A. Hickman, and Carol N. Skornicka.
ITEM 5. OTHER INFORMATION
None
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 United Wisconsin Services, Inc. Stock Appreciation
Rights Plan (As amended effective May 26, 1999).
10.2 Joint Venture and Shareholders Agreement by and
between Health Care Service Corporation ("HCSC"),
United Heartland, Inc., United Wisconsin Insurance
Company ("UWIC") and UWS dated May 3, 1999.
10.3 Stock Purchase Agreement by and between UWS and HCSC
dated June 4, 1999, and Addendum to Stock Purchase
Agreement by and between UWS, UWIC and HCSC dated
June 18, 1999.
(b) Reports on Form 8-K
None
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: 8/11/99
UNITED WISCONSIN SERVICES, INC.
/S/ GAIL HANSON
------------------------------------------
Gail Hanson
Vice President and Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
23
<PAGE>
UNITED WISCONSIN SERVICES, INC.
STOCK APPRECIATION RIGHTS PLAN
(as amended effective May 26, 1999)
<PAGE>
UNITED WISCONSIN SERVICES, INC.
STOCK APPRECIATION RIGHTS PLAN
(as amended effective May 26, 1999)
1. PURPOSE. The purpose of the United Wisconsin Services, Inc. Stock
Appreciation Rights Plan (the "Plan") is to attract and retain
outstanding individuals as officers and key employees of United
Wisconsin Services, Inc. (the "Corporation") and its subsidiaries, and
to furnish incentives to such individuals through rewards upon the
performance of the common stock of the Corporation. To this end, the
Management Review Committee of the Corporation, or such other committee
as determined by the Board of Directors (the "Committee") may grant
stock appreciation rights ("SARs") to officers and other key employees
of the Corporation and its subsidiaries, on the terms and subject to
the conditions set forth in this Plan.
2. PARTICIPANTS. Participants in the Plan shall consist of such officers
and employees of the Corporation and its subsidiaries as the Committee
in its sole discretion may select from time to time to receive stock
appreciation rights. In determining the officers and employees to whom
stock appreciation rights will be granted, the Committee shall take
into account the duties of the respective officers and employees, their
past, present and potential contributions to the success of the
Corporation, their level of responsibility for the growth, development
and financial success of the Corporation, and such other factors as the
Committee deems relevant in connection with accomplishing the purposes
of the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Committee. The Committee shall consist of not less than two members of
the Board of Directors, all of whom shall, to the extent required,
qualify to administer the Plan as contemplated by Rule 16b-3, as
amended, or other applicable rules under Section 16 of the Securities
Exchange Act of 1934, as amended ("Section 16"). For purposes of
Section 16 and as of the date of adoption of the Plan, members of the
Board of Directors shall qualify to administer the Plan if each
proposed member is a disinterested person. A "disinterested person"
means a director who is not, during the one year prior to service as a
member of the Committee, or during such service, granted or awarded
equity securities pursuant to the Plan or any other plan of the
Company, or any of its affiliates, subject to certain exceptions.
Subject to the provisions of the Plan, the Committee shall have sole
discretion and authority (i) to determine which officers and employees
of the Corporation and its subsidiaries shall be eligible for
participation in the Plan; (ii) to select officers and employees to
receive grants under the Plan; (iii) to determine the number of stock
appreciation rights subject to the grant, the conditions of exercise,
the fair market value of the common stock of the Corporation for
purposes of the Plan, and all other terms and conditions of any grant;
and (iv) to prescribe the form of agreement, certificate or other
instrument evidencing the grant. The Committee shall also have
authority to interpret the Plan and to establish, amend and rescind
rules and regulations for the administration of the Plan, and all such
interpretations, rules and regulations shall be conclusive and binding
on all persons, provided, however, that the Committee shall not
exercise such authority in a manner
-1-
<PAGE>
adversely and significantly affecting stock appreciation rights
previously granted unless the action taken is required to comply
with any applicable law or regulation.
4. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective on
January 1, 1992. The Plan shall terminate only by action of the Board
of Directors. No further grants may be made under the Plan after its
termination, but the termination of the Plan shall not adversely and
significantly affect the rights of any participant under, or the
authority of the Committee with respect to, any grants made prior to
termination unless the action taken is required to comply with any
applicable law or regulations.
5. NUMBER OF STOCK APPRECIATION RIGHTS SUBJECT TO THE PLAN. Subject to
adjustment as provided in paragraph 7 hereof, the aggregate number of
stock appreciation rights which may be granted under the Plan shall not
exceed 150,000. Each stock appreciation right evidences the right upon
exercise to receive payment from the Corporation of the amount set
forth in Section 6(d) hereof. Whenever stock appreciation rights
granted under the Plan can no longer under any circumstances be
exercised, these stock appreciation rights shall be available for
additional grants under the Plan. Stock appreciation rights which are
exercised shall thereafter be canceled and retired.
6. STOCK APPRECIATION RIGHTS.
(a) GRANTS. Stock appreciation rights entitling the grantee to
receive cash equal to the sum of (i) the appreciation in value
and (ii) the value of dividends paid on a stated number of
shares of common stock of the Corporation between the date of
grant and the date of exercise may be granted without
consideration from time to time to such officers and employees
of the Corporation and its subsidiaries as may be selected by
the Committee.
(b) TERMS OF GRANT AND EXERCISE: GENERAL. The grantee's rights
with respect to stock appreciation rights granted shall vest
three years after the date of grant as to 50% of the stock
appreciation rights; the remaining 50% of the stock
appreciation rights granted shall vest six years after the
date of grant. Not withstanding the above, the Committee has
the sole discretion to alter the time in which previously
granted SARs vest in the event a grantee becomes disabled,
retires or dies; provided, however, that no previously granted
SARs vest prior to six months from the date of grant. Stock
appreciation rights are exercisable in whole or in part
provided all of the following conditions are met at the time
of exercise: (i) the stock appreciation rights to be exercised
are vested; (ii) the stock appreciation rights are exercised
only during the period beginning on the third business day
following the date of release of the Corporation's quarterly
or annual summary statements of revenues and earnings and
ending on the twelfth business day following such date (the
"Exercise Date"); (iii) the stock appreciation rights are
exercised prior to the
-2-
<PAGE>
expiration of twelve years from the date of grant; and (iv)
the grantee is employed by the Corporation or any present or
future parent or subsidiary of the Corporation at the time
of exercise. Stock appreciation rights not exercised on or
before the close of business twelve years from the date of
grant shall automatically expire and the stock appreciation
rights shall become void. The Committee may at the time of
grant or at any time thereafter impose such additional terms
and conditions on the exercise of stock appreciation rights
as it deems necessary or desirable for compliance with
Section 16.
(c) TERMS OF GRANT AND EXERCISE: TERMINATION OF EMPLOYMENT,
RETIREMENT OR DEATH. If a grantee ceases to be employed by the
Corporation or any of its subsidiaries for any reason other
than death or retirement, any stock appreciation right held by
such grantee may be exercised only on the Exercise Date
immediately following the date of such cessation of
employment, but only with respect to that number of stock
appreciation rights which were exercisable immediately prior
to the date of cessation of employment.
If a grantee ceases to be employed by the Corporation or any
of its subsidiaries by reason of death, or dies after
termination of his employment by the Corporation or any of its
subsidiaries but prior to the Exercise Date immediately
following thereto, any stock appreciation right held by such
grantee which was exercisable by the grantee immediately prior
to his or her death, may be exercised by the grantee's
personal representative or executor of his or her estate on
any date, so long as such date is during the period ending on
the earlier of the first anniversary of the date of such
grantee's death or the date of expiration of such stock
appreciation rights.
If a grantee ceases to be employed by the Corporation or any
of its subsidiaries by reason of Retirement, any stock
appreciation right held by such grantee which was exercisable
by the grantee immediately prior to his Retirement may be
exercised by the grantee on any date, so long as such date is
during the period ending on the earlier of the third
anniversary of the date of the grantee's Retirement or the
date of expiration of such stock appreciation rights. For
purposes of this Plan, Retirement shall mean a termination of
employment after the grantee has attained age 55 and completed
10 years of service. Notwithstanding anything in this Section
to the contrary, no grantee who terminates employment by
reason of Retirement may exercise his stock appreciation
rights on a date other than an Exercise Date if exercise on
such date could subject the grantee to liability under federal
or state securities laws.
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The Committee has the sole discretion to alter the time in
which previously granted SARs vest in the event a grantee
becomes disabled, retires or dies; provided, however, that no
previously granted SARs vest prior to six months from the date
of grant.
(d) PAYMENT ON EXERCISE. Upon exercise of a stock appreciation
right, the grantee shall be paid within five business days an
amount in cash equal to the sum of (i) the amount by which the
fair market value of one share of the Corporation's common
stock on the date of exercise exceeds the date of grant value
thereof multiplied by the number of stock appreciation rights
being exercised and (ii) the value of the cash dividends
associated therewith. The value of the cash dividends
associated with exercised stock appreciation rights shall be
equal to the actual cash dividend paid on a share of common
stock between the date of grant and the date of exercise, plus
annual interest earned on the dividend paid between the date
the cash dividend is paid and the date of exercise, multiplied
by the number of stock appreciation rights being exercised.
Annual interest shall be reset annually and shall be at the
rate of the one year Treasury Bill as of September 30th of the
prior year plus 150 basis points; provided, however, the
annual interest rate shall in no event be less than 7.00% or
greater than 10.00% per annum.
For purposes of this paragraph, the fair market value of a
share of common stock of the Corporation shall be determined
using the first of the following rules which apply:
(A) During such time as the Corporation's common stock
is traded on the New York Stock Exchange (the
"Exchange"), the closing price of the
Corporation's common stock on the Exchange; or
(B) If the Corporation's common stock is not then
traded on the Exchange, the mean between the
published bid and asked prices of the common stock
of the Corporation if the common stock of the
Corporation was then traded on a bona fide
over-the-counter market; or
(C) If the common stock of the Corporation was not
traded on the Exchange or on a bona fide
over-the-counter market, a value determined by an
appraiser selected by the Committee.
In the event that the date of exercise of a stock appreciation
right is a date for which there were no sales of the
Corporation's common stock if the stock is traded on the
Exchange, such fair market value shall be
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determined by taking an average of the closing prices on
the nearest day before and the nearest day after the
exercise date. In the event that the date of exercise of a
stock appreciation right is a date for which there is no
published bid and asked prices if the stock is traded on the
over-the-counter market, such fair market value shall be
determined by referring to the next preceding business day
on which trading occurs or on which published prices are
available.
With regard to only the initial grants of SARs, the Committee,
in its sole discretion, may set the date of grant value of one
share of the Corporation's common stock at a value equal to
the Initial Public Offering price of the Corporation's common
stock declared effective October 24, 1991. All subsequent
grants of SARs, shall be valued as of the date of grant.
(E) ADDITIONAL TERMS AND CONDITIONS. The agreement or instrument
evidencing the grant of stock appreciation rights may contain
such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Committee in its
sole discretion.
7. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION, ETC. The terms and
conditions of stock appreciation rights shall be subject to adjustment
by the Committee in its sole discretion as to the number, kind and date
of grant value in the event of changes in the outstanding common stock
of the Corporation by reason of stock dividends, stock splits,
recapitalization, reorganizations, mergers, consolidations,
combinations, exchanges or other relevant changes in corporate
structure or capitalization occurring after the date of the grant of
any stock appreciation right, provided that if the Corporation shall
change its common stock into a greater or lesser number of shares
through a stock dividend, stock split-up, or combination of shares,
outstanding rights shall be adjusted proportionately, consistent with
existing law and regulation, to prevent inequitable results.
8. EFFECT OF LIQUIDATION, MERGER, CONSOLIDATION OR OTHER EVENTS. Nothing
contained in the Plan or in the terms of any stock appreciation rights
granted under the Plan shall in any way prohibit the Corporation from
merging with or consolidating into another corporation, or from selling
or transferring all or substantially all of its assets, or from
distributing all or substantially all of its assets to its shareholders
in liquidation, or from dissolving and terminating its corporate
existence; and in any such event, all outstanding stock appreciation
rights granted under the Plan which have vested shall be deemed to have
been exercised at the time of any such merger, consolidation, sale or
transfer of assets, liquidation, or dissolution, except to the extent
that any agreement or undertaking of any party to such merger,
consolidation, or sale or transfer of assets, or any plan pursuant to
which such liquidation or dissolution is effected, shall make specific
provision to continue such stock appreciation rights and the rights of
such person or persons entitled to exercise such stock appreciation
rights.
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9. AMENDMENT AND TERMINATION OF PLAN. The Plan may be amended or
terminated by the Board of Directors of the Corporation in any respect;
provided, however, the Board shall not exercise such authority in a
manner adversely and significantly affecting stock appreciation rights
previously granted unless the action taken is required to comply with
any applicable law or regulation.
10. MISCELLANEOUS.
(a) NO RIGHT TO A GRANT. Neither the adoption of the Plan nor any
action of the Board of Directors or of the Committee shall be
deemed to give any officer or employee any right to be
selected as a participant or to be granted a stock
appreciation right.
(b) NO RIGHTS AS SHAREHOLDER. No officer or employee shall have
any rights of any kind as a shareholder of the Corporation
with respect to stock appreciation rights.
(c) EMPLOYMENT. Nothing contained in this Plan shall be deemed to
confer upon any officer or employee any right of continued
employment with the Corporation or any of its subsidiaries or
to limit or diminish in any way the right of the Corporation
or any such subsidiary to terminate his or her employment at
any time with or without cause.
(d) TAXES. The Corporation shall be entitled to deduct from any
payment under the Plan the amount of any tax required by law
to be withheld with respect to such payment or may require any
participant to pay such amount to the Corporation prior to and
as a condition of making such payment.
(e) NONTRANSFERABILITY. No stock appreciation right shall be
transferable except by will or the laws of descent and
distribution. During the grantee's lifetime, stock
appreciation rights shall be exercisable only by such grantee.
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JOINT VENTURE AND SHAREHOLDERS AGREEMENT
THIS AGREEMENT (the "AGREEMENT) made and entered into effective as
of the ___ day of _______ 1999 by and between Health Care Service
Corporation, a Mutual Legal Reserve Company ("HCSC"), United Heartland,
Inc., a Wisconsin corporation, ("UH"), United Wisconsin Insurance Company, a
Wisconsin corporation ("UWIC"), and United Wisconsin Services, Inc., a
Wisconsin corporation (UH, UWIC and United Wisconsin Services, Inc.
collectively referred to as "UWS") (UWS and HCSC sometimes individually and
collectively referred to as the "VENTURER" or "VENTURERS").
RECITALS
1. HCSC, through its subsidiaries Third Coast Holding Company,
Third Coast Insurance Company and Third Coast Insurance Services Company,
each an Illinois corporation (collectively referred to as "Third Coast"),
engages in workers' compensation insurance business in Illinois, including
without limitation managed care, management and administrative services
relating thereto; and
2. UWS, through its wholly owned subsidiaries, engages in
workers' compensation insurance business in Wisconsin and other states,
including without limitation managed care, management and administrative
services relating thereto and possesses expertise and know-how, including
registered and unregistered copyrighted computer software and computer
systems relating to the workers' compensation insurance business; and
3. The Venturers desire to operate a joint venture in Illinois
through an Illinois corporation to be formed (the "Company") to underwrite
and market workers' compensation insurance policies to employers located in
Illinois.
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4. The parties hereto desire that their respective rights and
obligations be set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree to the
following:
1. PURPOSE
The Venturers wish to invest in the Company as a separate business
entity with an objective to engage in the following activities in Illinois
(and such other states as the Company's board of directors may approve):
a. Developing, marketing and servicing managed care/preferred
provider organization programs in connection with administering workers'
compensation claims of employees of Illinois employers, and foreign employees
of Illinois employers.
b. Providing services as a managing general agent and third
party administrator in connection with workers' compensation claims programs
of Illinois employers and foreign employees of Illinois employers.
c. Developing, marketing, servicing and administering workers'
compensation or other individual or group policies of insurance, to be
underwritten and/or issued by UWIC on behalf of the Company, and offered by
the Company to Illinois employers, foreign employees of Illinois employers
and Illinois employees of foreign employers.
2. SUBSCRIPTION FOR SHARES: CONTRIBUTION
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2.1 SUBSCRIPTION OF AND PAYMENT FOR SHARES OF STOCK. Each of
HCSC and UWS does hereby subscribe for and purchase 500 shares of Common
Stock, no par value, of the Company ("Company Stock"), and does hereby agree
to make payment for such shares as set forth in Sections 2.2 and 2.3 below.
2.2 CONTRIBUTIONS OF HCSC. In consideration of the issuance of
Common Stock to HCSC as set forth in Section 2.1, HCSC agrees to contribute
to the Company the following:
a. For the first year of operation, HCSC will permit the
Company to utilize without additional fees to HCSC the existing Third Coast
provider network in Illinois and any HCSC provider network that may be
developed in any new market. At the end of the first year of operation, the
Company will either pay rent in an amount to be agreed upon in exchange for
the right to use such network, or the parties shall agree on the creation of
a new provider network;
b. All Third Coast operational, administrative, loss control,
claims and managed care staff shall be transferred to and become employees of
the Company at no additional cost to the Company. In the event any of these
employees have their employment terminated during the first three (3) months
of the Company's operations, Third Coast shall be responsible for any
liabilities associated with such termination(s); and
c. HCSC will contribute $50,000 to the Company in immediately
available funds.
2.3 CONTRIBUTIONS BY UWS. In consideration of the issuance of
Common Stock to UWS as set forth in Section 2.1, UWS agrees to contribute to
the Company the following:
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a. ,, the use of and access to UWS's know how, methods, systems,
software and all other information and expertise relating to the
operations, management, underwriting and administration of worker's
compensation insurance business; and
b. the use of UWS's license for utilizing customized workers
compensation systems and software; and
c. UWS will contribute $50,000 to the Company in immediately available
funds.
3. OPERATIONS OF THE COMPANY FOLLOWING CLOSING
3.1 UNDERWRITING. All insurance policies issued by the Company
shall be written through UWS's wholly owned subsidiary, United Wisconsin
Insurance Company ("UWIC") pursuant to an Underwriting Management Agreement
in a form reasonably acceptable to the parties.
of
3.2 PROFIT SHARING. UWS (collectively with its subsidiaries)
and HCSC (collectively with its subsidiaries) shall share both profits and
losses, as applicable, 50% to UWS and 50% to HCSC, for all joint venture
business written by the Company after Closing. Any such profits of the
Company shall be determined after deducting for any underwriting losses
incurred pursuant to the Underwriting Management Agreement referenced in
Section 3.1 above.
3.3 ADMINISTRATIVE AND MARKETING ALLOWANCE. The Company shall
agree with HCSC and UWS on an administrative and marketing allowance for the
Company. Such allowance shall be approximately equal to the cost of
operations plus an annual bonus to be
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paid to Company employees based on the Company's confirmed loss and expense
ratios as set by the Company's Board of Directors. The Board of Directors of
the Company shall determine annually in advance target loss and expense
ratios for purposes of the bonus.
3.4 EXCLUSIVITY. During the term of the Joint Venture, HCSC and
UWS will contribute to the Company all new and renewal worker's compensation
business developed by either of them in the State of Illinois, as further
defined in Section 9.2, and shall offer the Company a right of first refusal
on all worker's compensation business developed by either of them in the
State of Texas.
3.5 MARKETING OVERRIDE ALLOWANCE. The Company shall pay to
HCSC, as an operating expense, an allowance ("Override Allowance") on
premiums written for the Company by HCSC's salaried sales force equal to one
percent (1%) of annual premium of new business written and one-half percent
(0.5%) of annual premium of renewal business written. The Override Allowance
shall constitute full and complete compensation by the Company to HCSC's
sales force for such business written. The Override Allowance shall continue
for two years following termination of this Agreement.
3.6 BLUE CROSS BLUE SHIELD TRADEMARK. The Company shall not use
the Blue Cross Blue Shield tradenames or trademarks.
3.7 COMPANY EXPENSES. The Company shall be responsible for the
following costs of operating the joint venture:
(a) costs related to acquiring and retaining any necessary additional
personnel
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(b) costs associated with upgrading or adding any workstations or computers
in connection with utilization of the workers compensation computer software
licensed to UWS.
(c) costs associated with systems conversions except that HCSC shall not be
responsible for any costs associated with the Company's or the Wisconsin
Companies' becoming Year 2000 compliant. The Company, however, shall not be
responsible for any costs associated with the conversion of HCSC or Third
Coast data to the new system.
4. REPRESENTATIONS AND WARRANTIES
4.1 AUTHORITY FOR AGREEMENT. Each of the Venturers warrants and
represents to the other that it has the full power, right and authority to
enter into and perform this Agreement without the consent of any other
person, entity (other than UWIC or parties which have entered into
reinsurance agreements with Third Coast) or governmental agency except as set
forth in Section 6.2(c), and that neither this Agreement nor its performance
will breach any agreement or covenant to which it is a party or otherwise
bound.
4.2. NO COMMISSIONS. Each of the Venturers represents and
warrants to the other that it has not taken any action or entered into any
agreement that would obligate the Company or any Venturer to pay any broker's
or finder's fee or commission to any third party on account of the
consummation of this Agreement or the transactions contemplated hereunder.
4.3 LITIGATION. Each of the Venturers represents and warrants
to the other that it is not a party to and has not been threatened by any
action, suit, proceeding, claim, demand or investigation that questions the
legality or propriety of the transactions contemplated hereunder
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or that would, if adversely determined, have the effect of preventing or
impairing consummation or performance of the transactions contemplated
hereunder.
4.4 SURVIVAL. The representations and warranties made hereunder
shall survive the Closing of the transactions contemplated hereunder.
5. ORGANIZATION AND GOVERNANCE OF COMPANY
5.1 ARTICLES OF INCORPORATION AND BY-LAWS. Prior to the
Closing, as hereinafter provided, the articles of incorporation and by-laws
of the Company will be prepared in form and substance mutually acceptable to
the Venturers.
5.2 OFFICE. The initial principal place of business of the
Company will be located in Rosemont, IL. The Company may maintain other
offices at such locations as the Venturers mutually agree.
5.3 AUTHORIZED STOCK. The authorized capital stock of the
Company shall consist of 1,000 shares of common stock ("SHARES"). The
articles of incorporation of the Company shall provide for pre-emptive rights
with regard to further issuance of common stock or warrants, rights or
securities convertible into Common Stock, except as may be contemplated
hereunder or for employee option and benefit purposes.
5.4 BOARD OF DIRECTORS.
(a) The board of directors of the Company shall consist of six
(6) directors, elected as hereinafter provided. In the event any vacancy
occurs in the board of directors, such vacancy shall be filled as hereinafter
provided. The board of directors shall annually select a
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chairperson. The chairperson shall alternate annually between representatives
of UWS and HCSC.
(i) The Venturers agree that UWS shall have the right to
appoint and remove three (3) directors of the Company and that HCSC shall
have the right to appoint and remove three (3) directors of the Company. In
the event a director shall resign, the Venturer whom such director represents
shall have the right to appoint a successor. Each Venturer agrees to cause
the shares owned by it to be voted for the nominees of the other Venturer as
directors as contemplated herein.
(ii) The initial members of the board of directors shall
hold office until the earlier of their resignation or removal.
(iii) Each Venturer agrees that all shares owned or
controlled by it will be voted in a manner consistent with this Agreement.
(b) A quorum of the board of directors shall consist of a
majority of the directors then in office and must include at least one
director representative of each Venturer. Notice of all directors' meetings,
including the purpose thereof, shall be provided in writing at least two (2)
business days prior to any such meeting.
(c) Action by the Company's board of directors in
Section 5.4 (e) must be authorized by a "Supermajority Vote", as
hereinafter defined. All other action by the Company's board of
directors shall be authorized by a "Majority Vote", as herein after
defined. A "SUPERMAJORITY VOTE" shall mean the affirmative vote of
four of the directors. A "MAJORITY VOTE" shall mean the affirmative
vote of a majority of the directors present at a meeting at which a
quorum is present.
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(d) The following matters shall require a Supermajority Vote of
the board of directors.
(i) any loan or line of credit of $100,000 or more;
(ii) any guarantee of the obligation of a third party
other than in the ordinary course of business, or other than for amounts
which are not material to the Company's assets or net income;
(iii) any amendment to the by-laws or articles of
incorporation of the Company;
(iv) transactions between the Company and either
Venturer or any of their respective subsidiaries or affiliates, other than:
(1) those in the ordinary course of business of the Company; or (2) those
which are not reasonably expected to have a material effect on the Company;
or (3) those which do not involve a material amount of the Company's assets
or income;
(v) investment of the Company's assets in another
entity or business.;
(vi) declaring dividends or any other distribution of
profits other than as provided in the articles of incorporation;
(vii) changing the major duties, responsibilities or
title of any elected officer of the Company;
(viii) selection of an external auditor;
(ix) approval of overall financial policy and adoption
or revision of any business plan or annual budget;
(x) adoption, amendment or termination of employee
benefit plans or senior management compensation plans, if any.
(xi) election, compensation or discharge of officers of
the Company; and
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(xii) issuance of additional capital stock of the
Company .
(xiii) creation of any committee of the Board of
Directors.
(xiv) any modification or amendment of, any waiver of
noncompliance under, cancellation of or declaration of an Event of Default
under the Underwriting Management Agreement.
6. CLOSING, CAPITAL CONTRIBUTIONS
AND SUPPORT OBLIGATIONS
6.1 CLOSING. A closing (the "CLOSING") pursuant to this
Agreement shall be held at 10:00 a.m., local time, on June 30, 1999, or such
later date as the parties may mutually agree upon, at Blue Cross Blue Shield
of Illinois, Chicago, Illinois, or at such other place or time as the
Venturers shall agree upon (such date and time hereinafter referred to as the
"CLOSING DATE").
6.2 CONDITIONS PRECEDENT TO CLOSING. The obligations of each
Venturer under this Agreement shall, at its option, be subject to the
satisfaction, on or prior to the Closing Date, of the following conditions:
(a) There shall have been no material breach by any
Venturer in the performance of any of its covenants and agreements herein;
each of the representations and warranties of the other Venturer shall be
true and correct in all material respects on the Closing Date as though made
on the Closing Date, except for changes therein specifically permitted by
this Agreement or resulting from any transaction expressly consented to in
writing by the other Venturer and except that any representation or warranty
made as of a specified date pursuant to the express terms of this Agreement
shall be true and correct as of
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such date; and there shall have been delivered to the other Venturer a
certificate or certificates to such effect, dated as of the Closing Date,
signed on behalf of the other Venturer by the President or other senior
officer of such other Venturer.
(b) No action, suit or proceeding shall have been
instituted or threatened to restrain or prohibit or otherwise challenge the
legality or validity of the transactions contemplated hereby.
(c) The parties shall have received all governmental
regulatory approvals, if any, necessary to consummate the transactions
contemplated hereby which are required to be obtained on or prior to the
Closing by applicable law or regulations.
(d) UWIC and HCSC shall have obtained commitments for
excess reinsurance agreements that are reasonably acceptable to the parties.
(e) The Company and UWIC shall have executed the
Underwriting Management Agreement.
(f) On or prior to the tenth business day after the
execution of this Agreement, the parties shall have executed a Stock Purchase
Commitment pursuant the terms and conditions of which;
(i) United Wisconsin Services, Inc. shall
purchase from HCSC 50% of the Common Stock (the "Purchased Stock") of Third
Coast Holding Company (including its subsidiaries) (collectively "Third
Coast") and contribute the Purchased Stock to the Company.
(ii) HCSC shall contribute the remaining 50%
of the Common Stock of Third Coast to the Company.
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(iii) United Wisconsin Services, Inc. shall pay
for the Purchased Stock with Common or Preferred stock of United Wisconsin
Services, Inc., notes of United Wisconsin Services, Inc., cash, or any
combination thereof at UWS's option, having a value equal to 50% of the
adjusted book value of Third Coast as determined by an independent appraiser
satisfactory to both parties; provided that the parties shall use their best
efforts to cause Third Coast to be able to pay to HCSC, prior to the Closing
of the purchase and sale of the Purchased Stock, the surplus notes owed by
Third Coast to HCSC for the Purchased Stock.
In the event that the parties do not agree to a Stock
Purchase Commitment on or before the tenth business day after the execution
of this Agreement, either party may terminate this Agreement and neither
party shall have any liability to the other party with respect to the
transactions described herein.
In connection with the Stock Purchase Commitment, the
parties shall negotiate in good faith to amend Article 3 of this Agreement to
have HCSC receive the economic effect of a ceding of 50% of the Company's
business written after the closing of the Stock Purchase Commitment.
(g) Third Coast and the Company shall have executed an
Administrative Services Agreement relating to the administration of claims on
policies written by Third Coast prior to the closing of the transactions
contemplated by Section 6.2(f) hereof.
(h) The Company, HCSC and UWS shall have agreed on a
business plan and cash flow projection relating to the Company.
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(i) UWS shall have received approval of this Agreement by
its Board of Directors.
(j) UWS shall have received an unqualified opinion of tax
counsel of UWS's choice that the consummation of the transactions
contemplated by this Agreement will not, either by itself or in combination
with any other transaction, cause the spin-off of UWS's managed care and
specialty businesses from its small group businesses to be taxable in whole
or in part to UWS, American Medical Security Group, Inc. ("AMSG") or the
shareholders of UWS or AMSG.
Each Venturer agrees to notify the other Venturer promptly
in the event such Venturer determines that it is unlikely that any condition
set forth in this Section 4.2 will not be satisfied prior to Closing.
6.3 SUPPORT OBLIGATIONS.
Each of the Venturers covenants to continue to provide to the Company each of
the contributions set forth in Section 2 of this Agreement for the term of
this Agreement, unless otherwise indicated.
7. TRANSACTIONS WITH VENTURERS
(a) Each of the Venturers anticipates that certain of their
respective Subsidiaries or affiliates will enter into agreements with the
Company to provide various services therefor. All other factors being equal,
the Company shall treat each Venturer, and its Subsidiaries and affiliates,
as preferred suppliers or providers of such services, but the terms and
conditions of such services shall be negotiated on an arm's length basis.
Further, each Venturer and its
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respective subsidiaries and affiliates agree that, to the extent it sells or
provides its goods or services to the Company, it shall do so on terms no
less favorable than it sells or provides similar goods or services to other
similar entities.
(b) HCSC has certain business that exists from prior to Closing
("Prior Business"), as listed on Exhibit 3 attached hereto, which will not be
contributed to the Company. To the extent that the Company, its employees or
representatives perform any work on claim run-off of said Prior Business,
HCSC shall be solely liable for all related claims, employment compensation,
other costs, expenses, fees and any and all liability related to or arising
out of the Prior Business in accordance with the Administrative Services
Agreement.
8. PUBLIC ANNOUNCEMENT
No press release or other announcement to the public regarding this
Agreement or the transactions contemplated hereby shall be made without the
prior mutual consent of UWS and HCSC.
9. CONFIDENTIALITY AND NON-COMPETITION
9.1 CONFIDENTIALITY. The Company and each Venturer, on behalf
of itself and its subsidiaries and affiliates, shall keep confidential all
books of account and other records of the Company in accordance with the
Confidentiality Agreement between UWS, HCSC, Blue Cross and Blue Shield of
Texas, Inc. and Blue Cross & Blue Shield United of Wisconsin dated January,
1997.
9.2 NON-COMPETITION. For the term of this Agreement, except
through the Company, neither Venturer, either individually or through an
affiliate or subsidiary, will engage in the
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worker's compensation insurance business with employers headquartered in the
State of Illinois. This non-competition commitment does not apply to existing
clients of UWS as identified to HCSC prior to Closing. It does apply to any
future clients who purchase or are covered by worker's compensation related
services from UWS or HCSC or any of their respective subsidiaries or
affiliates.
9.3 PURCHASE OF THE COMPANY. In the event UWS or HCSC
purchases the other party's interest in the Company, as defined in Section
10, then the selling party, including any of its subsidiaries or affiliates,
shall not directly or indirectly solicit, accept or perform any of the
business covered by this Agreement for a period of two (2) years following
the closing of such purchase of the Company.
10. RESTRICTIONS ON TRANSFERS OF SHARES
10.1 GENERAL TRANSFER PROHIBITION. During the term of this
Agreement, neither Venturer shall sell or transfer any of its Shares to the
other Venturer or to any third party, except to the extent permitted in this
Section 10.
10.2 PERMITTED TRANSFERS. Either Venturer may transfer all or
part of its Shares to any of its subsidiaries or affiliates at any time
during the term of this Agreement provided that the transferring Venturer
remains a party to and bound by, this Agreement. Any agreement or
understanding governing any such transfer shall provide that such transferee
understands and agrees that by virtue of such transfer, it will be subject to
and bound by the terms and conditions of this Agreement, including but not
limited to the provisions of Section 5.4, as applicable to the Venturer
transferring such Shares.
10.3 RIGHTS TO PURCHASE.
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(a) Effective December 31, 2002 and at any time thereafter, each of
the Venturers shall have the right to purchase the Common Stock of the other
Venturer or sell its shares of Common Stock to the other Venturer as follows:
1. A Venturer (for purposes of this seciton, the "Initiating
Venturer") shall offer to purchase the Common Stock of the other Venturer
(for purposes of this Section, the "Receiving Venturer") for cash in an
amount specified by the Initiating Venturer (the "Proposed Price") or to sell
to the Purchasing Venturer for the Proposed Price the shares of Common Stock
owned by the Initiating Venturer.
2. For a period of 30 days after receipt by the Receiving Venturer
of the offer to purchase, the Receiving Venturer shall have the option either
to accept such offer or to notify the Initiating Venturer that the Receiving
Venturer elects to purchase the Initiating Venturer's shares for cash at the
Proposed Price (if the Initiating Venturer's offer is an offer to purchase
the Receiving Venturer's shares) or that the Receiving Venturer elects to
sell the Receiving Venturer's shares (if the Initiating Venturer's offer is
an offer to sell the Initiating Venturer's shares).
3. The Receiving Venturer shall notify the Initiating Venturer of
its decision and the parties shall complete whichever transaction is selected
within 30 days after receipt by the Initiating Venturer of written
notification from the Receiving Venturer of its decision.
10.4 RIGHT OF FIRST REFUSAL.
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Except for permitted transfers in Section 10.2 above, in the event
that a Venturer shall desire to sell, assign or transfer all Shares held by
it to any other person or entity, (the "Offered Shares") and shall be in
receipt of a BONA FIDE offer to purchase the Offered Shares ("Offer"), the
following procedure shall apply. The Selling Venturer shall give to the
Non-Selling Venturer written notice containing the terms and conditions of
the Offer, including, but not limited to (i) the number of Offered Shares;
(ii) the price per share; (iii) the method of payment; and (iv) the name(s)
of the proposed purchaser(s); (v) any information which such Selling Venturer
may have with respect to the business management, marketing strategy and
financial capacity of such bona fide proposed purchaser(s); and (vi) a
statement that such Selling Venturer is willing to accept the bona fide
offer. A copy of the bona fide offer, signed by the proposed purchaser(s),
shall be affixed to the written notice.
An Offer shall not be deemed BONA FIDE unless, among other things,
the method of payment is cash, promissory notes, marketable securities or a
combination thereof, the Selling Venturer has informed the prospective
purchaser of its obligation under this Agreement and the prospective
purchaser has agreed to become a party hereunder and to be bound hereby. The
Non-Selling Venturer is entitled to take such steps as they reasonably may
deem necessary to determine the validity and BONA FIDE nature of the Offer.
Until 30 days after receipt of such notice, the Non-Selling Venturer
shall have the right to purchase the Offered Shares at the price offered by
the prospective purchaser and specified in such notice. The Non-Selling
Venturer electing to purchase must give written notice of its election to
purchase the Offered Shares to the Selling Venturer within 30 days of the
date of
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the notice of Offered Shares referred to above. Such Non-Selling Venturer
notice shall specify the number of Offered Shares desired to be purchased
hereunder.
If all of the Offered Shares are not purchased by the Non-Selling
Venturer as permitted herein, then the Offered Shares may be sold, assigned
or transferred according to the Offer; provided that such transfer requires
the new shareholder to assume the obligations of the Selling Venturer under
this Agreement; and provided further that such transfer complies with all
applicable federal and state securities laws.
10.5 LEGEND. All Shares shall be subject to this Agreement, and
each certificate for such Shares shall bear the following legend:
"The sale, transfer, or encumbrance of these shares is
prohibited unless and then only to the extent allowed by a
Joint Venture and Shareholders Agreement dated April 28, 1999
among the Company Shareholders. Any sale or transfer or
encumbrance of these shares which is not in accordance with
such Agreement is void and of no effect. By accepting this
certificate or any shares of stock evidenced by this
certificate, the holder agrees to be bound by such Agreement.
A copy of such Agreement is on file with the Secretary of the
Company."
10.6 TRANSFER OF INTELLECTUAL PROPERTY. ANY SOFTWARE OR OTHER
CUSTOMIZED WORKERS COMPENSATION SYSTEMS ("INTELLECTUAL PROPERTY") DEVELOPED
BY THE VENTURERS DURING THE TERM OF THE JOINT VENTURE SHALL BE AND REMAIN THE
PROPERTY OF THE JOINT VENTURE. ANY OTHER INTELLECTUAL PROPERTY SUSCEPTABLE OF
LICENSE BY A VENTURER AND USED BY THE COMPANY SHALL BE LICENSED BY SUCH
VENTURER TO ANY PURCHASER OF THE COMPANY, ON COMMERCIALLY REASONABLE TERMS,
SO AS TO ENABLE SUCH PURCHASER TO OPERATE THE COMPANY IN THE SAME MANNER AS
WAS OPERATED PRIOR TO SUCH PURCHASE. THE LICENSE REFERRED TO ABOVE SHALL BE
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EXCLUSIVE FOR BUSINESS CONDUCTED IN THE STATE OF ILLINOIS ONLY AND
NONEXCLUSIVE WITH RESPECT TO OTHER GEOGRAPHIC AREAS.
11. ACCOUNTING REPORTING AND RELATED MATTERS
11.1 FISCAL YEAR. The Company's fiscal year shall begin on
January l and end on December 31 of each year.
11.2 BOOKS AND RECORDS. The Company shall keep proper corporate
records and books of account in which true and correct entries will be made
of all transactions on an accrual basis. Such records and books of account
shall be sufficient to permit the preparation of the financial statements
described in Section 11.4 below. Each Venturer, at its own expense, shall
have the right to audit the books and records of the Company.
11.3 INSPECTION. Each Venturer, for so long as it or any of its
subsidiaries or affiliates owns Shares, shall have the right, either directly
or through its representatives, to visit and inspect the properties of the
Company, to examine its books of account and corporate records to make copies
thereof and to discuss the affairs, finances and accounts of the Company with
the Company's officers, employees and external auditors.
11.4 FINANCIAL STATEMENTS. The Company shall cause to be
prepared and delivered to each Venturer, for so long as such Venturer or any
of its subsidiaries or affiliates own Shares, the following financial
statements, prepared in accordance with generally accepted accounting
principles consistently applied:
(a) within thirty (30) business days after the end of each
calendar quarter, an unaudited balance sheet of the Company as of its most
recently completed accounting quarter and related statement of earnings and
retained earnings and of cash flow; and
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(b) as soon as available and in any event within sixty
(60) days after the end of each fiscal year, audited balance sheets of the
Company as of such fiscal year-end and the related statements of earnings and
retained earnings and of cash flow for such fiscal year, all accompanied by
an opinion of the Company's certified independent public accountants.
(c) Statutory Annual Statements and other statements as
required by applicable state law.
12. DEFAULT
12.1 EVENTS OF DEFAULT. Each of the following shall be deemed
to be an "EVENT OF DEFAULT":
(a) A material breach of this Agreement or the attendant
Underwriting Management Agreement, which breach, if susceptible of cure, is
not cured as promptly as possible but in any event within sixty (60) days
after receipt by the breaching party or parties of written notice from the
other party or parties, specifying such violation or breach.
(b) Any fraudulent action or representation by any party
to this Agreement.
(c) The filing by a Venturer of a petition for
liquidation, adjudication as a bankrupt or relief as a debtor or of a
petition or answer seeking reorganization or an arrangement or similar relief
under any bankruptcy, insolvency, or similar laws of the United States of
America or any state thereof, now or hereafter in effect; the consent by a
Venturer to the filing of a petition in any such liquidation, bankruptcy or
reorganization proceeding; the consent by a Venturer to the appointment of a
receiver or trustee or officer performing similar functions with respect to
any substantial part of its property; the making of a general assignment by
the Venturer for the benefit of its creditors; the execution by a Venturer of
a
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consent to any other type of insolvency proceeding (under the United States
Bankruptcy Code or otherwise) or any formal or informal proceeding for the
dissolution or liquidation of, or settlement of claims against or winding up
of affairs of, the Venturer; or the appointment of a receiver, trustee,
custodian, or officers performing similar functions for a Venturer or for any
of its assets or the filing against a Venturer of a petition for liquidation,
or adjudication as a bankrupt or insolvent or for reorganization under any
bankruptcy or similar laws of the United States of America or of any state
thereof, now or hereinafter in effect, or the institution of any other type
of insolvency proceeding (under the United States Bankruptcy Code or
otherwise) or for any formal or informal proceeding for the dissolution or
liquidation of, a Venturer and such appointment is not vacated or such
petition or proceeding is not dismissed within thirty (30) days after such
appointment, filing or institution.
12.2 TERMINATION OF OWNERSHIP UPON DEFAULT. Upon the occurrence
and during the continuance of an Event of Default, the non-defaulting
Venturer, in addition to and without diminishing or affecting any other
rights and remedies it may have under applicable law, this Agreement or
otherwise, shall have the right at its option, to avail itself of the rights
provided for in Section 10.3 of this Agreement.
13. TERM AND TERMINATION
13.1 TERMINATION BEFORE CLOSING.
(a) Any Venturer may terminate this Agreement at or prior
to the Closing, upon written notice to the other Venturers, upon the
occurrence of any of the following:
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(i) A representation or warranty of the other
Venturer set forth in Section 4 of this Agreement is incorrect or untrue in
any material respect.
(ii) A suit, action, investigation by any
governmental body or legal or administrative proceeding is brought or
threatened questioning the validity or legality of this Agreement or any of
the transactions contemplated hereby.
(iii) The other Venturer shall cause an Event of
Default to occur.
(iv) The Venturers mutually agree to extend or
terminate the Closing and performance of this Agreement.
(v) any of the Closing conditions specified in
Sections 6.2 or 6.4 shall not have been satisfied prior to Closing Date (or
such earlier date as may be applicable).
(b) Upon or in connection with termination of this
Agreement pursuant to Section 13:
(i) Each Venturer shall bear its own costs and
expenses incurred up to and including such termination, and the Venturers
shall have no further obligation or liabilities to each other, except as
provided in (ii) below.
(ii) Neither Venturer shall issue any press release
or make any public announcement with respect to the termination of this
Agreement without the consent of the other Venturer, such consent not to be
unreasonably withheld.
13.2 TERMINATION AFTER CLOSING. The Venturers may terminate
this Agreement at any time upon mutual written agreement.
13.3 TERM.
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(a) Except as otherwise expressly provided herein, this
Agreement shall be effective from the date hereof and continue in effectfrom
Closing until DECEMBER 31, 2002.
(b) Upon termination of this Agreement other than pursuant
to Sections 9.3 and 10 herein, the Venturers shall proceed with an equitable
distribution of the Company business.
14. GENERAL
14.1 DISPUTES. All disputes or controversies between the
Venturers, or the Company and either Venturer or any of its subsidiaries or
affiliates, arising out of or in connection with this Agreement, shall, to
the extent reasonably possible, be resolved within thirty (30) business days
following written notice of such dispute to all interested parties. In the
event that such disputes cannot be resolved as provided hereinabove, any
party to such dispute, upon fifteen (15) notice to the other interested
parties, may request that such dispute be submitted for non-binding
mediation. In such event, all such parties shall consent to participate in
good faith and in such mediation.
14.2 GIVING OF NOTICE. All notices under this Agreement shall
be deemed to be given upon receipt by the party entitled to such notice of a
fax or certified or registered letter and addressed as indicated below. Any
party may change the address to which any notice or report shall be sent by
making a written notice to the other party specifying the new address.
If to UWS:
401 West Michigan Street
--------------------------------
Milwaukee, Wisconsin 53203
--------------------------------
Thomas R. Hefty
--------------------------------
Attention: President
--------------------
Fax: (414) 226-6229
--------------------------
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If to HCSC:
901 South Central Expressway
--------------------------------
Richardson, Texas 75080
--------------------------------
Attention: Michael Lewis
--------------------
Fax: (972) 766-1221
--------------------------
with copy to:
Hugo Tagli, Jr.,Esq.
--------------------------------
300 E. Randolph
--------------------------------
Chicago, Illinois 60601-5655
--------------------------------
(312) 819-1943
--------------------------------
14.3 ASSIGNMENTS. Except as set forth in Section 10 hereof,
this Agreement may not be assigned or transferred, including an assignment or
transfer by operation of law, by either party without the prior written
consent of the other party.
14.4 NO BENEFIT TO THIRD PARTIES. The rights and privileges
afforded by this Agreement are solely for the benefit of the parties hereto
and in no circumstances shall any other person have any rights or privileges
or be entitled to any benefits under this Agreement.
14.5 STOCK LEGEND. All certificates representing Shares shall
bear a legend reflecting the existence of this Agreement and the restrictions
on transfer of Shares provided in Section 10 of this Agreement, all in form
satisfactory to the Venturers.
14.6 AMENDMENTS. This Agreement may be amended or modified only
by the execution by the parties hereto of a document setting forth such
amendment or modification.
14.7 ENTIRE AGREEMENT. This Agreement embodies the entire
agreement and understanding of the parties in respect of the transactions
contemplated hereby and supersedes
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any and all prior agreements, arrangements, letter or letters of intent, and
understandings related to the subject matter hereof.
14.8 GOVERNING LAW. The Agreement shall be governed by and
construed and enforced in accordance with the laws of Illinois.
14.9 SEVERABILITY. If any one or more of the provisions
contained in this Agreement or in any document executed in connection
herewith shall be or become invalid, illegal or unenforceable in any respect
under any applicable law, the validity, legality and enforceability of the
remaining provisions contained herein or therein shall not in any way be
affected or impaired; provided, however, that in such event the parties shall
achieve the purpose of the invalid provision by agreeing to a new, legally
valid provision which shall become part of this Agreement or such document.
14.10 RECITALS. The recitals are part of this Agreement.
14.11 CAPTIONS. The Section captions and headings used herein
shall not be used to interpret this Agreement.
14.12 WAIVER. The failure of a party hereto at any time or times
to require performance of any provision hereof shall in no manner affect its
right at a later time to enforce the same unless the same is waived in
writing. No waiver by a party of any condition or of any breach of any term,
covenant, representation or warranty contained in this Agreement shall be
effective unless in writing and signed by the President of such party, and no
waiver in any one or more instances shall be deemed to be a further or
continuing waiver of any such condition or breach of any other term,
covenant, representation.
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<PAGE>
14.13 COUNTERPARTS. This Agreement may be executed in one or
more copies, each of which shall be deemed an original, provided that all
such copies, in the aggregate, shall contain the signature of all parties
hereto.
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IN WITNESS WHEREOF, the duly authorized representatives of the
parties have executed this Agreement as of the day and year first above
written.
UNITED WISCONSIN
SERVICES, INC.
By:
------------------------------------
Thomas R. Hefty
President
HEALTH CARE SERVICE
CORPORATION
By:
------------------------------------
------------------------------------
UNITED HEARTLAND, INC.
By:
------------------------------------
------------------------------------
UNITED WISCONSIN INSURANCE COMPANY
By:
------------------------------------
------------------------------------
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<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made this __ day of June, 1999 by and
between UNITED WISCONSIN SERVICES, INC. ("UWS") and HEALTH CARE SERVICE
CORPORATION, a Mutual Legal Reserve Company doing business as Blue Cross Blue
Shield of Illinois ("HCSC").
RECITALS
A. HCSC is the owner of 10,000 shares of the issued and outstanding
capital stock of Third Coast Holding Company, an Illinois corporation
("HOLDING"), $1.00 par value per share (the "SHARES"), constituting 100% of
the issued and outstanding Shares.
B. Holding, through its wholly owned subsidiaries, Third Coast
Insurance Company, an Illinois corporation ("THIRD COAST INSURANCE") and
Third Coast Insurance Services Company, an Illinois corporation ("THIRD COAST
SERVICES"), engages in the workers compensation insurance business in
Illinois, including without limitation managed care, management and
administrative services relating thereto.
C. UWS, through its wholly owned subsidiaries United Wisconsin
Insurance Company, a Wisconsin corporation ("UNITED WISCONSIN") and United
Heartland, Inc., a Wisconsin corporation ("UNITED HEARTLAND"), engages in the
workers compensation insurance business in Wisconsin and other states,
including without limitation managed care, management and administrative
services relating thereto.
D. As a result of its years of experience in the workers'
compensation insurance business, UWS has previously acquired or independently
developed valuable expertise and know-how, including registered and
unregistered copyrighted computer software and computer systems.
E. HCSC, UWS, United Wisconsin and United Heartland have formed or
will form [Managing General Agent], an Illinois corporation (the "MGA"),
pursuant to the terms of that certain Joint Venture and Shareholders
Agreement (the "JOINT VENTURE AGREEMENT") dated as of May 3, 1999, by and
among HCSC, UWS, United Wisconsin and United Heartland.
F. It is the intention of the parties hereto that the MGA will enter
into and compete in the market for offering workers compensation insurance in
the State of Illinois, including without limitation managed care, management
and administrative services relating thereto.
G. It is the intention of the parties hereto that, under and
pursuant to the terms and conditions of the Joint Venture Agreement and the
various documents contemplated thereby and executed in connection therewith
(together, the "ANCILLARY AGREEMENTS"), from and after the closing thereon
all of the efforts of the parties hereto insofar as offering workers
compensation insurance in the State of Illinois is concerned will be
conducted by and through the MGA and various subsidiaries of UWS, and Third
Coast Insurance and Third Coast Services will no longer remain active as
insurers or insurance service providers for newly written policies of workers
compensation insurance sold in the State of Illinois.
H. The parties hereto acknowledge and agree that UWS's and HCSC's
transitioning of the Third Coast Companies' business of writing new or
renewal policies of workers compensation insurance to the MGA is a valuable
contribution to the MGA and such transitioning will cause the owners of the
MGA to receive a substantial and material benefit therefrom.
<PAGE>
I. The parties acknowledge that it is a condition of HCSC's
willingness to enter into the Joint Venture Agreement and the Ancillary
Agreements that UWS purchase 50% of the common stock of Holding owned by HCSC
upon the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, and with the intention to be legally bound,
the parties do hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 INCORPORATION OF RECITALS. Each of the
Recitals above is hereby incorporated into and made a part of this Agreement.
1.2 CERTAIN DEFINITIONS. Each of the following
terms used herein shall have the meanings given to them as hereinafter set
forth:
"ACQUISITION STOCK" shall mean shares of preferred or common stock of
UWS that will be issued to HCSC in consideration for the Purchased Shares
unless payment is made in cash or by promissory note of UWS.
"AFFILIATE" means, with respect to any Person, any other Person that,
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with such Person.
"AGREEMENT" shall mean this Stock Purchase Agreement between HCSC and
UWS.
"BUSINESS" shall mean the worker's compensation insurance business and
third party administrative services business conducted by Holding and the
Operating Subsidiaries.
"BUSINESS DAY" shall mean any day other than a Saturday or Sunday or a
legal holiday on which commercial banks are authorized or required to be
closed for business in Chicago, Illinois.
"CLOSING" shall have the meaning ascribed to such term in Section 2.3
of this Agreement.
"CLOSING DATE" shall have the meaning ascribed to such term in Section
2.3 of this Agreement.
"DOI" shall mean the Illinois Department of Insurance or any successor
regulatory body formed for the purpose of regulating workers compensation
insurers selling insurance in the State of Illinois.
"FAIR MARKET VALUE" shall have the meaning ascribed to such term in
Section 2.2(b) of this Agreement.
"GAAP" shall mean generally accepted accounting principles, applied
consistently.
"GOVERNMENTAL BODY" means any court, government (federal, state, local
or foreign), department, commission, board, bureau, agency, official or other
regulatory, administrative or governmental authority or instrumentality,
including the Illinois Department of Insurance.
"HCSC" shall mean Health Care Service Corporation, A Mutual Legal
Reserve Company doing business as Blue Cross Blue Shield of Illinois.
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<PAGE>
"HOLDING" shall mean Third Coast Holding Company, an Illinois
corporation.
"JOINT VENTURE AGREEMENT" shall have the meaning given to it in the
Recitals hereto.
"JOINT VENTURE CLOSING" shall be the closing on the transactions
contemplated under the Joint Venture Agreement.
"JOINT VENTURE CLOSING DATE" shall be the date on which the Joint
Venture Closing shall have occurred, which shall in no event be later than
September 24, 1999.
"LAW" shall mean any federal, state, local or other governmental law,
rule or regulation of any kind, and the rules and regulations promulgated
thereunder.
"KNOWLEDGE" shall mean actual knowledge of a party after making due
inquiry, which in the case of HCSC and the Third Coast Companies shall mean
inquiry by HCSC of officers of the Third Coast Companies. If a party fails to
make inquiry, knowledge shall include constructive knowledge of such facts as
would have been learned had such due inquiry been made.
"OPERATING SUBSIDIARIES" shall mean Third Coast Insurance and Third
Coast Services.
"PERSON" shall mean and includes a natural person, a corporation, an
association, a partnership, a limited liability company, a trust, a joint
venture, an unincorporated organization, a business, any other legal entity
or a Governmental Body.
"PURCHASED SHARES" shall mean 5,000 shares of common stock of Holding,
par value $1.00 per share, representing 50% of the issued and outstanding
Shares of Holding and being the Shares purchased by UWS from HCSC under this
Agreement.
"RELATED PARTY" shall mean (i) Holding, (ii) any Operating Subsidiary,
(iii) any Affiliate of Holding or any Operating Subsidiary, (iv) any officer
or director of any Person identified in clauses (i)-(iii) preceding, and (v)
any spouse, sibling, ancestor, or lineal descendant of any natural Person
identified in any one of the preceding clauses.
"SAP" shall mean statutory accounting principles, applied consistently.
"SHARES" shall have the meaning ascribed to such term in the recitals
to this Agreement.
"SURPLUS LOANS" shall mean the surplus loans made by HCSC to Holding to
support the operations of the Third Coast Companies.
"SURPLUS NOTES" shall mean those promissory notes of Third Coast
Companies evidencing the Surplus Loans.
"THIRD COAST COMPANIES" shall mean collectively, Holding, Third Coast
Insurance and Third Coast Services. A "Third Coast Company" shall mean any of
the Third Coast Companies.
"THIRD COAST INSURANCE" shall mean Third Coast Insurance Company, an
Illinois domestic stock insurance company, which is a wholly-owned subsidiary
of Holding.
"THIRD COAST SERVICES" shall mean Third Coast Insurance Services
Company, an Illinois corporation, which is a wholly-owned subsidiary of
Holding.
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"UWS" shall mean United Wisconsin Services, Inc., a Wisconsin
corporation.
ARTICLE II
PURCHASE OF SHARES
2.1 AGREEMENT TO PURCHASE STOCK. UWS does hereby agree
and commit to purchase on the Closing Date, subject only to fulfillment of
those conditions to purchase set forth in Section 6.1 hereof and no others,
the Purchased Shares and does hereby agree to make payment for such Shares in
accordance with the terms of Section 2.2 below. Immediately upon consummation
of such purchase, UWS shall contribute the Purchased Shares to the capital of
the MGA and HCSC shall contribute the remaining Shares owned by it to the
capital of the MGA.
2.2 DETERMINATION AND PAYMENT OF PURCHASE PRICE.
(a) PURCHASE PRICE AMOUNT.
(i) Within the 60 day period prior to the
Closing Date, HCSC will cause to be prepared and delivered concurrently to
HCSC and UWS a balance sheet of the Third Coast Companies as of the date
thereof (the "ESTIMATED CLOSING BALANCE SHEET"). The Estimated Closing
Balance Sheet shall serve as the basis for determining the adjusted book
value of the Third Coast Companies as of the date thereof (the "ESTIMATED
ADJUSTED BOOK VALUE"), which shall be set forth on the Estimated Closing
Balance Sheet (or an attachment thereto), along with a description of the
calculation used to derive the Estimated Adjusted Book Value. The Estimated
Closing Balance Sheet shall be prepared contemplating two alternative
scenarios. The first scenario shall assume that the DOI WILL NOT PERMIT the
Surplus Loans to be repaid by Third Coast Insurance prior to Closing. Under
this scenario, on the day prior to the Closing Date the Surplus Loans shall
be converted to equity and the Surplus Notes canceled for purposes of
calculating the Estimated Adjusted Book Value. The alternative scenario shall
assume that the DOI WILL PERMIT Third Coast to repay all or part of the
Surplus Loans prior to Closing and that the Surplus Notes will be reduced by
the amount of such repayment. Under this scenario, only the then-unpaid
portion of the Surplus Loans will be converted to equity on the day prior to
the Closing Date for purposes of calculating the Estimated Adjusted Book
Value. The Purchase Price for the Purchased Shares, as such amount shall be
finally adjusted in accordance with this Section 2.2 (a) ("PURCHASE PRICE")
shall be 50% of the Estimated Adjusted Book Value as determined under one of
the two scenarios, such choice depending on whether or not the DOI has
permitted the repayment of the Surplus Notes. The Estimated Closing Balance
Sheet shall be prepared in accordance with statutory accounting principles on
a basis consistent with past practices ("SAP"). The fees and expenses
attributable to preparation of the Estimated Closing Balance Sheet will be
paid by HCSC.
(ii) As promptly as practicable after the Closing
Date (but in no event later than 120 days after the Closing Date), HCSC and
UWS will cause an accounting firm acceptable to both (the "ACCOUNTANT") to
conduct a valuation of the Third Coast Companies and to prepare and deliver
concurrently to HCSC and UWS an audited balance sheet of the Third Coast
Companies as of the Closing Date (the "CLOSING BALANCE Sheet"). The Closing
Balance Sheet shall set forth the adjusted book value of the Third Coast
Companies as of the Closing Date (the "ADJUSTED BOOK VALUE") and shall
reflect the treatment actually accorded to the Surplus Loans and Surplus
Notes as authorized by the DOI. The Closing Balance Sheet shall be prepared
in accordance with SAP. The fees and expenses of the Accountant will be
shared equally by HCSC and UWS.
(iii) HCSC and UWS shall each have the ability to
challenge the determination of the Accountant as set forth herein. Either
HCSC or UWS may claim that the Closing Balance Sheet was not prepared in
accordance with the requirements of Section 2.2(a)(ii), and shall deliver to
the other party a detailed statement describing the basis for any such claim
within fifteen (15) days after receiving the Closing Balance Sheet. A party's
failure to deliver such statement within such 15 day period shall make the
Accountant's determination final as against such party. HCSC and UWS will use
reasonable efforts to resolve
4
<PAGE>
any such claims themselves. If they do not obtain a final resolution within
thirty (30) days after first receiving the Closing Balance Sheet, however,
HCSC and UWS will select another accounting firm mutually acceptable to them
to resolve any remaining such claims. If HCSC and UWS are unable to agree on
the choice of an accounting firm, they will select a nationally-recognized
accounting firm by lot (after excluding any such firm which has provided
services to HCSC, UWS or others affiliated with HCSC or UWS) (the
"ARBITRATING ACCOUNTANT"). Upon submission to the Arbitrating Accountant for
resolution, HCSC and UWS shall indicate in writing its position on each
disputed matter. The Arbitrating Accountant shall choose one of the two
positions on each disputed matter no later than sixty (60) days after first
receiving the Closing Balance Sheet and such position will be conclusive and
binding upon HCSC and UWS with respect to that disputed matter. The proposed
Closing Balance Sheet and the Closing Adjusted Book Value will be revised as
appropriate to reflect the resolution of any claims pursuant to this Section
2.2(b). The term "FINAL CLOSING BALANCE SHEET" means the Closing Balance
Sheet, together with any revisions thereto pursuant to this Section 2.2 (b).
The term "FINAL ADJUSTED BOOK VALUE" means the Closing Adjusted Book Value,
together with any revisions thereto pursuant to this Section 2.2(b). HCSC and
UWS shall each be responsible for one-half of the fees and expenses of the
Arbitrating Accountant.
(iv) HCSC will make the work papers and back-up
materials used in preparing the Closing Balance Sheet, and any books, records
and financial staff of the Third Coast Companies available to UWS and its
accountants and other representatives and to the Arbitrating Accountant
resolving any claim concerning the Closing Balance Sheet at reasonable times
and upon reasonable notice at any time during (a) the preparation of the
Closing Balance Sheet, (b) the review by HCSC and UWS of the Closing Balance
Sheet, and (c) the resolution by HCSC and UWS of any objections thereto.
(v) The Purchase Price will be adjusted if the
Final Adjusted Book Value of the Company is greater or less than the
Estimated Adjusted Book Value (using the scenario reflecting the treatment
actually accorded the Surplus Notes and Surplus Loans as authorized by the
DOI). If the Final Adjusted Book Value is greater than the Estimated Adjusted
Book Value, then the Purchase Price will be increased by 50% of the amount of
such excess. If the Final Adjusted Book Value is less than the Estimated
Adjusted Book Value, then the Purchase Price will be decreased by 50% of the
amount of such deficiency.
(vi) Any adjustment to the Purchase Price made in
accordance with subsection (a)(v) above shall be made in the same form of
consideration as was paid to HCSC at Closing. If the consideration selected
is cash, the party to whom an amount is owed by virtue of a Purchase Price
adjustment shall be paid by the other by wire transfer of immediately
available funds in an amount equal to the amount owed within five (5)
business days following the determination of the Final Adjusted Book Value.
If the consideration selected is Acquisition Stock and the Final Adjusted
Book Value is greater than the Estimated Adjusted Book Value, UWS shall
deliver to HCSC a certificate(s) for a number of shares of Acquisition Stock
having a Fair Market Value (calculated as of the Closing Date) equal to 50%
of the amount of such excess. If the consideration selected is Acquisition
Stock and the Final Adjusted Book Value is less than the Estimated Adjusted
Book Value, HCSC shall tender to UWS the certificate(s) representing the
Acquisition Stock received by HCSC at Closing and UWS shall immediately
tender a new certificate(s) for the appropriate number of shares after giving
effect to the adjustment of the Purchase Price made based on the Final
Closing Balance Sheet. Any adjustment to the number of shares to be received
by HCSC shall be made within five (5) business days following receipt of the
Final Closing Balance Sheet. If the consideration selected is a note, a new
note in a principal account reflecting such adjustment will be substituted
within five (5) business days following receipt of the Final Closing Balance
Sheet.
(b) PAYMENT OF PURCHASE PRICE. The Purchase Price shall
be paid to HCSC by UWS at the Closing in one of the following currencies. The
selection of which currency shall be used shall be made by UWS. The terms of
such currency shall be agreed upon by the parties pursuant to Article VII.
(i) cash or cash equivalents;
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(ii) a promissory note of UWS containing terms
agreed to by the parties;
(iii) preferred stock of UWS in an amount equal to
the Purchase Price determined by the Fair Market Value of such shares as of
the date such payment is made; or
(iv) common stock of UWS in an amount equal to
the Purchase Price determined by Fair Market Value of such shares as of the
date such payment is made.
"FAIR MARKET VALUE" shall mean (1) with respect to preferred stock of
UWS, the price agreed to by HCSC and UWS as the price at which a willing
buyer and a willing seller would agree to sell the preferred stock in an
arms-length transaction as of the Closing Date. If the parties are unable to
reach an agreement on the Fair Market Value on or prior to the Closing, they
shall select a neutral, nationally recognized auditing firm to conduct a
valuation, which valuation shall be completed within 45 days of the Closing
Date. The cost of such valuation shall be divided equally between the
parties; and (2) with respect to the common stock of UWS, the average of the
closing trading prices of such stock on the New York Stock Exchange for the
ten trading days immediately preceding the date such payment is made.
2.3 CLOSING. The Closing with respect to the
transactions provided for in this Agreement (the "CLOSING") shall take place
at the offices of HCSC at 300 East Randolph Street Chicago, Illinois during
the first 10 Business Days of the calendar year 2000, such date to be chosen
by HCSC (the "CLOSING Date"). The Closing shall be effective as of December
31, 1999.
2.4 LIABILITIES RETAINED BY HCSC. HCSC shall retain and
be responsible for all liabilities of the Third Coast Companies occurring
prior to the Closing Date and all actions and events occurring prior to the
Closing Date that could result in liabilities to the Third Coast Companies,
including claims payable under policies of Third Coast Insurance in force on
and prior to the Closing Date (collectively, the "Retained Liabilities").
Such claims payable shall be paid from the reserves of Third Coast Insurance
established for that purpose and reflected on the Interim Balance Sheet and
the Final Closing Balance Sheet. Any liabilities that are in addition to
those reserved for on the Interim Balance Sheet or the Final Closing Balance
Sheet will be the financial responsibility of HCSC. Such claims shall be
administered and a final settlement made of such claims as provided in
Section 5.7.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HCSC
The schedules attached hereto are hereby incorporated by reference.
HCSC represents and warrants to UWS that:
3.1 ORGANIZATION AND STANDING. HCSC (i) is a Mutual
Legal Reserve Company duly organized, validly existing and in good standing
under the laws of the State of Illinois; (ii) has the corporate power and
authority to own its property and assets and to transact the business in
which it is engaged or presently proposes to engage, including the
transactions contemplated by this Agreement. Each Third Coast Company (x) is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Illinois; (y) has the corporate power and authority to
own its property and assets and to transact the business in which it is
engaged or presently proposes to engage; and (z) has duly qualified and is
authorized to do business and is in good standing as a foreign corporation in
every jurisdiction in which it owns or leases real property or in which the
nature of its business requires it to be so qualified.
3.2 SUBSIDIARIES. Holding's only subsidiaries are Third
Coast Insurance and Third Coast Services. Neither Third Coast Insurance nor
Third Coast Services has any subsidiaries.
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3.3 CAPITALIZATION. On the date hereof, (a) the
authorized capital stock of Holding consists of 10,000 shares of Common
Stock, $1.00 par value; (b) the authorized capital stock of Third Coast
Insurance consists of 10,000,000 shares of Common Stock, $1.00 par value; and
(c) the authorized capital stock of Third Coast Services consists of 10,000
shares of Common Stock, $1.00 par value. Such Shares are issued and
outstanding and held of record as set forth on SCHEDULE 3.3 and all such
Shares have been validly issued and are fully paid and nonassessable. There
are no other outstanding shares of capital stock of any Third Coast Company
or any subscriptions, options, warrants, calls, rights (including, without
limitation, preemptive rights) or other agreements or commitments of any
nature relating to any capital stock of any Third Coast Company other than
the rights created by this Agreement.
3.4 DUE AUTHORIZATION; VALID AND BINDING AGREEMENT. All
corporate action on the part of HCSC necessary for the authorization,
execution, delivery and performance of all obligations of HCSC under this
Agreement and for the sale and delivery of the Purchased Shares has been
taken prior to the execution and delivery hereof. This Agreement constitutes
the legal, valid and binding obligation of HCSC enforceable against HCSC in
accordance with its terms except as such enforcement may be limited by
bankruptcy, insolvency or other laws of general application relating to or
affecting creditors' rights or by general principles of equity limiting the
availability of equitable remedies.
3.5 VALIDITY. The Purchased Shares, when sold and
delivered to UWS in accordance with the terms of this Agreement, shall be
duly and validly issued, fully paid and nonassessable.
3.6 COMPLIANCE WITH OTHER INSTRUMENTS. No Third Coast
Company is in material violation of any provision of its Articles of
Incorporation or By-Laws in effect as of the date hereof, or of any provision
of any mortgage, indenture, agreement, instrument or contract to which it is
a party or by which any of its properties or assets is bound (collectively,
the "MATERIAL CONTRACTS"), or of any provision of any federal, state or local
judgment, writ, decree, order, statute, rule or governmental regulation
applicable to it. The execution, delivery and performance of this Agreement
will not result in any such violation or be in a conflict with or constitute
a default under any such provision or any Material Contract.
3.7 INTELLECTUAL PROPERTY RIGHTS. SCHEDULE 3.7
identifies all of the trademark and service mark rights, applications and
registrations, trade names, fictitious names, service marks, logos and brand
names, copyrights, copyright applications, letters patent, patent
applications and licenses of any of the foregoing owned or used by any Third
Coast Company in or applicable to the Business (the "INTELLECTUAL Property").
SCHEDULE 3.7 separately identifies all Intellectual Property under license.
Except as set forth in Schedule 3.7, the Intellectual Property is valid and
not the subject of any interference, opposition, reexamination or
cancellation. To the knowledge of HCSC, no Person is infringing upon nor has
any Person misappropriated any Intellectual Property. No Third Coast Company
is infringing upon the intellectual property rights of any other Person.
3.8 GOVERNMENTAL AUTHORIZATIONS. Each Third Coast
Company possesses all governmental, regulatory and administrative licenses,
permits, approvals and other authorizations as are necessary to enter into
this Agreement and to conduct its business and operations. Each Third Coast
Company is in compliance with the terms and conditions of all such licenses,
permits, approvals and authorizations. No proceeding is pending or, to the
knowledge of HCSC, threatened against any Third Coast Company, an adverse
consequence of which would be the revocation, cancellation or suspension of
any such licenses, permits, approvals and authorizations nor does HCSC have
any knowledge of any facts that would provide the basis of any such
proceeding. Neither the execution of this Agreement or the agreements
contemplated hereby nor the consummation of the transactions contemplated
hereby or thereby will result in the revocation, or an adverse change in the
terms or conditions, of any such license, permit, approval or authorization.
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3.9 LITIGATION. Except for claims litigation in the
ordinary course of the Third Coast Companies' business and except as set
forth on SCHEDULE 3.9, there is no litigation, claim, proceeding or
investment pending, or, to the knowledge of HCSC, threatened against or
relating to any Third Coast Company, its business or the transactions
contemplated hereby. SCHEDULE 3.9 discloses, with respect to each item
described thereon, the name or title of the action (and parties or potential
parties thereto) and a description of the nature of the action or claim.
Except as so described, HCSC knows of no state of facts or circumstances
which reasonably could be expected to ripen into any litigation, proceeding
or investigation or adversely affect the Third Coast Companies' business or
prospects. Except as described on SCHEDULE 3.9, there is no outstanding
order, decree or stipulation issued by any federal, state or local authority
to which any Third Coast Company is a party or subject.
3.10 COMPLIANCE WITH LAW. The conduct of the business of
each Third Coast Company does not violate, nor is any such Company in default
under, any law, rule, regulation, code, guideline, order, arbitration award,
judgment, decree, restriction or condition.
3.11. ENVIRONMENTAL CONCERNS. Each Third Coast Company is
and has been in compliance with all applicable environmental, health, safety
and noise pollution laws, rules and regulations and with all laws, rules and
regulations regarding the generation, production, storage, treatment,
labeling, transportation or disposition of infectious, hazardous or other
wastes or toxic substances ("ENVIRONMENTAL LAWS"). Each Third Coast Company
has timely filed all reports and notices required to be filed by it, has
obtained all required approvals and permits and has generated and maintained
all required data, documentation and records required under the Environmental
Laws. The Third Coast Companies have not, nor has, to the knowledge of HCSC
any other person or entity, caused or permitted hazardous substances to be
stored, discharged or released, deposited, treated, recycled, leaked, spilled
or disposed of on, under or at any real property occupied by any Third Coast
Company.
3.12 FINANCIAL STATEMENTS. Attached hereto as SCHEDULE
3.12 are the following financial statements, including in each case all notes
thereto, all of which are complete and correct, have been prepared from the
books and records of the Third Coast Companies and (in the case of the GAAP
financial statements only) in accordance with GAAP and fairly present the
financial condition of the Third Coast Companies as of their respective dates
and the results of its operations for the periods covered thereby:
(a) statutory balance sheets of the Third Coast
Companies as of the end of their two most recently completed fiscal years and
audited GAAP balance sheets of the Third Coast Companies as of December 31,
1997 and statements of income, changes in shareholders' equity and cash flows
of the Third Coast Companies for each of the years then ended; and
(b) the most recently prepared monthly balance
sheet and the related statement of income, changes in shareholders' equity
and cash flows for such period (the "INTERIM BALANCE SHEET"). The financial
statements referred to in paragraphs (a) and (b) above are referred to as the
Financial Statements.
Such statements of income do not contain any items of
special or nonrecurring income or any other income not earned in the ordinary
course of business except as expressly specified therein, and the interim
financial statements include all adjustments, which consist only of normal
recurring accruals (the effect of which will not, individually or in the
aggregate, be materially adverse), necessary for such fair representation.
The Third Coast Companies' books of account, minute
books and stock records are complete and correct.
3.13 CONTINGENT AND UNDISCLOSED LIABILITIES. No Third
Coast Company has any debts, obligations or liabilities nor is it subject to
the imposition of any valid governmental or third-party claim
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arising from the conduct of its business or the ownership or use of its
assets on or prior to the date hereof, whether known or unknown, fixed or
contingent, of any nature whatsoever, except those: (a) reflected or reserved
against on the Financial Statements, (b) disclosed on SCHEDULE 3.13 or (c)
liabilities which have arisen in the ordinary course of business and
consistent with past practice from the date of the Financial Statements
through the date hereof and which are not, singly or in the aggregate,
materially adverse to such Third Coast Company.
3.14 TAXES.
(a) The federal and state corporate tax returns
of the Third Coast Companies have not been audited. There is no tax audit or
examination now pending or, to the knowledge of HCSC, threatened with respect
to any Third Coast Company. The Third Coast Companies have filed or have
properly filed for extensions for the filing of all federal, state and local
tax reports and returns required by any law, rule or regulation to be filed
by them (the "RETURNS").
(b) The Returns reflect all taxes due and
payable with respect to the periods covered thereby and there are no other
tax liabilities, deficiencies, interest or penalties payable or asserted with
respect to such periods and, to HCSC's knowledge, no circumstances exist
which, with the passage of time or the examination of the Returns by the
taxing authorities, would result in additional tax liability.
(c) Except with respect to the 1998 tax year,
there are no pending agreements, waivers or other arrangements providing for
an extension of time with respect to the filing of any tax return or the
payment of any tax, governmental charge (including interest, penalties or
excise taxes) or deficiency by the Third Coast Companies. There are no
actions, suits, proceedings, investigations or claims pending or, to HCSC's
knowledge, threatened against the Third Coast Companies with respect to
taxes, governmental charges or assessments, or any such matters under
discussion with any governmental authority or any claims for additional
taxes, charges or assessments asserted by such authority.
(d) The Third Coast Companies have withheld or
collected from each payment made to each of its employees the amount of all
taxes (including, but not limited to, state and federal income taxes, state
and federal employment taxes and FICA) required to be withheld or collected
therefrom and promptly remitted such amounts, or have remitted all past-due
amounts along with all penalties and interest assessed thereon, to the proper
taxing authorities and have filed all reports with respect thereto with the
proper taxing authorities.
3.15 PERFORMANCE OF CONTRACTS. No Third Coast Company is
in material default under, nor has any breached any provision of, any oral or
written contract, agreement, instrument, document, lease, license, permit,
indenture, insurance policy or other obligation to which it is a party (the
"COMPANY CONTRACTS"), and there is no oral modification or past practice
inconsistent in any material respect with the written terms of any of the
Company Contracts. All of the Company Contracts are currently in full force
and effect. To the knowledge of HCSC, the other parties to the Company
Contracts have complied with their obligations thereunder and are not in
breach thereof. The Third Coast Companies have performed each material term,
condition and covenant of each Company Contract required to be performed by
them on or prior to the date hereof and HCSC knows of no state of facts
which, with the giving of notice or the passing of time or both, would give
rise to any default under the Company Contracts.
3.16 BUSINESS CHANGES. Since the last day of the period
covered by the Interim Balance Sheet (the "INTERIM BALANCE SHEET DATE") and
except as set forth on SCHEDULE 3.16 there has not been:
(a) any material (i) adverse change in the
assets or the financial or other condition, operations, or business prospects
of the Third Coast Companies, (ii) damage, destruction or loss (whether or
not covered by insurance) affecting the assets or (iii) transaction outside
the ordinary course of
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business affecting the Third Coast Companies, including, without limitation,
any adverse change in the Third Coast Companies' revenues, costs, backlog or
relations with its employees, consultants, agents, customers or suppliers;
(b) any (i) sale, lease, transfer, assignment,
abandonment or other disposition of any operating or intangible property or
other assets used or usable in the Third Coast Companies' business except for
dispositions in the ordinary course of business, (ii) cancellation or
compromise of any material debt or claim or (iii) waiver or release of any
right of substantial value;
(c) any indebtedness incurred by the Third Coast
Companies for money borrowed;
(d) any mortgage, pledge or creation of any
lien, charge, security interest or other encumbrance on any of the assets;
(e) any payment of dividends or other
distributions declared or made to the Third Coast Companies' shareholders or
upon or in respect of any of their shares of capital stock, or any redemption
or obligation to redeem by the Third Coast Companies any of their shares of
capital stock or other securities;
(f) any change in the rate of compensation,
commission, bonus or other direct or indirect remuneration payable or paid or
oral or written agreement or promise to pay, conditionally or otherwise, any
bonus, extra compensation, pension or severance or vacation pay, to any
shareholder, director, officer, employee, consultant or agent of any Third
Coast Company.
3.17 EMPLOYEE BENEFIT PLANS. Except as set forth on
SCHEDULE 3.17, the Third Coast Companies do not have any union contract,
collective bargaining agreement, employment contract, deferred compensation
agreement or bonus, incentive, profit-sharing, pension, retirement or other
employee benefit plan (as that term is defined by the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) (collectively the "PLANS")
currently in force and effect, or any informal understanding with respect to
any of the foregoing. The Third Coast Companies do not maintain and have not
ever maintained or contributed to any funded employee pension plan (as that
term is defined in ERISA). All Plans which are subject to ERISA comply with
ERISA and have been administered (a) in strict compliance with ERISA and the
Internal Revenue Code of 1986, as amended (the "CODE") as to filing when due
all materials required to be filed, and (b) in material compliance with ERISA
and the Code in all other respects. With respect to each of the Plans, the
Third Coast Companies do not have any material liability for any failure to
comply with ERISA or the Code or for any action or failure to act in
connection with the administration of the Plans. No Plan has engaged in any
prohibited transaction in violation of ERISA or any prohibited transaction
within the meaning of the Code. There are no material controversies or
employment related claim or allegation pending or, to the knowledge of HCSC,
currently threatened between any Third Coast Company and its employees.
3.18 REAL PROPERTY. No Third Coast Company owns any
parcel of real estate, buildings, fixtures or improvements. SCHEDULE 3.18 to
this Agreement sets forth (a) a true and complete list and description of
each parcel of real estate, buildings, fixtures and improvements (the "REAL
PROPERTY") leased by any Third Coast Company and (b) a true, correct and
complete copy of each lease, contract, option, agreement or enforceable right
or obligation relating to or affecting, the Real Property to which a Third
Coast Company is a party. All Real Property leased by the Third Coast
Companies is leased under valid and subsisting leases and there exists no
event of default on the part of the Third Coast Companies under any such
leases or, to HCSC's knowledge, any event of default on the part of the
landlords under any such leases.
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3.19 CONDITION OF REAL PROPERTY. Except as set forth on
SCHEDULE 3.19 to this Agreement, the Third Coast Companies have received no
notice (a) of any structural or nonstructural defects in any of the buildings
or other improvements situated on the Real Property or (b) that any building
systems, structures, fixtures and improvements, leased or used by the Company
are not in all material respects in good condition and working order
(reasonable wear and tear excepted) or adequate in quality and quantity for
the current normal operation of the Third Coast Companies' business.
3.20 TRANSACTIONS WITH CERTAIN PERSONS. Except as set
forth on SCHEDULE 3.20, no Third Coast Company owes any amount to, or has any
contract with or commitment to, HCSC or its directors, officers, employees,
consultants or agents (other than compensation for current services not yet
due and payable and reimbursement of expenses arising in the ordinary course
of business), and no such Person owes any amount to any Third Coast Company.
3.21 INSURANCE. SCHEDULE 3.21 lists all insurance
policies owned by the Company insuring against all liabilities, hazards and
risks. All premiums on policies due to the date hereof have been paid, and no
notice has been received nor has HCSC any reason to believe that any such
insurance is in default, will be canceled or not renewed.
3.22 DISCLOSURE. This Agreement (including the Schedules
hereto) and any certificate, document, financial information or projection
furnished by or on behalf of HCSC to UWS or any agent or representative of
UWS in connection herewith, taken as a whole, does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading. The parties
acknowledge that, in connection with the transitioning of the Business from
the Third Coast Companies to the Joint Venture, material changes are expected
to occur to the Business from and after the Joint Venture Closing Date. Such
changes attributable to the parties' performance under the Joint Venture
Agreement shall not form the basis of any claim that the foregoing
representations and warranties are untrue or misleading. With the exception
of such changes, there are no facts presently known to, or anticipated by
HCSC that materially and adversely affects or in the future may (so far as
HCSC can reasonably foresee) materially and adversely affect the Third Coast
Companies' business, which have not been set forth in this Agreement or
otherwise disclosed to UWS (including in the Schedules hereto).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF UWS
UWS represents and warrants to HCSC as follows:
4.1 ORGANIZATION; GOOD STANDING; POWER. UWS is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Wisconsin and has all requisite corporate power and authority to own,
lease and operate its properties, to carry on its business as now being
conducted and to enter into this Agreement and perform its obligations
hereunder.
4.2 AUTHORITY RELATIVE TO AGREEMENT. The execution, delivery and
performance of this Agreement and the transactions contemplated hereby by UWS
will have been duly and effectively authorized and ratified by all necessary
corporate action by UWS on or prior to the Closing Date. This Agreement has
been duly executed by UWS and is the valid, legally binding obligation of UWS
enforceable in accordance with its terms, except as the same may be limited
or otherwise affected by applicable bankruptcy, insolvency or other laws
affecting creditors' rights or contractual obligations generally or by
general principles of equity.
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4.3 EFFECT OF AGREEMENT. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated
hereby will not (i) require the consent, approval or authorization of any
person, corporation, partnership, joint venture or other business association
or other Person (except those consents, approvals, or authorizations which
have been obtained or will be obtained prior to the Closing); (ii) violate,
with or without the giving of notice or the passage of time, or both, any
provisions of law or statute or any rule, regulation, order, award, judgment
or decree of any court or Governmental Body applicable to UWS; or (iii)
conflict with or result in a breach or termination of any provision of, or
constitute a default under, any indenture, corporate charter, bylaw,
mortgage, deed of trust, lease, contract, agreement or other instrument or
any order, judgment, award, decree, statute, ordinance, regulation or any
other restriction of any kind or character, to which UWS is a party, or by
which UWS or any of its assets or properties may be bound.
4.4 FINANCIAL ABILITY. UWS has the financial ability to discharge
all of its obligations under this Agreement.
4.5 THIRD PARTY CONSENTS. No material approval, authorization,
notice, consent or other action by or filing with any Governmental Body is
required for the execution, delivery and performance of this Agreement by UWS
and the consummation of the transactions contemplated hereby.
4.6 UWS'S KNOWLEDGE OF HOLDINGS' REPRESENTATIONS AND WARRANTIES.
UWS has no knowledge of any items which call into question the accuracy or
truthfulness of the representations and warranties of HCSC herein, the breach
of which would form the basis of a right to terminate hereunder.
ARTICLE V
CERTAIN COVENANTS PENDING CLOSING
5.1 ACCESS TO BOOKS AND RECORDS. From and after the date hereof
and until the Closing Date, unless UWS shall otherwise consent in writing,
Holding and each other Third Coast Company shall give to UWS and to UWS
employees and representatives (including accountants, actuaries, attorneys,
environmental consultants and engineers) access during normal business hours
to all of the properties, books, tax returns, contracts, commitments,
records, officers, personnel and accountants (including independent public
accountants) of the Third Coast Companies and shall furnish to UWS all such
documents and copies of documents and all information with respect to the
properties, liabilities and affairs of the Third Coast Companies as UWS may
reasonably request.
5.2 CERTAIN TAX MATTERS. HCSC and UWS shall each provide the
other with such assistance as may reasonably be requested by any of them in
connection with the preparation of any tax return, any audit or examination
by any taxing authority (a "TAX AUDIT"), or any judicial or administrative
proceedings relating to taxes, and each will retain and provide the other
with any records or information that may be relevant to such tax return, Tax
Audit, proceeding or determination. Such assistance shall include making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder and shall
include providing copies of any relevant tax returns and supporting work
schedules. The party requesting assistance hereunder shall reimburse the
other only for extraordinary expenses incurred in providing such assistance.
Without limiting the foregoing, UWS and HCSC agree to retain, until the
appropriate statutes of limitation (including any extensions) expire, copies
of all tax returns, supporting work schedules and other records or
information that may be relevant to such tax returns of the Third Coast
Companies for all taxable periods prior to the Closing Date, inclusive, and
to refrain from destroying or otherwise disposing of such records without
first providing the other with a reasonable opportunity to review and copy
such records.
5.3 PUBLICITY. HCSC and UWS shall not issue any press release or
otherwise make any announcements to the public or the employees of any Third
Coast Company with respect to this Agreement
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without the prior written consent of the other, except as required by Law.
This Section shall expire on the 10th day after the Closing Date.
5.4 CHANGES IN CORPORATE GOVERNANCE DOCUMENTS. On or prior to the
Closing Date, each of the Third Coast Companies shall have amended and
restated its Articles of Incorporation and By Laws in a form agreed to by the
parties to eliminate provisions that are inconsistent with their being wholly
owned subsidiaries of the MGA and to include provisions reflecting the
governance provisions contained in the Joint Venture Agreement.
5.5 REPAYMENT OF SURPLUS NOTES. HCSC and the Third Coast
Companies shall be permitted, at any time prior to the Closing Date, to cause
the Surplus Loans to be repaid from the surplus of Third Coast Insurance so
long as such repayment is made with the approval of the DOI and otherwise in
accordance with applicable laws. Additionally, any other surplus of Third
Coast Insurance, whether or not corresponding to any Surplus Note, that is
not required to support payment of claims under policies in force at the
Closing Date may be repaid to HCSC so long as such repayment is made with the
approval of the DOI and otherwise in accordance with applicable laws. The
parties shall each use their best efforts to obtain permission from the DOI
to authorize such repayment. The parties acknowledge that the effect of such
repayment will be to reduce the adjusted book value of the Third Coast
Companies by the amount of any such repayment and the Purchase Price will be
reduced by 50% of such amount.
5.6 HSR ACT FILINGS. Each party shall to the extent legally
required, in cooperation with the other party, file or cause to be filed any
report or notification that may be required to be filed by it under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the "HSR
ACT"), with the Federal Trade Commission and the Antitrust Division of the
Department of Justice, and shall furnish to the others all such information
in its possession as may be necessary for the completion of the reports or
notifications to be filed by others. Prior to making any communication,
written or oral, with the Federal Trade Commission, the Antitrust Division of
the Department of Justice or any other governmental agency or authority or
members of their respective staffs with respect to this Agreement or the
transactions contemplated hereby, each party shall consult with the other
parties with respect thereto. HCSC and UWS shall share all filing costs
equally.
5.7 ADMINISTRATION AND SATISFACTION OF CLAIMS RUN-OFF.
Concurrently with the Joint Venture Closing, the parties shall enter into an
Administrative Services Agreement, pursuant to which the Joint Venture shall
agree to administer on behalf of the Third Coast Companies all claims
relating to policies of workers compensation insurance theretofore written by
the Third Coast Companies (the "PRIOR POLICIES"). It is anticipated that the
claim reserves of Third Coast Insurance in existence as of the Closing Date
will be sufficient to settle any claims made in respect of the Prior Policies
during the three-year period following the Closing (the "RUN-OFF PERIOD").
However, in the event that claims incurred in respect of the Prior Policies
during the Run-Off Period exceed such claim reserves, HCSC in accordance with
Section 2.4 shall cause such claims in excess of the claims reserve to be
paid at its expense. At the end of the Run-Off Period, the MGA shall engage
an actuarial firm to conduct a valuation of the remaining claims under Prior
Policies (the "Future Claims Value"). In the event that the Future Claims
Value exceeds the then remaining claim reserves HCSC shall reimburse the
Joint Venture for the difference. If the Future Claims Value is less than the
then remaining claims reserve, HCSC shall be entitled to receive from the
Joint Venture such difference; PROVIDED, HOWEVER, that HCSC shall continue to
remain liable for all liabilities of the Third Coast Companies in accordance
with Section 2.4.
5.8 UNPAID AND ACCRUED TAXES. The amount of liability of the
Third Coast Companies for unpaid taxes for all periods ending on or before
the Closing Date (and for any period beginning before and ending after the
Closing Date to the extent allocable to the portion of such period beginning
before and ending on the Closing Date) and the amount of deferred taxes from
events occurring before the Closing Date shall not, in the aggregate, exceed
the amount of the liability accruals for taxes and deferred taxes as such
accruals are reflected on the Closing Balance Sheet.
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ARTICLE VI
CLOSING CONDITIONS AND DELIVERIES
6.1 CONDITIONS PRECEDENT TO OBLIGATION OF UWS. The obligation of
UWS to proceed with the Closing under this Agreement is subject to the
fulfillment prior to or at Closing of the following conditions (any one or
more of which may be waived in whole or in part by UWS at UWS's sole option):
(a) Each of the representations and warranties of HCSC contained
in this Agreement except those set forth in Section 3.15 shall be true and
correct in all material respects on and as of the Closing Date, with the same
force and effect as though such representations and warranties had been made
on, as of and with reference to the Closing Date except as modified by
transactions permitted hereunder and under the Joint Venture Agreement. HCSC
shall have performed in all respects all of the covenants and complied with
all of the provisions required by this Agreement to be performed or complied
with by it at or before the Closing.
(b) No statute, regulation or final order of any Governmental Body
shall be in effect that restrains or prohibits the transactions contemplated
hereby, and there shall not have been any instituted, threatened or finally
adjudicated action or proceeding by or before any Governmental Body that
shall have concluded that the transactions contemplated hereby are unlawful
or which award monetary or other relief by reason of the consummation of such
transactions.
(c) HCSC shall have delivered a certificate of its President or
any Vice President, dated the Closing Date, in such detail as UWS shall
request, certifying to the fulfillment of the conditions set forth in
subparagraphs (a) and (b) of this SECTION 6.1. Such certificate shall
constitute a representation and warranty of HCSC with regard to the matters
therein for purposes of this Agreement.
(d) UWS shall have received the other documents referred to in
SECTION 6.3 and intended to be delivered to UWS. All agreements,
certificates, opinions and other documents delivered by HCSC to UWS hereunder
shall be in form and substance satisfactory to counsel for UWS, in the
exercise of such counsel's reasonable professional judgment.
(e) The Board of Directors of UWS shall have approved the
transactions contemplated herein.
(f) All applicable waiting periods under the HSR Act shall have
expired.
(g) The Joint Venture Closing shall have occurred.
(h) The directors and officers of the Third Coast Companies shall
have resigned.
6.2 CONDITIONS PRECEDENT TO OBLIGATION OF HCSC. The obligation of
HCSC to proceed with the Closing under this Agreement is subject to the
fulfillment prior to or at Closing of the following conditions (any one or
more of which may be waived in whole or in part by HCSC at HCSC's sole
option):
(a) Each of the representations and warranties of UWS contained in
this Agreement shall be true and correct in all material respects on and as
of the Closing Date, with the same force and effect as though such
representations and warranties had been made on, as of and with reference to
the Closing Date. UWS shall have performed all of the covenants and complied
in all respects with all of the provisions required by this Agreement to be
performed or complied with by it at or before the Closing.
(b) No statute, regulation or final order of any Governmental Body
shall be in effect that restrains or prohibits the transactions contemplated
hereby, and there shall not have been any finally adjudicated action or
proceeding by or before any Governmental Body that shall have concluded that
the transactions contemplated hereby are unlawful or which award monetary or
other relief by reason of the consummation of such transactions.
(c) UWS shall have delivered a certificate of its President or any
Vice President, dated the Closing Date, in such detail as HCSC shall request,
certifying to the fulfillment of the conditions set forth in
14
<PAGE>
subparagraphs (a) and (b) of this SECTION 6.2. Such certificate shall
constitute a representation and warranty of UWS with regard to the matters
therein for purposes of this Agreement.
(d) HCSC shall also have received the other documents referred to
in SECTION 6.3 and intended to be delivered to HCSC. All agreements,
certificates, opinions and other documents delivered by UWS to HCSC hereunder
shall be in form and substance satisfactory to counsel for UWS in the
exercise of such counsels reasonable professional judgment.
(e) All applicable waiting periods under the HSR Act shall have
expired.
(f) The Joint Venture Closing shall have occurred.
6.3 CLOSING DELIVERIES. At the Closing hereof, the parties hereto
shall make the following deliveries:
(a) HCSC shall deliver to UWS a certificate evidencing the
Purchased Shares.
(b) UWS shall deliver the cash, notes or share certificates
representing the Acquisition Stock contemplated under Section 2.2 hereof.
(c) HCSC and UWS shall have delivered the certificates
contemplated in Sections 6.1(c) and 6.2(c), respectively.
6.4 TERMINATION. This Agreement may not be terminated for any
reason whatsoever, EXCEPT at any time prior to Closing, this Agreement may be
terminated: (i) by written agreement of UWS and HCSC; (ii) by UWS, if any of
the conditions specified in SECTION 6.1 hereof shall not have been fulfilled
by December 31, 2000 and shall not have been waived by UWS; or (iii) by HCSC,
if (a) HCSC and UWS have not executed the Addendum contemplated under Article
VII within the time frame specified in such Article or (b) any of the
conditions specified in SECTION 6.2 hereof shall not have been fulfilled by
December 31, 2000 and shall not have been waived by HCSC. In the event of
termination of this Agreement by either UWS, on one hand, or HCSC, on the
other hand, pursuant to clause (ii) or (iii) of the immediately preceding
sentence, UWS, on the one hand, and HCSC, on the other hand, shall be liable
to the other for any breach hereof by such party, which breach led to such
termination. UWS and HCSC shall also be entitled to seek any other remedy to
which it may be entitled at law or in equity in the event of such termination
(which remedies shall include injunctive relief and specific performance).
6.5 POST-CLOSING UNDERTAKING. Each party shall take all such
steps following the Closing as may be necessary to cause the then-current
directors and officers of the Third Coast Companies to resign and to cause
the MGA to take all steps necessary to appoint and elect new officers and
directors of each such Third Coast Company to serve as officers and directors
from and after the Closing Date.
6.6 GOOD FAITH. Each party hereto agrees that such party shall
act in good faith and shall use its best efforts to satisfy each of the
conditions to closing listed in Article VI hereof that are applicable to such
party in order to effect a timely closing of the transactions contemplated by
this Agreement.
ARTICLE VII
ADDENDUM
HCSC and UWS shall negotiate in good faith and shall have executed an
addendum ("ADDENDUM") to this Stock Purchase Agreement on or before the date
that is 10 days prior to the Joint Venture Closing Date. Such Addendum shall
include, among other things, the agreement of the parties as to the form of
consideration to be paid by UWS in exchange for the Shares of Holding
purchased hereunder. In the event that such consideration is to be comprised
of Acquisition Stock, the Addendum will also set forth the parties' agreement
as to any rights and preferences to be accorded to any preferred stock (in
the event that preferred stock is used), appropriate conversion rights,
registration rights (including the form and timing of any registration
15
<PAGE>
statement and whether any registered offering must be underwritten), Rule 144
sale rights, lock-up provisions, transfer restrictions, listing requirements,
indemnifications and other terms and conditions to which the parties shall
agree. In the event that such consideration is to consist of notes, the
Addendum will set forth, among other things, a payment and maturity schedule,
interest rate, prepayment rights and other terms and conditions to which the
parties shall agree. Unless the form of consideration shall consist solely of
cash or cash equivalents, the Addendum will also contain additional customary
representations and warranties of UWS.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties, obligations, covenants and agreements made by
the parties in this Agreement, or in any Schedule, Exhibit, certificate or
other document delivered pursuant hereto, shall survive the Closing and shall
continue for a period of one year following the termination of the Joint
Venture, except for those contained in Section 3.14 (taxes) and Section 3.10
(compliance with law), which continue until expiration of applicable statutes
of limitations (including extensions thereof), and except for those contained
in Sections 2.4 (retained liabilities, 3.1 and 4.1 (corporate organization),
3.3 (capitalization) and 3.4 and 4.2 (authorization), which shall continue
indefinitely.
8.2 GENERAL INDEMNIFICATION. HCSC shall indemnify UWS and the MGA
and UWS shall indemnify HCSC and the MGA as provided in this Section 8. The
remedies provided in this Section 8 shall be cumulative and shall not
preclude the assertion by either party hereto of any other rights or the
seeking of any other remedies against the other party hereto.
8.3 INDEMNIFICATION COVENANTS. Subject to the provisions of this
section 8, from and after the Closing:
(a) BY HCSC. HCSC shall indemnify UWS and the
MGA for and defend and hold UWS and the MGA harmless from and against any
demands, suits, orders, proceedings, claims, actions, causes of action,
assessments, losses, damages, liabilities, fees, fines, forfeitures, costs
and expenses, including, without limitation, interest, penalties and
reasonable attorneys' fees (collectively "DAMAGES"), sustained or incurred by
UWS or the MGA as a result of (i) any breach, inaccuracy or nonfulfillment of
any representation, warranty or covenant of HCSC contained in or made
pursuant to this Agreement or in any Schedule, Exhibit, certificate or other
document delivered by HCSC to UWS in connection with the transactions
contemplated hereby and (ii) the Retained Liabilities.
(b) BY UWS. UWS shall indemnify HCSC and the
MGA for and defend and hold HCSC and the MGA harmless from and against any
Damages sustained or incurred by HCSC or the MGA as a result of any breach,
inaccuracy or nonfulfillment of any representation, warranty or covenant of
UWS contained in or made pursuant to this Agreement or in any Schedule,
Exhibit, certificate or other document delivered by UWS to HCSC in connection
with the transactions contemplated hereby.
(c) PROCEDURES. The party seeking
indemnification (the "INDEMNIFIED PARTY") shall give the party from whom
indemnification is sought (the "INDEMNIFYING PARTY") written notice of any
claim, demand, assessment, action, suit or proceeding to which the indemnity
set forth in this Agreement applies. If the document evidencing such claim or
demand is a court pleading, the Indemnified Party shall give such notice
within 10 days of receipt of such pleading, and otherwise shall give such
notice within 30 days of the date it receives notice of such claim. If the
Indemnified Party's request for indemnification arises from the claim of a
third party, the written notice shall permit the Indemnifying Party to assume
the control of
16
<PAGE>
any such claim, or any litigation resulting from such claim. Failure by the
Indemnifying Party to notify the Indemnified Party of its election to defend
a complaint by a third party within five days of notice shall be a waiver by
the Indemnifying Party of its right to respond to such complaint and, within
20 days after notice thereof, shall be a waiver by the Indemnifying Party of
its right to assume control of the defense of such action. Notwithstanding
the Indemnifying Party's assumption of the defense of such third-party claim
or demand, the Indemnified Party shall have the right to participate in the
defense of such third party claim or demand at its own expense. The
Indemnified Party shall furnish the Indemnifying Party, in reasonable detail,
all information the Indemnified Party may have with respect to any such
third-party claim and shall make available to the Indemnifying Party and its
representatives all records and other similar materials which are reasonably
required in the defense of such third-party claim and shall otherwise
cooperate with and assist the Indemnifying Party in the defense of such
third-party claim. If the Indemnifying Party does not assume control of the
defense of any such third-party claim or litigation resulting therefrom, the
Indemnified Party may defend against such claim or litigation in such manner
as it may reasonably deem appropriate.
17
<PAGE>
(d) PAYMENT OF CLAIMS. In the event that HCSC
is required to compensate UWS for any Damages incurred by UWS, such payment
may be made, at HCSC's election, in cash or in the same form of consideration
as was used by UWS to purchase the Purchased Shares at the Closing.
8.4 ATTORNEYS' FEES. It after the Closing, UWS or HCSC seeks
arbitration or institutes any judicial action or proceeding to recover
Damages pursuant to this section 8 or to otherwise enforce any provision of
this Agreement, the party in whose favor final judgment shall be entered
shall be entitled to receive from the other party such amount as the
arbitrator or court may determine to be reasonable.
ARTICLE IX
TAX MATTERS
9.1 TAX SHARING AGREEMENTS. Any tax sharing agreement between
HCSC and any of the Third Coast Companies shall be terminated as of the
Closing Date and will have no further effect for any taxable year (whether
the current year, a future year, or a past year).
9.2 TAXES OF OTHER PERSONS. HCSC agrees to forever indemnify UWS
from and against the entirety of any adverse consequences UWS may suffer
resulting from, arising out of, relating to, in the nature of, or caused by
any liability of any of the Third Coast Companies for taxes of any person
other than any of The Third Coast Companies (i) under Treas. Reg. Section
1.1502-6 (or any similar provision of the state, local or foreign law), (ii)
as a transferee or successor, (iii) by contract, or (iv) otherwise.
9.3 RETURNS FOR PERIODS THROUGH THE CLOSING DATE. HCSC will
include the income of the Third Coast Companies (including any deferred
income triggered into income by Reg. Section 1.1502-13 and Reg. Section
1.1502-14 and any excess loss accounts taken into income under Reg. Treas.
Section 1.1502-19) on the HCSC consolidated federal income tax returns for
all periods through the Closing Date and pay any federal income taxes
attributable to such income. The Third Coast Companies will furnish tax
information to HCSC for inclusion in HCSC's federal consolidated income tax
return for the period which includes the Closing Date, in accordance with
Holding's past custom and practice. HCSC will allow UWS an opportunity to
review and comment upon such tax returns (including any amended returns) to
the extent that they relate to the Third Coast Companies. HCSC will take no
position on such returns that relate to the Third Coast Companies that would
adversely affect the Third Coast Companies after the Closing Date. The books
of the Third Coast Companies will be closed as of the end of the Closing
Date. The income of the Third Coast Companies prior to and including the
Closing Date will be apportioned to HCSC. The income of the Third Coast
Companies following the Closing Date will be apportioned to the MGA.
9.4 AUDITS. HCSC will forever indemnify and hold UWS harmless
from and against any matters adversely affecting the Third Coast Companies
after the Closing Date due to the settlement of any audit of HCSC.
ARTICLE X
GENERAL PROVISIONS
10.1 FURTHER ASSURANCES. The parties hereto shall cooperate with
each other to any reasonable extent and shall execute and deliver such
instruments and documents and take all such action as may reasonably be
necessary or desirable to carry out the purposes and intent of this Agreement.
18
<PAGE>
10.2 NOTICES. All offers and notices provided for or permitted
herein shall be in writing and shall be delivered personally or sent by
United States certified or registered mail, postage prepaid, return receipt
requested, addressed as follows:
(a) If to HCSC:
Health Care Service Corporation
233 North Michigan Avenue
Chicago, Illinois 60601-5655
Attn.: Michael Lewis
with a copy to: Health Care Service Corporation
233 North Michigan Avenue
Chicago, Illinois 60601-5655
Attn.: Hugo Tagli, Jr., Esq.
with a copy to: Doepken Keevican & Weiss
USX Tower, 58th Floor
600 Grant Street
Pittsburgh, Pennsylvania 15219
Attn.: James F. Bauerle, Esq.
(c) If to UWS:
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53202
Attn.: Thomas Hefty
with a copy to: Michael Best & Friedrich LLP
100 East Wisconsin Street
Milwaukee, Wisconsin 53202
Attn.: Geoffrey R. Morgan, Esq.
or to such other address as any party hereto may designate for itself from
time to time in a written notice served upon the other parties hereto in
accordance herewith. Any notice sent by mail as provided above shall be
deemed delivered on the second (2nd) business day next following the postmark
date which it bears.
10.3 PUBLIC DISCLOSURE. Except as otherwise may be required or by
the rules and regulations of the Securities and Exchange Commission or the
New York Stock Exchange, the parties hereto shall jointly agree upon the
content of any disclosure in any disclosure documents filed by either party
with the United States Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, which filing(s) disclose the
existence of this Agreement and the relationship herein created. The parties
also may make additional announcements in public disclosure with respect to
such agreements, provided that they jointly agree in writing in advance of
making such announcement or public disclosure on the form and content of such
announcement or public disclosure. The parties hereto further agree that any
consent required by such party in connection with any public disclosure to be
made pursuant to this Section 8.3 shall not be unreasonably withheld.
10.4 WAIVER. Failure to insist upon strict compliance with any of
the terms or conditions hereof shall not be deemed a waiver of such term or
condition, nor shall any waiver or relinquishment of any right or remedy
hereunder at any one or more times be deemed a waiver or relinquishment of
such right or remedy at any other time or times.
19
<PAGE>
10.5 SEVERABILITY. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision hereof, and any provision hereof which is adjudicated to be
invalid or unenforceable shall be severed from this Agreement.
10.6 BENEFIT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and
permitted assigns; provided, however, that neither party hereto shall have
any right to assign any of its rights hereunder or to delegate any of its
duties hereunder without the express written consent of the other party
hereto.
10.7 PARAGRAPH HEADINGS. Paragraph headings contained herein have
been inserted for convenience of reference only, and this Agreement shall not
be construed or interpreted by reference to such paragraph headings.
10.8 ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto with respect to the subject matter
hereof, and all prior agreements, understandings and negotiations are merged
herein. This Agreement may not be modified or rescinded except pursuant to a
written instrument signed by the party against whom enforcement is sought.
10.9 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall constitute an original document, but all
such counterparts taken together shall constitute but one and the same
document.
10.10 GOVERNING LAW; VENUE. This Agreement and the rights and
obligations of the parties hereto shall be governed by and construed in
accordance with the laws of the State of Illinois.
[Signatures Appear on Next Page]
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
HEALTH CARE SERVICE CORPORATION, A Mutual
Legal Reserve Company d/b/a Blue Cross and
Blue Shield of Illinois
By:
-----------------------------------------
Title:
---------------------------------
UNITED WISCONSIN SERVICES, INC., a Wisconsin
corporation
By:
-----------------------------------------
Title:
---------------------------------
<PAGE>
ADDENDUM TO STOCK PURCHASE AGREEMENT
THIS ADDENDUM TO STOCK PURCHASE AGREEMENT (this "Addendum") is made
this 18th day of June, 1999 by and between UNITED WISCONSIN SERVICES, INC.
("UWS"), UNITED WISCONSIN INSURANCE COMPANY, a Wisconsin corporation ("UWIC")
and HEALTH CARE SERVICE CORPORATION, a Mutual Legal Reserve Company doing
business as Blue Cross Blue Shield of Illinois ("HCSC").
RECITALS
A. UWS and HCSC have entered into a certain Stock Purchase Agreement
(the "STOCK PURCHASE AGREEMENT"), dated as of June 4, 1999, pursuant to which
HCSC has agreed to sell to UWS, upon the fulfillment of certain conditions
set forth therein, shares constituting 50% of the common stock of Third Coast
Holding Company, an Illinois corporation ("Holding").
B. The Stock Purchase Agreement, in Article VII thereof,
contemplated the execution prior to the Joint Venture Closing Date, of an
Addendum thereto, pursuant to which the parties would resolve certain issues,
including without limitation the choice of consideration to be paid by UWS in
exchange for the shares of Holding purchased thereunder.
C. Notwithstanding the addition of UWIC as a party hereto, this
Addendum is the Addendum referred to in Article VII of the Stock Purchase
Agreement.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, and with the intention to be legally bound,
the parties do hereby agree as follows:
1. DEFINITIONS. Unless otherwise defined herein, defined terms used
herein shall have the same meanings given thereto in the Stock Purchase
Agreement.
2. PARTY TO RECEIVE AND PAY FOR PURCHASED SHARES. UWS does hereby
assign the right to receive the Purchased Shares from HCSC to UWIC and does
further delegate the duty to make payment to HCSC for such Purchased Shares
to UWIC, all in accordance with the terms of the Stock Purchase Agreement.
UWIC does hereby agree to receive such Purchase Shares and to assume all
payment responsibilities. HCSC hereby consents to such assignment, delegation
and assumption.
3. CHOICE OF CONSIDERATION. UWIC shall pay the Purchase Price for
the Purchased Shares in cash. Payment shall be made by wire transfer to an
account designated by HCSC prior to closing to receive such wire transfer.
4. INCORPORATION BY REFERENCE. Each of the provisions set forth in
Article X of the Stock Purchase Agreement is incorporated by reference and
made a part hereof as if fully set forth herein.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
HEALTH CARE SERVICE CORPORATION, A Mutual
Legal Reserve Company d/b/a Blue Cross and
Blue Shield of Illinois
By:
---------------------------------------
Title:
--------------------------------
UNITED WISCONSIN SERVICES, INC., a
Wisconsin corporation
By:
---------------------------------------
Title:
--------------------------------
UNITED WISCONSIN INSURANCE COMPANY, a
Wisconsin corporation
By:
---------------------------------------
Title:
--------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001062780
<NAME> UNITED WISCONSIN SERVICES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,686
<SECURITIES> 156,589
<RECEIVABLES> 65,957
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 237,553
<PP&E> 19,513
<DEPRECIATION> 10,403
<TOTAL-ASSETS> 287,906
<CURRENT-LIABILITIES> 198,347
<BONDS> 0
0
0
<COMMON> 13,660
<OTHER-SE> 44,011
<TOTAL-LIABILITY-AND-EQUITY> 287,906
<SALES> 341,465
<TOTAL-REVENUES> 347,952
<CGS> 354,770
<TOTAL-COSTS> 354,770
<OTHER-EXPENSES> 80
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,425
<INCOME-PRETAX> (9,323)
<INCOME-TAX> (4,010)
<INCOME-CONTINUING> (5,313)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,313)
<EPS-BASIC> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
