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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1999
REGISTRATION NO. 333-67911
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 1.
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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UNITED WISCONSIN SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
WISCONSIN 39-1931212
(State of incorporation) (I.R.S. Employer
Identification
No.)
</TABLE>
401 WEST MICHIGAN STREET
MILWAUKEE, WISCONSIN
53203-2896
(414) 226-6900
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
THOMAS R. HEFTY, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
UNITED WISCONSIN SERVICES, INC.
401 WEST MICHIGAN STREET
MILWAUKEE, WISCONSIN 53203-2896
(414) 226-6900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPY TO:
GEOFFREY R. MORGAN
MICHAEL BEST & FRIEDRICH LLP
100 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202-4108
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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SUBJECT TO COMPLETION DATED APRIL 6, 1999
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
UNITED WISCONSIN SERVICES, INC.
DIVIDEND REINVESTMENT AND DIRECT STOCK PURCHASE PLAN
800,000 SHARES OF COMMON STOCK
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The Dividend Reinvestment and Direct Stock Purchase Plan (the "Plan") of
United Wisconsin Services, Inc. (the "Company") provides you with a convenient
and economical way of purchasing additional shares of Common Stock of the
Company through the automatic reinvestment of cash dividends and/or through
optional cash payments. Any record owner or beneficial owner (as those terms are
defined in the Plan) of shares of Common Stock is eligible to participate. If
you participate in the Plan, you will pay no brokerage commissions or other
expenses in connection with the purchase of shares of Common Stock under the
Plan.
You may participate in the following ways:
- You may reinvest automatically your cash dividends and invest additional
amounts by making cash payments of at least $100 per calendar quarter, or
- You may reinvest automatically a portion of your cash dividends while
continuing to receive the remainder and invest limited additional amounts
by making cash payments of at least $100 per calendar quarter, or
- You may invest by making optional cash payments of at least $100 per
calendar quarter, or
- If you are not a record owner or beneficial owner you may become a full
participant in the Plan through the Plan's direct stock purchase feature
by making a cash payment of at least $100.
Shares purchased will generally be issued by the Company, either through
original issuance or out of treasury shares held by the Company. However, the
Company may also purchase shares for the Plan on the open market. The purchase
price of shares of Common Stock purchased from the Company will equal the
average of the high and low sale prices for the Common Stock on the Reinvestment
Date (as defined in the Plan).
If you do not wish to participate in the Plan, you will receive cash
dividends, as declared, in the usual manner.
The outstanding shares of Common Stock are, and the additional shares
offered hereby will be, listed on the New York Stock Exchange under the symbol
"UWZ."
The Company will receive all of the net proceeds from the sale of the Common
Stock purchased from the Company and none of the proceeds from the sale of
Common Stock purchased in the open market.
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Neither the Securities and Exchange Commission nor any state securities
regulators has determined if this prospectus is adequate or accurate. Any
representation to the contrary is a criminal offense.
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You should rely only on the information contained in this document or other
document to which we have referred you. We have not authorized anyone to provide
you with information that is different.
YOU SHOULD CONSIDER CAREFULLY THE FACTORS UNDER THE CAPTION "RISK FACTORS"
PRIOR TO MAKING ANY INVESTMENT IN COMMON STOCK.
The date of this Prospectus is April , 1999.
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GENERAL
On September 11, 1998, the corporation formerly known as "United Wisconsin
Services, Inc." ("Old UWS" or "AMSG") transferred its managed care and specialty
products business to the Company which was renamed "United Wisconsin Services,
Inc." on that date (the "Distribution"). Simultaneously, Old UWS was renamed
"American Medical Security Group, Inc."
FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward looking statements with respect to
the financial condition, results of operation and business of the Company. Such
forward looking statements are subject to inherent risks and uncertainties that
may cause actual results or events to differ materially from those contemplated
by such forward looking statements. Forward-looking statements may include, but
are not limited to, projections of revenues, income or losses, capital
expenditures, plans for future operations, financing needs or plans, compliance
with financial covenants in loan agreements, plans relating to products or
services of the Company, assessments of materiality, predictions of future
events, the ability to obtain additional financing, the Company's ability to
meet obligations as they become due, as well as assumptions relating to the
foregoing. In addition, when used in this discussion, the words "anticipates,"
"believes," "estimates," "expects," "intends," "plans" and similar expressions
are intended to identify forward-looking statements. Factors that may cause
actual results to differ materially from those contemplated by such forward
looking statements include, among others, rising health care costs, economic and
business conditions and competition in the managed care industry, terms of
provider contracts, capital requirements, resolution of Year 2000 issues,
administrative costs, retention of key employees, development of claims
reserves, developments in health care reform and other regulatory issues.
RISK FACTORS
You should carefully consider and evaluate all of the following factors,
before you decide to purchase shares of Common Stock under the Plan.
OPERATING HISTORY AND FUTURE PROSPECTS
The Company does not have an operating history as an independent public
company, but now owns and conducts the operations of the managed care companies
and the management business of Old UWS. On an historical basis, in each of the
three years ended December 31, 1998, the Company's businesses were profitable.
There can be no assurance, however, that the Company's operations will be
profitable in 1999 or future years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LIMITED RELEVANCE OF HISTORICAL COMBINED FINANCIAL INFORMATION OF THE COMPANY
The historical combined financial information may not necessarily reflect
the results of operations, financial position and cash flows of the Company in
the future or the results of operations, financial position and cash flows had
the Company operated as an independent company during the periods presented. The
combined financial information included herein does not reflect any changes that
may occur in the funding or operations of the Company as a result of the
Distribution.
HEALTH CARE COSTS AND HEALTH CARE INDUSTRY
The Company's profitability will depend in part on accurately predicting
health care costs and controlling future health care costs. Changes in factors
affecting health care costs may adversely affect the Company's financial
condition or results of operations.
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A large portion of the revenue received by the Company is, in turn, spent by
the Company to pay the costs of health care services or supplies delivered to
its members. The total health care costs incurred by the Company are affected by
the number and scope of individual services rendered and the cost of each
service. Much of the Company's premium revenue is agreed to before the actual
delivery of services, usually on a prospective annual basis. While the Company
attempts to base the premiums it charges at least in part on its estimate of
expected health care costs over the fixed premium period, competition,
regulations and other circumstances may limit the Company's ability to fully
base premiums on estimated costs. In addition, actual health care costs may
exceed the estimated costs.
In addition to the challenge of controlling health care costs, the Company
faces competitive pressure to contain premium prices. While managed health plans
compete on the basis of many factors, the Company expects that price will
continue to be a significant basis of competition. Fiscal concerns regarding the
continued viability of programs such as Medicare and Medicaid may cause
decreasing reimbursement rates for government-sponsored programs. The Company's
financial condition or results of operations would be adversely affected by
significant premium decreases by any of its major competitors or by any
limitation on the Company's ability to increase or maintain its premium levels.
The Company, like HMOs and health insurers generally, excludes certain
health care services from coverage under its managed care benefit plans. In the
ordinary course of business, the Company is subject to the claims of its members
from decisions to restrict reimbursement for certain treatments. The loss of
even one such claim, if it were to result in a significant punitive damage
award, could have a material adverse effect on the Company's financial condition
or results of operations.
The managed care industry is labor intensive, and its profit margin is low.
Hence, it is especially sensitive to inflation. Health care industry costs have
been rising annually at rates higher than the Consumer Price Index. Increases in
medical expenses without corresponding increases in premiums could have a
material adverse effect on the Company.
Competitive price pressures in the group health insurance industry, which
generally result from the entry and exit of health care companies in the
marketplace, historically have resulted in pricing and profitability cycles.
These cyclical patterns could adversely affect the Company in the future.
DEPENDENCE UPON HEALTH CARE PROVIDERS AND EMPLOYER GROUPS
The Company regularly contracts with physicians, hospitals and other
providers to manage health care costs. In any particular market, providers could
refuse to contract with the Company, demand higher payments or take other
actions which could result in higher health care costs or less desirable
products for customers and members.
In some markets, certain providers, particularly hospitals,
physician/hospital organizations or multi-specialty physician groups, have
significant market positions or even monopolies. Many of these providers may
compete directly with the Company which could affect the Company's
profitability.
The Company's contracts with its health care providers and employer groups
are renewable periodically. The Company's profitability and ability to expand
will be dependent upon its ability to continue to contract with these parties on
favorable terms. For the year ended December 31, 1998, five medical groups and
hospitals accounted for 36.1% of claims and capitation expense.
The Company's managed care business is dependent upon its ability to obtain
and maintain group benefit agreements with employer groups. As of December 31,
1998, the managed care companies had contractual relationships with 2,857 groups
for medical coverage, ten of which accounted for approximately 44.4% of the
managed care companies' total earned premiums.
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PROVIDER ARRANGEMENTS
Approximately 33.8% of the Company's total earned premiums in 1998 and 13.3%
of the Company's 1998 net income were attributable to the business sold through
the Company's wholly owned subsidiaries, Valley Health Plan, Inc. ("Valley") and
Unity Health Plans Insurance Corporation ("Unity"). The Company's provider
arrangement relating to Valley was renewed through January 1, 2000, and can be
renewed for up to an additional three-year term, and the Company's provider
arrangement relating to Unity terminates on November 1, 2004. The continued
success of Valley and Unity will depend to a significant degree on the mutuality
of interest between the Company and its provider partners. The termination or a
material modification of the Company's current provider relationships or changes
in the business of its provider arrangements could adversely affect the
Company's profitability.
One of the Company's providers, Midelfort Clinic, Ltd. ("Midelfort"), has an
option to purchase Valley on December 31, 1999 for Valley's net equity plus
$400,000. If Midelfort exercises this repurchase option, the Company would
thereafter have no ongoing interest in Valley, and would lose all of the earned
premiums associated with Valley. One of the Company's providers, Community
Health Systems, LLC ("CHS"), has the right to repurchase a portion of the Unity
business and the Unity legal entity for its book value on either November 1,
1999 or November 1, 2004. If CHS exercises this repurchase option, the Company
will need to transfer the remaining Unity business to one of its other managed
care companies. The other major provider partner, University Health Care, Inc.
("UHC"), has the option to repurchase the remainder of the Unity business for
its book value plus $500,000 on either November 1, 1999 or November 1, 2004. Any
exercise of either or both of these repurchase options relating to Unity would
result in the Company losing the premium revenues attributable to that business.
In addition, the exercise of any of these repurchase options would be deemed a
taxable event to the Company.
PHARMACEUTICAL COSTS
The costs of pharmaceutical products and services generally are increasing
faster than the costs of other medical products and services. Thus, the
Company's managed care operations face ever higher pharmaceutical expenses. The
Company tries to keep pharmaceutical costs low, but may be unable to do so in
the face of rapidly rising prices. Also, statutory and regulatory changes may
significantly alter the Company's ability to manage pharmaceutical costs.
GOVERNMENT PROGRAMS AND REGULATION
The Company's business is subject to extensive federal and state laws and
regulations which change frequently. These laws and rules are intended primarily
to protect policyholders rather than investors. Although such regulations have
not significantly impeded the growth of the Company's business to date, there
can be no assurance that the Company will be able to continue to obtain or
maintain required governmental approvals or licenses or that regulatory changes
will not have a material adverse effect on the Company's business. Delays in
obtaining or failure to obtain or maintain such approvals could adversely affect
the Company's revenue or the number of its members or could increase costs.
A portion of the Company's revenues relate to federal, state and local
government health care coverage programs, such as the Medicaid program. Such
contracts carry certain risks such as higher comparative medical costs,
government regulatory and reporting requirements, the possibility of reduced or
insufficient government reimbursement in the future, and higher marketing and
advertising costs per member as the result of marketing to individuals as
opposed to groups. Changes to such government programs in the future may also
affect the Company's willingness to participate in such programs.
Statutory capital and surplus requirements vary based upon the types of
risks underwritten and the nature of the provider contracts. The premiums
written by HMOs and insurance companies are limited by the amount of their
statutory capital and surplus requirements. Statutory capital and surplus
requirements for workers' compensation coverage are greater than those for the
Company's other businesses. In
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addition, risk-based capital formulas, which are currently in effect or may be
adopted, affect the Company's statutory capital and surplus requirements. In
order to maintain its recent rate of growth in premium revenue, the Company may
have to obtain additional statutory capital or utilize reinsurance agreements to
cede a greater percentage of premium revenue.
HEALTH CARE REFORM LAWS
In recent years, both the Clinton Administration and several members of
Congress and various state legislators and state regulators have proposed
numerous other health care reform measures. The Company is unable to predict
when or whether any of these proposals will be enacted or what impact they could
have on the Company.
COMPETITION
The Company competes with a number of other entities in its geographic and
product markets. Certain of the Company's customers may decide to perform
themselves functions or services currently provided by the Company, which could
decrease the Company's revenues. Certain of the Company's providers could decide
to market products and services to the Company customers in competition with the
Company. In addition, significant merger and acquisition activity has occurred
in the industry in which the Company operates as well as in industries which act
as suppliers to the Company. This activity may create stronger competitors
and/or result in higher health care costs. To the extent that there is strong
competition or that competition intensifies in any market, the Company's ability
to retain or increase customers, its revenue growth, its pricing flexibility,
its control over medical cost trends and its marketing expenses could be
adversely affected.
The Company faces competition from other regional and national managed
health care companies, including Humana, Inc. and United HealthCare Corp. in
Southeastern Wisconsin, and Dean Health Plan, Inc. in the Madison, Wisconsin
area, many of which have significantly greater financial and other resources
than the Company. If competition were to further increase in any of its markets,
the Company's financial condition or results of operations could be materially
adversely affected.
ADMINISTRATION AND MANAGEMENT
The level of administrative expenses affects the Company's profitability.
While the Company attempts to effectively manage such expenses, increases in
administrative expenses may occur from time to time. Expense increases are not
clearly predictable and could adversely affect the Company's profitability.
The future success of the Company is dependent on a number of key management
employees. Competition for highly skilled people with extensive experience in
the health care industry is intense. The Company will be dependent on the
continued services and management experience of its executive officers and other
personnel. The Company does not have key man life insurance covering any of its
executive officers, nor does it have employment agreements with any of its
executive officers.
CONTROL BY CERTAIN SHAREHOLDERS; EFFECTS OF BLUE CROSS & BLUE SHIELD UNITED OF
WISCONSIN'S INTENDED PURCHASES; DEFENSIVE MEASURES; POTENTIAL CONFLICTS OF
INTEREST
Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") and executive
officers and directors of the Company own approximately 41.3% of the outstanding
shares of the Common Stock and, thus, have significant influence over all
matters requiring a shareholder vote. Furthermore, BCBSUW intends to purchase
additional shares of the Common Stock to bring its direct and indirect ownership
of the Company to approximately 51%. At and after this time, BCBSUW will have
the power to affect the outcome of shareholder votes on all corporate actions
requiring majority approval. This will limit the ability of a third party to
acquire control of the Company and could adversely affect the market price of
the shares of Common Stock.
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The Company's Articles of Incorporation ("Articles of Incorporation") and
By-Laws ("By-Laws") and certain sections of the Wisconsin Business Corporation
Law ("WBCL") may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors (including
takeovers which some shareholders may deem to be in their best interests). These
provisions could delay or frustrate the removal of incumbent directors or the
assumption of control by an acquiror. These provisions also could discourage or
make more difficult a merger, tender offer or proxy contest. These provisions
include, among other things, a classified Board of Directors serving staggered
three-year terms and provisions in the WBCL which may discourage certain types
of transactions involving a change in control of the Company.
The Company and certain of its subsidiaries and BCBSUW have entered into
service agreements (the "Service Agreements") that provide for certain services,
including sales and marketing, computerized data processing, legal, investment,
actuarial and other management services. Under the Service Agreements, the
company receiving a service pays the company providing the service an amount
which the Company and BCBSUW believe approximates cost. The Company and certain
of its subsidiaries also have entered into reinsurance agreements with BCBSUW in
the past, and may do so in the future, on terms that are believed to be
reasonable at the time. Pursuant to Wisconsin statutory and regulatory
requirements, these reinsurance agreements and the Service Agreements are
required to be filed with the Wisconsin Office of the Commissioner of Insurance
("OCI") for its review to determine whether the "transactions are fair and
reasonable." In addition, BCBSUW's sales force markets and sells some of the
Company's products. Also, certain of the Company's products may compete with
managed health care products offered by BCBSUW in Wisconsin. Three of the nine
directors of the Company also are directors of BCBSUW.
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THE PLAN
The following questions and answers constitute a summary of the Plan.
PURPOSE
1. WHAT IS THE PURPOSE OF THE PLAN?
The purpose of the Plan is to provide interested investors, Record Owners
and Beneficial Owners with a convenient means of investing in the Company
through new investments in Common Stock and through the regular reinvestment of
cash dividends paid on Common Stock. Shares of the Common Stock for the Plan may
be purchased, in the discretion of the Company, either directly from the Company
through the reinvestment agent (the "Reinvestment Agent") and/or in the open
market. See question 4 for a definition of "Record Owner" and "Beneficial
Owner."
If shares are purchased from the Company, the proceeds from such purchases
will be received by the Company and will be used from time to time for general
corporate purposes.
ADVANTAGES
2. WHAT ARE SOME OF THE ADVANTAGES OF THE PLAN?
Participants in the Plan may elect to have all or a designated portion of
cash dividends on their shares of Common Stock automatically reinvested and/or
build their ownership in the Company through additional cash investment of not
less than $100 per calendar quarter and not more than $100,000 in any calendar
year. (See Question 4 for information on who is eligible to participate.)
Participants in the Plan will pay the Market Price (as defined in Question
15) for shares whether reinvesting all or a designated portion of their cash
dividends or purchasing additional shares through the cash investment option
available under the Plan.
All service charges and brokerage commissions, if any, in connection with
purchases under the Plan will be paid by the Company.
ADMINISTRATION
3. WHO ADMINISTERS THE PLAN FOR PARTICIPANTS?
The Reinvestment Agent administers the Plan for Participants. The present
Reinvestment Agent is Firstar Bank Milwaukee, N.A. ("Firstar").
The Reinvestment Agent maintains a continuing record of all Participants'
Noncertificated Share Accounts, sends statements of account to each Participant,
and performs other duties relating to the Plan. The Reinvestment Agent will hold
for safekeeping the certificates for shares purchased for each Participant under
the Plan until termination of the shareholder's participation in the Plan, or
until a written request is received from the Participant for withdrawal of the
shares.
Should Firstar cease to act as the Reinvestment Agent under the Plan, the
Company may perform these administrative duties itself or may designate another
agent. In such event, all references herein to Firstar or the Registration Agent
shall be deemed to be references to the Company or such other agent as the
Company may designate.
Participants can contact the Reinvestment Agent either by telephone at (800)
637-7549 or by mail addressed to:
Firstar Bank Milwaukee, N.A.
1555 N. RiverCenter Drive, Suite 301
Milwaukee, Wisconsin 53212
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PARTICIPATION
4. WHO IS ELIGIBLE TO PARTICIPATE IN THE PLAN?
All Record Owners and Beneficial Owners of the Common Stock are eligible to
participate in all features of the Plan. A Beneficial Owner is a shareholder who
beneficially owns shares of Common Stock that are registered in a name other
than his or her own name (e.g., the shares are held in the name of a broker,
bank or other nominee). A Record Owner is a shareholder who owns shares of
Common Stock registered in his or her own name. Record Owners and Beneficial
Owners may make optional cash payments whether or not they also have elected to
reinvest dividends on Common Stock registered in their names.
You must be a Record Owner or Beneficial Owner to participate in the
dividend reinvestment feature of the Plan, and only shares of Common Stock of
which you are the Record Owner or Beneficial Owner may have their dividends
reinvested pursuant to the Plan.
The Company may refuse participation in the Plan in its entirety, or
participation through any particular option under the Plan, to shareholders
residing in states whose securities laws do not exempt from registration shares
offered pursuant to the Plan, or pursuant to any particular participation option
under the Plan.
5. HOW DOES AN ELIGIBLE SHAREHOLDER OR INVESTOR PARTICIPATE?
In order to participate in the Plan, a Record Owner must properly complete
an authorization card furnished by the Reinvestment Agent (the "Authorization
Card") and return it to the Reinvestment Agent. An Authorization Card may be
obtained at any time by any shareholder by written or oral request to the
Reinvestment Agent (see Question 3). Telephone requests or general inquiries may
also be made by calling the Reinvestment Agent at (800) 637-7549 (see Question
3).
Beneficial Owners who wish to participate in the Plan must instruct their
broker, bank or other nominee to complete and sign the Authorization Card and
return it to the Plan Administrator. See Question 7 for a discussion of the
Broker and Nominee Form (the "B&N Form") which is required to be used for
optional cash payments of a Beneficial Owner whose broker, bank or other nominee
holds the Beneficial Owner's shares in the name of a securities depository. See
also Question 12.
An Authorization Card will be mailed to all new Record Owners of Common
Stock by the Reinvestment Agent. Authorization Cards may also be obtained at any
time by written request to the Reinvestment Agent.
Shareholders who do not wish to participate in the Plan will receive cash
dividends, as declared, in the usual manner.
If a shareholder returns a properly executed Authorization Card to the
Reinvestment Agent without electing an investment option, such Authorization
Card will be deemed to indicate the intention of such shareholder to apply all
cash dividends, together with any optional cash payments, toward the purchase of
additional shares of Common Stock.
If a Participant's shares are registered in more than one name or in a
representative capacity (i.e., joint tenants, trustees, etc.), all registered
holders must sign the Authorization Card exactly as their names appear on the
Company's stock transfer records.
Persons who received shares of Common Stock pursuant to the Distribution are
already enrolled in the Plan and are deemed Participants. Unless such a
Participant notifies the Reinvestment Agent by returning a properly executed
Authorization Card electing an investment option, all cash dividends, together
with any optional cash payments, will be applied toward the purchase of
additional shares of Common Stock.
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6. WHAT DOES THE AUTHORIZATION CARD PROVIDE?
The Authorization Card provides for the purchase by any entity, whether or
not a record holder of Common Stock, of additional shares of Common Stock
through the following investment options offered under the Plan:
- Full Dividend Reinvestment--Record Owners may reinvest cash dividends on
all shares owned by the Participant. Optional cash payments of not less
than $100 may also be made quarterly.
- Partial Dividend Reinvestment--Record Owners may reinvest cash
distributions on less than all of the shares owned by the Participant and
continue to receive cash dividends on the other shares. Optional cash
payments of not less than $100 may also be made quarterly.
- Optional Payments Only--Record Owners may invest by making optional cash
payments of not less than $100 per calendar quarter.
- Initial Direct Purchase--Investors who are not currently Record Owners may
participate in the Plan by making a cash payment of not less than $100 to
the Plan.
Cash dividends on shares credited to the Participant's Noncertificated Share
Account under the Plan are automatically reinvested to purchase additional
shares. See Questions 18-20 for a discussion of Noncertificated Share Accounts.
7. WHAT DOES THE B & N FORM PROVIDE?
The B&N Form must be submitted for optional cash payments of a Beneficial
Owner whose broker, bank or other nominee holds the Beneficial Owner's shares in
the name of a registered security depository. A B&N Form must be delivered to
the Plan Administrator each time that such broker, bank or other nominee
transmits optional cash payments on behalf of a Beneficial Owner. B&N Forms will
be furnished at any time upon request to the Reinvestment Agent (see Question
3).
Prior to submitting the B&N Form, the broker, bank or other nominee for a
Beneficial Owner must have established participation in the Plan by means of a
duly completed and executed Authorization card on behalf of the Beneficial Owner
(see Questions 5 and 6).
The Reinvestment Agent will make purchases for the Plan once a month on the
first business day of each month (the "Investment Date"). Accordingly, the B&N
Form and appropriate instructions must be received by the Reinvestment Agent no
later than the 25th day of the preceding month or the optional cash payment will
not be invested until the following Investment Date.
8. IS PARTIAL PARTICIPATION POSSIBLE UNDER THE PLAN?
Yes, a Participant who desires the dividends on only some certificated
shares to be reinvested under the Plan may indicate such number of shares on the
Authorization Card. Cash dividends will continue to be made on the remaining
shares.
9. MAY A PARTICIPANT CHANGE HIS/HER METHOD OF PARTICIPATION IN THE PLAN AFTER
ENROLLMENT?
Yes, by submitting a revised Authorization Card or sending a written request
signed by all registered owners to the Reinvestment Agent at the address
specified in Question 3. A change in dividend reinvestment will be effective
with the next Dividend Payment Date (as defined in Question 10), if the request
for change is received at least two weeks before that date.
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10. WHEN MAY A SHAREHOLDER OR INVESTOR JOIN THE PLAN?
If an Authorization Card specifying a dividend reinvestment feature is
properly completed and received by the Reinvestment Agent at least two weeks
before the record date established for the payment of a particular dividend,
reinvestment of dividends will commence with that dividend payment.
If an Authorization Card is received from a shareholder after the record
date established for a particular dividend, the reinvestment of such dividends
will begin on the dividend payment date following the next record date if such
shareholder is still a holder of record.
Dividend payment dates are anticipated to be in December each year (the
"Dividend Payment Date").
Record Owners and Beneficial Owners wishing to make additional optional cash
payments through the Plan or investors not owning shares but wishing to make an
initial direct purchase through the Plan may do so at any time.
INITIAL DIRECT PURCHASE AND OPTIONAL CASH PAYMENTS
11. WHO IS ELIGIBLE TO MAKE OPTIONAL CASH PAYMENTS?
Record Owners who have executed an Authorization Card, and Beneficial Owners
who have executed an Authorization Card and a B&N Form, are eligible to make
optional cash payments of not less than $100 in the aggregate for any quarter
(noncumulative from quarter to quarter). The first contribution in any quarter
must equal or exceed $100. The maximum aggregate amount of optional cash
payments under the Plan may not exceed $100,000 in any calendar year.
12. HOW ARE INITIAL DIRECT PURCHASE AND OPTIONAL CASH PAYMENTS MADE?
A new Participant may make an initial cash payment when enrolling in the
Plan by sending the Reinvestment Agent a check or money order, payable to
Firstar Bank Milwaukee, N.A., for not less than $100, with a completed
Authorization Card.
Once a Participant has enrolled in the Plan and the initial investment is
made, whether of dividends or through an initial direct purchase through the
Plan, a Participant will have the ability to make optional cash payments. Any
check or money order for an optional cash payment must be made to Firstar Bank
Milwaukee, N.A. and should be accompanied by a properly completed Authorization
Card. Checks and cards should be mailed to Firstar Bank Milwaukee, N.A. (see
Question 3 for address), Attention: Dividend Reinvestment. Beneficial Owners
whose broker, bank or other nominee holds the shares of the Beneficial Owner in
a registered securities depository must make their optional cash payments
through the use of the B&N Form rather than through the use of an Authorization
Card.
Initial direct purchases and subsequent optional cash payments must be in
United States dollars, payable at a United States bank, and may not be less than
$100 for initial direct purchases or $100 in the aggregate for any quarterly
period between Dividend Payment Dates for optional cash payments (noncumulative
from quarter to quarter). The same amount need not be sent each time, and there
is no obligation to make an optional cash payment in any quarter. Do not send
cash.
Optional cash payments of Participants can be refunded if a written request
is received by the Reinvestment Agent at the above address at least two business
days prior to the Investment Date (see Question 16).
Optional cash payments received by the 25th day of the month prior to each
Investment Date will be invested on that Investment Date. No interest will be
paid on funds held between receipt and investment. You are therefore strongly
encouraged to send your optional cash payments so that they are received by the
Reinvestment Agent close to, but not later than the Investment Date (see
Question 16).
10
<PAGE>
COSTS
13. ARE THERE ANY EXPENSES TO PARTICIPANTS IN CONNECTION WITH PURCHASES UNDER
THE PLAN?
No. Participants will incur no brokerage commissions, service or other
charges for purchases made under the Plan. Any costs of administration of the
Plan will be borne by the Company. However, charges will be incurred by a
Participant upon the sale of his or her shares (see Questions 25, 27 and 28),
and certain fees may be charged to Participants by brokers when shares are held
by brokers. The benefit of any reduced brokerage commission charges to the
Company will be passed on, pro rata, to Participants.
PURCHASES
14. HOW MANY SHARES WILL BE PURCHASED FOR PARTICIPANTS?
The number of shares to be purchased will be determined by the amount of the
Participant's dividends and/or optional cash payments or initial direct purchase
payments, being reinvested or paid and the Market Price (as defined in Question
15) of the shares. Each Participant's Noncertificated Share Account in the Plan
(see Questions 18-20) will be credited with the number of shares, including
fractional shares computed to three decimal places, equal to the amount of the
dividends and/or optional cash to be reinvested or paid divided by the
applicable purchase price of the shares.
15. HOW WILL THE PURCHASE PRICE OF SHARES BE DETERMINED?
Shares may be purchased from the Company through the Reinvestment Agent or
may be purchased, in the discretion of the Company, in the open market by the
Reinvestment Agent. For shares purchased from the Company through the
Reinvestment Agent, the price per share will be the average of the high and low
sale prices of the shares (the "Market Price") on the Reinvestment Date (defined
as the date on which dividends are paid and can first be reinvested in the
Company by the Reinvestment Agent) on the NYSE as reported by THE WALL STREET
JOURNAL. If no shares were traded on the Reinvestment Date, the Market Price
will be based on the most recent date immediately prior to the Reinvestment Date
that the shares were traded. For shares purchased on the open market, the price
per share will be the average price of all shares purchased for the Plan in
respect of any Reinvestment Date.
16. WHEN WILL DIVIDENDS AND/OR INITIAL DIRECT PURCHASES OR OPTIONAL CASH
PAYMENTS BE INVESTED?
Dividend reinvestment payments will be invested in additional shares and
credited to a Participant's Noncertificated Share Account (see Questions 18-20)
within thirty days of each Reinvestment Date. If any dividend reinvestment
payments are not reinvested by the Reinvestment Agent within thirty days after a
Reinvestment Date, such dividend payments will be returned to the Participant
without any interest thereon.
Record Owners and Beneficial Owners wishing to make additional optional cash
payments through the Plan may do so at any time. The Reinvestment Agent will
make purchases for the Plan once a month on the first business day of each month
(the "Investment Date") to satisfy those investment requests. Accordingly,
Participants and interested investors should send cash investments so as to
reach the Reinvestment Agent by the 25th day of the preceding month.
17. MUST ALL DIVIDENDS ON SHARES CREDITED TO A PARTICIPANT'S NONCERTIFICATED
SHARE ACCOUNT UNDER THE PLAN BE REINVESTED?
Yes. Regardless of the investment option chosen, all cash dividends on
shares held in the Plan for all Participants are automatically reinvested in
additional shares of Common Stock.
11
<PAGE>
SHARE CERTIFICATES
18. WILL CERTIFICATES BE ISSUED TO PARTICIPANTS FOR SHARES PURCHASED UNDER THE
PLAN?
Although the Company reserves the right at any time to issue certificates
for any number of shares in a Participant's Noncertificated Share Account,
certificates for shares will not be issued except as described in Question 19.
Shares purchased under the Plan will be credited to a Participant's
Noncertificated Share Account and will be shown on a Participant's statement of
account. Certificates for the shares purchased pursuant to the Plan will be
issued to Participants upon their written request, except that no certificates
will be issued for fractional shares. A Participant requesting a certificate for
all the shares in the Participant's Noncertificated Share Account will receive
cash for a fractional share only if participation in the Plan is terminated.
(See Question 19 for how a Participant may obtain certificates.) Cash dividends
on all shares held in the Participant's Noncertificated Share Account under the
Plan will be automatically reinvested to purchase additional shares which will
be reflected in the Participant's Noncertificated Share Account. If a
Participant is a Beneficial Owner, such request should be placed through such
Participant's broker, banker or other nominee.
19. HOW MAY A PARTICIPANT OBTAIN CERTIFICATES FOR SHARES PURCHASED UNDER THE
PLAN?
A Participant who has purchased shares under the Plan may obtain
certificates for those shares in the Participant's Noncertificated Share Account
at any time by sending a written request to that effect to the Reinvestment
Agent. If a Participant is a Beneficial Owner, such request should be placed
through such Participant's broker, banker or other nominee. No certificates will
be issued for fractional shares, but a Participant requesting termination of
participation in the Plan will receive, in cash, the Market Price of any
fractional share as well as one certificate, unless otherwise requested by the
Participant, for all whole shares held for such terminating Participant in the
Noncertificated Share Account. This notice should be mailed to the Reinvestment
Agent (see Question 3 for address). The Company, however, reserves the right at
any time to issue certificates to Participants for any shares in their
Noncertificated Share Accounts. (See Questions 24-27 for information on
termination of participation.)
20. MAY COMMON STOCK HELD IN CERTIFICATE FORM BE DEPOSITED IN A PARTICIPANT'S
NONCERTIFICATED SHARE ACCOUNT?
Yes. Common Stock certificates registered in a Participant's name may be
surrendered to the Reinvestment Agent for deposit to the Participant's
Noncertificated Share Account. This procedure enables Participants to avoid the
necessity of safekeeping certificates. The Participant should contact the
Reinvestment Agent (see Question 3) for the proper procedure to deposit
certificates.
Common Stock certificates may be deposited in a Participant's
Noncertificated Share Account whether or not the Participant has previously
authorized reinvestment of dividends on Common Stock registered in the
Participant's name. Such deposits must be accompanied by a completed
Authorization Card. However, as with all other shares held in the Participant's
Noncertificated Share Account, all dividends on any shares deposited will
automatically be reinvested.
PARTICIPANTS' RECORDS AND ACCOUNTS
21. WHAT TYPE OF REPORTS WILL BE SENT TO PARTICIPANTS IN THE PLAN?
As soon as practicable after each Reinvestment Date (in the case of dividend
reinvestment) or Investment Date (in the case of initial direct purchases or
optional cash payments) a Participant in the Plan will receive a statement
indicating the Market Price, the number of shares purchased and the number of
shares in the Participant's Noncertificated Share Account. In addition to the
above information, a statement to a Participant in the dividend reinvestment
feature of the Plan will also show the total dividend
12
<PAGE>
payment and the amount of the dividend payment reinvested. EACH OF THESE
STATEMENTS IS A RECORD OF THE COST OF PURCHASES UNDER THE PLAN AND SHOULD BE
RETAINED FOR TAX PURPOSES.
In addition, each Participant will receive copies of the Company's annual
report to shareholders, notices of annual and special meetings, proxy statements
and income tax information for reporting dividends. Beneficial owners whose
shares are registered in names other than their own (for instance, in the name
of a broker, bank nominee or other record holder) must arrange to obtain their
copies of such reports from the record holder.
22. IN WHOSE NAME WILL ACCOUNTS BE MAINTAINED AND CERTIFICATES REGISTERED WHEN
ISSUED?
A Participant's Noncertificated Share Account will be maintained in the name
or names which appear on the Company's shareholder records.
A certificate for shares, when delivered to a Participant, will be
registered in the name or names in which the Noncertificated Share Account is
maintained. Upon written request, certificates can be registered and issued in
names other than the account name, provided that the request bears the signature
of the Participant or Participants and the signature(s) are guaranteed by a
commercial bank or a member of the NYSE.
MODIFICATION OR TERMINATION BY A PARTICIPANT
23. HOW DOES A PARTICIPANT MODIFY THE MANNER OF PARTICIPATION IN THE PLAN?
A Participant may change participation from partial to total dividend
reinvestment, from total to partial dividend reinvestment, or may simply change
the number of shares that are enrolled in the Plan by executing and delivering a
new Authorization Card to the Reinvestment Agent (see Question 3 for address).
Beneficial Owners must use the B&N Form to change their participation. Notices
to change dividend reinvestments must be received by the Reinvestment Agent at
least two weeks before any Dividend Payment Date to be effective as of that
date.
24. HOW DOES A PARTICIPANT TERMINATE PARTICIPATION IN THE PLAN?
A Participant may terminate participation in the Plan by notifying the
Reinvestment Agent in writing to that effect. Notices will be effective only
upon receipt by the Reinvestment Agent. Notices to discontinue dividend
reinvestment received by the Reinvestment Agent at least two weeks before any
Dividend Payment Date will be effective as of that date. Notices received less
than two weeks prior to the Dividend Payment Date will take effect after the
dividend has been posted to the Participant's account. After termination,
dividends will be paid to the shareholder in cash unless and until the
shareholder rejoins the Plan. In order to re-enter the Plan after termination, a
shareholder must complete a new Authorization Card.
25. CAN THE SHARES HELD IN THE PLAN BE SOLD THROUGH THE REINVESTMENT AGENT?
A Participant can instruct the Reinvestment Agent to sell any or all of the
whole shares held in the Plan. The written notification to the Reinvestment
Agent should include the number of shares that are to be sold. The Reinvestment
Agent will make the sale as soon as practicable after receipt of a Participant's
request and will then issue to the Participant a check for the proceeds less
brokerage commission and transfer taxes (if any). In its discretion, the
Reinvestment Agent also may effect a net share exchange between a selling
Participant and another Participant's optional cash purchase or reinvestment of
dividends.
No Participant shall have the authority or power to direct the date or sales
price at which shares may be sold. The request must indicate the number of
shares which may be sold and not the dollar amount to be obtained. Any such
request that does not clearly indicate the number of shares which may be sold
may
13
<PAGE>
be returned to the Participant with no action taken. A withdrawal/termination
form will be provided on the stub of the account statement for this purpose.
This notice should be addressed to the Reinvestment Agent (see Question 3 for
address).
26. WHAT HAPPENS TO THE SHARES HELD IN THE NONCERTIFICATED SHARE ACCOUNT WHEN A
PARTICIPANT TERMINATES PARTICIPATION IN THE PLAN?
A certificate for the shares held in the Noncertificated Share Account will
be issued to the Participant upon the Participant's written request or upon a
Participant's termination of participation in the Plan. No fractional shares
will be issued. (See Question 18 for information on share certificates and
Question 19 for information on the cash payment for fractional shares in the
Noncertificated Share Account.)
27. MAY A PARTICIPANT RECEIVE CASH IN LIEU OF FULL SHARE CERTIFICATES UPON
TERMINATION OF PARTICIPATION?
Yes. The Participant may request, in his or her written notification of
termination, that the Reinvestment Agent sell all full and fractional shares
held in the account under the Plan in which case the Reinvestment Agent will
sell the shares and deliver the Market Price of any fractional share and the
proceeds from the sale of full shares, less brokerage commissions and any taxes
payable in connection with the sale, to the Participant.
28. MAY A PARTICIPANT SELL HIS OR HER RECORD SHARES AND STILL REMAIN IN THE
PLAN?
If a Participant should sell or transfer all of his or her record shares of
Common Stock, the Reinvestment Agent, at its discretion, may continue to
reinvest the dividends on the shares credited to his or her Noncertificated
Share Account under the Plan until notified in writing by the Participant to
withdraw from the Plan, or may terminate the Participant's participation and
sell all of the shares credited to the Participant's Noncertificated Share
Account. Upon termination, the Reinvestment Agent will remit to the former
Participant the proceeds from any sale, less any related brokerage commissions
and applicable taxes, and payment for any fractional shares.
29. WHAT HAPPENS IF A PARTICIPANT SELLS OR TRANSFERS SOME BUT NOT ALL OF THE
COMMON STOCK CREDITED TO THE PARTICIPANT'S NONCERTIFICATED SHARE ACCOUNT?
If a Participant is reinvesting dividends on only a portion of his or her
record shares, the Common Stock sold or transferred will be considered to be the
shares receiving cash dividends to the extent possible. Dividend reinvestment
will only be reduced when the number of shares of Common Stock sold or
transferred exceeds the number of shares receiving cash dividends. For example,
if a Participant owns 1,000 shares of Common Stock and has authorized dividends
on 600 of those shares to be reinvested under the Plan, such Participant could
sell up to 400 of his or her record shares without reducing the number of shares
which participate in the dividend reinvestment option of the Plan.
30. MAY A PARTICIPANT STOP REINVESTING THE DIVIDENDS FROM HIS OR HER RECORD
SHARES AND RECEIVE THEM IN CASH AND STILL REMAIN IN THE PLAN?
Yes. A Participant who terminates the reinvestment of dividends paid on his
or her record shares, may leave shares acquired through the Plan in the
Participant's Noncertificated Share Account. Dividends paid on shares left in
the Plan will continue to be automatically reinvested.
31. WHEN MAY A SHAREHOLDER RE-ENROLL IN THE PLAN?
Generally, a shareholder may again become a Participant at any time.
However, the Company reserves the right to reject any Authorization Form from a
previous Participant on grounds of excessive enrolling and termination. This
reservation is intended to minimize administrative expenses and to encourage use
of the Plan as a long-term investment service.
14
<PAGE>
OTHER INFORMATION
32. WHAT ARE THE DIVIDEND PAYMENT DATES?
Dividend Payment Dates are anticipated to be in December of each year.
33. HOW WILL A PARTICIPANT'S SHARES BE VOTED AT ANNUAL MEETINGS OF SHAREHOLDERS?
The Reinvestment Agent will obtain voting instructions from the Participant
for all full and fractional shares which are held by the Reinvestment Agent in
the Participant's Noncertificated Share Account on the record date established
by the Company for determining shareholders entitled to vote. In the absence of
voting instructions from the Participant, shares accumulated under the Plan will
not be voted.
34. WHAT HAPPENS IF THE COMPANY ISSUES A STOCK DIVIDEND, DECLARES A STOCK SPLIT
OR HAS A RIGHTS OFFERING?
Any stock dividends or split shares distributed by the Company on shares
held by the Reinvestment Agent for the Participant will be credited to the
Participant's Noncertificated Share Account on a pro rata basis. In the event
that the Company makes available to its common shareholders rights to purchase
additional shares, debentures or other securities, the Reinvestment Agent will
sell such rights accruing on shares held by the Reinvestment Agent for
Participants and invest the proceeds in shares of Common Stock prior to or with
the next regular cash dividend. A Participant who wishes to exercise purchase
rights must request that a stock certificate be sent to him or her by the
Reinvestment Agent prior to the record date for the rights offering.
35. CAN A PARTICIPANT PLEDGE SHARES CREDITED TO HIS OR HER ACCOUNT?
No. Shares in a Participant's Noncertificated Share Account in the Plan may
not be pledged, assigned or otherwise encumbered unless withdrawn from the
Noncertificated Share Account.
36. WHAT IS THE RESPONSIBILITY OF THE COMPANY OR THE REINVESTMENT AGENT UNDER
THE PLAN?
In administering the Plan, neither the Company nor the Reinvestment Agent
nor any agent of either of them will be liable for any act done in good faith,
without negligence, or for any omission to act including, without limitation,
any claims for liability arising out of failure to terminate the Participant's
Noncertificated Share Account upon his or her death prior to receipt of notice
in writing of such death, and with respect to the prices at which shares are
purchased or sold for the Participant's Noncertificated Share Account and the
times such purchases or sales are made.
All notices from the Reinvestment Agent to a Participant will be addressed
to the Participant's last known address. Beneficial Owners will receive all
notices and other mailings through their broker, banker or other nominee.
Participant's should notify the Reinvestment Agent promptly in writing of any
change in address.
The risk to Participants is the same as with any other investment in shares
of Common Stock. It should be recognized that a Participant loses any advantage
otherwise available from being able to select the timing of his or her
investment. It should also be recognized that, like any investment, the Company
cannot assure the Participant of a profit or protect the Participant against a
loss on the shares purchased by the Participant under the Plan, nor can the
Company control purchases by the Reinvestment Agent. The Company also cannot
guarantee that dividends on shares of Common Stock will not be reduced or
eliminated.
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<PAGE>
37. MAY THE PLAN BE MODIFIED, SUSPENDED OR TERMINATED?
While the Company hopes to continue the Plan indefinitely, the Company
reserves the right to suspend or terminate the Plan at any time. It also
reserves the right to make modifications or amendments to the Plan and in
particular reserves the right to refuse optional cash payments from any
shareholder who, in the sole discretion of the Company, is attempting to
circumvent the interest of the Plan by making excessive optional cash payments
through multiple Noncertificated Share Accounts. To the extent practicable,
notice of any such suspension, termination, modification or amendment will be
sent to all Participants at least 30 days prior to the effective date. Any
modification will be deemed to be accepted by Participants who do not withdraw
prior to the effectiveness of the modification.
If the Plan is terminated, each Participant will receive (1) a certificate
for all whole shares of Common Stock held in the Participant's Noncertificated
Share Account and (2) a check representing the value of any fractional share
held in the Participant's Noncertificated Share Account and any uninvested
optional cash payment held in the account.
FEDERAL INCOME TAX CONSEQUENCES
Participants should consult their personal tax advisors with specific
reference to their own tax situations and potential changes in the applicable
laws as to all federal, state, local, foreign and other tax matters in
connection with the reinvestment of dividends and purchases of Common Stock
under the Plan, the Participant's tax basis and holding period for Common Stock
acquired under the Plan and the character, amount and tax treatment of any gain
or loss realized on the disposition of shares of Common Stock. The following is
only a brief summary of some of the principal federal income tax considerations
applicable to the Plan.
38. WHAT IS THE TAX TREATMENT OF DIVIDENDS RECEIVED BY A PARTICIPANT?
Participants in the Plan who are reinvesting dividends will be treated for
federal income tax purposes as having received with respect to each Reinvestment
Date a dividend equal to the purchase price of the shares purchased by dividend
reinvestment on that date (i.e., the amount that would have been received as a
cash dividend) plus the cash dividend actually received (if any). Dividends will
be taxed in the following manner: (i) if the dividend is paid by the Company out
of its current or accumulated earnings and profits, it will be taxed as ordinary
income; (ii) if the Company has no current or accumulated earnings and profits,
the dividend will be treated as a return of capital, which results in a
reallocation of basis between shares previously owned and shares acquired by
dividend reinvestment; and (iii) if all capital has been returned under (ii),
the dividend will be treated as capital gain income.
Participants who acquire shares under the Plan, except those shares acquired
as a return of capital, will have a tax basis in the shares so acquired equal to
the amount being paid for those shares increased by any brokerage fees treated
as a dividend to the Participant. Except for those dividends treated as a return
of capital, the holding period for tax purposes for all Participants will begin
on the day following the Reinvestment Date on or for which the shares are
acquired. A Participant will not realize any taxable income when the Participant
receives certificates for whole shares previously credited to the Participant's
Noncertificated Share Account, either upon the Participant's request for those
shares or upon withdrawal from the Plan.
A Participant will realize gain or loss when shares are sold or exchanged,
or when the Participant receives a cash adjustment for a fraction of a share
credited to the Participant's Noncertificated Share Account upon withdrawal from
the Plan. The amount of such gain or loss will be the difference between the
amount which the Participant receives for the shares, or fraction of a share,
and the Participant's tax basis.
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39. WHAT IS THE TAX TREATMENT OF SERVICE CHARGES AND BROKERAGE COMMISSIONS, IF
ANY, AS WELL AS OTHER ADMINISTRATIVE EXPENSES OF THE PLAN PAID BY THE
COMPANY?
In connection with purchases of shares on the open market, service charges
and brokerage commissions paid by the Company on the behalf of Participants will
likely be treated as distributions subject to income tax in the same manner as
dividends. With respect to administrative expenses, such expenses paid by the
Company are not likely to be treated as constructive distributions to
Participants and, as a result, are not subject to income tax.
40. WHAT PROVISION IS MADE FOR PARTICIPANTS WHOSE DIVIDENDS ARE SUBJECT TO
INCOME TAX BACKUP WITHHOLDING?
In the case of those Participants whose dividends are subject to United
States income tax backup withholding, the Reinvestment Agent will apply the net
amount of their dividends, after the deduction for taxes, to the purchase of
shares of Common Stock. As a general matter, the Company is currently required
to withhold for United States income tax purposes 31% of all dividend payments
to a shareholder if (i) the Participant fails to furnish its taxpayer
identification number (the "TIN") to the Company as required, (ii) the Internal
Revenue Service (the "IRS") notifies the Company that the TIN furnished by the
Participant is incorrect, (iii) the IRS notifies the Company that the
Participant has failed properly to report certain payments as required or (iv)
the Participant fails to certify, when and as required to do so, under penalties
of perjury, that it is not subject to backup withholding. Shareholders may be
requested by the Company or their broker to submit all information and
certifications required in order to exempt them from back-up withholding if such
exemption is available to them.
Information previously provided by a person who is deemed to be a
Participant as a result of the Distribution, including such person's TIN and
certification regarding back-up withholding, is deemed provided by such person
with regard to the dividends on the shares of Common Stock for which the person
is the Record Owner or Beneficial Owner, unless and until the person notifies
the Company otherwise in writing.
41. WHAT IS THE TAX TREATMENT OF CASH RECEIVED BY A PARTICIPANT UPON THE SALE OF
SHARES PURCHASED BY THE PARTICIPANT PURSUANT TO THE PLAN?
Assuming that the shares are held as capital assets, a Participant who
receives a cash payment for any full or fractional shares then held in his or
her Plan account will recognize either short-term or long-term capital gain or
loss, depending on his or her particular circumstances, the tax basis of his or
her shares, and the period of time he or she has held his or her shares. Federal
law requires the Company to notify the IRS of all sales of stock made under the
Plan during the year. If a Participant sells any shares from the Plan, he or she
will be sent a Form 1099B for each sale pursuant to federal income tax
regulations.
42. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATION IN THE PLAN BY
AN IRA, KEOGH PLAN, 401(K) PLAN, SIMPLIFIED PENSION ACCOUNT OR ANY CORPORATE
EMPLOYER-SPONSORED RETIREMENT PLAN?
The tax consequences of participation in the Plan by retirement plans differ
from those outlined above for individuals. Since the law and regulations
regarding the federal income tax consequences of retirement plan participation
are complex and subject to change, those considering such participation should
consult with their own retirement plan trustees, custodians or tax advisors for
specific information.
USE OF PROCEEDS
The net proceeds from the sale of authorized but unissued stock purchased
from the Company will be used for general corporate purposes.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data present consolidated financial
information with respect to the Company. The balance sheet data as of December
31, 1998, 1997, and 1996 and the statement of income data for each of the four
years in the period ended December 31, 1998, have been derived from the audited
consolidated financial statements and notes thereto of the Company. The balance
sheet data as of December 31, 1995, and 1994 and the statement of income data
for the year ended December 31, 1994 have been derived from unaudited financial
statements which, in the opinion of the Company's management, include all
adjustments necessary to present the financial position and results of
operations at and for the years presented. The consolidated financial statements
of the Company do not necessarily reflect the results of operations or financial
position that would have resulted had the Company been a separate, independent
company and are not necessarily indicative of the results to be expected for any
future fiscal year. The following data should be read in conjunction with the
Company's consolidated financial statements, the related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
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<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1994(3) 1995(3) 1996 1997 1998
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF INCOME DATA:
Revenues:
Health Services Revenues:
Premium revenue.............................. $ 355,025 $ 466,929 $ 493,092 $ 560,825 $ 608,917
Other revenue................................ 15,997 24,222 27,632 26,046 29,728
Investment results............................. 12,050 9,665 19,040 22,238 18,976
----------- ---------- ---------- ---------- ----------
Total revenues............................. 383,072 500,816 539,764 609,109 657,621
Expenses:
Medical and other benefits..................... 306,056 416,167 425,258 485,198 519,636
Selling, general and administrative expenses... 58,026 72,576 83,839 94,496 103,517
Interest expenses with affiliate............... -- -- -- -- 1,411
Profit sharing on provider arrangements........ 1,516 2,734 2,868 3,380 2,762
Amortization of goodwill and other
intangibles.................................. 195 678 841 818 450
----------- ---------- ---------- ---------- ----------
Total expenses............................. 365,793 492,155 512,806 583,892 627,776
----------- ---------- ---------- ---------- ----------
Income before income tax expense............... 17,279 8,661 26,958 25,217 29,845
Income tax expense............................. 5,072 3,277 10,617 9,433 11,767
----------- ---------- ---------- ---------- ----------
Net income....................................... $ 12,207 $ 5,384 $ 16,341 $ 15,784 $ 18,078
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Pro forma net income (2)......................... $ 15,974 $ 12,722 $ 15,863
---------- ---------- ----------
---------- ---------- ----------
OPERATING STATISTICS:
Medical loss ratio............................. 86.2% 89.1% 86.2% 86.5% 85.3%
Selling, general and administrative expense
ratio (1).................................... 15.6% 14.8% 16.1% 16.1% 16.2%
(UNAUDITED)
BALANCE SHEET DATA:
Cash and investments........................... $ 154,201 $ 178,926 $ 182,431 $ 176,579 $ 192,558
Total assets................................... 216,954 261,523 269,478 266,256 298,208
Note payable to affiliate...................... -- -- -- -- 70,000
Total shareholders' equity..................... 101,465 120,277 123,882 123,616 64,459
Pro forma note payable to affiliate (2)........ 70,000 70,000
Pro forma total shareholders' equity (2)....... 53,882 53,616
</TABLE>
- ------------------------
(1) Ratios are based on health service revenues and selling, general and
administrative expenses.
(2) Reflects pro forma adjustments for interest expense on assumed debt. See
note 1 (Pro forma Earnings Per Common Share) in the accompanying
Consolidated Financial Statements.
(3) Commencing October 1, 1994, the Company's results of operations include the
results of operations of Unity. For the years ended December 31, 1994 and
1995, Unity accounted for $23,994,000 and $100,342,000 of the Company's
total premium revenue and $112,000 and $1,062,000 of the Company's net
income, respectively.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
United Wisconsin Services, Inc. (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.
On May 27, 1998, the Board of Directors of American Medical Security Group,
Inc. ("AMSG") (formerly United Wisconsin Services, Inc.) approved a formal plan
to spin off its managed care companies and specialty business to its
shareholders. The new corporation originally was named Newco/UWS, Inc. and was
subsequently renamed United Wisconsin Services, Inc. The spin off resulted in
the distribution on September 25, 1998 ("Spin off date") of one share of common
stock of the Company for each share of AMSG common stock held as of September
11, 1998 (the "Distribution"). AMSG received a private letter ruling from the
Internal Revenue Service that the spin off is tax free to AMSG, the Company and
their shareholders.
SUMMARY OF OPERATING RESULTS AND STATISTICS
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Membership at end of period:
HMO products:
Compcare............................................................... 175,037 173,241 149,636
Valley................................................................. 41,282 37,906 33,434
Unity.................................................................. 87,924 85,117 79,147
---------- ---------- ----------
Total HMO products membership........................................ 304,243 296,264 262,217
---------- ---------- ----------
---------- ---------- ----------
Specialty managed care products and services:
Life/AD&D.............................................................. 160,619 129,406 116,390
Dental HMO............................................................. 169,709 169,823 169,063
Behavioral health...................................................... 992,216 863,538 826,153
Workers' compensation.................................................. 53,025 54,928 53,574
Disability and other................................................... 125,357 97,727 81,462
---------- ---------- ----------
Total specialty managed care products and services membership........ 1,500,926 1,315,422 1,246,642
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Premium revenue (as a percentage of the total):
HMO products......................................................................... 85.2% 85.7% 85.4%
Specialty managed care products and services......................................... 15.3% 14.7% 15.0%
Intercompany eliminations............................................................ (0.5)% (0.4)% (0.4)%
--------- --------- ---------
--------- --------- ---------
Total.............................................................................. 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating Statistics:
HMO Products:
Medical loss ratio(1)................................................................... 88.8% 90.1% 89.8%
Selling, general and administrative expense ratio(2).................................... 9.6% 9.3% 9.3%
Specialty managed care products and services:
Loss ratio(1)........................................................................... 70.9% 70.6% 69.8%
Consolidated:
Loss ratio(1)........................................................................... 85.3% 86.5% 86.2%
Net income margin(3).................................................................... 2.7% 2.6% 3.0%
</TABLE>
- ------------------------
(1) Medical and other benefits as a percentage of premium revenue.
(2) Selling, general and administrative expenses (associated with premium
revenue) as a percentage of premium revenue.
(3) Net income as a percentage of total revenues.
The Company's revenues are derived primarily from premiums, while medical
benefits constitute the majority of expenses. Profitability is directly affected
by many factors including, among others, premium rate adequacy, estimates of
medical benefits, health care utilization, effective administration of benefit
payments, operating efficiency, investment returns and federal and state laws
and regulations.
RESULTS OF OPERATIONS
All financial data in the Results of Operations section are gross numbers
and, therefore, are not net of intercompany eliminations. For this reason, some
of the financial data does not precisely match the data in the financial tables.
1998 COMPARED WITH 1997 AND 1997 COMPARED WITH 1996
TOTAL REVENUES
Total revenues in 1998 increased 8.0% to $657.6 million from $609.1 million
in 1997. Total revenues in 1997 increased 12.8% from $539.8 million in 1996.
These increases were due primarily to membership and rate increases.
PREMIUM REVENUE-- HMO premium revenue in 1998 increased 8.2% to $518.7
million from $479.2 million in 1997. HMO premium revenue in 1997 increased 13.8%
from $421.2 million in 1996. The increases in both years are primarily due to
increases in average HMO premium revenue per member and increases in the average
number of HMO medical members. Average HMO medical premium per member in 1998
increased 4.3% from 1997 and increased 3.0% in 1997 from 1996, due to premium
increases, partially offset by benefit reductions. The average number of HMO
medical members in 1998 increased 3.5% to 297,737 from 287,534 in 1997. The
average number of HMO medical members in 1997 increased 10.8% from 259,507 in
1996. This increase in 1997 was due in part to the elimination of a key provider
from the network of one of Compcare's competitors, resulting in a shift of
members to Compcare.
Premium revenue for specialty managed care products and services in 1998
increased 11.5% to $93.4 million from $83.8 million in 1997. This increase was
due primarily to an increase of $8.4 million in the life and disability products
and $1.4 million in dental premiums. Premium revenue in 1997 increased 13.6%
from $73.8 million in 1996. The increase was due primarily to an increase of
$2.7 million in disability premiums, an increase of $2.7 million in dental
premiums and an increase of $1.9 million in workers' compensation premiums. The
increases in life and disability premiums were driven by membership increases of
24.1% and 11.2% in 1998 and 1997, respectively. The increase in workers'
compensation premiums in 1997 was due primarily to a change in the reinsurance
agreement related to this business. In
21
<PAGE>
1998 and 1997, the Company ceded 40% of the workers' compensation premiums
written by United Heartland to a third-party reinsurer while the percentage
ceded to the outside reinsurer was 50% in 1996.
OTHER REVENUE-- Other revenue from specialty managed care products and
services in 1998 increased 10.5% to $44.2 million from $40.0 million in 1997.
This increase was due primarily to an increase in managed behavioral health and
managed care consulting. In addition, the acquisitions of Intercare and Ladd
during 1998 provided $0.6 million and $0.4 million of additional revenue,
respectively. Other revenue in 1997 increased 1.3% from $39.5 million in 1996.
Included in other revenue in 1996 is a $1.5 million gain on the sale of the
vision line of business which is non-recurring. After adjusting for the gain on
the sale of the vision line of business, other revenue increased by 5.2% from
1996 to 1997. These increases are primarily attributable to growth in managed
behavioral health, electronic claim transmission services and managed care
consulting services.
INVESTMENT RESULTS-- Investment results include investment income and
realized gains on the sale of investments. Investment results in 1998 decreased
14.4% to $19.0 million from $22.2 million in 1997. Investment results in 1997
increased 16.8% from $19.0 million in 1996. Average annual investment yields,
excluding net realized gains, were 5.53%, 5.75% and 5.90% for 1998, 1997 and
1996, respectively. Average invested assets in 1998 increased 3.2% to $185.2
million from $179.5 million in 1997. Average invested assets in 1997 decreased
0.1% from $180.7 million in 1996. Changes in levels of average invested assets
relate to ongoing operations, including collection of receivables and timing of
claim payments. Investment results in 1997 also included $1.8 million of mutual
fund distributions which were recorded as investment income in December 1997.
Net realized investment gains decreased to $9.1 million in 1998 from $11.9
million in 1997. Net realized investment gains in 1997 increased from $8.4
million in 1996. Investment gains are realized in the normal investment process
in response to market opportunities. In addition, a portion of the gains
realized during the second half of 1997 were achieved as part of a portfolio
restructuring to reduce the overall level of equity investments.
EXPENSE RATIOS
LOSS RATIO-- The consolidated loss ratio represents the ratio of medical and
other benefits to premium revenue for the Company on a consolidated basis, and
is therefore a blended ratio for medical, life, dental, disability and other
product lines. The consolidated loss ratio was 85.3% in 1998 compared with 86.5%
in 1997 and 86.2% in 1996. The consolidated loss ratio is influenced by the
component loss ratio for each of the Company's two primary product lines, as
discussed below.
The medical loss ratio for HMO products for 1998 was 88.8%, compared with
90.1% for 1997 and 89.8% for 1996. The decrease in the medical loss ratio in
1998 for HMO products is due primarily to provider recontracting with a
continuing shift toward capitation in the southeastern Wisconsin HMO market. For
1998, approximately 54.9% of the medical benefits were provided under capitated
arrangements, compared to 47.5% and 48.4% during 1997 and 1996, respectively.
The lower loss ratio in 1998 is also attributable to higher premium rate
increases and a favorable development in the reserves as of December 31, 1997.
The increase in the medical loss ratio in 1997 is attributable to the
competitive market conditions in southeastern Wisconsin where pricing pressures,
coupled with increased utilization, had an adverse impact on Compcare's loss
ratio.
The loss ratio for the risk products within specialty managed care products
and services in 1998 was 70.9%, compared with 70.6% in 1997 and 69.8% in 1996.
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 the four products should
range between 70% and 75%. The 1998 and 1997 loss ratios were impacted by a
higher level of life and disability claims in comparison to a more favorable
level of life and disability claims in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO-- The Selling, General and
Administrative ("SGA") expense ratio includes commissions, administrative
expenses, and premium taxes and other assessments.
22
<PAGE>
The SGA expense ratio for HMO products in 1998 was 9.6%, compared with 9.3% in
1997 and 9.3% in 1996. During 1998, Compcare incurred higher costs as a result
of a major system conversion and related training costs. A new claims
administrative system was necessary to replace the previous system for which the
service agreement expired, provide improved functionality and resolve the Year
2000 Issue.
SGA expenses related to specialty managed care products and services
increased 9.7% in 1998 to $63.1 million from $57.5 million in 1997. SGA expenses
related to specialty managed care products and services increased 10.8% in 1997
from $51.9 million in 1996. Increases in SGA expenses correlate to premium and
other revenue increases which were 8.8% in 1998 compared with 1997 and 12.7% in
1997 compared with 1996. In addition, the mix of business shifted over these
yearly periods, as a result of greater growth in ancillary lines of business
that have higher SGA expense ratios.
OTHER EXPENSES
Profit sharing on provider arrangements was $2.8 million in 1998, compared
with $3.4 million in 1997 and $2.9 million in 1996, net of intercompany
eliminations. Included in this caption is expense related to the Unity and
Valley provider arrangements and income from the workers' compensation
agreements. Profit sharing expenses related to the Unity and Valley provider
arrangements were $3.2 million, $4.0 million and $3.0 million in 1998, 1997 and
1996, respectively. Income from the workers' compensation agreements was $0.4
million, $0.6 million and $0.1 million in 1998, 1997 and 1996, respectively.
Interest expense of $1.4 million was incurred in 1998 as a result of the
assumption of $70 million in debt owed to BCBSUW as of September 11, 1998.
Amortization of goodwill and other intangibles was $0.5 million for 1998
compared with $0.8 for 1997 and 1996. The reduction in 1998 is due to full
amortization of certain intangibles.
NET INCOME
Consolidated net income in 1998 increased 14.5% to $18.1 million from $15.8
million in 1997. Consolidated net income in 1997 decreased 3.1% from $16.3
million in 1996.
The Company's effective tax rate was 39.4% in 1998, compared with 37.4% in
1997 and 39.4% in 1996. The Company's effective tax rate fluctuates based upon
the relative profitability of the Company's two product lines and the differing
effective tax rates for each of those product lines.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of health services
revenues and investment income. The primary uses of cash include medical and
other benefits and operating expense payments. Positive cash flows are invested
pending future payments of medical and other benefits and other operating
expenses. The Company's investment policies are designed to maximize yield,
preserve principal and provide liquidity to meet anticipated payment
obligations.
On an historical basis, the Company has generated positive cash flow from
operations. For 1998, net cash provided by operating activities amounted to
$21.9 million, compared with $1.6 million for 1997. The increase in cash flows
from operations in 1998 compared to 1997 was due primarily to an increase in
operating income and an increase in medical and other benefits payable and
premium advances. Due to periodic cash flow requirements of certain
subsidiaries, the Company made borrowings under its bank line of credit ranging
up to $10.0 million during 1998 and $8.0 million during 1997 to meet short-term
cash needs. No balance was outstanding at December 31, 1998, 1997 or 1996.
The Company's investment portfolio consists primarily of investment grade
bonds, Government securities and has a limited exposure to equity securities. At
December 31, 1998, $133.1 million or 80.0% of the Company's total investment
portfolio was invested in bonds compared with $127.9 million or 80.1% at
December 31, 1997. The bond portfolio had an average quality rating by Moody's
Investor Service of Aa3 at December 31, 1998 and 1997. The majority of the bond
portfolio was classified as available for sale.
23
<PAGE>
The market value of the total investment portfolio, which includes stocks and
bonds, exceeded amortized cost by $1.9 million and $4.8 million at December 31,
1998 and 1997, respectively. Unrealized holding gains and losses on bonds
classified as available for sale are included as a component of shareholders'
equity, net of applicable deferred taxes. The Company has no investments in
mortgage loans, no non-publicly traded securities, or financial derivatives.
From time to time, capital contributions are made to the subsidiaries to
assist them in maintaining appropriate levels of capital and surplus for
regulatory and rating purposes. Insurance subsidiaries are required to maintain
certain levels of statutory capital and surplus. In Wisconsin, where a large
percentage of the Company's premium is written, these levels are based upon the
amount and type of premiums written and are calculated separately for each
subsidiary. As of the balance sheet dates presented, statutory capital and
surplus for each of these insurance subsidiaries exceeded required levels.
The amount of dividends which may be paid to the Company from insurance
subsidiaries are limited by state regulation. In the past, the insurance
subsidiaries have been allowed, with prior notification to the OCI, to pay
dividends in excess of the ordinary dividend levels prescribed by regulation.
In conjunction with the distribution of assets pursuant to the spin off, UWS
assumed a $70 million note obligation to BCBSUW. The assumption of debt was
effective September 11, 1998. The obligation and related debt service costs of
$1.4 million, for the period subsequent to September 11, 1998, have been
reflected in the accompanying consolidated financial statements. The Company
recognizes that its debt to equity ratio is high, primarily as a result of its
assumption of the $70.0 million loan from BCBSUW. However, the Company believes
that this ratio should improve to the extent that BCBSUW purchases new shares of
UWS common stock to increase its ownership from 37.8% to approximately 51%. The
purchase price for the shares of common stock which are purchased directly from
the Company will be paid through either the cancellation of a corresponding
portion or all of the $70.0 million debt obligation or in cash. BCBSUW also may
purchase some of the shares of common stock in the open market.
In addition to internally generated funds and periodic borrowings on its
bank line of credit, the Company believes that additional financing to
facilitate long-term growth could be obtained through equity offerings, debt
offerings, financings from BCBSUW or bank borrowings, as market conditions may
permit or dictate.
The Company is party to certain provider arrangements in conjunction with
Unity and Valley as further described below.
Effective January 1, 1992, the Company acquired all of the outstanding
capital stock of Valley for cash approximating $2,800,000, representing the net
assets of Valley plus $400,000 as negotiated by the Company. Valley, a health
maintenance organization located in Eau Claire, Wisconsin, was purchased from
Midelfort, which continues to be Valley's primary health care provider. Under
the terms of the purchase and sale agreement, Midelfort retained an option to
repurchase all of the capital stock of Valley, at a price determined by the
formula used in computing the purchase price paid by the Company, at any time
until December 31, 1996. The option to repurchase was subsequently amended to
permit repurchase at December 31, 1999. The acquisition was accounted for under
the purchase method of accounting.
Effective October 1, 1994, the Company acquired all of the outstanding
common stock of HMO-W, Inc. for cash approximating $7,482,000 representing the
net assets of HMO-W, Inc. as negotiated by the Company. HMO-W, Inc. owned all of
the outstanding common stock of HMOW.
Effective October 1, 1994, the Company acquired all of the assets of U-Care
and certain assets from an affiliate of U-Care for cash approximating
$3,772,000, representing net assets plus $500,000 as negotiated by the Company.
Pursuant to the HMO-W, Inc. and U-Care purchase agreements, options to
repurchase the net assets of HMO-W, Inc. and U-Care were issued to the
respective primary provider groups, at prices determined by the formula used in
computing the purchase prices paid by the Company, effective on November 1, 1999
or 2004. The U-Care and HMO-W, Inc. acquisitions were accounted for under the
purchase method of
24
<PAGE>
accounting. The accompanying consolidated financial statements include the
results of operations of U-Care and HMOW which have been merged to form Unity.
Total revenues subject to repurchase options, pursuant to the various
acquisition agreements, totaled $207,014,000, $186,318,000, $169,341,000 for
1998, 1997 and 1996, respectively. Profit sharing expense related to these
provider arrangements is calculated based on the profitability of the HMO
subsidiary and totaled $3,171,000, $3,960,000, $3,002,000 in 1998, 1997 and
1996, respectively. Total net income subject to repurchase options, pursuant to
the various acquisition agreements, totaled 2,358,000 $2,395,000, $2,629,000 for
1998, 1997 and 1996, respectively. Total assets and total net assets subject to
repurchase options were $44,798,000 and $21,362,000, respectively, at December
31, 1998 and $49,802,000 and $20,632,000, respectively, at December 31, 1997.
Should the buy back options be exercised, the Company would receive an
amount equal to the premium over net assets but would lose rights to the future
profits on the HMO. The cash received by the Company pursuant to the exercise of
the buy back option could be redeployed to support additional premium writings,
acquire other businesses or be invested to earn a portfolio return. Due to these
alternative uses of capital, the potential buy back arrangements do not
represent material claims against the Company's liquidity and capital resources.
INFLATION
Health care costs have been rising and are expected to continue to rise at a
rate that exceeds the consumer price index. The Company's cost control measures,
risk-sharing incentive arrangements with medical care providers, and premium
rate increases are designed to reduce the adverse effect of medical cost
inflation on its operations. In addition, the Company utilizes its ability to
apply appropriate underwriting criteria in selecting groups and individuals and
in controlling the utilization of health care services. However, there can be no
assurance that the Company's efforts will fully offset the impact of inflation
or that premium revenue increases will equal or exceed increasing health care
costs.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 in the accompanying Consolidated Financial Statements for
Statement of Financial Accounting Standards (SFAS) recently adopted by the
Company. These include SFAS 130, "Reporting Comprehensive Income", SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information", and SFAS
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits".
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
25
<PAGE>
systems that could be significantly affected by the Year 2000 Issue. The
completed assessment indicated that most of the Company's significant
information technology systems could be affected, particularly the general
ledger, billing and processing of medical claims. That assessment also indicated
that software and hardware (embedded chips) used in building operations and
office equipment (hereafter also referred to as non-IT systems) also are at
risk. The Company does not believe that the Year 2000 Issue presents a material
exposure as it relates to the Company's non-IT systems. 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 December 31, 1998, the Company is approximately 77% complete with the
remediation phase for its information technology exposures. Once software is
reprogrammed or replaced for a system, the Company will begin testing and
implementation. These phases are expected to run concurrently for different
systems. For all systems where the Company has completed the remediation phase,
the Company has also completed the testing and implementation phases. For those
systems where remediation is still underway, the Company expects to complete
remediation, testing and implementation by September 30, 1999.
The remediation phase of non-IT systems is nearly complete. Testing of
remediated non-IT systems is approximately 65% complete. Once testing is
complete, the non-IT systems are expected to be ready for immediate use. The
Company expects to complete its remediation efforts, testing and implementation
of affected non-IT systems by April 30, 1999.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
YEAR 2000
The Company outsources and relies extensively on third party systems to
process selected payroll, membership and claims processing functions, among
others. The Company is in the process of working with third party vendors to
ensure that their systems are Year 2000 ready. Several third party systems are
currently not Year 2000 ready. Compcare utilizes a membership system that is
expected to complete its upgrades and testing by March 31, 1999. UWG is expected
to be Year 2000 ready by September 30, 1999 for its administrative, claims and
billing systems. Based on discussions with these key vendors, the Company is of
the understanding that the vendor systems utilized are or will be Year 2000
ready.
The Company has initiated formal communications with its systems processing
vendors, government agencies and all large customers and providers using
electronic interfaces to determine the extent to which the Company's interface
systems are vulnerable to the failure of third parties to remediate Year 2000
Issues. The Company is not aware of any significant interface issues.
The Company has surveyed its significant suppliers and subcontractors
(external agents) that do not share information systems with the Company. To
date, the Company is not aware of any external agent with a Year 2000 Issue that
would materially impact the Company's results of operations, liquidity or
capital resources. However, the Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of external agents to complete
their Year 2000 resolution process in a timely fashion could materially impact
the Company. The effect of non-compliance by external agents is not
determinable.
COST OF THE YEAR 2000 PROJECT
The Company has utilized both internal and external resources to reprogram
or replace, test and implement the software and non-IT systems for the Year 2000
modifications. The total direct costs of the Year 2000 project is estimated at
$1.5 million and is being funded through operating cash flows. To date, the
Company has incurred $0.9 million of identifiable costs related to all phases of
the Year 2000 project. Remaining costs, to be incurred to complete the Year 2000
project, are estimated to approximate $0.6
26
<PAGE>
million. In addition, the Company has capitalized $2.7 million related to other
functionality enhancing system upgrades which also provide Year 2000 readiness.
A number of other repairs to current systems are covered by existing maintenance
agreements and by normal upgrades and do not present incremental additional
expense.
BCBSUW leases the claims, membership and general ledger software programs
and subleases the use of these systems to the Company under the 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
are 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.
CONTINGENCY PLANS
The Company is developing contingency plans for certain critical
applications and is working on such plans with major data center vendors. These
contingency plans are being developed in the event the system conversions and
their functionality or the readiness of Year 2000 are not completed on a timely
basis. These contingency plans involve, among other actions, manual workarounds,
reducing claim inventories prior to December 31, 1999, and adjusting staffing
strategies.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Of the $192.6 million of cash and investments held by the Company at
December 31, 1998, approximately $26.4 million were cash and cash equivalents
and $7.7 million were securities that were being held to maturity. The remaining
$158.5 million available for sale securities is comprised of $33.4 million
equities and $125.1 million of principally US domestic fixed income securities
with an average quality of Aa3. The Company also has access to an
adjustable-rate line-of-credit and has an adjustable-rate loan with its majority
shareholder. The total borrowings as of December 31, 1998 were $70.0 million.
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 or 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
27
<PAGE>
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 assets classes and segments within various asset classes, and
using performance measurement and reporting.
The Company uses a sensitivity model to assess the interest rate risk of its
fixed income investments. The model includes all fixed income securities held as
of December 31, 1998 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 $3.9 million as of December 31, 1998.
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BUSINESS
AVAILABLE INFORMATION
The Company is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Information as of particular dates concerning
directors and officers, their remuneration and any material interest of such
persons in transactions with the Company will be disclosed in reports, proxy
statements and other information distributed to shareholders of the Company and
filed with the Commission. Such reports, proxy statements and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain
Regional Offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048, and at Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can be obtained in
person from the Public Reference Section of the Commission at its principal
office located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 25049, at prescribed rates. The Common Stock is listed on the
New York Stock Exchange (the "NYSE"), and such reports, proxy statements and
other information also may be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005. The Commission also maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants such as the Company that file
electronically with the Commission.
This Prospectus constitutes a part of a registration statement on Form S-1
(herein, together with all exhibits and schedules thereto, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Reference is hereby made to the Registration
Statement for further information with respect to the Company and the securities
offered hereby. Copies of the Registration Statement are on file at the offices
of the Commission and may be obtained upon payment of the prescribed fee or may
be examined without charge at the public reference facilities of the Commission
described above. Statements contained herein concerning the provisions of
documents are necessarily summaries of such documents, and each statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission.
GENERAL
The Company is a Wisconsin corporation organized in May of 1998 for the
purpose of owning and operating the managed care companies and specialty
business of the Company's predecessor AMSG. On May 27, 1998, the Board of
Directors of AMSG approved a formal plan to contribute the managed care
companies and specialty business and spin off UWS to its shareholders. The new
corporation originally was named Newco/UWS, Inc., and subsequently renamed
United Wisconsin Services, Inc. The spin off resulted in the distribution on
September 25, 1998 of one share of common stock of UWS for each share of AMSG
common stock held as of September 11, 1998 ("Record Date"). AMSG received a
private letter ruling from the Internal Revenue Service that the spin off is tax
free to AMSG, UWS and their shareholders.
The Company's principal executive offices are located at 401 West Michigan
Street, Milwaukee, Wisconsin 53203 and its telephone number at that address is
(414) 226-6900. As used herein, the terms "the Company" or "UWS" include United
Wisconsin Services, Inc. and its subsidiaries.
The Company is a leading provider of managed health care services and
employee benefit products sold primarily in Wisconsin, but also serves markets
in 38 other states. The products and services offered by the Company comprise a
broad range of group medical and related benefit products, which provide
employers with cost effective solutions to their employee benefits needs.
Managed health care services are
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delivered through health maintenance organization ("HMO") and point-of-service
("POS") products, as well as other related products that encourage or require
the use of contracting providers. HMO and POS products help control health care
costs by various means, including utilization controls such as pre-admission
approval for hospital inpatient services, pre-authorization of outpatient
surgical procedures, and capitated or discounted fee arrangements. The Company
also offers various specialty products and services including prepaid dental
care, group life and disability, workers' compensation products, managed care
consulting, electronic claim transmission services, pharmaceutical management,
managed behavioral health services and receivables management.
Compcare Health Services Insurance Corporation ("Compcare"), a wholly owned
subsidiary of the Company, was organized in 1971 and operates primarily in
Southeastern Wisconsin. Compcare is Wisconsin's oldest and second largest HMO in
terms of enrollment and premium revenues. Valley Health Plan, Inc. ("Valley"),
an HMO in Northwestern Wisconsin, was acquired by the Company in 1992. Its major
provider is Midelfort Clinic Ltd. ("Midelfort"). Unity Health Plans Insurance
Corporation ("Unity"), an HMO serving Southwestern and Central Wisconsin, was
formed by the combination of HMO of Wisconsin Insurance Corporation ("HMOW") and
the business of U-Care HMO, Inc. ("U-Care"). HMOW and U-Care were purchased by
the Company effective October 1, 1994. Community Physicians' Network, Inc.
("CPN") and the University of Wisconsin-Madison Medical Center, constitute the
provider networks for Unity.
The Company's HMO products are sold primarily by a salaried sales force to
employers and other groups including Medicaid-eligible individuals throughout
Wisconsin. Specialty products and services are sold through a variety of
distribution channels to employer groups and providers in Wisconsin and
throughout the United States.
BCBSUW holds approximately 37.8% of the outstanding common stock of UWS as
of December 31, 1998 and is the Company's largest shareholder.
THE COMPANY'S STRATEGY
The Company believes current market conditions in health care favor
companies that provide quality health care products and services, while ensuring
meaningful cost containment for the buyer. The Company also believes there are
significant niches offering opportunities for companies that are responsive to
consumer demand for affordable health care. The Company is a managed care leader
in Wisconsin due to the quality and extent of its provider network, the number
of members, the breadth of its managed care product offerings and the pricing of
those products. The Company also believes there are opportunities to develop or
enhance specialty managed care products and services which will leverage the
Company's expertise in the health care market. To take advantage of market
opportunities, the Company has developed the following business strategy:
- EMPHASIZE COST-EFFECTIVE ACCESS TO QUALITY HEALTH CARE OPTIONS. The
Company believes that rising health care costs continue to cause buyers to
seek cost-effective quality health care options for employees. The Company
plans to focus on this demand through its HMO and specialty managed care
products by offering a full range of products coupled with
state-of-the-art managed care techniques and competitive administrative
costs. The Company markets its "United 24" product in selected Wisconsin
counties which combines health, disability and workers' compensation
coverage into a single lower premium product.
- PURSUE ACQUISITIONS AND DEVELOP STRATEGIC ALLIANCES. The Company intends
to continue to pursue strategic acquisitions and alliances, including
agreements with providers that it believes will complement or enhance its
existing products and/or markets. Since 1996, the Company has expanded its
HMO operations through two new start-up HMO's in the northern half of
Wisconsin in a partnership arrangement with two major providers. The
Company also recently completed the acquisitions of Intercare Network,
Inc. ("Intercare") and Ladd Enterprises, Inc. ("Ladd"). Further,
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the Company believes that additional strategic alliances will enable the
Company to provide additional products and services in its existing
markets.
- EXPAND GEOGRAPHICALLY. The Company intends to continue to expand its
activities outside of its traditional areas of operation both inside and
outside of Wisconsin. Compcare has continued to increase its market share
in southeastern Wisconsin by expanding its provider networks in counties
surrounding Milwaukee. The Company is executing its plan to expand
Heartland Dental Plan, Inc. ("Heartland Dental"), its dental HMO product,
to selected market territories in a number of states in the upper Midwest.
The Company continues to expand its life and disability products through a
brokerage sales effort in the upper Midwest. The workers' compensation
product is being actively marketed in Iowa and Illinois, and the Company
seeks additional opportunities to expand the workers' compensation
business through acquisitions or strategic joint ventures. In addition,
the Company may acquire other managed care companies or related lines of
business in order to enter new markets both inside and outside of
Wisconsin.
- LEVERAGE BCBSUW RELATIONSHIP. When BCBSUW increases its ownership of the
Company to approximately 51%, Compcare intends to license and use the Blue
Cross and Blue Shield service marks with its products. The Company
believes this licensing and use will give Compcare a marketing and sales
advantage over its other managed care competitors in its markets. In
addition, as a result of its affiliation with BCBSUW, including through
the Service Agreements, the Company has access to BCBSUW's extensive
database of health care claims information. The Company believes this
database provides it with a competitive advantage since it is able to
utilize the database to design, underwrite, price and administer its
products more effectively. Given a stronger relationship with BCBSUW, the
individual specialty businesses can expand their markets for specialty
products and services to other blue cross and blue shield plans
nationwide. The Company currently has business contracts with other blue
cross and blue shield plans such as Empire Blue Cross, Blue Cross & Blue
Shield of Arizona and Blue Cross & Blue Shield of Kansas.
HMO PRODUCTS
PRODUCTS
Compcare offers a variety of HMO and POS products throughout Wisconsin. POS
products have become the coverage of choice for a number of employers as they
provide a complete replacement for programs that include a preferred provider
organization ("PPO") plan or both traditional indemnity and HMO coverages.
Compcare offers its members a broad network of providers, which include all
three of the major integrated health care systems in Southeastern Wisconsin.
Valley offers the following plans: (i) the Group Plan, a comprehensive HMO
plan; (ii) the Partner Plan, a traditional HMO plan which incorporates
co-payments; (iii) POS products, which combines a traditional HMO plan and an
out-of-network benefit with deductible and coinsurance; (iv) a Medicare
Supplement product, which is designed to close the gap between health care costs
incurred and government programs' allowed payments; (v) a small group product,
combining managed care with deductibles and co-payments; and (vi) an HMO
Medicaid plan, which is a comprehensive HMO plan for Medicaid recipients.
Unity offers a comprehensive group plan, which incorporates some co-payments
and deductibles, and a modified comprehensive group plan which incorporates
co-payments and deductibles as well as coinsurance on certain benefits such as
hospitalization and specialty care. Unity also offers an individual plan,
including an in-area conversion plan, and a Medicare Supplement plan and markets
POS plans with a wide variety of benefits.
The POS plans provide significant incentives for its members to utilize the
plans' managed care benefits and provide reduced benefits and increased
deductibles and co-payments when services are
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rendered by providers outside of the POS network. In order to receive the higher
level of benefits available within the network, a member must follow referral
and prior authorization requirements by receiving care from a primary care
physician within the network or be referred to a specialist by the primary care
physician. These incentives lower the overall premium for the group, even though
the POS premiums tend to be slightly higher than comparable traditional HMO
products. POS plans provide a greater level of health care cost control than a
traditional HMO or an indemnity plan. POS plans are sold generally as a complete
replacement for an employer's HMO and indemnity offerings.
MARKETING AND CUSTOMERS
Marketing HMO products generally is a two-step process. Presentations are
made first to employers. Once selected by an employer, the Company then directly
solicits members from the employee base. During periodic "open enrollments,"
when employees are permitted to change health care programs, the Company uses
advertising and work site presentations to attract new members. Virtually all of
the HMO employer group contracts are renewable annually.
Significant factors in HMO selection by employers and employees include the
composition of provider networks, quality of services, price, choice and scope
of benefits and market presence. To the extent permitted by OCI and the federal
government, the Company can offer an employer a wide spectrum of benefit
options, including federally qualified and non-federally qualified products. To
address rising health care costs, some employers now consider a variety of
health care options to encourage employees to use the most cost-effective form
of health care services. These options, which include HMO and POS plans, may
either be self-funded or provided by third parties.
As of December 31, 1998, HMO membership consisted of the following (in
numbers of individuals):
<TABLE>
<CAPTION>
HMO POS MEDICAID TOTAL
--------- ----------- ----------- ---------
COMMERCIAL
----------------------
<S> <C> <C> <C> <C>
Compcare........................................ 104,367 38,969 31,701 175,037
Valley.......................................... 24,732 12,675 3,875 41,282
Unity........................................... 67,161 15,974 4,789 87,924
--------- ----------- ----------- ---------
196,260 67,618 40,365 304,243
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
Trends in membership over the last several years have shown that there is
strong growth in the Company's POS and Medicaid products, with slower growth in
HMO membership.
Compcare's operations in the six counties included in the Southeastern
Wisconsin region comprise approximately 86% of its total membership. The
remainder of Compcare's membership is spread throughout Wisconsin. Valley
operates in a 15 county area in Western Wisconsin, and Unity operates in a 28
county area in Southwestern and Central Wisconsin. During 1996, the Company
entered into two strategic partnerships to offer HMO products in Northern
Wisconsin. Compcare Northwest is a partnership with the Duluth Clinic to bring
managed care operations to the underserved rural market. Northwoods Health
Plans, LLC is a joint venture formed with Howard Young Health Care, Inc., a
leading provider of health care services in North Central Wisconsin. The Company
believes that expansion efforts should contribute to increased enrollment by
attracting new employer groups and by increasing penetration in existing
employer groups. Effective July 1, 1999 the State of Wisconsin will implement
BadgerCare, which offers affordable health care coverage to uninsured families
with income below 185% of the federal poverty level. Coverage will be provided
through the existing Medicaid network which utilizes HMO's throughout the State.
The Company's HMO's will participate in providing health care coverage to
BadgerCare participants.
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The following table identifies the top ten group contracts with the highest
HMO earned premium for 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
EARNED PREMIUMS
IN 1998
-------------------
<S> <C>
State of Wisconsin.......................................................... 12.3%
Medicaid.................................................................... 11.0
Federal Employee Health Benefits Program.................................... 4.1
Milwaukee County............................................................ 3.4
General Motors Corporation.................................................. 2.9
Briggs and Stratton Corporation............................................. 2.8
Milwaukee Public Schools.................................................... 2.5
Construction Worker Health Fund............................................. 2.0
City of Milwaukee........................................................... 2.0
Northwestern Mutual Life Insurance Company.................................. 1.4
-----
Subtotal................................................................ 44.4
Other employer groups (2,847 in number) 55.6
-----
100.0%
-----
-----
</TABLE>
The HMOs have significant enrollment among federal, state and municipal
government employees, as well as employees represented by collective bargaining
units. The Company believes that health care will continue to be an important
negotiating issue with organized labor groups and the reputation of the
Company's HMOs are advantageous to its future marketing efforts.
Through one of the Service Agreements, the Company utilizes BCBSUW's
salaried sales force that as of December 31, 1998, consisted of 15 account
representatives and customer relations personnel, 32 account executives, two
agency managers, five agency consultants, and five sales directors, to market
HMO products. The Company directly employs a sales staff of eight account
executives, one sales director, one agency manager and two agency consultants
who market products for Unity as well as BCBSUW.
PROVIDERS
Compcare, Valley and Unity contract with physicians and hospitals to provide
medical services to their members. Members designate one physician in the
network as their primary care provider and are required to seek non-emergency
care from this physician.
Compcare has an extensive provider network in Southeastern Wisconsin, which
included 3,610 physicians as of December 31, 1998. Compcare is the only HMO that
contracts with all eight of the largest multi-specialty clinics in Milwaukee for
the provision of health care services to its members. This network is augmented
by individual physicians; hospitals and independent physician associations
("IPAs") affiliated with Milwaukee's largest hospitals. Providers outside of
Milwaukee consist of multi-specialty clinics and hospitals. Ancillary services
are provided under capitated arrangements through sub-networks including
chiropractic, mental health, oral surgery, home care, durable medical equipment
and vision. No single provider represents a material relationship in Compcare's
provider network. Compcare's contracts with providers renew annually. Compcare
considers its relationships with its provider networks to be good and has been
able to renew its provider contracts on acceptable terms.
Approximately 54.6% of Valley's medical and other benefits are provided
under an arrangement with Midelfort and its affiliate, Luther Hospital, which
the Company believes is the leading medical services provider in Eau Claire,
Wisconsin. Arrangements with three smaller area clinics and five other hospitals
provide a majority of the other Valley medical and other benefits. As of
December 31, 1998, Valley's provider network consisted of 355 physicians.
Approximately 79% of Valley's physician services are
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provided under the Midelfort arrangement. Valley has contracts with six
hospitals (one of which is affiliated with Midelfort) which have provided a
majority of Valley's hospital services. The relationship with Midelfort is
generated by the Valley provider arrangement, which is renewable by the parties
through December 31, 2002. Valley's contracts with its other providers renew
annually. The Company considers its relationships with Midelfort and its other
providers for Valley to be good and has been able to renew provider contracts on
acceptable terms.
Unity contracts with CPN, an IPA and University Health Care ("UHC"), an
affiliate of the University of Wisconsin Hospital and Clinics, which together
provide the majority of physician services for Unity's membership throughout its
28 county service area. The contracts with CPN and UHC are renewable through
October 1, 2004. CPN and UHC collectively contract with approximately 570
primary care providers and 2,470 specialists and ancillary health care
providers. In addition, Unity contracts directly with approximately 50 acute
care and specialty care hospitals. CPN and UHC have renewed their provider
contracts for 1999.
Compcare, Valley and Unity manage the cost of health care provided to their
members through the method of payment and risk-sharing programs with physician
groups and hospitals and with their utilization management programs. The method
of payment consists of a mixture of capitation, fee schedules and discounted
fee-for-service arrangements. Capitation allows the payment of a fixed amount
per member per month to providers, regardless of services provided, which
stabilizes medical and dental costs. Capitation encourages providers to avoid
unnecessary utilization of hospital, physician and ancillary health care
services. For the year ended December 31, 1998, approximately 45.6%, 22.1% and
94.7% of Compcare's, Valley's and Unity's medical benefits, respectively, were
provided under capitated arrangements.
For certain medical providers, compensation for services is calculated on a
discounted fee-for-service basis. Under this arrangement, the Company will
reimburse physician groups for services rendered based upon negotiated fee
schedules or usual and customary charges less an agreed upon discount. Hospitals
may be reimbursed at a set per diem rate for each inpatient day, on a flat rate
per procedure basis, or on a discounted charge basis. In fee-for-service
arrangements, risks associated with utilization are retained by Compcare and
Valley. However, such arrangements provide Compcare and Valley with greater
pricing flexibility and opportunities to benefit by application of underwriting
on a group specific or individual basis. Furthermore, fee schedule-based
compensation allows Compcare and Valley to better target improvement in loss
ratios through product development and benefit modification. Such changes are
more difficult in a capitated system since capitation levels must be
renegotiated before any effective changes can be made to benefits or products.
One capitated physician group, two hospital systems and one mental health
facility in Compcare's provider network elect to participate in stop-loss
arrangements with the Company. For example, one integrated hospital system
elected a stop-loss arrangement in which the inpatient, outpatient and
professional service costs incurred for any eligible member cannot exceed
$75,000 in a given contract year. Any cumulative costs in excess of $75,000 per
year are paid to the provider in addition to the capitation payments previously
paid. These arrangements limit the facility's or group's claim liability to a
fixed amount per member per year. Claim costs in excess of stop-loss limits are
reimbursed by Compcare to the participating providers and represent
approximately 0.1% of the total capitation payments in 1998.
OPERATIONS OF PROVIDER ARRANGEMENTS
Valley has a provider arrangement with Midelfort. The current term of the
provider arrangement is through January 1, 2000, with an option for an
additional three-year renewal term or renewal terms of one year each. During the
initial five-year term of the provider arrangement, after-tax profits were
shared equally with Midelfort. Effective January 1, 1997, 50% of pre-tax profits
are shared with Midelfort. Profit sharing with Midelfort equaled $1.2 million
during 1998. Midelfort has an option to repurchase all the
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capital stock of Valley on December 31, 1999 for Valley's net equity plus
$400,000. If Midelfort exercises its repurchase option, the Company would have
no ongoing interest in Valley.
Unity has provider agreements with Community Health Systems, LLC ("CHS") and
UHC that provide for profit sharing. Under these agreements, 50% of the pre-tax
profits are shared, with CHS receiving 30% and UHC receiving 20%. The combined
profit sharing payments to CHS and UHC equaled $2.1 million in 1998. CHS and UHC
have options to repurchase the businesses originally sold to the Company
including the increased membership related to their respective provider networks
on November 1, 1999 or November 1, 2004. CHS has the right to repurchase the
former HMOW business related to the rural provider networks and the Unity legal
entity for the net assets of Unity related to the business being repurchased. If
CHS exercises this repurchase option, the Company would need to transfer the
remaining Unity business to one of its other managed care companies. UHC has the
option to repurchase the former U-Care business related to the University of
Wisconsin provider network exercisable on November 1, 1999 for the value of the
net assets of Unity related to the business being repurchased plus $500,000.
Exercise of the repurchase option ends the agreement with respect to that party.
If both repurchase options are exercised the Company would have no ongoing
interest in Unity.
COST CONTAINMENT
The majority of medical management and cost containment services for
Compcare are provided by the Company's wholly owned subsidiary Meridian Managed
Care, Inc. Services for Valley and Unity are coordinated by medical directors in
conjunction with the medical staffs of their providers.
MANAGEMENT INFORMATION SERVICES
Each of the Company's HMOs utilizes information systems developed and/or
customized specifically to meet the needs of the HMO. The information systems
support marketing, sales, underwriting, contract administration, billing,
financial and other administrative functions as well as provider capitation and
claims administration, provider management, quality management and utilization
review.
The Company continually evaluates, upgrades and enhances the information
systems that support its operations. Certain information system functions
utilized by Compcare and Valley are outsourced to a third party.
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES
In the last few years, the Company has focused on growing the specialty
products and services it offers. Such products and services include prepaid
dental care, life and disability insurance, workers' compensation and managed
behavioral health benefits, managed care consulting, electronic claims
processing, case management, pharmaceutical and receivables management and other
medical benefits. Such specialty products are sold through a variety of methods,
including brokers, agents and an in-house sales force.
DENTAL
At year end 1997, a separate corporate entity, Heartland Dental, was
established to manage the Company's dental HMO operations (formerly known as
Dentacare). Heartland Dental was established as a separate entity to facilitate
growth of prepaid dental business outside of Wisconsin. Heartland Dental
performed its initial filing for licensure in Michigan and Ohio at the end of
1998. Prepaid dental services were provided to 169,700 members as of December
31, 1998, which makes Heartland Dental the largest dental HMO in Wisconsin.
Premium revenues attributable to Heartland Dental were $29.1 million for the
year ended December 31, 1998. Heartland Dental contracts with group dental
practices on a capitated basis throughout Wisconsin and Northern Illinois.
Members receive services through their selected dental center. In addition,
Heartland Dental offers POS and out-of-area products. The Heartland Dental
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<PAGE>
provider network had 282 dental providers as of December 31, 1998. The Company
considers its relationship with its dental provider network to be good and has
been able to renew its dental provider contracts on acceptable terms. Heartland
Dental competes with other regional and national managed care dental plans,
indemnity dental insurance, self funded dental plans and direct reimbursement
dental programs.
Heartland Dental offers ten different products with varying benefit options,
most of which cover all preventive and diagnostic services. Other services are
offered at various levels of coverage. All products cover pre-existing
conditions and the full range of dental services, including orthodontics.
LIFE AND DISABILITY
The Company offers group term life and accidental death and dismemberment
("AD&D") coverages as well as dependent life and accelerated death benefits.
Short and long-term disability products have been designed to provide income
replacement for an employee who becomes disabled through a non-work related
situation. The Company's Rapid Pay plan is a unique short-term disability
product by which claimants receive benefits on a timely basis with minimal
up-front paperwork. As of December 31, 1998, the Company had a total of 273,500
life and disability certificates. Premium revenue related to life and disability
products was $40.2 million and $34.0 million for the years ended December 31,
1998 and 1997, respectively. Certain life and disability products are
underwritten by United Wisconsin Life Insurance Company ("UWLIC"), a wholly
owned subsidiary of AMSG, and ceded to United Heartland Life Insurance Company
("UHLIC"), which is licensed in Ohio and Wisconsin. UWLIC is licensed to do
business in 38 states and the District of Columbia. United Wisconsin Insurance
Company ("UWIC"), which sells disability products, is licensed in 35 states and
the District of Columbia. The Company competes with national providers of group
life and disability coverage.
An insurance company's rating is an important factor in establishing its
competitive position. In 1998, UWIC, UWLIC and UHLIC were assigned ratings of
"A-" (Excellent) by A.M. Best Company, Inc. ("Best"). The "A-" rating is the
fourth highest rating given to insurance companies.
MANAGED CARE WORKERS' COMPENSATION
Through United Heartland, Inc. ("United Heartland"), the Company applies
managed care techniques to the workers' compensation market in Wisconsin. The
workers' compensation coverage sold through United Heartland is underwritten by
UWIC in those states where UWIC is licensed to provide such coverage. A
reinsurer underwrites risk for coverage in those states where UWIC is not
licensed to provide workers' compensation coverage. Premium revenue attributable
to United Heartland approximated $21.5 million during 1998. During 1998, the
Company retained 60% of the workers' compensation risk and ceded the other 40%
to a reinsurer. The workers' compensation market, both nationally and in the
state of Wisconsin, is extremely competitive. Competition has primarily come
from the large, national multi-line property and casualty insurance companies.
The Company believes the key elements to success in the workers'
compensation insurance business are service to employers and control of workers'
compensation costs through comprehensive loss control and claims management
procedures. As part of its underwriting process, United Heartland performs a
loss control review of each prospective insured prior to making a commitment to
provide coverage. It also examines the employer's commitment toward developing
or improving light duty/return to work programs, safety awareness programs,
supervisor training in accident investigation and enforcement of safety in the
workplace. United Heartland also reviews the financial resources of the
employers to verify an ability to follow through on any commitments made that
may require a capital expenditure.
United Heartland utilizes medical management resources to assist in the
adjustment of its claims, which include: (i) access to BCBSUW's usual and
customary charges database; (ii) the PPO network established by the Company for
United Heartland clients; and (iii) access to the hospital bill audit and
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<PAGE>
medical staff of the Company as needed in claims handling. The Company believes
this managed care capability, combined with a commitment to communicating with
employers, employees and medical providers, assists United Heartland in
monitoring the major cost factors of workers' compensation claims. Cost savings
have been demonstrated as United Heartland's customers experienced a 16% drop in
the cost of their workers' compensation claims over the seven-year period ended
December 31, 1998.
MANAGED CARE CONSULTING
Through Meridian Resource Corporation ("Meridian"), the Company specializes
in providing consulting and technical services to insurance companies,
employers, providers, government agencies, coalitions and other organizations to
help them make decisions regarding health care benefits and more effective
health care delivery. Consulting services include health care data analysis,
hospital cost indexing and analysis, feasibility studies and economic analysis.
Technical services include hospital bill audit, data analysis and reporting,
claims audit and subrogation recovery services. Meridian also has established a
niche in collecting salvage and subrogation recoveries for self-insured groups
and other health insurers. The Company competes against other stand-alone
companies that provide similar cost reduction strategies and other large
insurance companies that have these functions. Revenues from managed care
consulting services totaled $13.2 million for the year ended December 31, 1998.
The Company's combined medical management functions are conducted through
Meridian Managed Care, Inc. ("MMC"). MMC primarily serves the population of
Compcare and BCBSUW but also markets its programs to non-affiliated
organizations. MMC controls costs by promoting quality and efficiency. Central
to its effectiveness is promoting and developing partnerships with providers.
MMC's utilization management program provides comprehensive, custom-designed
strategies that protect its members and control costs by ensuring
cost-effective, quality care. MMC's traditional utilization management program
offers inpatient prior authorization, admission review, continued stay review,
discharge planning, case management, patient education, appropriateness review
and outpatient procedure review.
Intercare is a catastrophic case management company that provides services
to reinsurance companies, 50 to 60 third party administrators, indemnity
insurers and employer groups nationwide. Intercare fully understands the
intricacies of the self funded marketplace and provides medical management and
support to those groups. Support services include catastrophic case management,
hospital admission reviews, a special investigation unit and a nurse review
program for underwriters. The Company acquired Intercare in August 1998.
Revenues of Intercare totaled $1.4 million for the year ended December 31, 1998.
ELECTRONIC CLAIM SUBMISSION
United Wisconsin Proservices, Inc. ("Proservices") provides software and
claim submission services and has created the largest provider/insurer network
for such services in Wisconsin, extending to over 200 hospitals and clinics in
Wisconsin and over 500 home health agencies nationwide. Proservices
electronically transmits more than seven million medical claims annually for
such clients as Medicare, Medicaid, private insurers, third party administrators
and re-pricers. Proservices competes with other hospital software vendors and
national suppliers of electronic claims processing.
PHARMACEUTICAL MANAGEMENT
Pharmacy management services promote appropriate and cost-effective
pharmaceutical utilization through formulary development, pharmacy network
management, pharmacy and therapeutic committees, and concurrent and
retrospective drug review. Central to the program is the pharmacy benefit
management company. The Right Rx, which performs rebate management for Compcare,
BCBSUW and non-affiliated clients, representing approximately 0.6 million lives.
37
<PAGE>
MANAGED BEHAVIORAL HEALTH
CNR Health, Inc. ("CNR") is a managed care organization that provides
cost-effective behavioral health care management solutions to a variety of
customers. CNR's primary products include behavioral health management, provider
networks, employee assistance programs, medical management, disability
management, behavioral health claims administration and behavioral health
management software. Additionally, through YW Works, a partnership formed with
two local organizations, it manages the Milwaukee County Regional contract of
the Wisconsin Works ("W-2") program. W-2 is a new program that replaced Aid to
Families with Dependent Children with programs to prepare individuals for the
job market and help them find and keep those jobs.
CNR customers include insurance companies, self-funded employers, third
party administrators, Medicaid and other governmental entities. Through its
various programs, CNR manages approximately 992,200 lives as of December 31,
1998 and earned revenues for the year ended December 31, 1998 of $23.0 million.
RECEIVABLES MANAGEMENT
Ladd is a health care receivables management firm based in Michigan and
serves five mid-western states. Ladd provides collections and receivables
management services to hospitals in Michigan and other commercial clients in
Michigan, Ohio, Illinois, Indiana and Wisconsin. Receivables management services
provided within the health care industry represents 95% of 1998 total revenues
of $3.8 million. The Company acquired Ladd in December 1998.
COMPETITION
The managed care industry is highly competitive. During the past few years,
the managed care industry in Wisconsin and the upper Midwest has experienced
consolidation. The Company believes the principal competitive features affecting
its ability to retain and increase its managed care membership include the price
of benefit plans offered, the composition of provider networks, quality of
service, responsiveness to user demands, financial stability, comprehensiveness
of coverage, diversity of product offerings and market presence and reputation.
Although the Company is a leading provider of managed care services in
Wisconsin, the Company may experience increased competition in the future. The
Company competes with national competitors for its HMO products including
Humana, Inc. and United HealthCare Corp. The Unity HMO competes with Dean Health
Plan, Inc. in the Madison area and surrounding counties. Many of the Company's
competitors are larger, have considerably greater financial resources and
distribution capabilities and offer more diversified types of insurance coverage
than the Company.
REINSURANCE
The Company manages the risk it retains through the use of reinsurance. The
Company maintains in force both "quota share" and "excess of loss" reinsurance
treaties. Quota share reinsurance is a contractual arrangement whereby the
reinsurer assumes an agreed percentage of certain risks insured by the ceding
insurer and shares premium revenue and losses proportionately. The Company's
quota share reinsurance treaties allocate the total amount of business subject
to the treaties between the Company and the respective parties to the treaties.
Through quota share reinsurance, UHLIC assumes 100% of certain life coverages
underwritten by UWLIC. UWIC cedes to BCBSUW 100% of certain medical coverages.
Approximately 40% of the Company's workers' compensation business is ceded to an
independent non-affiliated reinsurer. Excess of loss reinsurance is used to cap
the amount of loss retained by the Company on individual claims or a series of
claims. Excess of loss reinsurance is utilized by the Company's HMOs to limit
their exposure to inpatient hospital claims or, in the case of Compcare, to
organ transplants. On the
38
<PAGE>
life and disability business, the Company limits its retention per claim to
$75,000. For workers' compensation claims, the Company retains the first
$250,000 of a loss, which it shares with its quota share reinsurer, and cedes
losses between $250,000 and $10,000,000 on an individual excess of loss basis to
third party reinsurers. Except for affiliates of the Company, all reinsurers
with which the Company contracts are rated "A-" (Excellent) or better by Best.
SERVICE AGREEMENTS
The Company and several of its subsidiaries purchase services from, or
provide services to, BCBSUW pursuant to written agreements (the "Service
Agreements"). Services covered by these agreements include marketing,
information systems, legal, investment, actuarial, accounting, underwriting and
other administrative and management services. Fees under the Service Agreements
are calculated on a cost basis. Costs directly attributable to a particular
company are paid by such company. Costs that are not specific to any particular
company are allocated based on utilization and allocation methods agreed to by
the parties to the agreements. If the recipient can obtain any of the services
under more favorable terms by performing the services itself or by procuring
them from a third party, it is not obligated to renew the Service Agreement for
those services if the provider is unwilling to substantially match such terms.
The Service Agreements automatically renew annually unless otherwise terminated.
In addition, under Wisconsin law, the OCI reviews the Service Agreements to
ensure that the agreements are reasonable and fair to the interests of the
insurance companies that are parties to the agreements. For the year ended
December 31, 1998, the Company paid approximately $9.0 million for such
services, and received approximately $14.8 million from BCBSUW for the provision
of such services.
The Company may provide certain services to AMSG pursuant to a written
agreement (the "AMSG Service Agreement"). Services that AMSG may utilize
pursuant to the AMSG Service Agreement include investment management, investment
accounting, risk management, accounting and financial audit and corporate
communications. Fees under the AMSG Service Agreement for investment management
and investment accounting will be based on a percentage of the portfolio plus a
flat rate for each company whose investments are being handled by the Company.
Fees for risk management will be based on a percentage of the annual premiums
for risk management insurance. Fees for accounting and financial audit and
corporate communications will be based on an hourly rate. The AMSG Service
Agreement will terminate on December 31, 1999 unless terminated earlier upon
appropriate notice. The AMSG Service Agreement was submitted to OCI for its
review and lack of disapproval.
INVESTMENTS
The Company attempts to minimize its business risk through conservative
investment policies. Investment guidelines set quality, concentration and return
parameters. The Company's investment guidelines permit investments in various
types of liquid assets, including U.S. Treasury obligations, securities of
various Federal agencies and commercial paper, and other assets including
corporate debt securities, municipal securities, asset-backed securities,
mortgage-backed securities, equity securities and mutual funds. Up to 10% of the
Company's fixed income portfolio (at the time of purchase) may be invested in
issues rated BB by Standard & Poor's Corporation or an equivalent rating from
another nationally recognized securities rating organization. The remainder of
the individual fixed income issues must carry an investment grade rating at the
time of purchase, and the ongoing average portfolio rating must be "A-" or
better, based on ratings of Standard & Poor's Corporation or another nationally
recognized securities rating organization. The Company invests in securities
authorized by applicable state laws and regulations and follows investment
policies designed to maximize yield, preserve principal and provide liquidity.
The Company's portfolio contains no investments in mortgage loans or
non-publicly traded securities, except for investments in affiliates. However,
at December 31, 1998, $31.1 million of the Company's investment portfolios were
invested in investment grade government agency mortgage-backed securities.
39
<PAGE>
With the exception of short-term investments and securities on deposit with
various state regulators, investment responsibilities have been delegated to
external investment managers. Such investment responsibilities, however, must be
carried out within the investment parameters established by the Company, which
may be amended from time to time.
Securities which may be sold prior to maturity to support the Company's
investment strategies, such as in response to changes in interest rates, the
yield curve concentration or sector concentration, are classified as available
for sale and are stated at market value with unrealized gains and losses
reported as a component of shareholders' equity. Securities for which the
Company has both the positive intent and ability to hold to maturity are
recorded at amortized cost. Bonds, which are held to meet deposit requirements
of the various states, are classified as held to maturity. All other bonds are
classified as available for sale.
The table below reflects investment results for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
----------------------------------
<S> <C> <C> <C>
Average invested assets(1)............................... $ 180,679 $ 179,505 $ 185,249
Net investment income(2)................................. 10,659 10,317 10,240
Average yield............................................ 5.90% 5.75% 5.53%
Net realized gains....................................... 8,381 11,921 9,123
Net unrealized gains on stocks & bonds................... 6,272 4,795 1,895
</TABLE>
- ------------------------
(1) Average of aggregate investment amounts at the beginning and end of each
period.
(2) Amounts are calculated net of investment expenses, but prior to adjustment
for other interest income and expense.
REGULATION
GENERAL.
Government regulation of employee benefit plans, including health care
coverage, health plans and the Company's specialty managed care products, is a
changing area of law that varies from jurisdiction to jurisdiction and generally
gives responsible administrative agencies broad discretion. The Company believes
that it is in compliance in all material respects with the various federal and
state regulations applicable to its current operations. To maintain such
compliance, it may be necessary for the Company or a subsidiary to make changes
from time to time in its services, products, structure or operations. Additional
government regulation or future interpretation of existing regulations could
increase the cost of the Company's compliance or otherwise affect the Company's
operations, products, profitability or business prospects.
The Company is unable to predict what additional government regulations, if
any, affecting its business may be enacted in the future or how existing or
future regulations might be interpreted. A number of jurisdictions have enacted
small group insurance and rating reforms which generally limit the ability of
insurers and health plans to use risk selection as a method of controlling costs
for small group business. These laws may generally limit or eliminate use of
pre-existing condition exclusions, experience ratings and industry class
ratings, and limit the amount of rate increases from year to year. Under these
laws, cost control through provider contracting and managing care may become
more important, and the Company believes its experience in these areas will
allow it to compete effectively.
Federal legislation has significantly expanded regulation of group health
plans and health care coverage. The new laws place restrictions on the use of
pre-existing conditions and eligibility restrictions
40
<PAGE>
based upon health status and prohibit cancellation of coverage due to claims
experience or health status. Federal regulations also prohibit insurance
companies from declining coverage to small employers. Additional federal laws,
which took effect in 1998, include prohibitions against separate, lower, dollar
maximums for mental health benefits and requirements relating to minimum
coverage for maternity inpatient hospitalization. The Company does not
anticipate that these laws will affect its comparable profitability or business
prospects because all insurance companies across the country are subject to the
same requirements. Furthermore, many requirements of the federal legislation are
similar to small group reforms that have been in place for many years. The
Company will be able to utilize and expand upon the cost control measures
initiated as a result of small group legislative reform.
Increasingly, States are considering various health care reform measures
which, if passed, may limit the ability of the Company and its health plans to
control which providers are part of their networks and hinder their ability to
manage utilization and cost effectively. "Patient Protection" laws, which became
effective in Wisconsin in late 1998, established a prudent layperson standard
for coverage of emergency room care and provided extended access to providers
who are no longer part of the plan's network. A number of other States are
considering similar legislation. While this could affect the Company's
operations in those States, comparable profitability and business prospects
should not be impacted because competing insurance companies would be subject to
the same legislation.
HMOS.
Wisconsin and the other states in which the Company offers HMO products have
enacted statutes regulating the activities of those health plans. Most states
require periodic financial reports from HMOs licensed to operate in their states
and impose minimum capital or reserve requirements. In addition, certain of the
Company's subsidiaries are required by state regulatory agencies to maintain
restricted cash reserves represented by interest-bearing instruments which are
held by trustees or state regulatory agencies to ensure that adequate financial
resources are maintained or to act as a fund for insolvencies of other HMOs in
the State.
As a federally qualified HMO, Compcare must file periodic reports with, and
is subject to periodic review by, the Department of Health and Human Services,
the Health Care Financing Administration and the Office of Prepaid Health Care.
The Company's other HMOs are subject only to state regulation because they are
not federally qualified HMOs.
The Company's HMOs which have Medicaid contracts are subject to both federal
and state regulation regarding services to be provided to Medicaid enrollees,
payment for those services and other aspects of the Medicaid program. Medicaid
has in force and/or has proposed regulations relating to fraud and abuse,
physician incentive plans and provider referrals which may affect the Company's
operations.
Several of the Company's health plans have contracts with the Federal
Employees Health Benefit Plan ("FEHBP"). These contracts are subject to
extensive regulation, including complex rules relating to the premiums charged.
FEHBP has the authority to retroactively audit the rates charged and may seek
premium refunds and other sanctions against health plans participating in the
program. The Company's health plans, which have contracted with FEHBP, are
subject to such audits and may be requested to make such refunds.
INSURANCE REGULATION.
The Company's insurance subsidiaries are subject to regulation by the
Department of Insurance in each state in which the entity is licensed.
Regulatory authorities exercise extensive supervisory power over insurance
companies relating to the licensing of insurance companies; the amount of
reserves which must be maintained; the approval of forms and insurance policies
used; the nature of, and limitation on, an insurance company's investments;
periodic examination of the operations of insurance companies; the form and
content of annual statements and other reports required to be filed on the
financial condition of
41
<PAGE>
insurance companies; and the establishment of capital requirements for insurance
companies. The Company's insurance company subsidiaries are required to file
periodic statutory financial statements in each jurisdiction in which they are
licensed. Additionally, such companies are examined periodically by the
insurance departments of the jurisdiction in which they are licensed to do
business.
The National Association of Insurance Commissioners ("NAIC") adopted the
Risk-Based Capital ("RBC") for Life and/or Health Insurers Model Act ("RBC Model
Act"), effective December 31, 1993, to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks associated
with: (i) asset quality; (ii) mortality and morbidity; (iii) asset and liability
matching; and (iv) other business factors. The RBC Model Act formula is used by
the States to monitor trends in statutory capital and surplus for the purpose of
initiating regulatory action. The NAIC adopted similar RBC requirements for
property and casualty insurance companies effective December 31, 1994, and for
health organizations, including HMOs, effective December 31, 1998. The Company
has calculated the risk-based capital for its life, property and casualty, and
HMO subsidiaries as of December 31, 1998 using the applicable RBC formula. These
calculations produced risk-based capital levels that exceed the levels at which
the RBC formulas recommend intervention by regulatory authorities.
Under Wisconsin law, insurance companies must provide OCI with advance
notice of any dividend that is more than 15% larger than any dividend for the
corresponding period of the previous year. In addition, OCI may disapprove any
"extraordinary" dividend, defined as any dividend which, together with other
dividends paid by an insurance company in the prior twelve months, exceeds the
lesser of: (i) 10% of statutory capital and surplus as of the preceding December
31; (ii) with respect to a life insurer, net income less realized gains for the
calendar year preceding the date of the dividend; or (iii) with respect to a
non-life insurer, the greater of (ii) above or the aggregate net income less
realized gains for the three calendar years preceding the date of the dividend
less distributions made within the first two of those three years.
Based upon the financial results of the Company's combined insurance
subsidiaries for the year ended December 31, 1998, $7.7 million is available for
1999 dividend payments to their parent without regulatory approval.
INSURANCE HOLDING COMPANY REGULATIONS.
The Company is a holding company that conducts all of its business through
combined entities and is subject to insurance holding company laws and
regulations. Under Wisconsin law, acquisition of control of the Company, and
thereby indirect control of its insurance subsidiaries, requires the prior
approval of OCI. "Control" is defined as the direct or indirect power to direct
or cause the direction of the management and policies of a person. Any purchaser
of 10% or more of the outstanding voting stock of a corporation is presumed to
have acquired control of the corporation and its subsidiaries unless OCI, upon
application, determines otherwise.
Each of the Company's combined insurance entities is subject to regulation
under state insurance holding company regulations. Such insurance holding
company laws and regulations generally require registration with that state's
department of insurance and the filing of certain reports describing capital
structure, ownership, financial condition, certain intercompany transactions and
general business operations. Various notice and reporting requirements generally
apply to transactions between companies within an insurance holding company
system, depending on the size and nature of the transactions. Certain state
insurance holding company laws and regulations require prior regulatory approval
or, in certain circumstances, prior notice of, certain material intercompany
transfers of assets as well as certain transactions between the regulated
companies, their parent holding companies and affiliates, and acquisitions.
42
<PAGE>
UTILIZATION REVIEW REGULATIONS.
A number of states have enacted laws and/or adopted regulations governing
the provision of utilization review activities. Generally, these laws and
regulations require compliance with specific standards for the delivery of
services, confidentiality, staffing, and policies and procedures of private
review entities, including the credentials required of personnel. Some of these
laws and regulations may affect certain operations of the Company's business
units.
A few jurisdictions have enacted laws which hold managed care organizations
liable for damages resulting from wrongful denial of care or payment for care.
The Company provides utilization review services through CNR in at least one
state that has passed such legislation. The liability law encompasses entities
that do not provide insurance coverage, but merely provide utilization review
services. CNR has developed risk management procedures and believes that it will
be able to minimize potential liability for coverage decisions.
ERISA.
The provision of goods and services to or through certain types of employee
health benefit plans is subject to ERISA. ERISA is a complex set of laws and
regulations that are subject to periodic interpretation by the federal courts
and the United States Department of Labor. ERISA places certain controls on how
the Company's business units may do business with employers covered by ERISA,
particularly employers that maintain self-funded plans. The Department of Labor
is engaged in an ongoing ERISA enforcement program, which may result in
additional constraints on how ERISA-governed benefit plans conduct their
activities. There have been continued legislative attempts to limit ERISA's
preemptive effect on state laws. If such limitations were to be enacted, they
might increase the Company's liability exposure under state law-based suits
relating to employee health benefits offered by the Company's health plans and
specialty businesses and may permit greater state regulation of other aspects of
those businesses' operations.
EMPLOYEES
As of December 31, 1998, the Company had 1,236 full-time and 53 part-time
employees, of whom 218 were managerial and supervisory personnel. Of these
employees, 55 were represented by a union. In addition, the Company leases the
services of 49 people who manage and operate one of its subsidiaries. The
Company considers its relations with its employees to be good.
TRADEMARKS
"Compcare" is a federally registered service mark of the Company. The
Company has filed for and maintains various other trademarks and trade names at
the federal level and in the State of Wisconsin. Although the Company considers
its registered service marks, trademarks and trade names important in the
operation, of its business, the business of the Company is not dependent on any
individual service mark, trademark or trade name.
PROPERTIES
The Company occupies common facilities with BCBSUW and is charged a
proportionate share of the cost of such facilities under the Service Agreements.
The Company's corporate headquarters are located in Milwaukee, Wisconsin in a
235,000 square foot building leased by BCBSUW. The Company also utilizes space
in a Milwaukee regional office leased by BCBSUW, which has approximately 217,000
square feet of office and warehouse space. In addition, the Company's business
is sold and serviced in five other Wisconsin regional offices leased by BCBSUW.
Unity owns a 40,000 square foot facility in Sauk City, Wisconsin. Intercare and
Ladd both lease facilities including 9,900 square feet in Hartford, Wisconsin
and 10,000 combined square feet at two locations in Michigan, respectively.
43
<PAGE>
LEGAL PROCEEDINGS
The Company is currently, and is from time to time, subject to claims and
suits arising in the ordinary course of its business. Although the results of
litigation proceedings cannot be predicted with certainty, the Company believes
that the ultimate resolution of these proceedings will not have a material
adverse effect on its financial condition or results of operations.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "UWZ". The following table sets forth the per share high and low sale
prices for the Common Stock as reported on the NYSE for the periods indicated
and the cash dividends paid per share for those periods.
<TABLE>
<CAPTION>
HIGH LOW CASH DIVIDENDS PAID
--------- --------- ---------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
First Quarter......................................... N/A N/A N/A
Second Quarter........................................ N/A N/A N/A
Third Quarter from September 28, 1998................. $ 7.19 $ 5.81 --
Fourth Quarter........................................ $ 9.31 $ 4.81 $ 0.05
YEAR ENDED DECEMBER 31, 1999:
First Quarter.........................................
Second Quarter through April 2........................
</TABLE>
The Company paid a cash dividend of $0.05 per share was paid on December 30,
1998 to shareholders of record at the close of business on December 23, 1998.
As of March 8, 1999, there were 262 shareholders of record of Common Stock.
Based on information obtained from the Company's Transfer Agent and from
participants in security position listings and otherwise, the Company has reason
to believe there are more than 2,900 beneficial owners of shares of Common
Stock.
44
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The Company's Board of Directors is classified into three classes,
designated Class I, Class II and Class III, each class to be as nearly equal in
number of directors as possible. The term of office of the Class I directors
expires at the 1999 annual meeting of shareholders, the term of office of the
Class II directors expires at the 2000 annual meeting of shareholders, and the
term of office of the Class III directors expires at the 2001 annual meeting of
shareholders. All directors hold office until the next annual meeting of
shareholders at which their terms expire and until their successors have been
duly elected and qualified. Directors are not eligible to stand for re-election
after the age of 70. Newly created directorships resulting from any increase in
the number of directors and any vacancies on the Board of Directors resulting
from death, resignation, retirement, disqualification, removal or other cause
will be filled solely by the affirmative vote of a majority of the remaining
directors then in office. Increases or decreases in the number of directors will
be apportioned among the classes as nearly equal as possible, and any additional
director of any class elected to fill a vacancy resulting from an increase in
such class will hold office for a term that will coincide with the remaining
term of that class, but in no case will a decrease in the number of directors
shorten the term of any incumbent director.
The name, age as of March 31, 1999, class of directorship and business
background of each of the persons who serve as directors are set forth below.
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- --------------------------------------------------------------------------------------
<S> <C>
CLASS I DIRECTORS
Michael D. Dunham Director of the Company since 1998; Director of Old UWS from 1997 to 1998; Director of
Age: 53 BCBSUW from 1996 to 1997; Chief Executive Officer and a director of Effective
Management Systems, Inc., a developer of integrated manufacturing and business
management software, since its incorporation in 1978.
James L. Forbes Director of the Company since 1998; Director of Old UWS from 1991 to 1998; Director of
Age: 66 BCBSUW since 1974; President and Chief Executive Officer and Director of Badger Meter,
Inc., a manufacturer of products using flow measurement technology, since 1985;
Director of Universal Foods Corporation, Firstar Corporation and Firstar Trust
Company, a subsidiary of Firstar Corporation.
William C. Rupp, M.D. Director of the Company since 1998; Director of Old UWS from 1997 to 1998; President
Age: 52 and Chief Executive Officer of Luther/Midelfort Mayo Health System since 1994;
President of Midelfort Clinic since 1991; practicing physician in oncology since 1982.
CLASS II DIRECTORS
Richard A. Abdoo Director of the Company since 1998; Director of Old UWS from 1991 to 1998; Director of
Age: 55 BCBSUW from 1991 to 1997; Chairman of the Board, President and Chief Executive Officer
of Wisconsin Energy Corporation, a diversified energy services holding company, since
1991; Chairman of the Board and Chief Executive Officer of Wisconsin Electric Power
Company since 1990; Director of Wisconsin Energy Corporation since 1988; Director of
Wisconsin Electric Power Company since 1989; Chairman of the Board and Chief Executive
Officer of Wisconsin Natural Gas Company from 1990 to 1995; Director of
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- -------------------------- --------------------------------------------------------------------------------------
Wisconsin Natural Gas Company from 1989 to 1995; Director of Marshall & Ilsley
Corporation, a bank holding company, and Sundstrand Corporation.
<S> <C>
William R. Johnson Director of the Company since 1998; Director of Old UWS since 1993; Director, American
Age: 72 Medical Security Group, Inc.; Chairman of Johansen Capital Investment and Financial
Consulting since 1986; President of Johansen Capital Associates, Inc., a financial and
investment consultant to corporations and individuals, since 1984; Chairman, President
and Chief Executive Officer of National Investment Services of America, Inc., an
investment manager of pension, profit sharing and other funds, from 1968 to 1984.
Eugene A. Menden Director of the Company since 1998; Director of Old UWS since 1991; Director of BCBSUW
Age: 68 from 1987 to 1992. Director, American Medical Security Group, Inc. Prior to his
retirement, Director of International Finance for Marquette Medical Systems, Inc.
(f/k/a Marquette Electronics, Inc.), a manufacturer of medical electronic products.
Served as Vice President of Finance for Marquette Electronics, Inc. from 1970 to 1991,
Treasurer from 1970 to 1989, and director from 1972 until 1996.
CLASS III DIRECTORS
Thomas R. Hefty Director of the Company since 1998; Director of Old UWS since 1983; President of the
Age: 51 Company since 1998; Director of Old UWS from 1983 to 1998; President of Old UWS from
1986 to 1998 and Chairman of the Board and Chief Executive Officer of Old UWS from
1991 to 1998; Chairman of the Board and Director of BCBSUW since 1988; President of
BCBSUW since 1986; Executive Vice President of BCBSUW from 1982 to 1986; Deputy
Insurance Commissioner for OCI from 1979 to 1982; Director of Artisan Funds, Inc., an
investment company registered under the Investment Company Act of 1940, as amended.
James C. Hickman Director of the Company since 1998; Director of Old UWS since 1991; Director of BCBSUW
Age: 71 since 1986; Director of Century Investment Management Company; Director, American
Medical Security Group., Inc.; Emeritus Professor and Emeritus Dean of the School of
Business of the University of Wisconsin-Madison since 1993; Professor in the UW School
of Business from 1990 to 1993; Dean of the University of Wisconsin-Madison School of
Business from 1985 to 1990.
Carol N. Skornicka Director of the Company since 1998; Director of Old UWS from 1997 to 1998; Senior Vice
Age: 57 President - Corporate Development, Secretary and General Counsel of Midwest Express
Holdings, Inc. and Midwest Express Airlines, Inc. since March 1998; Vice President,
Secretary and General Counsel of Midwest Express Holdings, Inc. and Midwest Express
Airlines, Inc. since 1996; Secretary of the Wisconsin Department of Industry, Labor
and Human Relations from 1991 to 1996; Director of Astral Aviation, Inc. since 1996.
</TABLE>
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<PAGE>
DIRECTORS' MEETINGS AND COMMITTEES
The Board of Directors holds four regularly scheduled meetings per year and
will hold such special meetings as it deems advisable to review significant
matters affecting the Company and to act upon matters requiring Board approval.
The Board of Directors has standing Executive, Finance, Management Review and
Audit Committees.
COMPENSATION OF DIRECTORS
Directors who are officers or employees of the Company receive no
compensation as such for service as members of the Board of Directors or
Committees of the Board. A director who is not an officer or employee of the
Company receives a fee of $1,100 for each Board or Committee meeting attended,
and a monthly retainer of $750. In addition, each Committee Chairman receives a
monthly fee of $250. Also, pursuant to the United Wisconsin Services, Inc.
Equity Incentive Plan, each director is granted in connection with his or her
services as a director an option to purchase 6,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. Options that were previously granted to directors of Old UWS under its
Director Stock Option and who became directors of UWS were converted into
equivalent options to purchase shares of Common Stock. The new options have the
same difference of market value to exercise price as the options they replaced.
EXECUTIVE OFFICERS
The name, age, title and business backgrounds of each of the executive
officers are set forth below. The individuals named below previously were
officers of AMSG and various of its subsidiaries prior to the spin off, and had
resigned from all positions held at AMSG or its remaining subsidiaries as of the
date of the Distribution. Individuals with comparable positions as listed below
were elected to serve the new company, UWS, commensurate with the spin off. The
business address of each of the executive officers is 401 West Michigan Street,
Milwaukee, Wisconsin 53203.
As of March 11, 1999, the executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------------------------------ --- -------------------------------------------------------
<S> <C> <C>
Thomas R. Hefty............... 51 Chairman of the Board, President, Chief Executive
Officer and Director
Stephen E. Bablitch........... 45 Vice President, General Counsel and Secretary
Devon W. Barrix............... 56 Vice President
Mark H. Granoff............... 52 Vice President and President of UWIC and UHLIC
Gail L. Hanson................ 43 Vice President and Treasurer
C. Edward Mordy............... 55 Vice President and Chief Financial Officer
Herbert B. Olson.............. 43 Vice President and Chief Actuary
Emil E. Pfenninger............ 47 Vice President and President of United Heartland
Penny J. Siewert.............. 42 Vice President of Regional Services
Mary I. Traver................ 48 Vice President
</TABLE>
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed. There are no family
relationships among any of the directors and/or executive officers of the
Company.
THOMAS R. HEFTY is the Chairman of the Board, President and Chief Executive
Officer of the Company. Mr. Hefty was elected President of Old UWS in 1986 and
Chairman of the Board and Chief Executive Officer of Old UWS in 1991. Since
1987, he has served in various capacities with the Company's
47
<PAGE>
subsidiaries. Mr. Hefty has been Chairman of the Board and a director of BCBSUW
since 1988, having joined BCBSUW in 1982 and later serving as President. From
1979 to 1982, Mr. Hefty was Deputy Insurance Commissioner for OCI.
STEPHEN E. BABLITCH is Vice President, General Counsel and Secretary of the
Company. Mr. Bablitch joined Old UWS in 1996 as General Counsel, Vice President
and Secretary. He has been General Counsel, Vice President and Secretary of
BCBSUW since 1996 as well. He has also served in various capacities with the
Company's subsidiaries since 1996. Prior to joining Old UWS and BCBSUW, Mr.
Bablitch was an attorney with Dewitt, Ross and Stevens, Madison, Wisconsin from
1991 to 1996.
DEVON W. BARRIX is Vice President of the Company. He was elected a Vice
President of Old UWS in 1994 following the Company's acquisition of Unity and
its parent, HMO-W. He has served in various capacities with some of Old UWS's
other subsidiaries since 1985.
MARK H. GRANOFF is Vice President of the Company. Mr. Granoff was elected a
Vice President of Old UWS in 1991 and was elected President of UWIC in 1991 and
UHLIC in 1996. He has served in various capacities with some of Old UWS's other
subsidiaries since 1991. Mr. Granoff has been a Vice President of BCBSUW since
1990.
GAIL L. HANSON is Vice President and Treasurer of the Company. Ms. Hanson
was Treasurer of Old UWS since 1987 and was elected a Vice President in 1996.
She has served in various capacities with Old UWS's subsidiaries since 1984. Ms.
Hanson was elected Vice President and Treasurer of BCBSUW in 1996 and had been
Assistant Vice President and Treasurer since 1987, having joined BCBSUW in 1984
as the Controller of UWIC.
C. EDWARD MORDY is Chief Financial Officer of the Company. Mrs. Mordy was
elected Vice President in 1987 and was elected Chief Financial Officer of Old
UWS in 1991. He has served in various capacities with Old UWS's subsidiaries
since 1987. Mr. Mordy has been a Vice President and Corporate Controller of
BCBSUW since 1986.
HERBERT B. OLSON is Vice President and Chief Actuary of the Company,
overseeing the actuarial department. Mr. Olson was elected Vice President and
Chief Actuary in December of 1998.
EMIL E. PFENNINGER is Vice President of the Company. Mr. Pfenninger was
elected a Vice President of Old UWS in 1995 and President of United Heartland in
1990.
PENNY J. SIEWERT is Vice President of Regional Services of the Company. Ms.
Siewert was elected Vice President of Regional Services of Old UWS in 1995. Ms.
Siewert joined BCBSUW in 1977 and has served in various capacities. Ms. Siewert
was elected Vice President of Operations for BCBSUW in 1990, Vice President of
Special Markets for BCBSUW in 1992, and Vice President of Regional Services for
BCBSUW in 1995.
MARY I. TRAVER is Vice President of the Company. Ms. Traver was elected Vice
President of Old UWS in 1988. Ms. Traver was Vice President and General Counsel
of UWS from 1988 to 1996 and Secretary from 1992 to 1996. She has served in
various capacities with some of Old UWS's subsidiaries since 1987. Ms. Traver
was General Counsel of BCBSUW from 1988 to 1996, Secretary of BCBSUW from 1992
to 1996, and a Vice President of BCBSUW since 1988. She assumed the position of
Regional Vice President for the Southeastern region of BCBSUW in 1997.
48
<PAGE>
EXECUTIVE COMPENSATION
Pursuant to the Service Agreement (as hereinafter described) certain
executive officers of the Company provide services to BCBSUW, and expenses
associated with those services are shared in accordance with the Service
Agreement. See "Certain Transactions." Compensation information includes total
compensation paid by the Company for services rendered to the Company and
BCBSUW. Also, Old UWS had a similar Service Agreement with BCBSUW. Information
for 1998 reflects the annual and long-term compensation for the Chief Executive
Officer of the Company and the four other most-highly compensated executive
officers of the Company for services rendered in all capacities to Old UWS and
BCBSUW and to the Company and BCBSUW. Information for years prior to 1998
reflects the annual and long-term compensation for the Chief Executive Officer
of the Company and the four other most-highly compensated executive officers of
the Company at December 31, 1998 for services rendered in all capacities to Old
UWS and BCBSUW for the year ended December 31, 1997 and 1996. Those executive
officers performed substantially identical services for the Old UWS and BCBSUW
during those periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
AWARDS PAYOUTS
------------------- -----------
SECURITIES LTIP
NAME AND PRINCIPAL SALARY OTHER ANNUAL UNDERLYING PAYOUTS
POSITION YEAR ($)(1) BONUS($)(1,2) COMPENSATION($)(3) OPTIONS/SARS(#)(4) ($)(1)(5)
- ------------------- --------- --------- ------------- ------------------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas R. Hefty.... 1998 $ 525,000 $ 154,350 $ 11,570 198,200 $ 64,985
CHAIRMAN OF THE 1997 475,008 97,377 7,885 35,000 5,294
BOARD, PRESIDENT 1996 410,028 177,542 9,355 30,000 --
&
CHIEF EXECUTIVE
OFFICER
Roger A. 1998 264,996 -- 3,817 112,304 35,164
Formisano(7)..... 1997 244,536 22,008 904 55,217 2,894
FORMER EXECUTIVE 1996 235,128 61,604 3,424 33,130 --
VICE PRESIDENT &
CHIEF OPERATING
OFFICER; FORMER
PRESIDENT OF
COMPCARE HEALTH
SERVICES
INSURANCE
CORPORATION AND
MERIDIAN RESOURCE
CORPORATION
C. Edward Mordy.... 1998 211,080 39,261 3,555 70,000 28,095
VICE PRESIDENT & 1997 184,848 20,333 3,385 18,000 2,370
CHIEF FINANCIAL 1996 176,040 55,805 3,106 10,000 --
OFFICER
Penny J. Siewert... 1998 206,784 44,873 6,659 90,217 26,536
VICE PRESIDENT OF 1997 174,576 18,190 -- 33,130 2,061
REGIONAL SERVICES 1996 163,152 53,677 1,737 15,461 --
Stephen E. 1998 184,044 36,073 -- 79,174 11,646
Bablitch(8)...... 1997 166,416 21,634 615 33,130 --
VICE PRESIDENT & 1996 40,002 20,000 -- 22,087 --
GENERAL COUNSEL
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL COMPENSATION
POSITION ($)(6)
- ------------------- ---------------------
<S> <C>
Thomas R. Hefty.... $ 4,000
CHAIRMAN OF THE 4,000
BOARD, PRESIDENT 3,750
&
CHIEF EXECUTIVE
OFFICER
Roger A. 4,000
Formisano(7)..... 4,000
FORMER EXECUTIVE 3,750
VICE PRESIDENT &
CHIEF OPERATING
OFFICER; FORMER
PRESIDENT OF
COMPCARE HEALTH
SERVICES
INSURANCE
CORPORATION AND
MERIDIAN RESOURCE
CORPORATION
C. Edward Mordy.... 4,000
VICE PRESIDENT & 4,000
CHIEF FINANCIAL 3,750
OFFICER
Penny J. Siewert... 4,000
VICE PRESIDENT OF 4,000
REGIONAL SERVICES 3,017
Stephen E. 4,000
Bablitch(8)...... 1,040
VICE PRESIDENT & --
GENERAL COUNSEL
</TABLE>
- ------------------------
(1) Amounts include compensation earned and deferred at the election of the
named executive officer during the fiscal years indicated and paid
subsequently to the end of each fiscal year.
(2) Amounts represent bonuses earned under both Old UWS's and the Company's
Profit Sharing Plan and Management Incentive Plan.
49
<PAGE>
(3) Amounts represent reimbursement for the payment of taxes and the payout for
unused personal days. The amounts indicated do not include perquisites and
the other personal benefits to the named executive officers which for each
such officer did not exceed the lesser of $50,000 or 10% of the officer's
total annual salary and bonus.
(4) Numbers reflect adjustments made in 1998 as a result of the Distribution to
the number of stock options granted by Old UWS prior to the Distribution.
(5) Amounts represent payments for the 1995-1997 LTIP Plan and prorata payments
for the 1996-1998 and 1997-1999 LTIP Plans which were discontinued effective
December 31, 1997.
(6) Amounts represent the Old UWS's and the Company's matching contributions to
the UWSI/BCBSUW 401(k) Plan.
(7) Mr. Formisano ceased employment with the Company in February 1999.
(8) Mr. Bablitch was hired and named an executive officer of Old UWS on October
1, 1996.
The following table details the options granted to the executive officers
listed in the Summary Compensation Table:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
# OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE
UNDERLYING OPTION/ SARS APPRECIATION FOR
OPTIONS/ GRANTED TO EXERCISE OR OPTION TERM
SARS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
EXECUTIVE (1)(2)(3)(4) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- -------------------------------------------- -------------- ------------- ------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas R. Hefty............................. 35,000 26.51% 11.31 01/01/10 315,040 846,497
163,200 7.19 09/27/10 933,864 2,509,249
Roger A. Formisano.......................... 77,304 15.02% 11.72 01/01/10 721,048 1,937,422
35,000 7.19 09/27/10 200,277 538,136
C. Edward Mordy............................. 35,000 9.36% 11.31 01/01/10 315,040 846,497
35,000 7.19 09/27/10 200,277 538,136
Penny J. Siewert............................ 55,217 12.07% 11.72 01/01/10 515,033 1,383,869
35,000 7.19 09/27/10 200,277 538,136
Stephen E. Bablitch......................... 44,174 10.59% 11.72 01/01/10 412,030 1,107,106
35,000 7.19 09/27/10 200,277 538,136
</TABLE>
- ------------------------
(1) All options granted vest at the rate of 25% each year on the anniversary of
the grant date.
(2) The options with an expiration date of 01/01/10 were originally granted on
01/02/98 by Old UWS. The options with an expiration date of 09/27/10 were
granted by the Company on 09/28/98.
(3) Each option granted by the Old UWS with an expiration date of 01/01/10 to
Messrs. Hefty and Mordy was converted on September 25, 1998 into an option
of one share of Old UWS Common Stock and one share of the Company Common
Stock.
(4) The options granted by Old UWS with an expiration date of 01/01/10 to
Messrs. Formisano and Bablitch and Ms. Siewert were converted on September
25, 1998 into options of the Company Common Stock and adjusted to provide
equivalent value.
50
<PAGE>
No Stock Appreciation Rights ("SARs") or options were exercised by any of
the executive officers listed in the Summary Compensation Table during 1998.
Each option granted by Old UWS with an expiration date of 01/01/10 to Messrs.
Hefty and Mordy was converted on September 25, 1998 into an option of one share
of Old UWS Common Stock and one share of the Company Common Stock. The options
granted by the Old UWS with an expiration date of 01/01/10 to Messrs. Formisano
and Bablitch and Ms. Siewert were converted on September 25, 1998 into options
of the Company Common Stock and adjusted to provide equivalent value. The number
of unexercised SARs and options and the total value of unexercised in-the-money
SARs and options to purchase shares of UWS Common Stock at December 31, 1998 are
shown in the table below.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
OPTIONS/SARS AT FY-END(#) SARS AT FY-END($)
-------------------------- -----------------------
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
- ------------------------------------------------------------- -------------------------- -----------------------
<S> <C> <C>
Thomas R. Hefty.............................................. 145,554/239,450 $285,416/244,392
Roger A. Formisano........................................... 92,817/170,282 71,354/52,413
C. Edward Mordy.............................................. 70,446/88,500 142,707/52,413
Penny J. Siewert............................................. 28,438/126,935 --/52,413
Stephen E. Bablitch.......................................... 19,327/115,064 --/52,413
</TABLE>
- ------------------------
(1) Options become immediately exercisable upon change in control of the
Company. A change in control includes: the acquisition by certain persons or
groups of 25% or more of the outstanding Common Stock; a change in the
membership of a majority of the Board of Directors, if not approved by the
incumbent Directors; or the approval by the Company's shareholders of a plan
of liquidation, an agreement to sell substantially all of the Company's
assets, or certain mergers, consolidations or reorganizations.
DEFINED BENEFIT PENSION PLANS
The Company has provided a non-contributory defined benefit plan to its
employees pursuant to the UWSI/BCBSUW Pension Plan ("Pension Plan"). The Pension
Plan utilizes a cash balance formula which provides annual pay credits of 4%
plus transition credits of 4% for the number of years of service on December 31,
1996 (up to 15 years). Interest is credited monthly on the cash balance account
based on the yield on 10-year Treasury securities for the month of October of
the previous year. The Company has assumed sponsorship (with BCBSUW) of the
Pension Plan and the related trust and will continue to provide benefits for all
individuals who, immediately prior to the Effective Date of the Distribution,
were participants in the Pension Plan, taking into account all service with Old
UWS.
In addition, the Company provides to executives defined benefits from the
UWSI/BCBSUW Supplemental Executive Retirement Plan ("SERP"). The SERP provides a
total benefit (taking into account Pension Plan benefits and Social Security
benefits) of 2% of final 5-year average pay per year of service (up to 30
years). The Company has assumed sponsorship of the SERP and all liabilities with
respect thereto. The approximate annual benefits for the following pay
classifications and years of service are expected to be as follows:
51
<PAGE>
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-----------------------------------------------
<S> <C> <C> <C> <C>
REMUNERATION 15 20 25 30 OR MORE
- ----------------------------------------------------------------- ---------- ---------- ---------- -----------
$125,000......................................................... $ 37,500 $ 50,000 $ 62,500 $ 75,000
150,000......................................................... 45,000 60,000 75,000 90,000
175,000......................................................... 52,500 70,000 87,500 105,000
200,000......................................................... 60,000 80,000 100,000 120,000
225,000......................................................... 67,500 90,000 112,500 135,000
250,000......................................................... 75,000 100,000 125,000 150,000
275,000......................................................... 82,500 110,000 137,500 165,000
300,000......................................................... 90,000 120,000 150,000 180,000
400,000......................................................... 120,000 160,000 200,000 240,000
500,000......................................................... 150,000 200,000 250,000 300,000
600,000......................................................... 180,000 240,000 300,000 360,000
</TABLE>
The persons named in the Summary Compensation Table have the following years
of credited service which includes all years of service with Old UWS: Mr. Hefty,
sixteen years; Mr. Formisano, seven years; Mr. Mordy, thirteen years; Ms.
Siewert, twenty-two years; and Mr. Bablitch, two years.
52
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERVICE AGREEMENT.
The Company and BCBSUW have entered into the Service Agreement with respect
to the reciprocal provision of certain services, including sales and marketing,
rental of office space, computerized data processing, claims processing, and
legal, investment, actuarial and other management services. The company
receiving a service is obligated to pay the provider thereof the approximate
cost for the service which varies depending upon the particular service
rendered, determined on either an allocated cost basis or based upon direct
costs. If the recipient can obtain any of the services under more favorable
terms by performing the services itself or by procuring them from a third party,
it is not obligated to renew the Service Agreement for those services if the
provider is unwilling to substantially match such terms. However, the Company
agreed to purchase multi-year claims processing services from BCBSUW pursuant to
certain arrangements with Blue Shield of South Carolina ("BSSC") beginning in
1998.
Pursuant to the Service Agreement, the Company received net payments of $5.8
million, $5.3 million and $5.8 million from BCBSUW for the years ended December
31, 1996, 1997 and 1998, respectively. The Service Agreement is in effect until
December 31, 1998 and automatically renews for a period of one year on each
succeeding January 1, subject to negotiation of the services to be provided and
the rates and allocations set forth therein. Pursuant to Wisconsin law, the
Service Agreement is filed with the Office of the Commissioner of Insurance for
the State of Wisconsin for its review to determine whether the agreement is
reasonable and fair to the interests of the insurance companies which are
parties to the agreement.
In 1984, BCBSUW entered into with Electronic Data Corporation ("EDS") a
servicing agreement (the "EDS Servicing Agreement") whereby EDS would develop
integrated processing systems, maintain computer hardware and software and
provide data processing personnel. Key systems covered by this agreement
included claims, membership, actuarial, commission, general ledger, accounts
payable and fixed assets. The term of the EDS Servicing Agreement runs through
December 31, 1999, with an option to terminate upon one year's prior written
notice, deliverable at any time. BCBSUW exercised its early termination rights
for the claims, actuarial, commission, general ledger, accounts payable, and
fixed assets. BCBSUW will continue to receive membership services from EDS. All
claims processing functions were converted to the computer system operated by
BCBSUW and BSSC effective September 30, 1998. BCBSUW purchased software and
began processing the general ledger, accounts payable, and fixed asset systems
on January 1, 1998. For the years ended December 31, 1996, 1997 and 1998, the
Company paid approximately $3.5 million, $3.7 million and $2.7 million,
respectively, for services pursuant to the EDS Servicing Agreement. The Company
paid approximately $1.6 million for claims processing services obtained from
BSSC for the year ended December 31, 1998.
HEALTH AND OTHER BENEFITS TO THE EMPLOYEES OF BCBSUW.
Certain subsidiaries of the Company provide health, life and other insurance
benefits to the employees of BCBSUW. Premium revenue received from BCBSUW for
these services totaled $4.4 million, $4.5 million and $4.5 million in 1996, 1997
and 1998, respectively. In addition, BCBSUW provides health insurance to certain
of the Company's employees.
BCBSUW LOAN.
In connection with the Distribution, the Company assumed a debt obligation
of Old UWS to BCBSUW in the principal amount of $70.0 million. On October 30,
1996, the Predecessor Corporation borrowed $70.0 million from BCBSUW to fund the
cash portion of the merger consideration in connection with the merger of
American Medical Security, Inc. into Old UWS. Old UWS pledged the common stock
of certain of its subsidiaries as collateral for the loan. Interest only is
payable quarterly at a rate equal to LIBOR plus 125 basis points, adjusted
quarterly. The entire principal balance is due October 30, 1999.
53
<PAGE>
BCBSUW INTENDED PURCHASE OF ADDITIONAL SHARES OF COMMON STOCK.
BCBSUW owns 37.8% of the issued and outstanding shares of Common Stock. One
of the primary reasons for effectuating the Distribution was so that the managed
care business can use the Blue Cross and Blue Shield service marks in connection
with its products and services. In order to use the service marks, one of the
requirements is that a Blue Cross plan must "control" the company (meaning that
the plan must directly or indirectly own more than 50% of the stock of the
company and must have operational control over the company). Therefore, BCBSUW
intends to purchase additional shares of Common Stock to bring its overall
direct and indirect ownership of the Company to approximately 51%. The purchase
price for the shares of Common Stock to be purchased directly from the Company
will be based on the market price of the shares of Common Stock and an
independent third party valuation, and will be paid through the cancellation of
a corresponding portion or all of the $70.0 million Company indebtedness to
BCBSUW or in cash. BCBSUW may purchase some of the shares of Common Stock in the
open market. The intended purchases are subject to the receipt of OCI approval
and may be subject to the receipt of the Company shareholder approval as a
result of certain New York Stock Exchange rules.
REGISTRATION RIGHTS.
Pursuant to an agreement with the Company, Messrs. Wallace J. Hilliard and
Ronald A. Weyers have the following rights:
(i) Messrs. Hilliard and Weyers are entitled to make up to two requests
that the Company register at least 50% of the then outstanding shares of
Common Stock held by them, which the Company is obligated to use its best
efforts to do unless (a) the request comes during the period 45 days prior
to the estimated date of filing and 180 days following the effective date of
the Company's own registration of shares of Common Stock pertaining to an
underwritten public offering; (b) the Company has already effected two such
registrations pursuant to Messrs. Hilliard's and Weyers's requests; (c) the
filing of the registration statement could jeopardize or delay a material
transaction contemplated by the Company or would require the disclosure of
material information that the Company needs to preserve as confidential; or
(d) the Company is unable to comply with the requirements of the Securities
and Exchange Commission; and
(ii) Messrs. Hilliard and Weyers are entitled to make up to two requests
that the Company include Messrs. Hilliard's and Weyers's shares of Common
Stock in an offering of shares of Common Stock otherwise being registered
upon being notified by the Company that the Company is registering shares of
Common Stock in connection with a public offering for case on a form that
also would permit the registration of Messrs. Hilliard's and Weyers's shares
of Common Stock.
These registration rights expire upon the earlier of April 1, 2001 or upon
the date on which Messrs. Hilliard and Weyers in the aggregate own less than
three percent of the outstanding shares of Common Stock.
Messrs. Hilliard and Weyers have also agreed that, until December 3, 2006,
they will not acquire, or propose to acquire (I) any Company securities (other
than pursuant to the exercise of stock options) with the power to vote for the
election of directors (the "Voting Securities"), or (ii) any rights or options
to acquire any Voting Securities, if any of such acquisitions would require
regulatory approval, application or notification other than as required by the
Exchange Act. In addition, Messrs. Hilliard and Weyers agreed that, until
December 3, 1999, they will not (I) make or participate in any solicitation of
proxies (within the meaning of Rule 14a-1 of the Exchange Act) or initiate any
shareholder proposals with respect to the Company; (ii) make any proposals with
respect to a merger or other business combination, sale or transfer of assets,
liquidation or other extraordinary corporate transaction of the Company; or
(iii) for, join, or participate in a "group" (within the meaning of Section
13(d)(3) of the Exchange Act) with respect to Company securities or seek to
exercise control or influence over management, the Board of Directors, or the
corporate policies of the Company. Finally, Messrs. Hilliard and Weyers agreed
that, until December 3, 2006, they will vote their shares of Common Stock in
accordance with BCBSUW directions on matters submitted to a shareholder vote
which pertain to, or are a result of, BlueCross BlueShield Association rules,
regulations, or marketing issues.
54
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of the
Common Stock as of December 31, 1998 by each shareholder known to the Company to
own beneficially more than five percent (5%) of the shares of the Common Stock
outstanding, by each director of the Company, each person nominated to be a
director, each of the executive officers of the Company who appear in the
Summary Compensation Table below, and all directors and officers of the Company
as a group. Unless otherwise indicated, each shareholder listed below has sole
voting and dispositive power with respect to shares of the Common Stock
beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
NAME OWNED(2) CLASS
- -------------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
Blue Cross & Blue Shield United of Wisconsin(1)................................. 6,346,915 37.8%
Heartland Advisors, Inc.(1)..................................................... 1,653,600 9.8
Oppenheimer Capital............................................................. 1,048,830 6.2
Ronald A. Weyers(1)............................................................. 948,433 5.6
Wallace J. Hilliard(1).......................................................... 865,000 5.1
Thomas R. Hefty(3)(4)........................................................... 124,877 *
Stephen E. Bablitch............................................................. 41,460 *
Roger A. Formisano(3)(4)........................................................ 122,579 *
C. Edward Mordy(4).............................................................. 67,959 *
Penny J. Siewert(4)............................................................. 31,537 *
Richard A. Abdoo................................................................ 8,426 *
Michael D. Dunham............................................................... 2,209 *
James L. Forbes................................................................. 8,126 *
James C. Hickman................................................................ 4,617 *
William R. Johnson.............................................................. 9,726 *
Eugene A. Menden................................................................ 8,126 *
William C. Rupp, M.D............................................................ 1,000 *
Carol N. Skornicka.............................................................. 2,509 *
All directors and executive officers as a group (19 persons)(4)................. 602,301 3.5
</TABLE>
- ------------------------
* Amount represents less than 1% of the total shares of the Common Stock
issued and outstanding.
(1) Blue Cross & Blue Shield United of Wisconsin's address is 1515 North River
Center Drive, Milwaukee, Wisconsin 53212; Mr. Hilliard's address is P.O. Box
12146, Green Bay, Wisconsin 54307-2146; Mr. Weyer's address is 3100 AMS
Boulevard, Green Bay, Wisconsin 54313; and Heartland Advisors,
Incorporated's address is 790 North Milwaukee Street, Milwaukee, Wisconsin
53202.
(2) Includes the following number of shares covered under options exercisable
within 60 days of December 31, 1998: Mr. Hefty, 104,293; Mr. Formisano,
117,666; Mr. Mordy 50,566; Ms. Siewert, 28,438; Mr. Bablitch, 38,653; Mr.
Abdoo, 6,626; Mr. Dunham, 2,209; Mr. Forbes, 6,626; Mr. Hickman, 4,417; Mr.
Johnson, 6,626; Mr. Menden, 6,626; and Ms. Skornicka, 2,209.
(3) Includes the following shares owned jointly with such person's spouse, with
respect to which such person shares voting power and dispositive power: Mr.
Hefty, 5,000 shares; Mr. Formisano, 3,750 shares; and Mr. Bablitch, 1,000
shares. Also includes the following shares owned separately by such person's
spouse or child, with respect to which such person shares voting power and
dispositive power: Mr. Hefty, 450 shares owned by spouse, 150 shares owned
by daughter, 150 shares owned by second daughter.
(4) Includes the following shares held under the Company's 401(k) plan, as to
which such person has dispositive power: Mr. Hefty, 2,834; Mr. Formisano,
863; Mr. Mordy, 3,293; Ms. Siewert, 1,949; Mr. Bablitch, 307; and all
directors and officers as a group, 15,714.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, no par value per share, of which 16,812,239 shares are issued and
outstanding as of March 31, 1999 and 1,000,000 shares of Preferred Stock, no par
value per share, issuable in series of which none is issued and outstanding. The
following summary description of the capital stock of the Company is qualified
in its entirety by reference to the Articles of Incorporation and By-Laws.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held on all matters submitted to a vote of shareholders. Holders of shares of
Common Stock do not have cumulative voting rights in the election of directors
and have no preemptive, subscription or redemption rights. Holders of shares of
Common Stock are entitled to such dividends as may be declared by the Board of
Directors out of funds legally available therefor. Upon liquidation, dissolution
or winding up of the Company, the assets legally available for distribution to
shareholders are distributable ratably among the holders of shares of Common
Stock at that time outstanding subject to prior distribution rights of creditors
of the Company.
PREFERRED STOCK
The Articles of Incorporation provide that the Board of Directors is
authorized, subject to certain limitations prescribed by law, without further
shareholder approval, to issue from time to time up to an aggregate of 1,000,000
shares of Preferred Stock in one or more series and to fix or alter the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of shares
of Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The rights, preferences and privileges of
holders of shares of Common Stock are subject to, and may be adversely affected
by, the rights of the holders of shares of any series of Preferred Stock which
the Company may designate and issue in the future. The Company has no present
plans to issue any shares of Preferred Stock.
CERTAIN ARTICLES OF INCORPORATION AND BY-LAWS PROVISIONS OF THE COMPANY
Certain provisions of the Articles of Incorporation and By-Laws could have
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
shareholder might consider in the shareholder's best interest. These provisions
are intended to enhance the likelihood of continuity and stability in the
composition of and in the policies formulated by the Board of Directors. In
addition, these provisions also are intended to ensure that the Board of
Directors will have sufficient time to act in what the Board of Directors
believes to be the best interests of the Company and its shareholders.
CLASSIFIED BOARD OF DIRECTORS.
The Articles of Incorporation provide for a Board of Directors divided into
three classes of directors serving staggered three-year terms. The
classification of directors has the effect of making it more difficult for
shareholders to change the composition of the Board of Directors in a short
period of time. At least two annual meetings of shareholders, instead of one,
will generally be required to effect a change in a majority of the Board of
Directors.
NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL.
The Articles of Incorporation and By-Laws provide that the Board of
Directors will consist of nine members. The By-Laws provide that the Board of
Directors, acting by majority vote of the directors then in office, may fill any
newly created directorship or vacancies on the Board of Directors. The By-Laws
56
<PAGE>
provide that a director may be removed upon the affirmative vote of a majority
of the outstanding shares entitled to vote for the election of such director.
SHAREHOLDER NOTICE REQUIREMENTS.
The By-Laws provide that for nominations for the Board of Directors or for
other business to be properly brought by a shareholder before an annual meeting
of shareholders, the shareholder must first have given adequate notice thereof
in writing to the Secretary of the Company. To be adequate, a shareholder's
notice generally must be delivered not later than 90 days nor more than 120 days
in advance of the date of the meeting. The notice must contain, among other
things, certain information about the shareholder delivering the notice and, as
applicable, background information about each nominee or a description of the
proposed business to be brought before the meeting.
CERTAIN WBCL PROVISIONS
RESTRICTIONS ON BUSINESS COMBINATIONS.
Sections 180.1130 to 180.1134 of the WBCL provide generally that in addition
to the vote otherwise required by law or the articles of incorporation of a
"resident domestic corporation," such as the Company, certain business
combinations not meeting certain fair price standards specified in the statute
must be approved by the affirmative vote of at least (i) 80% of the votes
entitled to be cast by the outstanding voting shares of the corporation, and
(ii) two-thirds of the votes entitled to be cast by the holders of voting shares
other than voting shares beneficially owned by a "significant shareholder" or an
affiliate or associate thereof who is a party to the transaction. The term
"business combination" is defined to include, subject to certain exceptions, a
merger or share exchange of the issuing public corporation (or any subsidiary
thereof) with, or the sale or other disposition of substantially all of the
property and assets of the issuing public corporation to, any significant
shareholder or affiliate thereof. "Significant shareholder" is defined generally
to mean a person that is the beneficial owner of 10% or more of the voting power
of the outstanding voting shares of the issuing public corporation. These
statute sections also restrict the repurchase of shares and the sale of
corporate assets by an issuing public corporation in response to a takeover
offer.
Sections 180.1140 to 180.1144 of the WBCL prohibit certain "business
combinations" between a "resident domestic corporation," such as the Company,
and a person beneficially owning 10% or more of the voting power of the
outstanding voting stock of such corporation (an "interested shareholder")
within three years after the date such person became a 10% beneficial owner,
unless the business combination or the acquisition of such stock has been
approved before the stock acquisition date by the corporation's board of
directors. After such three-year period, a business combination with the
interested shareholder may be consummated only with the approval of the holders
of a majority of the voting stock not beneficially owned by the interested
shareholder at a meeting called for that purpose, unless the business
combination satisfies certain adequacy-of-price standards intended to provide a
fair price for shares held by disinterested shareholders. BCBSUW is an
interested shareholder of the Company due to its ownership of 38.1% of the
outstanding shares of Common Stock following the Distribution. The acquisition
of shares of Common Stock by BCBSUW was approved by the Company's Board of
Directors prior to such acquisition, and therefore, the three-year restriction
on business combinations with an interested shareholder will not apply to
BCBSUW.
CONTROL SHARE VOTING RESTRICTIONS.
Under Section 180.1150(2) of the WBCL, the voting power of shares of a
"resident domestic corporation," such as the Company, which are held by any
person in excess of 20% of the voting power in the election of directors shall
be limited (in voting on any matter) to 10% of the full voting power of such
excess shares, unless otherwise provided in the articles of incorporation or
unless full voting rights have
57
<PAGE>
been restored at a special meeting of the shareholders called for that purpose.
This statute is a "scaled voting rights/control share acquisition" statute and
is designed to protect corporations against uninvited takeover bids by reducing
to one-tenth of their normal voting power all shares in excess of twenty percent
owned by an acquiring person. Shares held or acquired under certain
circumstances are excluded from the application of Section 180.1150(2),
including (among others) shares acquired directly from the Company and shares
acquired in a merger or share exchange to which the Company is a party. The
Articles of Incorporation provide that shares of Common Stock held by BCBSUW are
not subject to the voting power restrictions provided by Section 180.1150(2) of
the WBCL.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Firstar Bank
Milwaukee, N.A..
NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL
The Articles of Incorporation provide that, subject to any rights of holders
of shares of Preferred Stock to elect additional directors under specified
circumstances, the number of directors will be fixed from time to time
exclusively pursuant to a resolution adopted by the Board of Directors. In
addition, the By-Laws provide that vacancies, including those created by an
increase in the number of directors, may be filled by the remaining directors
then in office. Accordingly, the Board of Directors could prevent any
shareholder from enlarging the Board and filling the new directorships with such
shareholder's own nominees.
Under the WBCL, shareholders may remove one or more directors with or
without cause unless the Articles or By-Laws provide that a director may be
removed only for cause. The By-Laws provide that directors may be removed with
or without cause and only upon the affirmative vote of holders of at least a
majority of the voting power of all the then outstanding shares of stock
entitles to vote generally in the election of directors ("Voting Stock"), voting
together as a single class.
SHAREHOLDER ACTION BY WRITTEN CONSENT
The Articles of Incorporation and By-Laws provide that any action required
or permitted to be taken at a meeting of the Company's shareholders may be taken
without a meeting by shareholders holding the minimum number of votes necessary
to authorize or take such action at a meeting at which all shares entitled to
vote were present and voted. Any action so taken must be done by written consent
signed by the number of shareholders necessary to take such action. The Company
will give notice of such action to shareholders who were entitled to vote on
such action and whose shares were not represented on the written consent within
ten days of the action. These provisions allow the holders of a majority of the
Voting Stock to unilaterally use the written consent procedure to take
shareholder action.
SPECIAL MEETINGS
The By-Laws provide that special meetings of shareholders may be called by
the Chairman of the Board of Directors, a majority of the Board of Directors or
holders of at least 10% of all the votes entitled to be cast on any issue
proposed to be considered at the proposed special meeting. The business
permitted to be conducted at any special meeting of shareholders is limited to
the business brought before the meeting pursuant to the notice of meeting given
by the Company.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
The By-Laws establish an advance notice procedure for shareholders to make
nominations of candidates for election as directors, or bring other business
before an annual or special meeting of shareholders of the Company (the
"Shareholder Notice Procedure").
58
<PAGE>
The Shareholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Board, or by a shareholder who has
given adequate written notice to the Secretary of the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of the Company. The Shareholder Notice Procedure provides that at an
annual or special meeting only such business may be conducted as has been
brought before the meeting by, or at the direction of, the Board or by a
shareholder who has given adequate written notice to the Secretary of the
Company of such shareholder's intention to bring such business before such
meeting. Under the Shareholder Notice Procedure, for notice of shareholder
nominations or other business proposals to be made at an annual meeting to be
adequate, such notice must be received by the Company not less than 90 days nor
more than 120 days prior to the last Tuesday in May; provided, however, than in
the event the annual meeting is changed by more than 30 days from the last
Tuesday in May, notice by a shareholder, to be adequate, must be received not
earlier than the 120th day prior to such meeting and not later than the close of
business of the later of (x) the 90th day prior to such annual meeting, or (y)
the tenth day after public announcement of the date of such annual meeting is
first made. In connection with a special meeting of shareholders, in order for a
notice of shareholder nominations or other business proposals to be adequate,
notice by such shareholder must be received not earlier than the 90th day prior
to such meeting and not later than the close of business of the later of (x) the
60th day prior to such special meeting, or (y) the tenth day after public
announcement of the date of such special meeting is first made.
Under the Shareholder Notice Procedure, a shareholder's notice to the
Company proposing to nominate a person for election as a director must contain
certain information, including: the name and address of the nominating
shareholder and the beneficial owners on whose behalf the nomination or proposal
is made; the class and number of shares of the Company beneficially owned by
such shareholder or beneficial owners; a representation that such shareholder is
a holder of record of shares of the Company entitled to vote at such meeting and
that such shareholder intends to appear in person or by proxy at the meeting to
make the nomination specified in the notice; the name, age and residence address
of such nominee; a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nominations are to be made by the shareholder;
the principal occupation or employment of the nominee, the class and number of
shares of the Company which are beneficially owned by the nominee, and any other
information regarding the proposed nominee that would be required to be included
in a proxy statement soliciting proxies for the proposed nominee; and a written
consent of each nominee to be named in a proxy statement and to serve as a
director if so elected.
Under the Shareholder Notice Procedure, a shareholder's notice relating to
the conduct of business other than the nomination of directors must contain
certain information about such business and about the proposing shareholder,
including, without limitation: the name and address of the nominating
shareholder and the beneficial owners on whose behalf the nomination or proposal
is made; the class and number of shares of stock of the Company beneficially
owned by such shareholder; a representation that such shareholder is a holder of
record of shares of the Company entitled to vote at such meeting and that such
shareholder intends to appear in person or by proxy at the meeting to introduce
the other business specified in the notice; a brief description of the business
the shareholder proposes to bring before the meeting, and, if the business
includes a proposal to amend the By-Laws, the language of the proposed
amendment; the reasons for conducting such business at such meeting; any
material interest of such shareholder in the business so proposed; and any other
information required to be provided by the shareholder pursuant to Regulation
14A under the Securities and Exchange Act of 1934 in his capacity as a proponent
to a shareholder proposal. If the chairman of the meeting determines that a
person was not nominated, or other business was not brought before the meeting,
in accordance with the Shareholder Notice Procedure, such person will not be
eligible for election as a director, or such business will not be conducted at
such meeting, as the case may be.
By requiring advance notice of nominations by shareholders, the Shareholder
Notice Procedure will afford the Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent
59
<PAGE>
deemed necessary or desirable by the Board, to inform shareholders about such
qualifications. By requiring advance notice of other proposed business, the
Shareholder Notice Procedure also will provide a more orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the Board, will provide the Board with an opportunity to inform
shareholders, prior to such meetings, of any business proposed to be conducted
at such meetings, together with any recommendations as to the Board's position
regarding action to be taken with respect to such business, so that shareholders
can better decide whether to attend such a meeting or to grant a proxy regarding
the disposition of any such business.
Although the By-Laws do not give the Board any power to approve or
disapprove shareholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of shareholder proposals if the proper procedures
are not followed, and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to the Company and its shareholders.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of the Company authorized at the time of the
Distribution will have any preemptive right to subscribe for or purchase any
kind or class of securities of the Company.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY
Under the By-Laws and the WBCL, directors and officers of the Company are
entitled to mandatory indemnification from the Company against certain
liabilities and expenses (a) to the extent such officers or directors are
successful in the defense of a proceeding, and (b) in proceedings in which the
director or officer is not successful in the defense thereof, unless it is
determined the director or officer breached or failed to perform such person's
duties to the Company and such breach or failure constituted: (i) a willful
failure to deal fairly with the Company or its shareholders in connection with a
matter in which the director or officer had a material conflict of interest;
(ii) a violation of criminal law, unless the director or officer had reasonable
cause to believe his or her conduct was lawful or had no reasonable cause to
believe his or her conduct was unlawful; (iii) a transaction from which the
director or officer derived an improper personal profit; or (iv) willful
misconduct. The WBCL specifically states that it is the public policy of
Wisconsin to require or permit indemnification, allowance of expenses and
insurance in connection with a proceeding involving securities regulation, as
described therein, to the extent required or permitted as described above.
Under the WBCL, unless the Articles of Incorporation provide otherwise,
directors of the Company are not subject to personal liability to the Company,
its shareholders, or any person asserting rights on behalf thereof for certain
breaches or failures to perform any duty resulting solely from their status as
directors, unless the person asserting liability proves that the breach or
failure constituted: (i) a willful failure to deal fairly with the corporation
or its shareholders in connection with a matter in which the director had a
material conflict of interest, (ii) a violation of criminal law, unless the
director had reasonable cause to believe his or her conduct was lawful or no
reasonable cause to believe that his or her conduct was unlawful, or (iii) a
transaction from which the director derived an improper personal profit, or (iv)
willful misconduct. The Articles of Incorporation do not limit a director's
immunity provided by the WBCL. The above provisions pertain only to breaches of
duty by directors as directors and not in any other corporate capacity, such as
officers. As a result of such provisions, shareholders may be unable to recover
monetary damages against directors for actions taken by them which constitute
negligence or gross negligence or which are in violation of their fiduciary
duties, although it may be possible to obtain injunctive or other equitable
relief with respect to such actions. If equitable remedies are found not to be
available to shareholders in any particular case, shareholders may not have any
effective remedy against the challenged conduct.
60
<PAGE>
INTERESTS OF NAMED EXPERTS AND COUNSEL
LEGAL MATTERS
The validity of the Common Stock to be issued pursuant to the Plan will be
passed upon by Michael Best & Friedrich LLP Milwaukee, Wisconsin.
EXPERTS
The consolidated financial statements of the Company at December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998,
appearing in this Post-Effective Amendment No. 1 to Form S-1 Registration
Statement have been audited by Ernst & Young, LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
61
<PAGE>
<TABLE>
<CAPTION>
FORM S-1
PAGE NUMBER
---------------
<S> <C>
Report of Independent Auditors...................................................................... F-2
Consolidated Financial Statements...................................................................
Consolidated Balance Sheets......................................................................... F-3
Consolidated Statements of Income................................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income................. F-6
Consolidated Statements of Cash Flows............................................................... F-7
Notes to Consolidated Financial Statements.......................................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
United Wisconsin Services, Inc.
We have audited the accompanying consolidated balance sheets of United
Wisconsin Services, Inc. (the Company) as of December 31, 1998 and 1997, and the
related statements of income, changes in shareholders' equity and comprehensive
income and cash flows for each of the three years in the period ended December
31, 1998. Our audits also include the financial statement schedules listed in
the Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of December 31, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth herein.
ERNST & YOUNG, LLP
Milwaukee, Wisconsin
February 12, 1999
F-2
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 26,385 $ 17,033
Investments - available for sale........................................................ 158,463 151,653
Other receivables....................................................................... 65,464 54,066
Prepaid and other current assets........................................................ 6,778 7,304
---------- ----------
Total current assets...................................................................... 257,090 230,056
Investments--held to maturity............................................................. 7,710 7,893
Property and equipment, net............................................................... 8,963 6,978
Goodwill and other intangibles, net....................................................... 7,751 5,005
Other noncurrent assets................................................................... 16,694 16,324
---------- ----------
Total assets.............................................................................. $ 298,208 $ 266,256
---------- ----------
---------- ----------
</TABLE>
F-3
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical and other benefits payable...................................................... $ 70,659 $ 60,724
Advance premiums........................................................................ 30,584 24,060
Note payable to affiliates.............................................................. 70,000 --
Due to affiliates--other................................................................ 7,513 3,867
Payables and accrued expenses........................................................... 19,129 20,926
Other current liabilities............................................................... 10,527 7,745
---------- ----------
Total current liabilities................................................................. 208,412 117,322
Other noncurrent liabilities.............................................................. 25,337 25,318
---------- ----------
Total liabilities......................................................................... 233,749 142,640
Shareholders' equity:
Preferred stock (no par value, 1,000,000 shares authorized)............................. -- --
Common stock (no par value, no stated value, 50,000,000 shares authorized, 16,812,081
shares issued and outstanding at December 31, 1998)................................... 13,378 --
Retained earnings....................................................................... 50,088 --
Investments by and advances from AMSG................................................... -- 120,405
Unrealized gains on investments, net of taxes........................................... 993 3,211
---------- ----------
Total shareholders' equity................................................................ 64,459 123,616
---------- ----------
Total liabilities and shareholders' equity................................................ $ 298,208 $ 266,256
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Health services revenues:
Premium revenue............................................................ $ 608,917 $ 560,825 $ 493,092
Other revenue................................................................ 29,728 26,046 27,632
Investment results........................................................... 18,976 22,238 19,040
---------- ---------- ----------
Total revenues............................................................... 657,621 609,109 539,764
Expenses:
Medical and other benefits................................................. 519,636 485,198 425,258
Selling, general and administrative expenses............................... 103,517 94,496 83,839
Profit sharing on provider arrangements.................................... 2,762 3,380 2,868
Interest expense with affiliate............................................ 1,411 -- --
Amortization of goodwill and other intangibles............................. 450 818 841
---------- ---------- ----------
Total expenses............................................................... 627,776 583,892 512,806
---------- ---------- ----------
Income before income tax expense............................................. 29,845 25,217 26,958
Income tax expense........................................................... 11,767 9,433 10,617
---------- ---------- ----------
Net income................................................................... $ 18,078 $ 15,784 $ 16,341
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Accompanying Notes.
F-5
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMMON INVESTMENTS BY COMPREHENSIVE
SHARES COMMON RETAINED AND ADVANCES INCOME, NET OF
OUTSTANDING STOCK EARNINGS FROM AMSG TAXES
----------- ----------- ----------- -------------- -------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............... -- $ -- $ -- $ 116,766 $ 3,511
Comprehensive income:
Net income............................. -- -- -- 16,341
Change in unrealized gains (losses) on
investments.......................... 448
Comprehensive income.................
Change in investment by and advances from
AMSG................................... -- -- -- (13,184)
--------------------------------------------------------------------------
Balance at December 31, 1996............... -- -- -- 119,923 3,959
Comprehensive income:
Net income............................. -- -- -- 15,784
Change in unrealized gains (losses) on
investments.......................... (748)
Comprehensive income.................
Change in investment by and advances from
AMSG................................... -- -- -- (15,302)
--------------------------------------------------------------------------
Balance at December 31, 1997............... -- -- -- 120,405 3,211
Comprehensive income:
Net income............................. -- -- 3,572 14,506
Change in unrealized gains (losses) on
investments.......................... (2,218)
Comprehensive income.................
Cash dividends paid on common stock...... -- -- (839) --
Change in investment by and advances from
AMSG................................... -- -- -- (76,133)
Distribution of equity to the Company
from AMSG.............................. -- 11,423 47,355 (58,778)
Issuances of common stock, no par value,
in connection with the spin off........ 16,573,202 -- -- --
Issuances of common stock, no par value,
related to acquisition and dividend
reinvestment plan...................... 238,879 1,955 -- --
--------------------------------------------------------------------------
Balance at December 31, 1998............... 16,812,081 $ 13,378 $ 50,088 $ -- $ 993
--------------------------------------------------------------------------
--------------------------------------------------------------------------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1995............... $ 120,277
Comprehensive income:
Net income............................. 16,341
Change in unrealized gains (losses) on
investments.......................... 448
-------------
Comprehensive income................. 16,789
-------------
Change in investment by and advances from
AMSG................................... (13,184)
Balance at December 31, 1996............... 123,882
Comprehensive income:
Net income............................. 15,784
Change in unrealized gains (losses) on
investments.......................... (748)
-------------
Comprehensive income................. 15,036
-------------
Change in investment by and advances from
AMSG................................... (15,302)
Balance at December 31, 1997............... 123,616
Comprehensive income:
Net income............................. 18,078
Change in unrealized gains (losses) on
investments.......................... (2,218)
-------------
Comprehensive income................. 15,860
-------------
Cash dividends paid on common stock...... (839)
Change in investment by and advances from
AMSG................................... (76,133)
Distribution of equity to the Company
from AMSG.............................. --
Issuances of common stock, no par value,
in connection with the spin off........ --
Issuances of common stock, no par value,
related to acquisition and dividend
reinvestment plan...................... 1,955
Balance at December 31, 1998............... $ 64,459
</TABLE>
F-6
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................................. $ 18,078 $ 15,784 $ 16,341
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 3,199 1,964 2,341
Realized investment gains........................................... (9,123) (11,921) (8,381)
Deferred income tax benefit......................................... 839 (1,023) (901)
Changes in other operating accounts net of acquisitions
in 1998:
Other receivables............................................... (3,495) (5,246) 2,802
Due from clinics and providers.................................. (6,784) (338) --
Medical and other benefits payable.............................. 8,392 6,501 1,415
Advance premiums................................................ 6,524 (1,983) 4,062
Due to/from affiliates.......................................... 3,392 7,782 (10,327)
Other, net...................................................... 831 (9,901) (532)
----------------------------------------
Net cash provided by operating activities............................... 21,853 1,619 6,820
INVESTING ACTIVITIES
Acquisition of subsidiaries (net of cash and cash equivalents acquired
of $549,000).......................................................... (1,181) -- --
Purchases of available for sale investments............................. (241,661) (452,906) (413,648)
Proceeds from sale of available for sale investments.................... 233,974 433,012 364,321
Proceeds from maturity of available for sale investments................ 6,500 34,252 43,031
Purchases of held to maturity investments............................... (313) (2,894) (2,573)
Proceeds from maturity of held to maturity investments.................. 405 3,567 2,171
Proceeds from sale of property and equipment............................ 3 112 2,861
Additions to property and equipment..................................... (3,572) (1,356) (1,564)
Purchase of minority interest in subsidiary............................. -- (2,218) --
----------------------------------------
Net cash provided by (used in) investing activities..................... (5,845) 11,569 (5,401)
FINANCING ACTIVITIES
Cash dividends paid..................................................... (839) -- --
Issuances of common stock............................................... 316 -- --
Decrease in investments by and advances from AMSG....................... (6,133) (15,302) (15,352)
----------------------------------------
Net cash used in financing activities................................... (6,656) (15,302) (15,352)
----------------------------------------
Cash and cash equivalents:
Increase (decrease) during year....................................... 9,352 (2,114) (13,933)
Balance at beginning of year.......................................... 17,033 19,147 33,080
----------------------------------------
Balance at end of year................................................ $ 26,385 $ 17,033 $ 19,147
----------------------------------------
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
United Wisconsin Services, Inc. ("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,
sold primarily in Wisconsin, 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 and receivables management, sold throughout
the United States.
On May 27, 1998, the Board of Directors of American Medical Security Group,
Inc. ("AMSG") (formerly United Wisconsin Services, Inc.) approved a formal plan
to spin off its managed care companies and specialty business to its
shareholders. The spin off involved the creation of a new corporation originally
named Newco/UWS, Inc., subsequently renamed United Wisconsin Services, Inc.
("UWS"). The spin off resulted in the distribution of one share of common stock
of UWS on September 25, 1998 ("Spin off date") for each share of AMSG common
stock held as of September 11, 1998. AMSG received a private letter ruling from
the Internal Revenue Service that the spin off is tax free to AMSG, UWS and
their shareholders. A further description of the spin off and certain
transactions with AMSG is included in Notes 1, 6, 7 and 10.
The Company is affiliated with Blue Cross & Blue Shield United of Wisconsin
("BCBSUW") through certain common officers and directors. At December 31, 1998,
BCBSUW owns approximately 38% of the Company's common stock.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
The consolidated financial statements present the Company's financial
position, operations and cash flows as if the Company had been an independent,
public company for all years presented. The Company consolidates majority owned
subsidiaries that are controlled by the Company. All material intercompany
transactions have been eliminated. For those subsidiaries for which repurchase
options exist (see Note 2), the Company consolidates those subsidiaries when
control is deemed to be other than temporary. Management believes that control
of Unity Health Plans Insurance Corporation ("Unity") and Valley Health Plan,
Inc. ("Valley") is not temporary as exercise of the repurchase options is not
probable. Any repurchase would not provide a substantial economic benefit to the
option holders and would require regulatory approval pursuant to change of
control regulations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include operating cash and short-term investments
with original maturities of three months or less. These amounts are recorded at
cost, which approximates market.
F-8
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Investments are classified as either held to maturity or available for sale.
Investments which the Company has the intent and ability to hold to maturity are
designated as held to maturity and are stated at amortized cost. All other
investments are classified as available for sale and are stated at fair value
based on quoted market prices, with unrealized gains and losses excluded from
earnings and reported in accumulated other comprehensive income, net of income
tax effects. Realized gains and losses from the sale of available for sale debt
securities and equity securities are based on the first-in, first-out basis.
OTHER RECEIVABLES
Receivables are stated at net realizable value, net of allowances of
$727,000 and $394,000 at December 31, 1998 and 1997, respectively, based upon
historical collection trends and management's judgment of the ultimate
collectibility. In late December 1998, Compcare Health Services Insurance
Corporation ("Compcare") provided $13,421,000 of interest bearing notes to
certain contracted health care providers primarily due in full on April 1, 1999.
The Company retained the ability to offset claim payments to these health care
providers after April 1, 1999 and has included the advances in other receivables
on the consolidated balance sheet.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives,
which are 20 to 30 years for land improvements, 10 to 40 years for buildings and
building improvements, 3 to 5 years for computer equipment and software and 3 to
10 years for furniture and other equipment.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of cost over the fair market value of net
assets acquired. Goodwill and other intangible assets are being amortized on a
straight-line basis over a period of 15 years or less. Accumulated amortization
was $1,947,000 and $1,347,000 at December 31, 1998 and 1997, respectively.
The Company periodically evaluates whether events and circumstances have
occurred which may affect the estimated useful life or the recoverability of the
remaining balance of its intangibles. At December 31, 1998, the Company's
management believed that no material impairment of goodwill or other intangible
assets existed.
REVENUE RECOGNITION
Health services premiums and managed behavioral health fees are recognized
as revenue in the period in which enrollees are entitled to care. Managed care
consulting revenues are generally recognized when services are rendered.
MEDICAL AND OTHER BENEFITS
Medical and other benefits expense consists principally of capitation
expenses, health and disability claims and life insurance benefits. In addition
to actual paid claims and capitation, these expenses include the change in
estimates of reported and unreported claims and accrued capitation fees and
adjustments, which are unpaid as of the balance sheet date. The estimates of
reported and unreported claims and
F-9
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accrued capitation fees and adjustments, which are unpaid as of the balance
sheet date, are based on historical payment patterns using actuarial techniques.
Processing costs are accrued as operating expenses based on an estimate of the
costs necessary to process these claims.
The Company's year-end claim liabilities are substantially satisfied through
claim payments in the subsequent year. Any adjustments to prior period estimates
are reflected in the current period. Capitation represents fixed per member per
month payments to participating physicians, other medical specialists and
hospital systems, as compensation for providing comprehensive health or dental
care services. In addition, certain subsidiaries have risk-sharing, stop-loss,
and bonus arrangements with certain providers. Accruals relating to these
arrangements are developed based on historical payment patterns using actuarial
techniques. The noncurrent portion of medical and other benefits payable
pertaining to long-term disability, workers' compensation and certain life
insurance products is $19,375,000 and $20,918,000 at December 31, 1998 and 1997,
respectively. The noncurrent portion of long-term disability, workers'
compensation and certain life insurance products is estimated using actuarial
techniques based on historical patterns. Amounts estimated to be paid more than
one year from the balance sheet date are considered noncurrent.
REINSURANCE
Certain premiums and benefits are assumed from and ceded to other insurance
companies under various reinsurance agreements. The ceded reinsurance agreements
provide the Company with increased capacity to write larger risks and maintain
its exposure to loss within its capital resources. The ceding company is
contingently liable on reinsurance ceded in the event that the reinsurers do not
meet their contractual obligations. Premiums ceded totaled $45,755,000,
$49,522,000 and $46,549,000 in 1998, 1997 and 1996, respectively. Ceded benefits
totaled $35,038,000, $42,003,000 and $32,073,000 in 1998, 1997 and 1996,
respectively. Premiums assumed totaled $28,682,000, $33,514,000 and $32,642,000
in 1998, 1997 and 1996, respectively. Assumed benefits totaled $22,694,000,
$28,213,000 and $21,722,000 in 1998, 1997 and 1996, respectively.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes.
PRO FORMA EARNINGS PER COMMON SHARE (UNAUDITED)
Historical earnings per share ("EPS") has been omitted since the Company was
not a separate entity with a capital structure of its own throughout any of the
years presented.
Pro forma net income per common and common equivalent share is calculated as
if the spin off had occurred at the beginning of fiscal year 1996, and is
adjusted in 1998, 1997 and 1996 for additional interest expense, net of related
income tax. Pro forma EPS are based on the pro forma weighted average number of
shares of outstanding Company common stock and dilutive common equivalent shares
from stock options, giving effect to the distribution of one share of Company
stock for each share of AMSG common stock. Pro forma dilutive common equivalent
shares from stock options are stated at the historical AMSG dilutive common
equivalent share level.
F-10
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the pro forma computation of basic and
diluted EPS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
-------------------------------------------
<S> <C> <C> <C>
Net income as reported................. $ 18,078 $ 15,784 $ 16,341
Pro forma adjustment--interest expense,
net of tax........................... 2,215 3,062 367
------------- ------------- -------------
Pro forma net income................... $ 15,863 $ 12,722 $ 15,974
------------- ------------- -------------
------------- ------------- -------------
Pro forma basic weighted average common
shares............................... 16,560,382 16,423,270 12,892,431
Pro forma dilutive weighted average
common shares(1)..................... 16,563,165 16,423,270 12,892,431
EPS on net income as reported-- basic
and diluted(2)....................... $ 1.09 $ 0.96 $ 1.27
------------- ------------- -------------
------------- ------------- -------------
EPS on pro forma net income-- basic and
diluted(3)........................... $ 0.96 $ 0.77 $ 1.24
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Pro forma calculations for dilutive securities for the period January 1,
1996 thru September 25, 1998, assume that the price of the stock and the
strike price of the options is the same for the periods prior to the Spin
off date.
(2) EPS on net income as reported are computed by dividing net income as
reported, by the pro forma weighted average number of common shares
outstanding. There is no dilutive effect on securities for the period prior
to the Spin off date(1).
(3) EPS on pro forma net income are computed by dividing pro forma net income by
the pro forma weighted average number of common shares outstanding. There is
no dilutive effect on securities for the period prior to the Spin off
date(1).
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 130, "Reporting Comprehensive Income". SFAS 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized gains
or losses, net of taxes, on the Company's available for sale securities, which
prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income.
SEGMENT REPORTING
At December 31, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 establishes new
rules for identification and disclosure of segment information.
F-11
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENSION PLAN REPORTING
At December 31, 1998, the Company adopted SFAS 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS 132 establishes new
rules for the disclosure of pension plan information.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for 1997 and 1996 to conform with the 1998 presentation.
2. PROVIDER ARRANGEMENTS
The Company is party to certain provider arrangements in conjunction with
Unity and Valley, wholly owned HMO subsidiaries included in the Company's
consolidated financial statements, which include profit-sharing payments to
certain providers and repurchase provisions.
Under the terms of the Valley purchase and sale agreement, as amended, the
seller retained an option to repurchase all of the capital stock of Valley as of
December 31, 1999, at a price equal to Valley's net assets plus $400,000.
Pursuant to the Unity related purchase agreements, options to repurchase the
net assets of the acquired companies were issued to the sellers effective as of
November 1, 1999 or 2004. One seller has the option to repurchase a portion of
Unity's business at a price equal to the net assets of such business plus
$500,000. The other seller has the option to repurchase the remainder of the
Unity business at a price equal to the net assets of such business.
Total revenues subject to repurchase options, pursuant to the various
acquisition agreements, totaled $207,014,000, $186,318,000 and $169,341,000 for
1998, 1997 and 1996, respectively. Profit sharing expense related to these
provider arrangements is calculated based on the profitability of the HMO
subsidiary and totaled $3,171,000, $3,960,000 and $3,002,000 in 1998, 1997 and
1996, respectively. Total net income subject to repurchase options, pursuant to
the various acquisition agreements, totaled $2,358,000, $2,395,000 and
$2,629,000 for 1998, 1997 and 1996, respectively. Total assets and total net
assets subject to repurchase options were $44,798,000 and $21,362,000,
respectively, at December 31, 1998 and $49,802,000 and $20,632,000,
respectively, at December 31, 1997.
F-12
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
Investment results comprise the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Interest on bondsc........................................... $ 8,223 $ 9,075 $ 10,097
Dividends on equity securities............................... 916 1,103 636
Realized gains............................................... 12,518 15,317 13,463
Realized losses.............................................. (3,395) (3,396) (5,082)
Interest on cash equivalents and other investment income..... 1,609 473 922
--------- --------- ---------
Gross investment results..................................... 19,871 22,572 20,036
Investment expenses.......................................... (508) (424) (467)
Other interest income (expense).............................. (387) 90 (529)
--------- --------- ---------
$ 18,976 $ 22,238 $ 19,040
--------- --------- ---------
--------- --------- ---------
</TABLE>
Proceeds from sales of stocks during 1998 was $73,156,000. Proceeds from sales
of bonds classified as available for sale during 1998, excluding maturities, was
$160,818,000.
Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for debt securities classified as available for
sale or cost for equity securities. A summary of the net increase (decrease) in
unrealized gains, less deferred income taxes, which is included in accumulated
other comprehensive income, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities.................................................................. $ (1,248) $ 1,582 $ (2,884)
Equity securities................................................................ (1,837) (3,134) 3,542
Provision for deferred income tax (benefit)...................................... 867 804 (210)
--------- --------- ---------
$ (2,218) $ (748) $ 448
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-13
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of investments are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1998:
Available for sale:
U.S. Treasury securities................. $ 10,858 $ 4 $ (50) $ 10,812
State and municipal securities........... 1,301 59 -- 1,360
Foreign government securities............ 6,457 135 (111) 6,481
Corporate debt securities................ 74,748 1,294 (689) 75,353
Government agency mortgage-backed
securities............................. 30,961 150 (36) 31,075
Equity securities........................ 32,527 2,149 (1,294) 33,382
---------- ----------- ----------- ----------
156,852 3,791 (2,180) 158,463
Held to maturity:
U.S. Treasury securities 7,710 284 -- 7,994
---------- ----------- ----------- ----------
$ 164,562 $ 4,075 $ (2,180) $ 166,457
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
At December 31, 1997:
Available for sale:
U.S. Treasury securities................. $ 30,618 $ 330 $ (2) $ 30,946
State and municipal securities........... 2,487 67 -- 2,554
Foreign government securities............ 7,337 113 (111) 7,339
Corporate debt securities................ 56,017 1,314 (59) 57,272
Government agency mortgage-backed
securities............................. 21,466 376 (25) 21,817
Equity securities........................ 29,033 3,716 (1,024) 31,725
---------- ----------- ----------- ----------
146,958 5,916 (1,221) 151,653
Held to maturity:
U.S. Treasury securities................. 7,893 109 (9) 7,993
---------- ----------- ----------- ----------
$ 154,851 $ 6,025 $ (1,230) $ 159,646
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
F-14
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of debt securities at December
31, 1998, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Available for sale:
Due in one year or less............................................. $ 1,565 $ 1,566
Due after one through five years.................................... 36,219 36,662
Due after five through ten years.................................... 42,674 42,942
Due after ten years................................................. 12,906 12,836
---------- ----------
93,364 94,006
Government agency mortgage-backed securities 30,961 31,075
---------- ----------
$ 124,325 $ 125,081
---------- ----------
---------- ----------
Held to maturity:
Due in one year or less............................................. $ -- $ --
Due after one through five years.................................... 7,710 7,994
---------- ----------
$ 7,710 $ 7,994
---------- ----------
---------- ----------
</TABLE>
At December 31, 1998, the insurance subsidiaries had debt securities and
cash equivalents on deposit with various state insurance departments with
carrying values of approximately $7,627,000, which are included in investments
held to maturity on the balance sheet.
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements.............................................. $ 398 $ 394
Building and building improvements...................................... 3,766 3,611
Computer equipment and software......................................... 9,953 6,259
Furniture and other equipment........................................... 4,365 4,484
--------- ---------
18,482 14,748
Less accumulated depreciation........................................... (9,519) (7,770)
--------- ---------
$ 8,963 $ 6,978
--------- ---------
--------- ---------
</TABLE>
5. DEBT
As of December 31, 1998, the Company and several subsidiaries participate
with BCBSUW in a bank line of credit, which permits aggregate borrowings up to
$10,000,000 for UWS and its subsidiaries. Prior to
F-15
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
this date the line of credit permitted aggregate borrowings up to $30,000,000.
Periodic borrowings have been made on these lines of credit. There was no
balance outstanding at December 31, 1998 and 1997.
6. RELATED-PARTY TRANSACTIONS
As of September 11, 1998, the Company assumed a $70,000,000 note obligation
to BCBSUW in connection with the spin off (see note 1). The Company pledged the
common stock of certain subsidiaries as collateral for the note obligation.
Interest is payable quarterly at a rate equal to the London Interbank Offered
Rate plus 1.25%, adjusted quarterly. The principal balance is due on October 30,
1999 and is classified as note payable to affiliates in the consolidated balance
sheet. Interest expense and interest paid for the period from September 12, 1998
thru December 31, 1998 totaled $1,411,000.
The Company provides marketing, underwriting, actuarial and certain
administrative services for BCBSUW. In addition, BCBSUW provides health
insurance to the employees of the Company and provides office space to the
Company. These activities are reimbursed at amounts approximating cost, which
resulted in allocations to the Company of $14,757,000, $14,564,000 and
$13,315,000 in 1998, 1997 and 1996, respectively, and allocations to BCBSUW of
$8,964,000, $9,278,000 and $7,474,000 in 1998, 1997 and 1996, respectively.
These amounts are included in selling, general and administrative expenses.
Certain subsidiaries of the Company provide health, life and other insurance
benefits to the employees of BCBSUW. Premium revenue received from BCBSUW
totaled $4,547,000, $4,537,000 and $4,370,000 in 1998, 1997 and 1996,
respectively.
The Company has an agreement with United Wisconsin Life Insurance Company
("UWLIC"), a subsidiary of AMSG, whereby United Wisconsin Insurance Company
("UWIC") underwrites certain small group health care and life, dental, drug and
disability products in Minnesota as UWLIC products have not yet been approved
for sale in Minnesota. The Company ceded to UWLIC 100% of the premium revenue of
these products sold in Minnesota. The ceded premium revenue approximated
$26,875,000, $27,014,000 and $24,739,000 in 1998, 1997 and 1996, respectively.
The Company has an agreement with UWLIC whereby UWLIC underwrites certain
life and disability products on behalf of United Heartland Life Insurance
Company ("UHLIC"). The Company also had agreements with UWLIC, through September
30, 1998, whereby UWLIC underwrote certain health care, dental and
pharmaceutical products on behalf of Compcare, Heartland Dental Plan, Inc., and
CNR Health, Inc. The Company assumes 100% of the premium revenues on these
products from UWLIC. The assumed premium revenue approximated $23,295,000,
$36,177,000 and $30,573,000 in 1998, 1997 and 1996, respectively.
Management believes the above stated related-party activity was entered into
on a reasonable basis and includes all costs of doing business.
Prior to the spin off, the Company's operations have been financed through
its operating cash flows and investments by and advances from AMSG.
Amounts due from/to affiliates are related primarily to operating expenses
and reinsurance arrangements. The amounts due from/to affiliates are generally
settled on a monthly basis for operating expenses and are settled in accordance
with industry practice for reinsurance agreements. The amounts due from/to
affiliates are typically less than $10,000,000 at any point in time during the
fiscal year, excluding the $70,000,000 note obligation due to BCBSUW.
F-16
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Income tax expense has been calculated as if the Company filed separate
federal income tax returns. Prior to the spin off, the Company has been included
in the consolidated federal income tax return filed by AMSG, except as noted
below. UHLIC has filed separate federal income tax returns due to specific
provisions of the Internal Revenue Code of 1986, as amended, related to
consolidation of life insurance entities. The entities included in these
consolidated financial statements file separate state franchise, income and
premium tax returns as applicable.
The Company had a net federal income tax payable of $1,650,000, included in
other current liabilities, and a net federal income tax receivable of $436,000,
included in other current assets, at December 31, 1998 and 1997, respectively.
Federal and state income tax payments, net of refunds, totaled $2,327,000,
$3,243,000 and $1,545,000 in 1998, 1997 and 1996, respectively.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................... $ 8,994 $ 8,870 $ 9,642
State...................................................... 1,934 1,586 1,876
--------- --------- ---------
10,928 10,456 11,518
Deferred:
Federal.................................................... 737 (651) (222)
State...................................................... 102 (372) (679)
--------- --------- ---------
839 (1,023) (901)
--------- --------- ---------
$ 11,767 $ 9,433 $ 10,617
--------- --------- ---------
--------- --------- ---------
</TABLE>
The differences between taxes computed at the federal statutory rate and
recorded income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at federal statutory rate................................. $ 10,446 $ 8,826 $ 9,435
Goodwill amortization......................................... 136 154 254
Tax-exempt interest and dividends received deduction.......... (141) (230) (246)
State income and franchise taxes, net of federal benefit...... 1,161 827 820
Other, net.................................................... 165 (144) 354
--------- --------- ---------
$ 11,767 $ 9,433 $ 10,617
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The components of deferred income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Reserve discounting............................................. $ 161 $ -- $ (1,050)
Employee benefits............................................... (698) -- 434
Depreciation and amortization................................... 272 (1,299) 81
Net operating loss carryforwards................................ 414 -- (482)
Prepaid expenses................................................ 683 -- --
Other, net...................................................... 7 276 116
--------- --------- ---------
$ 839 $ (1,023) $ (901)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Significant components of the Company's federal and state deferred tax
liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------
FEDERAL STATE FEDERAL STATE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Depreciation..................................... $ (944) $ (203) $ (721) $ (512)
Claims-based receivables......................... (1,864) (303) (1,331) (945)
Pension accrual.................................. (2,350) (449) (2,158) (1,532)
Unrealized gains on investments.................. (516) (104) (1,367) (970)
Prepaid expenses................................. (1,077) (119) -- --
Other, net....................................... (268) (36) (825) (586)
--------- --------- --------- ---------
(7,019) (1,214) (6,402) (4,545)
Deferred tax assets:
Postretirement benefits other than pensions...... 1,465 311 1,387 1,138
Advance premium discounting...................... 1,303 265 1,080 886
Deferred compensation............................ 2,063 421 1,387 1,138
Medical and other benefits payable discounting... 1,004 117 1,142 937
Business loss carryforwards...................... 127 241 509 --
Other, net....................................... 564 148 435 774
--------- --------- --------- ---------
6,526 1,503 5,940 4,873
--------- --------- --------- ---------
Net deferred tax assets (liabilities).............. $ (493) $ 289 $ (462) $ 328
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The federal deferred benefit arising from the deductibility of state
deferred tax is included as a component of other federal deferred taxes. The net
deferred tax assets and liabilities are included in other current or other
noncurrent assets and liabilities, as applicable.
F-18
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONTINGENCIES
The Company is involved in various legal actions occurring in the normal
course of its business. In the opinion of management, adequate provision has
been made for losses which may result from these actions and, accordingly, the
outcome of these proceedings is not expected to have a material adverse effect
on the consolidated financial statements.
9. SHAREHOLDERS' EQUITY
STATUTORY FINANCIAL INFORMATION
Insurance companies are subject to regulation by the Office of the
Commissioner of Insurance of the State of Wisconsin and certain other state
insurance regulators. These regulations require, among other matters, the filing
of financial statements prepared in accordance with statutory accounting
practices prescribed or permitted for insurance companies. The statutory surplus
of insurance subsidiaries at December 31, 1998 and 1997 aggregated $106,069,000
and $95,211,000, respectively. The statutory net income of insurance
subsidiaries aggregated $15,893,000, $17,380,000 and $24,159,000 in 1998, 1997
and 1996, respectively.
State insurance regulations also require the maintenance of a minimum
compulsory surplus based on a percentage of premiums written. In addition, the
Company's insurance subsidiaries are subject to risk-based capital ("RBC")
requirements promulgated by the National Association of Insurance Commissioners.
The RBC requirements establish minimum levels of capital and surplus based upon
the insurer's operations. At December 31, 1998, the Company's insurance
subsidiaries were in compliance with these capital surplus requirements.
RESTRICTIONS ON DIVIDENDS FROM SUBSIDIARIES
Dividends paid by insurance subsidiaries are limited by state insurance
regulations. The insurance regulator in the state of domicile may disapprove any
dividend which, together with other dividends paid by an insurance company in
the prior twelve months, exceeds the regulatory maximum as computed for the
insurance company based on its statutory surplus and net income.
Based upon the financial statements of the insurance subsidiaries included
in these consolidated financial statements as of December 31, 1998, as filed
with the insurance regulators, the aggregate amount available for dividends in
1999 without regulatory approval is $7,700,000.
10. EMPLOYEE BENEFIT PLANS
PENSION BENEFITS
The Company and certain of its subsidiaries participate with BCBSUW in two
multiple employer defined benefit pension plans. The plans provide retirement
benefits to covered employees based primarily on compensation and years of
service. Since the plans are overfunded, no contributions were made in 1998,
1997 or 1996.
Prior to December 31, 1998, separate salaried and hourly pension plans
existed. These plans were merged into a single plan in an effort to reduce
administrative expenses and streamline communication with plan participants. The
merger had no material effect on pension assets, liabilities or funding levels.
F-19
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Effective January 1, 1997, the Company amended the salaried pension plan and
the hourly pension plan with respect to non-union participants, which include
expansion of the lump-sum payment provisions and changes in the methods and
formulae used for the calculation of benefit accruals.
Prior to January 1, 1997, the salaried pension plan provided for benefit
payments based on compensation, years of service, year of birth and date of
retirement and the hourly pension plan provided for benefit payments of stated
amounts based on number of hours worked and years of credited service.
The following table summarizes the change in the pension plan's benefit
obligation:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Benefit obligation at beginning of year................................. $ 17,568 $ 15,781
Service cost.......................................................... 1,849 1,335
Interest cost......................................................... 1,362 1,259
Actuarial (gains) losses.............................................. 1,662 (104)
Company transfers..................................................... 270 --
Benefits paid......................................................... (1,835) (703)
--------- ---------
Benefit obligation at end of year....................................... $ 20,876 17,568
--------- ---------
--------- ---------
</TABLE>
The pension plans' assets are comprised primarily of debt, equity and other
marketable securities.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Fair value of plan assets at beginning of year.......................... $ 36,082 $ 29,310
Actual return on plan assets.......................................... (529) 7,475
Company transfers..................................................... 270 --
Benefits paid......................................................... (1,835) (703)
--------- ---------
Fair value of plan assets at end of year................................ $ 33,988 $ 36,082
--------- ---------
--------- ---------
</TABLE>
The following table provides a reconciliation of the funded status of the
pension plan to the prepaid pension costs:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Funded status of plan at end of year.................................... $ 13,112 $ 18,514
Unrecognized net transition asset..................................... (777) (1,051)
Unrecognized prior service cost....................................... (5,456) (6,146)
Unrecognized net gain................................................. (169) (5,151)
--------- ---------
Prepaid pension cost at end of year..................................... $ 6,710 $ 6,166
--------- ---------
--------- ---------
</TABLE>
F-20
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Weighted-average assumptions used as of September 30, 1998 and 1997, the
measurement date, in developing the projected benefit obligation are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Discount rate................................................................. 7.00% 8.00%
Expected return on plan assets................................................ 9.00 9.00
Rate of compensation increase................................................. 4.75 4.75
</TABLE>
The unrecognized net asset is being amortized over the remaining estimated
service lives of participating employees at January 1, 1986: 15.4 years for
salaried employees and 16.9 years for hourly employees.
The components of the pension credit, which is included in selling, general
and administrative expenses, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Service cost............................................................. $ 1,849 $ 1,335
Interest cost............................................................ 1,362 1,260
Expected return on plan assets........................................... (2,791) (2,553)
Net amortization of transition asset..................................... (274) (274)
Amortization of prior service cost....................................... (690) (690)
--------- ---------
Pension credit........................................................... $ (544) $ (922)
--------- ---------
--------- ---------
</TABLE>
After giving effect to all administrative expense allocations between the
Company and BCBSUW, the pension credit was $622,000, $945,000 and $1,288,000 in
1998, 1997 and 1996, respectively.
DEFINED CONTRIBUTION AND BONUS PLANS
The Company and certain of its subsidiaries participate in defined
contribution plans whereby the employer contributes a percentage of
participants' qualifying compensation up to certain limits, as defined by the
plans. The Company and certain of its subsidiaries also participates with BCBSUW
in various other profit sharing and bonus programs. Expenses related to all of
these plans, after giving effect to all administrative expense allocations
between the Company and BCBSUW, totaled $2,475,000, $2,042,000 and $2,932,000 in
1998, 1997 and 1996, respectively.
STOCK-BASED COMPENSATION PLANS
As of December 31, 1998, the Company has a stock-based compensation plan
covering employees and directors that allows for granting of options for up to
4,625,000 shares of common stock as incentive or nonqualified stock options
("NQSOs").
At the Spin off date, certain of the options to purchase AMSG common stock
held by the Company's employees were converted to Company stock options. AMSG
options totaling 2,232,334 were converted into an equal amount of Company and
AMSG options, including 1,000,000 options related to an acquisition. The options
were converted at exercise prices that maintained the amount of unrealized stock
F-21
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
appreciation that existed immediately prior to the Spin off date. The vesting
dates and expiration periods of the options were not affected by the conversion.
In 1992, certain executive officers of AMSG were awarded stock appreciation
rights ("SARs") in AMSG. At the Spin off date, 67,500 AMSG SARs were converted
into SARs of the Company to provide equivalent value.
The Company follows Accounting Principles Board Opinion No. 25 under which
no compensation expense is recorded when the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant. The Company's pro forma information, as if the options granted
subsequent to the Spin off date had been expensed in accordance with SFAS 123,
"Accounting for Stock-Based Compensation", is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C>
Pro forma net income..................................... $ 18,021
Pro forma earnings per common share:
Basic................................................ $ 1.09
Diluted.............................................. $ 1.09
</TABLE>
In determining compensation cost pursuant to SFAS 123, the fair value for
the options granted subsequent to the Spin off date were estimated at the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for 1998: risk-free interest rate of 4.62%;
dividend yield of 0.70%; volatility factor of the expected market price of the
Company's common stock of 0.45; and a weighted average expected life of the
options of 6.00 years. As calculated using the Black-Scholes model, the weighted
average, grant-date fair value of options granted in which the exercise price
equaled the market price on the date of the grant was $3.34 per share for 1998.
F-22
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Stock option activity for all plans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
TOTAL NUMBER OF NQSOS
Outstanding at beginning of year........................................... --
Conversion of AMSG options................................................. 2,232,334
Granted.................................................................... 456,700
Exercised.................................................................. --
Forfeited.................................................................. --
-----------------
Outstanding at end of year................................................. 2,689,034
-----------------
-----------------
Exercisable at end of year................................................. 1,640,637
Available for grant at end of year......................................... 1,935,966
WEIGHTED AVERAGE EXERCISE PRICE OF NQSOS
Outstanding at beginning of year........................................... --
Conversion of AMSG options--range of excercise prices...................... $ 9.61 - 16.81
Granted--Exercise price equals market price on grant date.................. $ 7.19
Exercised.................................................................. --
Forfeited.................................................................. --
Outstanding at end of year................................................. $ 11.58
Exercisable at end of year................................................. $ 11.61
NQSOS BY EXERCISE PRICE RANGE
Exercise price............................................................. $ 7.19
Weighted average exercise price............................................ $ 7.19
Weighted average remaining contractual life................................ 11.75
Outstanding at end of year................................................. 456,700
Exercisable at end of year................................................. --
Weighted average exercise price of options exercisable at end of year...... --
Exercise price............................................................. $ 9.61 - 12.85
Weighted average exercise price............................................ $ 11.25
Weighted average remaining contractual life................................ 8.95
Outstanding at end of year................................................. 1,166,437
Exercisable at end of year................................................. 613,002
Weighted average exercise price of options exercisable at end of year...... $ 11.36
Exercise price............................................................. $ 13.53
Weighted average exercise price............................................ $ 13.53
Weighted average remaining contractual life................................ 2.93
Outstanding and exercisable at end of year(1).............................. 1,000,000
Weighted average exercise price of options exercisable at end of year...... $ 13.53
</TABLE>
F-23
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Exercise price............................................................. $14.94 - $16.81
Weighted average exercise price............................................ $ 15.66
Weighted average remaining contractual life................................ 9.58
Outstanding at end of year................................................. 65,897
Exercisable at end of year................................................. 27,635
Weighted average exercise price of options exercisable at end of year...... $ 15.56
</TABLE>
- ------------------------
(1) Options were issued in 1996 at 125% of market value as consideration for an
acquisition.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Since the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1998
Total revenues....................................... $ 159,158 $ 163,782 $ 165,093 $ 169,588 $ 657,621
Income before income tax expense..................... 7,459 9,471 6,604 6,311 29,845
Net income........................................... 4,716 5,699 4,091 3,572 18,078
Earnings per common share(1):
Basic............................................ -- -- -- 0.22 --
Diluted.......................................... -- -- -- 0.21 --
1997
Total revenues....................................... $ 146,993 $ 150,790 $ 154,479 $ 156,847 $ 609,109
Income before income tax expense..................... 6,607 6,141 6,091 6,378 25,217
Net income........................................... 3,998 3,889 3,859 4,038 15,784
</TABLE>
- ------------------------
(1) Earnings per share data has not been provided for periods prior to the
fourth quarter of 1998 since the Company was not an independent, public
entity prior to the Spin off date.
F-24
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT REPORTING
The Company has two reportable business segments: 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, and receivables management sold throughout the
United States.
"Other Operations" includes operations not directly related to the business
segments, unallocated corporate items (i.e. corporate interest expense on
corporate debt, amortization of goodwill and intangibles and unallocated
overhead expenses) and intercompany eliminations. The Company evaluates segment
performance based on profit or loss from operations before income taxes.
Management has determined that it is impractical to prepare segment information
for the year ended December 31, 1996. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Financial data by segment as of and for the years ended December 31, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Health services revenue:
HMO products........................................................ $ 518,700 $ 479,182
Specialty managed care products and services........................ 137,652 123,859
Other operations.................................................... (17,707) (16,170)
---------- ----------
Total consolidated................................................ $ 638,645 $ 586,871
---------- ----------
---------- ----------
Investment results:
HMO products........................................................ $ 9,182 $ 6,889
Specialty managed care products and services........................ 9,516 17,309
Other operations.................................................... 278 (1,960)
---------- ----------
Total consolidated................................................ $ 18,976 $ 22,238
---------- ----------
---------- ----------
Income (loss) before income tax expense:
HMO products........................................................ $ 15,145 $ 6,355
Specialty managed care products and services........................ 17,693 23,257
Other operations.................................................... (2,993) (4,395)
---------- ----------
Total consolidated................................................ $ 29,845 $ 25,217
---------- ----------
---------- ----------
Total assets:
HMO products........................................................ $ 138,272 $ 118,595
Specialty managed care products and services........................ 151,845 144,520
Other operations.................................................... 8,091 3,141
---------- ----------
Total consolidated................................................ $ 298,208 $ 266,256
---------- ----------
---------- ----------
Health services revenue from transactions with other operating
segments:
HMO products........................................................ $ 1,853 $ 1,726
Specialty managed care products and services........................ 15,488 14,417
</TABLE>
F-25
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENT
On February 9, 1999, the Company announced that it had begun negotiations
with BCBSUW for the purchase by BCBSUW of approximately 2,750,000 shares of the
Company's common stock to be issued in a privately negotiated transaction. This
purchase is part of the previously disclosed plan for BCBSUW to increase its
ownership in the Company to allow Compcare to use the Blue Cross and Blue Shield
brand on its products.
F-26
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
General............................................................................... 2
Forwarding Looking Statements......................................................... 2
Risk Factors.......................................................................... 2
The Plan.............................................................................. 7
Use of Proceeds....................................................................... 17
Selected Consolidated Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 20
Quantitative and Qualitative Disclosures About Market Risk............................ 27
Business.............................................................................. 29
Properties............................................................................ 43
Legal Proceedings..................................................................... 44
Price Range of Common Stock and Dividends............................................. 44
Directors and Executive Officers...................................................... 45
Executive Compensation................................................................ 49
Certain Relationships and Related Transactions........................................ 53
Security Ownership of Certain Beneficial Owners and Management........................ 55
Description of Capital Stock.......................................................... 56
Liability and Indemnification of Directors and Officers of the Company................ 60
Interests of Named Experts and Counsel................................................ 61
</TABLE>
April , 1999
This Prospectus does not constitute an offer or solicitation by anyone in
any jurisdiction in which said offer or solicitation is not qualified or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make such offer or solicitation.
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is incorporated under the Wisconsin Business Corporation Law
("WBCL"). Under Section 180.0851(1) of the WBCL, the Company is required to
indemnify a director or officer, to the extent such person is successful on the
merits or otherwise in the defense of a proceeding, for all reasonable expenses
incurred in the proceeding if such person was a party because he or she was a
director or officer of the Company. In all other cases, the Company is required
by Section 180.0851(2) of the WBCL to indemnify a director or officer against
liability incurred in a proceeding to which such a person was a party because he
or she was a director or officer of the Company, unless it is determined that he
or she breached or failed to perform a duty owed to the Company and the breach
or failure to perform constitutes: (i) a willful failure to deal fairly with the
Company or its shareholders in connection with a matter in which the director or
officer has a material conflict of interest; (ii) a violation of criminal law,
unless the director or officer had reasonable cause to believe his or her
conduct was lawful or no reasonable cause to believe his or her conduct was
unlawful; (iii) a transaction from which the director or officer derived an
improper personal profit; or (iv) willful misconduct. Section 180.0858(1) of the
WBCL provides that, subject to certain limitations, the mandatory
indemnification provisions do not preclude any additional right to
indemnification or allowance of expenses that a director or officer may have
under a corporation's articles of incorporation, bylaws, a written agreement or
a resolution of the board of directors or shareholders.
Section 180.0859 of the WBCL provides that it is the public policy of the
state of Wisconsin to require or permit indemnification, allowance of expenses
and insurance to the extent required to be permitted under Sections 180.0850 to
180.0858 of the WCBL, for any liability incurred in connection with a proceeding
involving a federal or state statute, rule or regulation regulating the offer,
sale or purchase of securities.
Section 180.0828 of the WBCL provides that, with certain exceptions, a
director is not liable to a corporation, its shareholders, or any person
asserting rights on behalf of the corporation or its shareholders, for damages,
settlements, fees, fines, penalties or other monetary liabilities arising from a
breach of, or failure to perform, any duty resulting solely from his or her
status as a director, unless the person asserting liability proves that the
breach or failure to perform constitutes any of the four exceptions to mandatory
indemnification under Section 180.0851(2) referred to above.
Under Article VI of the Company's Bylaws, directors and officers are
indemnified against liability, in both derivative and nonderivative suits, which
may incur in their capacities as such, subject to certain determinations by the
Board of Directors, independent legal counsel or the shareholders that the
applicable standards of conduct have been met. The scope of such indemnification
is substantially the same as permitted and described in Sections 180.0850 to
180.0858 of the WBCL.
Under Section 180.0833 of the WBCL, directors of the Company against whom
claims are asserted with respect to the declaration of improper dividends or
distributions to shareholders or certain other improper acts which they approved
are entitled to contribution from other directors who approved such actions and
from shareholders who knowingly accepted an improper dividend or distribution,
as provided therein.
The directors and officers of the Company and its subsidiaries are included
in the directors' and officers' liability insurance policy applicable to BCBSUW.
The Company has not obtained substitute directors' and officers' liability
coverage; the officers and directors of the Company and its subsidiaries will
continue to be included in BCBSUW's policy. BCBSUW's insurance policy provides
that, subject to the applicable liability limits and retention amounts, the
insurer will reimburse directors and officers of BCBSUW and its subsidiaries,
including the Company, for a "loss" (as defined in the policy) made against them
for a "wrongful act" (as defined in the policy), except for such a loss against
which BCBSUW or its subsidiaries, including the Company, indemnifies (or is
required or permitted to indemnify) the director or officer. The policy also
provides that, subject to the applicable liability limits and retention amounts,
the insurer will reimburse BCBSUW and its subsidiaries, including the Company,
for a loss for which BCBSUW or its subsidiaries, including the Company, has
lawfully indemnified (or is required or permitted by law to indemnify) a
director or officer resulting from any such claim. Subject to certain exclusions
set
II-1
<PAGE>
forth in the policy, "Wrongful act" is defined in the policy to mean any
negligent act, error, omission, misstatement, misleading statement, or breach of
duty by BCBSUW or its subsidiaries, including the Company's directors or
officers in the discharge of their duties solely in their capacities as such
directors or officers.
EXHIBITS
See Exhibit Index attached.
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
Provided, however, that paragraphs (a)(i) and (a)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in said act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a directors,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in said act and
will be governed by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milwaukee, and the State
of Wisconsin, on the 31st day of March, 1999.
UNITED WISCONSIN SERVICES, INC.
By: /s/ THOMAS R. HEFTY
-----------------------------------------
Thomas R. Hefty
Chairman of the Board and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board
/s/ THOMAS R. HEFTY (Principal Executive
- ------------------------------ Officer), President & March 31, 1999
Thomas R. Hefty Director
/s/ C. EDWARD MORDY* Vice President (Principal
- ------------------------------ Financial and Accounting March 31, 1999
C. Edward Mordy Officer)
/s/ RICHARD A. ABDOO*
- ------------------------------ Director March 31, 1999
Richard A. Abdoo
/s/ MICHAEL D. DUNHAM*
- ------------------------------ Director March 31, 1999
Michael D. Dunham
/s/ JAMES L. FORBES*
- ------------------------------ Director March 31, 1999
James L. Forbes
/s/ JAMES C. HICKMAN*
- ------------------------------ Director March 31, 1999
James C. Hickman
/s/ WILLIAM R. JOHNSON*
- ------------------------------ Director March 31, 1999
William R. Johnson
/s/ EUGENE A. MENDEN*
- ------------------------------ Director March 31, 1999
Eugene A. Menden
II-3
<PAGE>
<TABLE>
<S> <C> <C>
/s/ WILLIAM C. RUPP*
- ------------------------------ Director March 31, 1999
William C. Rupp
/s/ CAROL N. SKORNICKA*
- ------------------------------ Director March 31, 1999
Carol N. Skornicka
</TABLE>
<TABLE>
<S> <C>
*By: /s/ THOMAS R. HEFTY
---------------------------------------
Thomas R. Hefty, Attorney-in-fact
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ------------------------------------------------------------
<C> <S>
2.1 Form of Distribution and Indemnity Agreement (as
amended).(1)
3.1 Articles of Incorporation of Registrant.(1)
3.2 By-Laws of Registrant.(1)
4.1 Specimen Common Stock Certificate.(1)
4.2 Registrant's United Wisconsin Services, Inc.'s Dividend
Reinvestment and Direct Stock Purchase Plan: Terms and
Conditions.(3)
5 Opinion of Michael Best & Friedrich LLP.(3)
10.1 Form of Employee Benefits Agreement (as amended).(1)
10.2 Form of Tax Allocation Agreement (as amended).(1)
10.3 Settlement Agreement by and between United Wisconsin
Services, Inc. ("UWS"), on behalf of itself and on behalf
of Registrant, Wallace J. Hilliard and Ronald A. Weyers,
dated April 1, 1998.(1)
10.4 Consolidated Federal Income Tax Allocation Agreement among
Blue Cross & Blue Shield United of Wisconsin ("BCBSUW"),
United Wisconsin Insurance Company ("UWIC"), UWS, United
Wisconsin Proservices, Inc. ("UWPS"), Leasing Unlimited,
Inc., United Wisconsin Life Insurance Company ("UWLIC"),
Compcare Health Services Insurance Corporation
("COMPCARE"), ProHealth, Inc. and Take Control, Inc., as
amended by Amendments dated August 6, 1993 and May 9,
1994, respectively.(1)
10.5 Comprehensive Tax Allocation Agreement dated July 1, 1994
among BCBSUW, UWS and various subsidiaries thereof.(1)
10.6 Federal Income Tax Allocation Agreement among BCBSUW, UWS,
UWIC, UWLIC, UWPS, Compcare, Take Control, Inc., Meridian
Resource Corporation ("MRC"), Valley Health Plan, Inc.
("VALLEY") and United Wisconsin Capital Corporation
("UWCC") for the period commencing January 1, 1993, as
amended.(1)
10.7 Consolidated Federal Income Tax Allocation Agreement among
UWS, UWIC, Compcare, Meridian Managed Care, Inc. ("MMC"),
MRC, Valley, UWCC, Your Health Plan, Inc. ("YHP"), HMO of
Wisconsin Insurance Corporation ("HMOW"), HMO-W, Inc. and
Hometown Insurance Services, Inc. ("HTWN") commencing
October 1, 1994.(1)
10.8 Consolidated Federal Income Tax Allocation Agreement among
UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley, UWCC, YHP,
HMOW, HMO-W, Inc., HTWN, United Heartland, Inc. ("UHI")
and Meridian Marketing Services, Inc. ("MMS") commencing
January 1, 1995.(1)
10.9 Consolidated Federal Income Tax Allocation Agreement among
UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley, AMS HMO
Holdings, Inc. (f/k/a UWCC), Unity Health Plans Insurance
Corporation ("UNITY") (f/k/a HMOW), HMO-W, Inc., HTWN, UHI
and MMS for the period commencing January 1, 1996, and
American Medical Security Holdings, Inc., American Medical
Security, Inc., American Medical Insurance Company,
Continental Plan Services, Inc., Nurse Healthline, Inc.,
Accountable Health Plans, Inc., AMS Provider Partnerships,
Inc., Unity HMO of Illinois, Inc., American Medical
Security Insurance Company of Ohio and American Medical
Security Insurance Company of Georgia for the period
commencing December 3, 1996.(1)
10.10 Amended and Restated Joint Venture Agreement by and among
BCBSUW, UWS (assigned to the Registrant), Valley and
Midelfort Clinic, Ltd., effective January 1, 1997.(1)
10.11 Intercompany Service Agreement between BCBSUW, UWS (assigned
to the Registrant) and UWIC, effective January 1, 1998.(1)
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10.12 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UWIC, effective January 1, 1998.(1)
10.13 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UHI, effective January 1, 1998.(1)
10.14 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MMC, effective January 1, 1998.(1)
10.15 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare on behalf of its
Pharmacy Services department, effective January 1,
1998.(1)
10.16 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare on behalf of its
RxCel department, effective January 1, 1998.(1)
10.17 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare, effective January 1,
1998.(1)
10.18 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Investigation
and Recovery Services department, effective January 1,
1998.(1)
10.19 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Consulting
Services department, effective January 1, 1998.(1)
10.20 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Audit Services
department, effective January 1, 1998.(1)
10.21 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UWPS, effective January 1, 1998.(1)
10.22 Service Agreement between BCBSUW and Valley, effective
January 1, 1993.(1)
10.23 Service Agreement between UWS (assigned to the Registrant)
and Community Health Systems, LLC, dated November 1,
1994.(1)
10.24 Form of Service Agreement between United Wisconsin Services,
Inc. (f/k/a Newco/UWS, Inc.) and American Medical Security
Group, Inc. (f/k/a United Wisconsin Services, Inc.).(1)
10.25 Amended and Restated Joint Venture Agreement among BCBSUW,
UWS (assigned to the Registrant), University Health Care,
Inc. ("UHC" ), U-Care HMO, Inc. ("U-CARE") and Health
Professionals, Inc. ("HPI") dated October 31, 1994.(1)
10.26 Agreement of Merger and Joint Venture by and among UWS
(assigned to the Registrant), UWS Acquisition Corporation,
BCBSUW, HMO-W, Inc. and HMOW dated October 11, 1994.(1)
10.27 Service Agreement between UWS (assigned to the Registrant)
and HPI dated November 1, 1994.(1)
10.28 License Agreement between UWS (assigned to the Registrant)
and U-Care dated November 1, 1994.(1)
10.29 Joint Venture Agreement among UWS (assigned to the
Registrant), BCBSUW, Compcare and Northwoods Health Care,
LLC dated July 1, 1996, as amended October 24, 1996.(1)
10.30 Information System Service Agreement among Blue Cross Blue
Shield of South Carolina and Blue Cross & Blue Shield
United of Wisconsin dated August 23, 1996, as amended
January 1, 1997.(1)
10.31 Form of Trademark Assignment Agreement by and among UWS, the
Registrant and UWLIC.(1)
10.32 Registrant's Equity Incentive Plan as revised.(2)
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10.33 1998 Management Incentive Plan.(1)
10.34 Registrant's Deferred Compensation Plan for Directors.(1)
10.35 Registrant/BCBSUW 401(k) Plan.(1)
10.36 Registrant/BCBSUW Union Employees 401(k) Plan.(1)
10.37 Unity Health Plans Insurance Corp. 1998 Profit Sharing
Plan.(1)
10.38 Registrant's and BCBSUW's 1998 Profit Sharing Plan.(1)
10.39 Registrant Voluntary Deferred Compensation Plan.(1)
10.40 Registrant Deferred Compensation Trust.(1)
10.41 Registrant/BCBSUW Hourly Pension Plan.(1)
10.42 Registrant/BCBSUW Salaried Pension Plan.(1)
10.43 Registrant/BCBSUW Supplemental Executive Retirement Plan.(1)
10.44 Registrant Stock Appreciation Rights Plan.(1)
10.45 Note and Pledge Agreement dated October 30, 1996, between
BCBSUW and United Wisconsin Services, Inc. (assumed by and
assigned to the Registrant).(1)
10.46 Administrative Services Agreement between UWSI and HMO of
Wisconsin Insurance Corporation, effective November 1,
1994.(1)
10.47 Amendment to Employee Benefits Agreement between the Company
and American Medical Security Group, Inc. effective
September 21, 1998.(2)
10.48 Federal Income Tax Allocation Agreement among UWS, UNITY,
HTWN, HMO-W, INC., VALLEY, COMPCARE, UWIC, MMS, UHI, UWPS,
MRC, MMC, CNR HEALTH, INC. ("CNR"), Intercare Network,
Inc. ("INT"), Heartland Dental Plan, Inc. ("HDP") and
Heartland Dental Plan of Michigan, Inc. ("HDPM") dated
September 25, 1998.(4)
11 Statement regarding computation of per share earnings. (See
Note 1 of Notes to Consolidated Financial Statements).
21 Subsidiaries of the Registrant.(4)
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.(1)
99 None
</TABLE>
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(1) Incorporated by reference to Registrant's Registration Statement on Form 10
declared effective September 11, 1998.
(2) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
(3) Previously filed.
(4) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 12, 1999 in the Post-Effective Amendment
No. 1 to Form S-1 Registration Statement (No. 333-67911) of the Company for
the registration of 800,000 shares of its common stock.
Milwaukee, Wisconsin ERNST & YOUNG, LLP
April 6, 1999
