<PAGE>
--------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNITED WISCONSIN SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
WISCONSIN 6324 39-1931212
(State of Incorporation) (Primary Standard (I.R.S. Employer
Industrial Identification No.)
Classification Code Number)
</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)
--------------------------
COPY TO:
GEOFFREY R. MORGAN
Michael Best & Friedrich LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
(414) 271-6560
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE COMBINATION.
--------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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(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. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value.... 31,313,390 $3.3125 $109,596,865 $27,399
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) promulgated under the Securities Act of 1933, as
amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 22, 2000
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT ISSUE THE COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE
COMBINATION DESCRIBED IN THIS PROXY STATEMENT/ PROSPECTUS UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[UWS LOGO]
UNITED WISCONSIN SERVICES, INC.
401 WEST MICHIGAN STREET
MILWAUKEE, WISCONSIN 53203-2896
(414) 226-6900
------------------------
A COMBINATION PROPOSAL--YOUR VOTE IS VERY IMPORTANT
---------------------
TO THE SHAREHOLDERS OF UNITED WISCONSIN SERVICES, INC.:
Your board of directors has approved an exchange agreement to combine United
Wisconsin Services, Inc. with Blue Cross & Blue Shield United of Wisconsin.
Under the exchange agreement:
1. BCBSUW will be converted from a non-stock service insurance corporation
to a stock insurance corporation, and all of the issued and outstanding
shares of capital stock of BCBSUW will be issued to Wisconsin BC Holdings
LLC, a Wisconsin limited liability company wholly owned by Wisconsin
United for Health Foundation, Inc.;
2. BC Holdings will exchange all of the issued and outstanding shares of
capital stock of BCBSUW for 31,313,390 shares of newly issued, no par
value, common stock of UWS and $500,000 in cash;
3. BCBSUW will become a wholly owned subsidiary of UWS;
4. BC Holdings will be dissolved and the 31,313,390 shares of UWS common
stock will be distributed to the Foundation;
5. UWS's Articles of Incorporation and Bylaws will be amended and restated
to reflect changes necessary to effectuate the combination, including a
change in the composition of the board of directors after the combination
is completed; and
6. UWS will change its name to "Cobalt Corporation" and begin trading under
the ticker symbol "CBZ" on the New York Stock Exchange.
If the combination is approved, BC Holdings will own approximately 77.5% of
the issued and outstanding shares of common stock of Cobalt.
The board of directors of UWS has called a special meeting of shareholders
to approve the proposed combination. The special meeting will be held at
10:00 a.m., local time, on March 23, 2001, at 401 West Michigan Street,
Milwaukee, Wisconsin.
Because BCBSUW owns approximately 46.3% of the UWS common stock, and because
several executive officers of UWS are also executive officers of BCBSUW, the UWS
board of directors appointed a special committee of the board of directors,
consisting of three members of the UWS board of directors who are not employees
of UWS and who are not affiliated with BCBSUW or BC Holdings. This special
committee was appointed to negotiate the exchange agreement on behalf of
<PAGE>
UWS, to consider the fairness of the proposed combination to UWS and its
shareholders (other than BCBSUW), and to recommend to the full board of
directors whether to proceed with the proposed combination. In connection with
its review and consideration of the proposed combination, the special committee
retained Lehman Brothers to act as its financial advisor. The special committee
requested that Lehman Brothers render its opinion with respect to the fairness,
from a financial point of view, to the shareholders of UWS (other than BCBSUW)
of the aggregate ownership interest to be retained by those shareholders upon
consummation of the combination.
At the conclusion of its review of the proposed combination, Lehman Brothers
advised the special committee that it was unable to deliver the requested
fairness opinion. On December 21, 2000, however, Lehman Brothers delivered its
written opinion to the UWS special committee to the effect that, as of the date
of its opinion, from a financial point of view, the aggregate ownership interest
in Cobalt to be retained by the shareholders of UWS (other than BCBSUW) upon
consummation of the combination was adequate. Lehman Brothers' opinion should
not be deemed to constitute a fairness opinion. A copy of Lehman Brothers'
opinion is attached as ANNEX B to, and a description of its opinion is included
in, the accompanying Proxy Statement/Prospectus. Please read it carefully.
Your board of directors believes that the combination is fair to, and in the
best interest of, the UWS shareholders (other than BCBSUW) and, therefore,
recommends that the shareholders of UWS vote "FOR" the approval of the exchange
agreement at the special meeting. A copy of the exchange agreement is attached
as ANNEX A to this Proxy Statement/Prospectus. Please read it carefully.
UWS common stock is listed on the New York Stock Exchange under the trading
symbol "UWZ." On December 21, 2000, the last trading day prior to the public
announcement of the proposed combination, the closing price of UWS common stock
on the New York Stock Exchange was $3.69 per share. On , 2001, the
most recent practicable trading day prior to the date of this Proxy
Statement/Prospectus, the reported closing price of UWS common stock on the New
York Stock Exchange was $ per share.
The general terms of the conversion of BCBSUW to a stock insurance
corporation and the combination of BCBSUW and UWS have been approved by the
Office of the Commissioner of Insurance of the State of Wisconsin, subject to a
number of conditions. One such condition is that, immediately following the
combination, the shareholders of UWS other than the Foundation must own shares
of UWS common stock having an aggregate market value of not less than
$50 million. Based on recent market prices of UWS common stock on the New York
Stock Exchange prior to the date of this Proxy Statement/Prospectus, this
condition would not be satisfied. We cannot be certain whether this condition
will be satisfied based on the market price of UWS common stock at the time set
for closing or whether, if this condition is not met, the Commissioner will
waive this condition. In addition, all the terms of the combination are subject
to further review and the prior approval of the Commissioner, in her discretion.
This approval has not yet been obtained.
Although Wisconsin law is unclear as to what vote, if any, is required to
approve the combination, the exchange agreement requires that the combination be
approved by the highest vote required under Wisconsin law for similar
transactions--the affirmative vote of both (i) 80% of the outstanding shares of
UWS common stock, and (ii) 66 2/3% of the outstanding shares UWS common stock
which are not owned by BCBSUW, its affiliates or its benefit plans. BCBSUW owns
7,840,817 shares of UWS common stock and has agreed to vote all of its shares in
favor of the combination.
This Proxy Statement/Prospectus provides you with information concerning
UWS, BCBSUW, BC Holdings and the combination. Please give all of the information
contained in the Proxy Statement/ Prospectus your careful attention. IN
PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE SECTION ENTITLED
"RISK FACTORS" ON PAGE OF THIS PROXY STATEMENT/PROSPECTUS.
<PAGE>
We cannot complete the combination unless the shareholders of UWS approve
the exchange agreement. YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO
ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED SELF-ADDRESSED STAMPED ENVELOPE. Returning
the proxy does not deprive you of your right to attend a meeting and to vote
your shares in person.
We appreciate your interest in and consideration of this matter.
Sincerely,
Thomas R. Hefty
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
, 2001
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SHARES OF UWS COMMON STOCK TO BE
ISSUED IN CONNECTION WITH THE COMBINATION OR DETERMINED WHETHER THIS PROXY
STATEMENT/PROSPECTUS IS ADEQUATE OR ACCURATE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Proxy Statement/Prospectus is dated , 2001 and was first
mailed to shareholders on or about , 2001.
<PAGE>
UNITED WISCONSIN SERVICES, INC.
401 WEST MICHIGAN STREET
MILWAUKEE, WISCONSIN 53203-2896
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON MARCH 23, 2001
---------------------
TO THE SHAREHOLDERS OF UNITED WISCONSIN SERVICES, INC.:
Notice is hereby given that a special meeting of shareholders of United
Wisconsin Services, Inc. will be held on March 23, 2001, at 10:00 a.m., local
time, at 401 West Michigan Street, Milwaukee, Wisconsin, and at any adjournment
or postponement thereof for the following purposes:
1. To consider a proposal to approve the exchange agreement, dated as of
December 22, 2000, by and among UWS, Wisconsin BC Holdings LLC and Blue Cross &
Blue Shield United of Wisconsin. The exchange agreement provides for or
contemplates what we refer to as the "combination," which includes, among other
things, (a) the conversion of BCBSUW from a non-stock service insurance
corporation to a stock insurance corporation, (b) the issuance of all BCBSUW
common stock to Wisconsin BC Holdings LLC, a Wisconsin limited liability company
wholly owned by Wisconsin United for Health Foundation, Inc., (c) an exchange of
all of the common stock of BCBSUW for 31,313,390 shares of newly issued, no par
value, common stock of UWS and $500,000 in cash (as a result of which BCBSUW
will become a wholly owned subsidiary of UWS), and (d) the amendment and
restatement of the Articles of Incorporation and Bylaws of UWS, including a
change in the composition of the board of directors and change of the corporate
name of UWS to "Cobalt Corporation." Approval of the exchange agreement will
constitute approval of the combination, the Amended and Restated Articles of
Incorporation and the Amended and Restated Bylaws, the change of UWS's corporate
name and ticker symbol and the other transactions contemplated by the exchange
agreement. The exchange agreement is attached as ANNEX A to this Proxy
Statement/Prospectus and is incorporated into this Notice by reference.
2. To consider any other matters that may properly be brought before the
special meeting or any adjournments or postponements thereof.
THE BOARD OF DIRECTORS OF UWS, AFTER RECEIVING THE UNANIMOUS RECOMMENDATION
OF A SPECIAL COMMITTEE OF DIRECTORS WHO ARE NOT EMPLOYEES OF UWS, BC HOLDINGS OR
BCBSUW, HAS UNANIMOUSLY (WITH THOMAS R. HEFTY, CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER OF BOTH BCBSUW AND UWS, ABSTAINING) APPROVED THE EXCHANGE
AGREEMENT AND THE COMBINATION, AND HAS DETERMINED THAT THE EXCHANGE AGREEMENT
AND THE COMBINATION ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS
OF UWS OTHER THAN BCBSUW. THE BOARD OF DIRECTORS RECOMMENDS THAT THE
SHAREHOLDERS OF UWS VOTE "FOR" THE APPROVAL OF THE EXCHANGE AGREEMENT AT THE
SPECIAL MEETING.
Under the exchange agreement, shareholders and beneficial owners are
entitled to dissenters' rights as described in Wisconsin law. Those shareholders
that perfect dissenters' rights according to the terms set forth in the
Wisconsin dissenters' rights statutes will be entitled to receive the fair value
of their shares as set forth in the dissenters' rights statutes. A copy of the
relevant provisions of Wisconsin law is attached as ANNEX E to this Proxy
Statement/Prospectus.
Only shareholders of record at the close of business on February 9, 2001 are
entitled to notice of, and to vote at, the special meeting. Prior to the special
meeting, any shareholder may examine a list of shareholders entitled to notice
of, and to vote at, the special meeting for any purpose related to the special
meeting, during ordinary business hours at the offices of UWS at 401 West
Michigan Street, Milwaukee, Wisconsin.
<PAGE>
Shareholders are entitled to one vote per share of UWS common stock. The
presence in person or by proxy of the holders of shares representing a majority
of the voting power of UWS common stock entitled to vote is necessary to
constitute a quorum for the transaction of business at the special meeting.
ALTHOUGH WISCONSIN LAW IS UNCLEAR AS TO WHAT VOTE, IF ANY, IS REQUIRED TO
APPROVE THE COMBINATION, THE EXCHANGE AGREEMENT REQUIRES THE COMBINATION TO BE
APPROVED BY THE HIGHEST VOTE REQUIRED UNDER WISCONSIN LAW FOR SIMILAR
TRANSACTIONS--THE AFFIRMATIVE VOTE OF BOTH (I) 80% OF THE OUTSTANDING SHARES OF
UWS COMMON STOCK, AND (II) 66 2/3% OF THE OUTSTANDING SHARES OF UWS COMMON STOCK
WHICH ARE NOT OWNED BY BCBSUW, ITS AFFILIATES OR ITS BENEFIT PLANS. YOUR VOTE IS
VERY IMPORTANT.
WE URGE YOU TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS
PROXY STATEMENT/ PROSPECTUS. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON AND REGARDLESS OF THE NUMBER OF SHARES OF UWS COMMON STOCK YOU
OWN, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY. IF
YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE YOUR SHARES OF UWS COMMON STOCK
PERSONALLY WHETHER OR NOT YOU HAVE PREVIOUSLY SUBMITTED A PROXY.
Sincerely,
Thomas R. Hefty
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
, 2001
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
------- --------
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE COMBINATION.................
SUMMARY.....................................................
SELECTED CONSOLIDATED FINANCIAL DATA FOR UWS................
SELECTED CONSOLIDATED FINANCIAL DATA FOR BCBSUW.............
UNAUDITED PRO FORMA COMBINED BALANCE SHEET..................
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS,
FOR THE NINE MONTHS ENDED SEPTEMBER 31, 2000..............
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS,
YEAR ENDED DECEMBER 31, 1999..............................
RISK FACTORS................................................
General...............................................
Risks Resulting from the Combination..................
Risks Related to Being a Regulated Entity.............
Business Risks........................................
Risks Related to Litigation...........................
FORWARD-LOOKING STATEMENTS..................................
UWS HISTORICAL AND PRO FORMA COBALT PER SHARE DATA..........
MARKET PRICE AND DIVIDENDS..................................
THE SPECIAL MEETING.........................................
Purpose of the Special Meeting........................
Time, Place and Date..................................
Record Date; Shares Entitled To Vote; Vote Required...
Proxies; Proxy Solicitation...........................
Rights of Dissenting Shareholders.....................
THE COMBINATION.............................................
Structure of the Combination..........................
UWS Stock Certificates................................
Treatment of UWS Stock Options........................
Background of the Application for Conversion..........
Background of the Combination.........................
Background of UWS...................................
UWS's Reasons for the Combination...................
"Adequacy Opinion" of UWS's Financial Advisor.......
Background of BCBSUW................................
BC Holdings and BCBSUW's Reasons for the
Combination.........................................
Interests of Certain Persons in the Combination.......
United States Federal Income Tax Considerations of the
Combination..........................................
Accounting Treatment of the Combination...............
Regulatory Filings and Approvals Required to Complete
the Combination......................................
New York Stock Exchange Listing of UWS Common Stock To
Be Issued In The Combination.........................
The Exchange Agreement................................
Registration Rights Agreement.........................
Voting Trust and Divestiture Agreement................
DESCRIPTION OF REGISTRANT'S SECURITIES......................
COBALT ARTICLES OF INCORPORATION AND BYLAWS.................
COMPARISON OF RIGHTS OF UWS SHAREHOLDERS BEFORE AND AFTER
THE COMBINATION...........................................
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
CAPTION PAGE
------- --------
<S> <C>
BUSINESS OF UWS.............................................
General...............................................
UWS's Strategy........................................
HMO Products..........................................
Regulation............................................
Employees.............................................
Trademarks............................................
Properties............................................
Legal Proceedings.....................................
UWS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................
Overview..............................................
Results of Operations.................................
Liquidity and Capital Resources.......................
Quantitative and Qualitative Disclosures About Market
Risk.................................................
BUSINESS OF BC HOLDINGS.....................................
BUSINESS OF BCBSUW..........................................
General...............................................
BCBSUW's Strategy.....................................
Products..............................................
Regulation............................................
Employees.............................................
Trademarks............................................
Properties............................................
Legal Proceedings.....................................
BCBSUW MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............
Overview..............................................
Results of Operations.................................
Liquidity and Capital Resources.......................
Quantitative and Qualitative Disclosures about Market
Risk.................................................
CERTAIN TRANSACTIONS........................................
SECURITY OWNERSHIP..........................................
DIRECTORS AND EXECUTIVE OFFICERS OF COBALT..................
EXECUTIVE COMPENSATION......................................
LEGAL MATTERS...............................................
EXPERTS.....................................................
SHAREHOLDER PROPOSALS FOR 2001 ANNUAL MEETING...............
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION.................
FINANCIAL STATEMENTS OF UWS................................. F-1
FINANCIAL STATEMENTS OF BCBSUW.............................. F-
Annex A--Exchange Agreement................................. A-1
Annex B--"Adequacy Opinion" of Lehman Brothers Inc.......... B-1
Annex C--Registration Rights Agreement...................... C-1
Annex D--Voting Trust and Divestiture Agreement............. D-1
Annex E--Wisconsin Dissenters' Rights Statutes.............. E-1
Annex F--Cobalt Corporation Amended and Restated Articles of
Incorporation............................................. F-1
Annex G--Cobalt Corporation Amended and Restated Bylaws..... G-1
</TABLE>
(ii)
<PAGE>
This Proxy Statement/Prospectus incorporates important business and
financial information about UWS that is not included in or delivered with this
document. You can obtain this information from UWS upon request, without charge,
not including exhibits to documents, unless those exhibits are specifically
incorporated by reference into this Proxy Statement/Prospectus. ANY REQUEST FOR
DOCUMENTS SHOULD BE MADE BY , 2001 TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS. Any shareholder can make a request for information orally or in
writing to: Corporate Secretary, United Wisconsin Services, Inc., 401 West
Michigan Street, Milwaukee, Wisconsin 53203-2896, telephone (414) 226-6900.
(iii)
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE COMBINATION
Q: WHY ARE YOU PROPOSING THE COMBINATION?
A: We believe that combining the operations of UWS and BCBSUW will result in a
stronger company that will be able to operate more effectively than either
company can operate separately.
Q: WHY DON'T YOU HAVE A FAIRNESS OPINION?
A: The special committee of the board of directors appointed to negotiate the
combination retained Lehman Brothers to act as its independent financial
advisor. The special committee asked Lehman Brothers for a fairness opinion,
but Lehman Brothers was unable to conclude that the aggregate ownership
interest in Cobalt to be retained by the shareholders of UWS (excluding
BCBSUW) upon consummation of the combination is fair from a financial point
of view to those shareholders.
Lehman Brothers did, however, deliver its opinion that the aggregate
ownership interest in Cobalt to be retained by the shareholders of UWS
(excluding BCBSUW) upon consummation of the combination is adequate from a
financial point of view.
Q: WHAT IS THE DIFFERENCE BETWEEN A FAIRNESS OPINION AND AN ADEQUACY OPINION?
A: A fairness opinion generally means that a financial advisor has reviewed and
analyzed the financial aspects of a proposed transaction and concluded that
the transaction is "fair" from a financial point of view.
For purposes of its adequacy opinion, Lehman Brothers reviewed and analyzed
the financial aspects of the combination and was unable to conclude that it
was fair from a financial point of view. However, Lehman Brothers concluded
that the combination was the best alternative under the circumstances and
therefore adequate from a financial point of view.
Q: WHY ARE YOU RECOMMENDING THE COMBINATION WITHOUT A FAIRNESS OPINION?
A: The board of directors believes the combination is fair to, and in the best
interests of, UWS and its shareholders. For an explanation, see "THE
COMBINATION--UWS's Reasons for the Combination."
Q: WHEN DO YOU EXPECT TO COMPLETE THE COMBINATION?
A: We hope to complete the combination during the first quarter of 2001, and
are working on completing it as quickly as possible. In order to complete
the combination, we need to obtain shareholder approval.
Q: WILL I RECEIVE NEW STOCK CERTIFICATES IF THE COMBINATION IS COMPLETED?
A: No. If the combination is completed, your existing certificates will
continue to represent shares of the combined corporation. As discussed in
this Proxy Statement/Prospectus, the combined corporation will change its
name to "Cobalt Corporation," but we will not replace existing certificates
reflecting the name change until you sell or otherwise transfer shares of
common stock following the combination.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE COMBINATION?
A: The combination must be approved by 80% of the outstanding shares of UWS
common stock AND by 66 2/3% of the shares of UWS common stock that are not
owned by BCBSUW, its affiliates or its benefit plans.
Q: WHAT SHOULD I DO NOW?
A: Carefully read and consider the information contained in this Proxy
Statement/ Prospectus and then indicate your vote on your proxy card, sign
the proxy card and mail it in the enclosed return envelope as soon as
possible. Your board of directors recommends that you vote "FOR" the
combination.
1
<PAGE>
Q: WHAT HAPPENS IF I DO NOT VOTE OR IF I ABSTAIN?
A: If you do not vote or if you abstain from voting, you will have effectively
voted against the combination.
Q: WHAT HAPPENS IF I RETURN A BLANK PROXY CARD?
A: If you sign and mail back your proxy card but do not indicate how you want
to vote, the persons named as proxies on the enclosed proxy card will vote
your shares in favor of the combination.
Q: WHAT HAPPENS IF I RETURN A BLANK PROXY CARD?
A: If you sign and mail back your enclosed proxy card but do not indicate how
you want to vote, the persons named as proxies on the proxy card will vote
your shares in favor of the combination.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: No, not unless you give your broker instructions on how to vote. Your broker
will send you directions on how you can instruct your broker to vote. If you
wish to vote in person, you should obtain appropriate authorization from
your broker.
Q: CAN I CHANGE MY VOTE?
A: Yes, you may take back your proxy at any time before the vote by following
the directions on page . Then you can either sign and deliver a new
proxy card or attend the special meeting and vote in person.
Q: MAY I ATTEND THE SPECIAL MEETING IN PERSON?
A: Yes, you may attend the special meeting and vote your shares in person
regardless of whether you vote, sign and mail back your proxy card
Q: WHEN AND WHERE IS THE MEETING?
A: The special meeting will be held on March 23, 2001 at 10:00 a.m. local time
at 401 West Michigan Street, Milwaukee, Wisconsin.
Q: WHO CAN ANSWER MY OTHER QUESTIONS ABOUT THE COMBINATION?
A: Please contact William Zaferos at (414) 226-6199 or e-mail us at
[email protected]. Please provide a telephone number so that we can call you
back.
2
<PAGE>
SUMMARY
Following is a summary description of the combination, United Wisconsin
Services, Inc. (which we sometimes refer to as "UWS"), Blue Cross & Blue Shield
United of Wisconsin (which we sometimes refer to as "BCBSUW"), Wisconsin BC
Holdings LLC (which we sometimes refer to as "BC Holdings"), and other important
information contained in this Proxy Statement/Prospectus. This summary may not
contain all of the information that is important to you. You should carefully
read this entire Proxy Statement/Prospectus and the other documents to which we
refer, including the documents attached as annexes to this Proxy
Statement/Prospectus, for a more complete understanding of the combination.
REASONS FOR THE COMBINATION
(see page )
The UWS board of directors believes that the combination will benefit
shareholders by:
- combining the business and operations of UWS and BCBSUW;
- improving the public image of the combined entity by establishing a large,
public benefit foundation;
- maintaining the stability of the license agreement with the Blue Cross and
Blue Shield Association (which we sometimes refer to as the "Association")
for the use of the Blue Cross-Registered Trademark- and Blue
Shield-Registered Trademark- names and service marks; and
- creating an entity with greater combined resources and prospects than
either company could achieve on a stand-alone basis.
In addition, the UWS board of directors believes the combination is fair to,
and in the best interest of, UWS shareholders (other than BCBSUW) in light of
several important factors, including:
- formation of a special committee which conducted arm's length negotiations
with BCBSUW;
- historical and projected financial performance of UWS and BCBSUW;
- lack of viable alternatives to the combination for UWS: and
- Lehman Brothers' adequacy opinion.
PARTIES TO THE COMBINATION
UNITED WISCONSIN SERVICES, INC.
(see page )
UWS is a leading provider in managed care health services and employee
benefit products sold throughout the United States, but primarily in
Wisconsin. The principal executive offices of UWS are located at 401 West
Michigan Street, Milwaukee, Wisconsin 53203, and its telephone number at
that address is (414) 226-6900.
WISCONSIN BC HOLDINGS LLC
(see page )
Wisconsin BC Holdings LLC is a Wisconsin limited liability company that has
been formed to be the sole shareholder of BCBSUW. Immediately prior to the
combination occurring, BCBSUW will convert from a service insurance
corporation (which has no authorized or issued stock) to a stock insurance
corporation, and all of its issued and outstanding stock will be issued to
and owned by BC Holdings. Wisconsin United for Health Foundation, Inc.
(which we sometimes refer to as the "Foundation") will be the sole member of
BC Holdings. Following the combination, BC Holdings will be dissolved and
its shares of Cobalt common stock will be distributed to the Foundation. The
principal executive offices of BC Holdings are c/o Foley & Lardner, 777 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202, and its telephone number at
that address is (414) 271-2400.
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
(see page )
BCBSUW is the largest health insurer in the State of Wisconsin. It is an
independent
3
<PAGE>
licensee of the Association and has the exclusive right to use the Blue
Cross-Registered Trademark- and Blue Shield-Registered Trademark- names and
service marks in Wisconsin. BCBSUW offers traditional indemnity and other
managed health care products and services to groups and individuals in
Wisconsin. Through its wholly owned subsidiary, United Government
Services, Inc., BCBSUW processes Medicare claims for providers in all 50
states and Medicaid for the State of Wisconsin. The principal executive
offices of BCBSUW are located at 401 West Michigan Street, Milwaukee,
Wisconsin 53203, and its telephone number at that address is
(414) 226-5000.
PROCEDURE FOR COMBINATION
(see page )
The combination will be accomplished through the following steps:
1. BCBSUW will convert its form of ownership from a service insurance
corporation (which has no authorized or issued stock) organized under
Wisconsin law to a stock insurance corporation.
2. BCBSUW will issue all of its capital stock to BC Holdings.
3. BC Holdings will exchange all of the shares of BCBSUW it owns for cash and
shares of UWS. UWS will change its name to "Cobalt Corporation" and change
its ticker symbol on the New York Stock Exchange to "CBZ."
- All of the shares of common stock and options to purchase shares of common
stock of UWS immediately prior to the combination will remain outstanding
and will represent a like number of shares and options of Cobalt.
- As a result of the combination, BCBSUW will become a wholly owned
subsidiary of Cobalt.
4. Following the combination, BC Holdings will be dissolved and its shares of
Cobalt common stock will be distributed to the Foundation.
VOTE REQUIRED
(see page )
Although Wisconsin law is unclear as to what vote, if any, is required to
approve the combination, the exchange agreement requires the combination to be
approved by the highest vote required under Wisconsin law for similar
transactions--the affirmative vote of both:
- 80% of the outstanding shares of UWS common stock; AND
- 66 2/3% of the outstanding shares of UWS common stock, other than those
owned by BCBSUW, its affiliates or its benefit plans.
BCBSUW owns approximately 46.3% of the issued and outstanding shares of UWS
common stock and has agreed to vote all of such shares "FOR" the combination. In
addition, through the UWSI/BCBSUW Pension Plan and the UWSI/BCBSUW 401(k) Plan,
BCBSUW has voting power over an additional 9.4% of the issued and outstanding
shares of UWS common stock. The directors, executive officers and affiliates of
UWS, in the aggregate, own approximately 0.4% of the issued and outstanding
shares of UWS common stock.
FAILURE TO COMPLETE THE COMBINATION
(see page )
The Commissioner of Insurance of the State of Wisconsin (which we sometimes
refer to as the "Commissioner") has issued an Order which allows BCBSUW to
convert to a stock form of ownership by completing the combination. Under the
terms of that Order, the combination must be completed on or before March 28,
2001. If we do not complete the combination by that time, we will be prohibited
from completing the combination at all unless the Commissioner extends the
deadline for completion of the combination.
ADEQUACY OPINION OF LEHMAN BROTHERS
(see page )
The UWS special committee did not receive a fairness opinion, but instead
has received a written opinion from Lehman Brothers Inc. that, as of the date of
that opinion, from a financial point of view, the aggregate ownership interest
4
<PAGE>
in Cobalt to be retained by the shareholders of UWS (other than BCBSUW) upon
consummation of the combination was adequate. ANNEX B attached to this Proxy
Statement/Prospectus contains the full text of Lehman Brothers' written adequacy
opinion dated December 21, 2000. Lehman Brothers' opinion should not be deemed
to constitute a fairness opinion. We encourage you to read this opinion
carefully for a description of assumptions made, procedures followed, matters
considered and limitations on the review undertaken by Lehman Brothers. Lehman
Brothers addressed its opinion to the UWS special committee. The opinion does
not constitute a recommendation to any shareholder with respect to matters
concerning the combination.
FEDERAL INCOME TAX CONSEQUENCES OF THE COMBINATION
(see page )
The combination is structured as a taxable purchase of BCBSUW stock. UWS
will incur no tax upon issuance of its shares in the exchange and UWS
shareholders who retain their shares will incur no gain or loss on the exchange.
Any UWS shareholder who exercises dissenters' rights generally will have gain
(or loss) based on the difference between the amount of cash received by such
dissenting shareholder and such shareholder's tax basis in UWS shares. Any
shareholder exercising dissenters' rights is urged to consult with a tax advisor
to determine the particular federal, state, local or foreign income or other tax
consequences of exercising dissenters' rights under the holder's particular
situation.
LISTING OF COMMON STOCK
(see page )
Like the existing UWS common stock, the common stock to be received by BC
Holdings in the conversion will be listed for trading on the New York Stock
Exchange. When the combination is completed, UWS will change its ticker symbol
on the New York Stock Exchange from "UWZ" to "CBZ".
DISSENTERS' RIGHTS
(see page )
Shareholders that perfect dissenters' rights according to the terms set
forth under the Wisconsin dissenters' rights statutes will be entitled to those
rights. This means that if you file a written objection to the combination
before the special meeting and otherwise comply with the applicable procedures
under Wisconsin law, you will be entitled to receive the "fair value" of your
shares of UWS common stock in cash rather than continue to hold UWS common
stock. Under the exchange agreement, UWS is not required to complete the
combination if more than 2.5% of the outstanding UWS common stock exercise
dissenters' rights.
AGREEMENTS GOVERNING COBALT AFTER THE COMBINATION IS COMPLETED
(see page )
Upon completion of the combination, Cobalt and the Foundation will be
parties to the following two agreements:
VOTING TRUST AND DIVESTITURE AGREEMENT
(see page )
Under the voting trust and divestiture agreement:
- The Foundation will deposit all of its shares of Cobalt common stock,
which will then equal approximately 77.5% of all of the outstanding shares
of Cobalt common stock, into a voting trust. These shares will remain
subject to the voting trust until they are no longer beneficially owned by
the Foundation or the trust terminates.
- The Cobalt board of directors will direct the trustee of the voting trust
how to vote these shares (including for their own election), except that
the Foundation will direct the trustee how to vote these shares in the
case of a proposed business combination transaction involving Cobalt in
which the Cobalt shareholders would own less than 50.1% of the shares of
the resulting company.
5
<PAGE>
- The Foundation must sell the shares deposited in the voting trust so that
it:
-- beneficially owns less than 80% of the outstanding shares of
Cobalt common stock within one year after the combination;
-- beneficially owns less than 50% of the outstanding shares of
Cobalt common stock within three years after the combination,
subject to a possible one-year extension; and
-- beneficially owns less than 20% of the outstanding shares of
Cobalt common stock within five years after the combination,
subject to a possible two-year extension.
- The voting trust terminates when the Foundation beneficially owns less
than 5% of the issued and outstanding shares of Cobalt common stock.
- Cobalt and the Foundation must mutually agree on an institutional trustee
to serve as trustee under the voting trust.
- The Foundation is subject to limitations regarding its participation in
discussions or negotiations regarding a merger, tender offer or other
business combination with Cobalt.
REGISTRATION RIGHTS AGREEMENT
(see page )
In general, the registration rights agreement requires Cobalt to register
with the Securities and Exchange Commission the Foundation's shares of Cobalt
common stock for sale to the public over a period of time and grants Cobalt the
right to buy the Foundation's shares of Cobalt common stock in some cases.
Under the registration rights agreement:
- Cobalt will register with the Securities and Exchange Commission the
Foundation's shares of Cobalt common stock for sale to the public:
-- when requested by the Foundation; or
-- when Cobalt registers the shares of Cobalt common stock for a
public offering and the Foundation requests that its shares be
included in the registration.
- There are limits on Cobalt's obligation to register the Foundation's
shares of Cobalt common stock in order to minimize the disruptive effect
of these registrations on Cobalt and the market for its common stock.
- Cobalt has the option to purchase the Foundation's shares of Cobalt common
stock at a price based upon the market value of the stock at the time of
purchase:
-- on an ongoing basis after the Foundation has received at least
$10 million from the sale of shares of Cobalt common stock; or
-- in certain cases when the Foundation exercises its registration
rights.
OWNERSHIP LIMITATIONS UNDER AMENDED AND RESTATED ARTICLES OF INCORPORATION
(see page )
Cobalt's Amended and Restated Articles of Incorporation that will be in
effect following the completion of the combination contain ownership limitations
required by the Association for its for-profit licensees. The Association
designed these ownership limitations to protect the independence of its
for-profit licensees from any single shareholder. Under these ownership
limitations:
- no institutional shareholder may own 10% or more of the voting power of
Cobalt;
- no non-institutional shareholder may own 5% or more of the voting power of
Cobalt; and
- no shareholder, institutional or non-institutional, may own 20% or more of
the total outstanding equity of Cobalt.
If a shareholder exceeds the ownership limitations, an escrow agent will
sell the excess shares and return the proceeds, net of expenses, to the
shareholder, as discussed on page .
6
<PAGE>
Cobalt's Amended and Restated Articles of Incorporation will exempt the
Foundation and BC Holdings from these ownership limitations, because the
Foundation has agreed to sell its shares of Cobalt common stock in accordance
with the divestiture deadlines described in this document and also has agreed to
comply with all other provisions of the voting trust and divestiture agreement.
MANAGEMENT OF COBALT
(see page )
When the combination is completed, the directors of Cobalt will be Richard
A. Abdoo, Barry K. Allen, James L. Forbes, Thomas R. Hefty, Michael S. Joyce, D.
Keith Ness, M.D., William C. Rupp, M.D., Janet D. Steiger and Kenneth M. Viste,
Jr., M.D. The executive officers of Cobalt will be Thomas R. Hefty, Chairman of
the Board, President and Chief Executive Officer; Stephen E. Bablitch, Vice
President, General Counsel and Secretary; Michael E. Bernstein, Senior Vice
President; Frank M. Cino, Vice President and Controller; Timothy F. Cullen,
Senior Vice President and Chairman of United Government Services, LLC; Gail L.
Hanson, Vice President, Chief Financial Officer and Treasurer; James E. Hartert,
Vice President, and President of IRG; Catherine S. Harvey, Senior Vice
President; Terrance L. Knecht, Vice President and Chief Information Officer;
Thomas E. Liechty, Vice President, and President of UWIC and UHLIC; Emil E.
Pfenninger, Vice President, and President of United Heartland; Penny J. Siewert,
Senior Vice President of Regional Services; and Mary I. Traver, Vice President,
and President of Compcare.
INTERESTS OF DIRECTORS AND OFFICERS IN THE COMBINATION
(see page )
In considering the board of directors' recommendation that you vote in favor
of the combination, you should be aware that the directors and executive
officers of Cobalt will have interests in the combination that are different
from or in addition to your interests. The UWS special committee and UWS board
of directors knew about these interests and considered them when they approved
the exchange agreement.
CONDITIONS OF THE COMBINATION
(see page )
We will complete the combination only if the following conditions are
satisfied or waived, if waivable:
- UWS shareholders approve the combination;
- we receive the necessary regulatory approvals from the state authorities
in states where we do business;
- UWS receives an opinion from its counsel, Michael Best & Friedrich LLP,
regarding the tax-free nature of the combination to the shareholders of
UWS (other than BCBSUW);
- the Association approves the combination; and
- all of the conditions to the obligations of UWS, BCBSUW and BC Holdings to
complete the combination that are contained in the exchange agreement are
satisfied or waived.
REQUIRED REGULATORY APPROVALS
(see page )
The terms and conditions of the combination are subject to the prior review
and approval of the Office of the Commissioner of Insurance of the State of
Wisconsin (which we sometimes refer to as "OCI"), and under the terms of the
Order approving the conversion, the OCI may only approve the combination if its
terms and conditions are fair and reasonable to the interests of the Foundation.
Additionally, the combination may not be completed until BCBSUW has amended its
conversion application materials consistent with the terms and conditions of the
Order approving the conversion which requires modifications to certain
application materials. Such modifications are subject to the prior review and
approval of the OCI.
7
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA FOR UWS
The following selected consolidated financial data for the five years ended
December 31, 1999 are derived from the audited consolidated financial statements
of UWS. The selected financial data for the nine month periods ended
September 30, 2000 and 1999 and the December 31, 1995 balance sheet data are
derived from unaudited financial statements. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which UWS
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 2000. The data should be
read in conjunction with UWS's consolidated financial statements, related notes,
and other financial information included herein.
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Health services revenue:
Premium................................ $554,069 $484,207 $651,567 $608,917 $560,825 $493,092 $466,929
Other.................................. 33,812 29,477 41,586 29,728 26,046 27,632 24,222
Investment results....................... 5,967 9,509 11,371 19,029 22,340 19,236 9,776
-------- -------- -------- -------- -------- -------- --------
Total revenues....................... 593,848 523,193 704,524 657,674 609,211 539,960 500,927
Expenses:
Medical and other benefits............... 504,976 441,505 621,916 519,636 485,198 425,258 416,167
Selling, general and administrative...... 95,737 95,492 127,404 103,517 94,496 83,839 72,576
Profit (loss) sharing on provider
arrangements........................... 420 (820) (4,096) 2,762 3,380 2,868 2,734
Interest................................. 4,876 3,780 5,293 1,464 102 196 111
Amortization of goodwill and other
intangibles............................ 716 571 796 450 818 841 678
-------- -------- -------- -------- -------- -------- --------
Total expenses....................... 606,725 540,528 751,313 627,829 583,994 513,002 492,266
-------- -------- -------- -------- -------- -------- --------
Pre-tax income (loss)...................... (12,877) (17,335) (46,789) 29,845 25,217 26,958 8,661
Income tax expense (benefit)............... (5,578) (7,309) (17,785) 11,767 9,433 10,617 3,277
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................... $ (7,299) $(10,026) $(29,004) $ 18,078 $ 15,784 $ 16,341 $ 5,384
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per share:
Basic.................................... $ (0.43) $ (0.60) $ (1.72) N/A(1) N/A(2) N/A(2) N/A(2)
Diluted.................................. $ (0.43) $ (0.60) $ (1.72) N/A(1) N/A(2) N/A(2) N/A(2)
Weighted average shares outstanding:
Basic.................................... 16,940(3) 16,838(3) 16,841(3) 16,560 N/A(2) N/A(2) N/A(2)
Diluted.................................. 16,940(3) 16,838(3) 16,841(3) 16,563 N/A(2) N/A(2) N/A(2)
BALANCE SHEET DATA:
Cash and investments....................... $156,316 $145,528 $146,128 $192,558 $176,579 $182,431 $178,926
Total assets............................... 333,419 282,864 297,154 298,208 266,256 269,478 261,523
Note payable to affiliate.................. 70,000 70,000 70,000 70,000 -- -- --
Total shareholders' equity................. 24,658 50,638 31,032 64,459 123,616 123,882 120,277
OPERATING STATISTICS:
Medical loss ratio(4)...................... 91.1% 91.2% 95.5% 85.3% 86.5% 86.2% 89.1%
Selling, general and administrative expense
ratio(5)................................. 16.3% 18.6% 18.4% 16.2% 16.1% 16.1% 14.8%
Net income (loss) margin(6)................ (1.1%) (1.9%) (4.1%) 2.7% 2.6% 3.0% 1.2%
</TABLE>
------------------------------
(1) Earnings per share data have been omitted since UWS was not an independent,
publicly owned company with a capital structure of its own for the entire
year. UWS became publicly owned on September 28, 1998.
(2) Earnings per share data have been omitted since UWS was not an independent,
publicly owned company with a capital structure of its own for the fiscal
periods presented.
(3) Potentially dilutive securities are not included in the calculation of
earnings per share because their inclusion would have an antidilutive
effect.
(4) Represents medical and other benefits as a percentage of premium revenue.
(5) Represents selling, general and administrative expenses as a percentage of
health services revenue.
(6) Represents net income (loss) as a percentage of total revenues.
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA FOR BCBSUW
The following selected consolidated financial data for the three years ended
December 31, 1999 are derived from the audited consolidated financial statements
of BCBSUW. The selected financial data for the years ended December 31, 1996 and
1995 and the nine month periods ended September 30, 2000 and 1999, and the
December 31, 1997 balance sheet are derived from unaudited financial statements.
The unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which BCBSUW considers necessary for a fair presentation of
the financial position and the results of operations for these periods.
Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 2000. The data should be read in conjunction with BCBSUW's
consolidated financial statements, related notes, and other financial
information included herein.
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Health services revenue:
Premium.................................. $393,611 $305,677 $418,949 $361,965 $345,903 $351,808 $355,266
Government contract fees................. 49,910 36,746 52,259 31,667 23,333 18,570 16,805
Other.................................... 18,168 19,581 25,970 25,302 20,606 20,147 20,771
Investment results......................... 7,494 16,318 18,510 13,501 18,347 19,065 42,415
-------- -------- -------- -------- -------- -------- --------
Total revenues......................... 469,183 378,322 515,688 432,435 408,189 409,590 435,257
Expenses:
Medical and other benefits................. 377,474 269,403 376,814 297,885 297,979 299,807 312,828
Selling, general and administrative........ 129,183 115,025 158,187 133,153 119,036 114,416 105,859
Interest................................... 280 448 553 115 215 139 43
Amortization of goodwill and other
intangibles.............................. 440 48 191 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total expenses......................... 507,377 384,924 535,745 431,153 417,230 414,362 418,730
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)...................... (38,194) (6,602) (20,057) 1,282 (9,041) (4,772) 16,527
Equity in net income (loss) of affiliates,
net of tax................................. (2,358) (14,173) (22,690) 3,991 6,857 4,731 3,330
-------- -------- -------- -------- -------- -------- --------
Pre-tax income (loss)........................ (40,552) (20,775) (42,747) 5,273 (2,184) (41) 19,857
Income tax expense (benefit)................. 548 -- -- (78) (2,785) (1,393) 1,168
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...................... $(41,100) $(20,775) $(42,747) $ 5,351 $ 601 $ 1,352 $ 18,689
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and investments......................... $ 34,602 $ 66,562 $ 57,383 $109,447 $104,261 $124,821 $132,002
Investments in and advances to affiliates.... 176,350 181,120 173,847 195,773 193,777 189,484 169,642
Total assets................................. 369,643 376,362 381,400 443,186 395,022 391,418 394,729
Total surplus................................ 163,885 221,048 200,109 250,991 245,857 246,521 234,031
OPERATING STATISTICS:
Medical loss ratio(1)........................ 95.9% 88.1% 89.9% 82.3% 86.1% 85.2% 88.1%
Selling, general and administrative expense
ratio(2)................................... 28.0% 31.8% 31.9% 31.8% 30.5% 29.3% 26.9%
Net income (loss) margin(3).................. (8.8%) (5.5%) (8.3%) 1.2% 0.1% 0.3% 4.3%
</TABLE>
------------------------------
(1) Represents medical and other benefits as a percentage of premium revenue.
(2) Represents selling, general and administrative expenses as a percentage of
health services revenue.
(3) Represents net income (loss) as a percentage of total revenues.
9
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
BCBSUW UWS ADJUSTMENTS COMBINED
--------- -------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $(10,882) $ 31,196 $ (500)(1) $ 19,814
Investments--available-for-sale, at fair value............ 45,484 115,848 -- 161,332
Due from affiliates....................................... 13,840 6,614 (14,745)(2) 5,709
Other receivables......................................... 27,218 78,377 -- 105,595
Prepaid expenses and other current assets................. 16,310 25,024 (9,449)(3) 31,885
-------- -------- -------- --------
Total current assets........................................ 91,970 257,059 (24,694) 324,335
Investments--held-to-maturity, at amortized cost............ -- 9,272 4 (4) 9,276
Note receivable from affiliate.............................. 70,000 -- (70,000)(5) --
Investments in affiliates................................... 106,350 -- (11,413)(6) 94,937
Property and equipment, net................................. 22,310 10,602 -- 32,912
Goodwill and other intangibles, net......................... 8,202 11,629 51,548(1)(7) 71,379
Other non-current assets.................................... 70,381 44,857 (21,351)(3) 93,887
-------- -------- -------- --------
Total assets................................................ $369,213 $333,419 $(75,906) $626,726
======== ======== ======== ========
LIABILITIES AND SURPLUS/SHAREHOLDERS' EQUITY:
Current liabilities:
Medical and other benefits payable........................ $ 94,108 $ 88,344 $ -- $182,452
Advance premiums.......................................... 34,608 45,326 -- 79,934
Due to affiliates......................................... 433 14,455 (14,745)(2) 143
Payable and accrued expenses.............................. 22,403 13,189 -- 35,592
Other current liabilities................................. 8,798 34,409 (5,060)(3) 38,147
-------- -------- -------- --------
Total current liabilities................................... 160,350 195,723 (19,805) 336,268
Noncurrent liabilities:
Note payable to affiliate................................. -- 70,000 (70,000)(5) --
Noncurrent other benefits payable......................... -- 30,549 -- 30,549
Other noncurrent liabilities.............................. 44,978 12,489 (6,937)(3) 50,530
-------- -------- -------- --------
Total liabilities........................................... 205,328 308,761 (96,742) 417,347
SURPLUS/SHAREHOLDERS' EQUITY
Common stock (no par value, no stated value, 50,000,000
shares authorized, 16,939,682 issued and outstanding at
September 30, 2000)....................................... -- 14,052 -- 14,052
Surplus..................................................... 168,663 12,943 (18,803)(3) 200,082
4 (4)
(12,495)(6)
51,048 (7)
(1,278)(8)
Accumulated other comprehensive income (loss)............... (4,778) (2,337) 1,082 (6) (4,755)
1,278 (8)
-------- -------- -------- --------
Total surplus / shareholders' equity........................ 163,885 24,658 20,836 209,379
-------- -------- -------- --------
Total liabilities and surplus / shareholders' equity........ $369,213 $333,419 $(75,906) $626,726
======== ======== ======== ========
</TABLE>
------------------------------
(1) Adjustment to record $500,000 cash payment to BC Holdings.
(2) Adjustment to eliminate intercompany activity between UWS and BCBSUW. The
majority of the remaining receivable balance is between UWS and United
Heartland Illinois. The remaining liability balance is between UWS and
American Medical Security Group, Inc.
(3) Adjustment to establish a full valuation allowance for UWS's net deferred
tax asset balances.
(4) Adjustment of held-to-maturity investments to fair value.
(5) Adjustment to eliminate $70.0 million intercompany note between UWS and
BCBSUW.
(6) Adjustment to eliminate BCBSUW's investment in UWS.
(7) Adjustment to record goodwill calculated as a result of purchase accounting
based on the September 30, 2000 balance sheets and fair values. The closing
price of UWS common stock on the New York Stock Exchange on September 30,
2000 ($5.00 per share) was utilized in determining goodwill.
(8) Adjustment of basis of available-for-sale investments to fair value as of
the transaction date.
10
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
BCBSUW UWS ADJUSTMENTS COMBINED
--------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Health services revenue:
Premium........................................... $393,611 $554,069 $ (6,930)(1) $ 940,750
Government contract fees.......................... 49,910 -- -- 49,910
Other............................................. 18,168 33,812 (3,884)(1) 48,096
Investment results.................................... 7,494 5,967 (4,052)(2) 9,409
-------- -------- -------- ----------
Total revenues................................ 469,183 593,848 (14,866) 1,048,165
Expenses:
Medical and other benefits............................ 377,474 504,976 (5,396)(1) 877,054
Selling, general, administrative and other............ 129,183 95,737 (5,418)(1) 219,502
Profit (loss) sharing on provider arrangements........ -- 420 -- 420
Interest.............................................. 280 4,876 (4,052)(2) 1,104
Amortization of goodwill and other intangibles........ 440 716 2,578 (3) 3,734
-------- -------- -------- ----------
Total expenses................................ 507,377 606,725 (12,288) 1,101,814
-------- -------- -------- ----------
Operating loss.......................................... (38,194) (12,877) (2,578) (53,649)
Equity in net income (loss) of affiliates,
net of tax............................................ (2,358) -- 3,379 (4) 1,021
-------- -------- -------- ----------
Pre-tax loss............................................ (40,552) (12,877) 801 (52,628)
Income tax expense (benefit)............................ 548 (5,578) 5,569 (5) 539
-------- -------- -------- ----------
Net loss...................................... $(41,100) $ (7,299) $ (4,768) $ (53,167)
======== ======== ======== ==========
Loss per share:
Basic................................................. N/A $ (0.43) (1.32)
Diluted............................................... N/A $ (0.43) (1.32)
Weighted average shares outstanding:
Basic................................................. N/A 16,940 (6) 40,412 (6)
Diluted............................................... N/A 16,940 (6) 40,412 (6)
</TABLE>
------------------------------
(1) Adjustment to eliminate intercompany activity between UWS and BCBSUW.
(2) Adjustment to eliminate interest on the $70.0 million intercompany note
between UWS and BCBSUW.
(3) Goodwill calculated as a result of purchase accounting based on the
September 30, 2000 balance sheets and fair values amortized over 15 years.
The closing price of UWS common stock on the New York Stock Exchange on
September 30, 2000 ($5.00 per share) was utilized in determining goodwill.
(4) Adjustment to eliminate BCBSUW's equity in net loss of UWS.
(5) Adjustment to establish a full valuation allowance for UWS's federal
deferred tax benefit.
(6) Potentially dilutive securities are not included in the calculation of
earnings per share because their inclusion would have an antidilutive
effect.
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UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
BCBSUW UWS ADJUSTMENTS COMBINED
--------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Health services revenue:
Premium............................................... $418,949 $651,567 $ (7,716)(1) $1,062,800
Government contract fees.............................. 52,259 -- -- 52,259
Other................................................. 25,970 41,586 (4,310)(1) 63,246
Investment results........................................ 18,510 11,371 (4,804)(2) 25,077
-------- -------- -------- ----------
Total revenues.................................... 515,688 704,524 (16,830) 1,203,382
Expenses:
Medical and other benefits................................ 376,814 621,916 (6,858)(1) 991,872
Selling, general and administrative....................... 158,187 127,404 (5,168)(1) 280,423
Profit (loss) sharing on provider arrangements............ -- (4,096) -- (4,096)
Interest.................................................. 553 5,293 (4,804)(2) 1,042
Amortization of goodwill and other intangibles............ 191 796 3,437 (3) 4,424
-------- -------- -------- ----------
Total expenses.................................... 535,745 751,313 (13,393) 1,273,665
-------- -------- -------- ----------
Operating loss.............................................. (20,057) (46,789) (3,437) (70,283)
Equity in net loss of affiliates, net of tax................ (22,690) -- 12,711 (4) (9,979)
-------- -------- -------- ----------
Pre-tax loss................................................ (42,747) (46,789) 9,274 (80,262)
Income tax expense (benefit)................................ -- (17,785) 18,344 (5) 559
-------- -------- -------- ----------
Net loss.......................................... $(42,747) $(29,004) $ (9,070) $ (80,821)
======== ======== ======== ==========
Loss per share:
Basic..................................................... N/A $ (1.72) (2.00)
Diluted................................................... N/A $ (1.72) (2.00)
Weighted average shares outstanding:
Basic..................................................... N/A 16,841 (6) 40,313
Diluted................................................... N/A 16,841 (6) 40,313
</TABLE>
------------------------------
(1) Adjustment to eliminate intercompany activity between UWS and BCBSUW.
(2) Adjustment to eliminate interest on the $70 million between UWS and BCBSUW.
(3) Goodwill calculated as a result of purchase accounting based on the
September 30, 2000 balance sheet and market value amortized over 15 years.
The closing price of UWS common stock on the New York Stock Exchange on
September 30, 2000 ($5.00 per share) was utilized in determining goodwill.
(4) Adjustment to eliminate BCBSUW's equity in net loss of UWS.
(5) Adjustment to establish a full valuation allowance for UWS's federal
deferred tax benefit.
(6) Potentially dilutive securities are not included in the calculation of
earnings per share because their inclusion would have an antidilutive
effect.
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RISK FACTORS
By voting in favor of the combination, you will be choosing to invest in the
common stock of Cobalt. In addition to the other information contained in or
incorporated by reference into this Proxy Statement/Prospectus, you should
carefully consider the following risk factors in deciding whether to vote for
the combination.
GENERAL
WE OBTAINED AN ADEQUACY OPINION, NOT A FAIRNESS OPINION, FOR THE COMBINATION.
The UWS special committee retained Lehman Brothers as its independent
financial advisor with respect to the combination. The UWS special committee
requested Lehman Brothers to render its opinion with respect for the fairness,
from a financial point of view, to the shareholders of UWS (other than BCBSUW)
of the aggregate ownership interest to be retained by those shareholders upon
the consummation of the combination. Lehman Brothers advised the special
committee that it was unable to provide the requested fairness opinion based on
the proposed terms of the combination. Lehman Brothers, however, did provide its
opinion to the special committee that as of the date of such opinion, from a
financial point of view, the aggregate ownership interest in Cobalt to be
retained by the shareholders of UWS (other than BCBSUW) upon consummation of the
combination was adequate. It is customary to receive a fairness opinion from a
financial advisor in transactions such as this and it is unusual for a board of
directors not to receive one. Lehman Brothers' opinion is not a fairness
opinion. You should keep this in mind when deciding whether to vote for the
combination. A copy of the Adequacy Opinion is attached as ANNEX B.
RISKS RESULTING FROM THE COMBINATION
STOCK SALES BY THE FOUNDATION COULD CAUSE OUR COMMON STOCK PRICE TO FALL.
The Foundation and UWS have agreed to enter into a voting trust and
divestiture agreement when the combination is completed. The voting trust and
divestiture agreement requires the Foundation to reduce its ownership of Cobalt
common stock by selling shares of Cobalt common stock. Based upon the current
number of shares of UWS stock outstanding, and assuming the 7,840,817 shares of
UWS common stock currently owned by BCBSUW are not considered outstanding
following the combination, the Foundation must sell approximately 11,107,253
million shares of the Cobalt common stock within the first three to four years
after the combination, and it must sell a total of 23,230,939 million shares of
Cobalt common stock within the first five to seven years after the combination.
Given the limited historical trading volume for UWS common stock, significant
sales of Cobalt common stock by the Foundation, and the expectation of these
sales, could cause the Cobalt common stock price to fall after the combination.
The price of the Cobalt stock could be affected by these factors for an
undetermined period of time. If the Foundation fails to meet these divestiture
requirements, Cobalt will arrange for the sale of the Foundation's shares as
described under "THE COMBINATION--Voting Trust and Divestiture Agreement"
beginning on page .
We cannot predict how the market will value Cobalt. The market value of
Cobalt common stock may vary from the current market value of the UWS common
stock, and the price of Cobalt common stock after the combination could be
lower.
REGISTRATION RIGHTS OF THE FOUNDATION MAY INHIBIT THE ABILITY OF COBALT TO
RAISE ADDITIONAL FUNDS THROUGH EQUITY OFFERINGS.
Our industry is in a state of change, and, in order to take advantage of
acquisition and other investment opportunities that may arise in the future, we
may desire the flexibility to raise funds quickly by selling Cobalt common stock
in the equity markets. The registration rights agreement with
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<PAGE>
the Foundation could limit or make more difficult our ability to raise funds
through equity offerings after the combination upon terms that we desire or at
times when we may require funds.
Our failure to raise additional equity capital when required could:
- restrict our future growth, both internally and through acquisitions;
- inhibit our ability to invest in technology and other products and
services that we may need; and
- adversely affect our ability to compete in our markets.
We can issue Cobalt common stock as consideration to buy another company.
If, however, we want to buy a business for cash and we need to raise money for
the acquisition by selling Cobalt common stock, the restrictions in the
registration rights agreement described above may limit our flexibility. We may
not be able to sell Cobalt common stock at the most opportune times. None of our
agreements with the Foundation, however, will prevent us from borrowing money to
buy a business.
PROVISIONS IN COBALT'S AMENDED AND RESTATED ARTICLES OF INCORPORATION AND
BYLAWS MAY PREVENT COBALT FROM BEING SOLD TO A THIRD PARTY UNLESS THE COBALT
BOARD OF DIRECTORS APPROVES THE SALE, AND MAY LIMIT OR ELIMINATE INCREASES IN
STOCK PRICE BASED ON "TAKEOVER" SPECULATION.
If the combination is completed, the Amended and Restated Articles of
Incorporation and Bylaws of Cobalt which will be in effect will include
provisions required by the Association for its for-profit licensees which the
Association designed to protect the independence of its for-profit licensees
from any single shareholder. These provisions, which we do not have in our
current Articles of Incorporation or Bylaws, include the following:
- ownership limitations that prohibit institutional investors from owning
10% or more of the Cobalt voting securities, and prohibit other investors
from owning 5% or more of the Cobalt voting securities; and
- initially, at least 80% of the Cobalt directors must be independent
directors who are not affiliated or associated with the Foundation or any
shareholder that owns Cobalt shares in excess of the ownership limits.
These provisions will make it more difficult for a third party to acquire
Cobalt in a transaction that the Cobalt board of directors has not negotiated or
approved but in which the Cobalt shareholders may receive a premium for their
shares. Also, these provisions will deter a party from acquiring a significant
ownership position in Cobalt prior to submitting an offer to the Cobalt board of
directors, and, as a result, the Cobalt common stock may trade at lower prices
relative to other companies that do not have similar ownership limitations in
their charter documents.
COBALT DIRECTORS WILL BE ABLE TO CONTROL THE OUTCOME OF ALL MATTERS OTHER
THAN CHANGE OF CONTROL PROPOSALS THAT ARE SUBMITTED TO THE COBALT
SHAREHOLDERS FOR A VOTE AS LONG AS THE FOUNDATION BENEFICIALLY OWNS A
SUBSTANTIAL PERCENTAGE OF THE OUTSTANDING SHARES OF COBALT COMMON STOCK.
The Foundation will beneficially own approximately 77.5% of the outstanding
shares of Cobalt common stock immediately after the combination. The Foundation
will place all of its shares in a voting trust for a trustee to vote and dispose
of under the terms of the voting trust and divestiture agreement described in
this document.
The trustee of the voting trust must, as a general matter, vote all of the
Foundation's shares held in the voting trust as directed by a majority of
Cobalt's independent directors and a majority of all of Cobalt's directors on
all proposals or matters that may come before the Cobalt shareholders, except
for matters relating to proposed combination and sale transactions if the Cobalt
shareholders will not own a majority of the shares of the resulting company.
Thus, for so long as the Foundation beneficially
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<PAGE>
owns a significant number of the Cobalt shares, the Cobalt board of directors
will be able to control the outcome of most matters brought before the Cobalt
shareholders for a vote, including amendments to the Cobalt Amended and Restated
Articles of Incorporation and Bylaws and the election and removal of the Cobalt
directors, subject prior to OCI approval as long as the Foundation beneficially
owns more than 20% of the outstanding shares of Cobalt.
COBALT WILL NOT BE ABLE TO SELL OR MERGE WITHOUT THE APPROVAL OF THE
FOUNDATION AS LONG AS THE FOUNDATION BENEFICIALLY OWNS 50% OR MORE OF THE
OUTSTANDING SHARES OF COBALT COMMON STOCK.
The Foundation will beneficially own approximately 77.5% of the outstanding
shares of Cobalt common stock immediately after the combination, and it is not
required to reduce its ownership to less than 50% of the outstanding shares of
Cobalt common stock until at least three to four years after the combination.
The acquisition of Cobalt by means of a merger or consolidation will require
the approval of the Cobalt board of directors and the holders of a majority of
the shares of the Cobalt common stock. As long as the Foundation beneficially
owns more than 50% of the Cobalt common stock, it will be able--by itself--to
block any proposed sale of Cobalt even if the Cobalt board of directors and
other shareholders would otherwise favor the transaction. In addition, for so
long as the Foundation beneficially owns at least 20% of the outstanding shares
of Cobalt, Cobalt must consult with the Foundation prior to soliciting, or upon
receiving, a business combination proposal which, if consummated, would result
in the then existing shareholders of Cobalt owning less than a majority of the
outstanding shares of the resulting company.
THE FOUNDATION MAY HAVE INTERESTS IN COBALT THAT DIFFER FROM YOUR INTERESTS
AS A PUBLIC SHAREHOLDER.
The Foundation is a non-stock, non-profit corporation with the purpose of
benefiting the citizens of the State of Wisconsin by funding health care
initiatives developed by the University of Wisconsin Medical School and the
Medical College of Wisconsin (which we sometimes refer to as the "Medical
Schools"). You should expect the Foundation to vote its shares of the Cobalt
common stock on proposed merger and sale transactions based upon its best
interests. The interests of the Foundation in a merger or sale transaction may
be different from your interests.
COBALT DIRECTORS WILL BE ABLE TO ENSURE THEIR RE-ELECTION AND DESIGNATE THEIR
SUCCESSORS AS LONG AS THE FOUNDATION BENEFICIALLY OWNS A SUBSTANTIAL NUMBER
OF OUTSTANDING SHARES OF COBALT COMMON STOCK.
Cobalt directors will be elected by plurality vote, and the Cobalt
shareholders will not have cumulative voting rights. In any election of
directors, the trustee of the voting trust must vote the Foundation's shares in
favor of each nominee approved by a majority of the directors of Cobalt who are
deemed to be "independent" under the Association's standards and a majority of
all of the directors of Cobalt. However, if directors are eligible for public
shareholder representation, the trustee will be directed to vote its shares in
the same proportion and for the same candidates voted for by the Cobalt
shareholders. Also, the directors of Cobalt may be removed from office only for
cause as described in the Amended and Restated Articles of Incorporation and
then only if the holders of 75% or more of the outstanding shares of Cobalt
common stock vote for removal. The trustee of the voting trust will vote all of
the Foundation's shares held in the voting trust against the removal of a
director unless a majority of the independent directors of Cobalt and a majority
of all of the directors of Cobalt initiate or consent to the removal. As a
result, the directors of Cobalt will likely be able to ensure their re-election
and designate their successors for as long as the Foundation owns a substantial
number of shares of Cobalt common stock.
15
<PAGE>
RISKS RELATED TO BEING A REGULATED ENTITY
CHANGES IN LAWS AND GOVERNMENT REGULATIONS MAY ADVERSELY IMPACT OUR BUSINESS.
Changes in laws and government regulations designed to protect providers and
members rather than our shareholders could force us to change how we operate and
could harm our business. Our business is extensively regulated by the states in
which we operate and, to a lesser extent, by the federal government. These laws
and regulations are generally intended to benefit and protect providers and
health plan members rather than shareholders. Changes in existing laws and
rules, the enactment of new laws and rules and changing interpretations of these
laws and rules could, among other things:
- force us to change how we do business;
- restrict revenue and enrollment growth;
- increase our health care and administrative costs;
- impose additional capital requirements; and
- increase or change our managed care liability.
Such regulations govern, among other things, (i) the amount of dividends and
other distributions that can be paid by certain of our subsidiaries without
prior approval or notification; (ii) the granting and revoking of licenses to
transact business, trade practices, premium rate regulation, underwriting
standards, policy forms, claims payment, licensing of agents and brokers,
minimum reserve and surplus requirements; and (iii) compelled participation in,
and assessments in connection with, risk-sharing pools and guaranty funds. Such
regulation is primarily intended to protect policyholders rather than investors.
Numerous proposals relating to changes in health care law have been
introduced, and some have been passed, by Congress and the states in which we
operate or may operate in the future. Changes in applicable laws and regulations
are continually being considered and interpretations of existing laws and rules
may also change from time to time. We are unable to predict what regulatory
changes may occur or what effect any particular change may have on our business.
Although some of the recent changes in government regulations, such as the
removal of the requirements on the enrollment mix between commercial and public
sector membership, have encouraged managed care participation in public sector
programs, we are unable to predict whether new laws or proposals will continue
to favor or hinder the growth of managed health care.
A recent example is state and federal legislation which would enable
physicians to collectively bargain with managed health care organizations. The
federal legislation, as currently proposed, contains an exemption for public
sector managed health care organizations. If legislation of this type were
passed without this exemption, it would negatively impact our bargaining
position with many of our providers and might result in an increase in our cost
of providing medical benefits.
We cannot predict the outcome of these legislative or regulatory proposals
or the effect which they might have on us. Legislation or regulations which
require us to change our current manner of operation, provide additional
benefits or change our contract arrangements may seriously harm our operations
and financial results.
GOVERNMENT REVIEWS, AUDITS AND INVESTIGATIONS MAY ADVERSELY IMPACT OUR
BUSINESS.
UWS, BCBSUW and their subsidiaries are subject to various governmental
reviews, audits and investigations. Any adverse investigation, audit results or
sanctions could result in:
- damage to the reputation of UWS, BCBSUW and their subsidiaries in various
markets;
- increased difficulty in selling our products and services;
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<PAGE>
- loss of a license to act as an insurer or health maintenance organization
or to otherwise provide a service;
- loss of the right to participate in various federal programs, including
the Medicare Supplement and Medicare Risk programs and Medicare Part A
processing; and
- imposition of significant fines, penalties and other sanctions.
LAWSUITS AND OTHER CLAIMS AGAINST US UNDER THE HEALTH INSURANCE PORTABILITY
AND ACCOUNTABILITY ACT OF 1996 MAY NEGATIVELY IMPACT OUR PROFITABILITY AND
REPUTATION.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA,
broadened the scope of fraud and abuse laws applicable to health care companies.
HIPAA created civil penalties for, among other things, billing for medically
unnecessary goods or services. HIPAA establishes new enforcement mechanisms to
combat fraud and abuse, including a whistleblower program.
The federal government has enacted, and state governments are enacting,
other fraud and abuse laws as well. Our failure to comply with HIPAA or these
other laws could result in criminal or civil penalties and exclusion from
Medicaid or other governmental health care programs and could lead to the
revocation of our licenses. These penalties or exclusions, were they imposed,
would negatively impact our ability to operate our business.
NEW STATUTORY ACCOUNTING RULES COULD NEGATIVELY IMPACT THE ABILITY OF BCBSUW
AND UWS TO MEET STATUTORY CAPITAL REQUIREMENTS.
During 1998, the National Association of Insurance Commissioners, or NAIC,
adopted a Codification of Statutory Accounting Principles ("Codification") which
provides interpretive guidance on statutory accounting principles and will
replace the current manual of Accounting Practices and Procedures adopted by the
NAIC commissioners. In addition, the NAIC is now considering amendments to
Codification that would be effective on the recommended implementation date of
January 1, 2001. Such amendments could have a significant impact on Codification
guidelines. Codification provides new interpretive guidance for some existing
statutory accounting principles in some areas, and requires the filing of new
insurance reports for statutory purposes. Management believes Codification will
have a significant negative impact on the statutory surplus of BSCSUW and
certain of the insurance subsidiaries of UWS. Depending on the final resolution
of pending amendments to the Codification, BCBSUW and UWS may be required to
obtain additional capital or implement other measures, such as securing new
reinsurance treaties, to mitigate the impact of Codification on surplus and
risk-based capital.
BUSINESS RISKS
RECEIPT OF INADEQUATE PREMIUMS WOULD NEGATIVELY IMPACT OUR REVENUES AND
PROFITABILITY.
Most of our revenues are generated by premiums consisting of fixed monthly
payments per member. These premiums are fixed by contract, and we are obligated
during the contract period to provide health care services as established by
contract. We have less control over costs related to the provision of health
care than we do over our selling, general and administrative expenses. While our
expenses related to health benefits were 98.1% of our combined premium revenue
in the first three quarters of 2000, for 1999, these expenses were 93.3% of our
combined premium revenue. Historically, our expenses related to health benefits
as a percentage of premium revenue have fluctuated, and the percentage for the
first three quarters of this year may not be indicative of full year or future
results. If premiums are not increased and expenses related to health benefits
rise, our earnings would be impacted negatively. In addition, our actual health
benefits costs may exceed our estimated costs. The
17
<PAGE>
premiums we receive under our current contracts may therefore be inadequate to
cover all claims, which may cause our earnings to decline.
OUR INABILITY TO MANAGE MEDICAL COSTS EFFECTIVELY WOULD REDUCE OUR
PROFITABILITY.
Our profitability depends, to a significant degree, on our ability to
predict and effectively manage medical costs. Changes in health care regulations
and practices, level of use of health care services, hospital costs,
pharmaceutical costs, major epidemics, new medical technologies, and other
external factors, including general economic conditions such as inflation
levels, are beyond our control and would reduce our ability to predict and
effectively control the costs of providing health care services. Although we
have been able to manage medical costs through a variety of techniques,
including various payment methods to primary care physicians and other
providers, advance approval for hospital services and referral requirements,
medical management and quality management programs, our information systems, and
reinsurance arrangements, we may not be able to continue to manage costs
effectively in the future. If our costs for medical services increase, our
losses could increase or we may not be able to achieve profitability.
OUR LIMITED ABILITY TO PREDICT OUR INCURRED MEDICAL EXPENSES ACCURATELY COULD
NEGATIVELY IMPACT OUR REPORTED RESULTS.
Our medical expenses include estimates of medical expenses incurred but not
yet reported, or IBNR. We estimate our IBNR medical expenses based on a number
of factors, including prior claims experience, maturity of markets, complexity
of products and stability of provider networks. Adjustments, if necessary, are
made to medical expenses in the period during which the actual claim costs are
ultimately determined or when criteria used to estimate IBNR change. We utilize
the services of independent actuaries who are contracted on a regular basis to
calculate and review the adequacy of our medical liabilities, in addition to
using our internal resources. We cannot be sure that our IBNR estimates are
adequate or that adjustments to such IBNR estimates will not harm our results of
operations. Further, our inability to accurately estimate IBNR may also affect
our ability to take timely corrective actions, further exacerbating the negative
impact on our results.
We maintain reinsurance to protect us against severe or catastrophic medical
claims, but cannot assure you that such reinsurance coverage will be adequate or
available to us in the future or that the cost of such reinsurance will not
limit our ability to obtain it.
OUR INABILITY TO ENTER INTO PROVIDER AGREEMENTS WOULD HARM OUR PROFITABILITY.
Our profitability will be dependent upon our ability, and the ability of our
subsidiaries, to contract on favorable terms with hospitals, physicians and
other health care providers. The failure to secure cost-effective health care
provider contracts may result in a loss of membership or higher medical costs.
In addition, our inability to contract with providers, or the inability of
providers to provide adequate care, could adversely affect our results of
operations.
OUR INABILITY TO MAINTAIN SATISFACTORY RELATIONSHIPS WITH OUR PROVIDER
NETWORKS WOULD HARM OUR PROFITABILITY.
Our profitability depends, in large part, upon our ability to contract
favorably with hospitals, physicians and other health care providers. Our
provider arrangements with our primary care physicians and specialists usually
are for one to two-year periods and automatically renew for successive one year
terms, subject to termination for cause by us based on provider conduct or other
appropriate reasons. The contracts generally may be cancelled by either party
upon 90 to 120 days prior written notice. Our contracts with hospitals are
usually for one to two-year periods and automatically renew for successive one
year periods, subject to termination for cause due to provider misconduct or
other appropriate
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<PAGE>
reasons. Generally, our hospital contracts may be canceled by either party
without cause on 90 to 150 days prior written notice. There can be no assurance
that we will be able to continue to renew such contracts or enter into new
contracts enabling us to service our members profitably. We will be required to
establish acceptable provider networks prior to entering new markets. Although
we have established long-term relationships with many of our providers, we may
be unable to enter into agreements with providers in new markets on a timely
basis or under favorable terms. If we are unable to retain our current provider
contracts or enter into new provider contracts timely or on favorable terms, our
profitability will be harmed.
A REDUCTION IN THE NUMBER OF SUBSCRIBERS TO OUR HEALTH CARE PROGRAMS MAY HARM
OUR PROFITABILITY.
A reduction in the number of subscribers to our health care programs could
adversely affect our financial position, results of operations and cash flows.
Factors that could contribute to the loss of membership include:
- failure to obtain new customers or retain existing customers;
- premium increases and benefit changes;
- reduction in our provider network;
- our exit from markets;
- reductions in work force by existing customers; or
- negative publicity and news coverage.
NEGATIVE PUBLICITY MAY DAMAGE OUR REPUTATION.
The health care industry is subject to negative publicity. Negative
publicity may result in increased regulation and legislative review of industry
practices which may further increase our cost of doing business and adversely
affect our profitability by:
- adversely affecting our ability to market our products or services;
- requiring us to change our products and services; or
- increasing the regulatory burdens under which we operate.
In addition, as long as we use the Blue Cross-Registered Trademark- and Blue
Shield-Registered Trademark- names and service marks in marketing our managed
care products, any negative publicity concerning the Association or other
Association licensees may adversely affect our business.
WE MAY BE SUBJECT TO CLAIMS RELATING TO MANAGED CARE LIABILITY, WHICH COULD
CAUSE US TO INCUR SIGNIFICANT EXPENSES.
Our providers and employees involved in care management decisions may be
exposed to the risk of managed care liability claims. In addition, states are
beginning to adopt legislation that permits managed care organizations to be
held liable for negligent treatment decisions or benefit coverage
determinations. Claims of this nature, if successful, could result in
substantial damage awards against us that could exceed the limits of any
applicable managed care liability insurance coverage. Therefore, successful
claims asserted against us or our employees could adversely affect our financial
condition and profitability.
In addition, we may be subject to other litigation that may adversely affect
our business or results of operations. We maintain managed care liability
insurance and such other lines of coverage as we believe are reasonable in light
of our experience to date. However, this insurance may not be sufficient or
available at a reasonable cost to protect us from liabilities which might
adversely affect our business
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or results of operations. Even if any claims brought against us were
unsuccessful or without merit, we would still have to defend ourselves against
such claims. Any such defenses may be time-consuming and costly, and may
distract our management's attention. As a result, we may incur significant
expenses and may be unable to effectively operate our business.
FAILURE TO PROPERLY MAINTAIN THE INTEGRITY OF PROPRIETARY INFORMATION AND
INFORMATION SYSTEMS COULD RESULT IN THE LOSS OF CUSTOMERS OR DECREASE OUR
PROFITABILITY.
Our business will depend in part on our ability to maintain our information
systems and to ensure the continued integrity of proprietary information. We are
committed to maintaining and enhancing existing information systems and
developing new systems in order to keep pace with continuing changes in
information processing technology, industry standards, and customer preferences.
If we don't maintain effective and efficient information systems, we could
experience the loss of existing customers, difficulty in attracting new
customers, customer and provider disputes, regulatory problems, increases in
administrative expenses or other adverse consequences.
THE ASSOCIATION MAY REVOKE OUR LICENSE AGREEMENTS.
In connection with the BCBSUW license agreement with the Association, BCBSUW
is subject to ongoing and customary financial and service performance review. As
a result of the financial performance of BCBSUW, the Association has included
BCBSUW in its Plan Performance Response Monitoring Process, or PPRMP. As a
result, the Association has requested that BCBSUW regularly submit additional
interim financial information to the Association. In addition, the PPRMP
monitoring thresholds require that BCBSUW maintain a prescribed level of
escrowed assets as a financial guarantee for its transactions with other Blue
Cross plans. The PPRMP monitoring process also requires that BCBSUW provide
certain notices to the Association regarding transactions with other Blue Cross
plans.
To maintain its Association license, BCBSUW is required to maintain a
minimum level of statutory capital and surplus based upon the Health
Organization Risk-Based Capital Requirements ("RBC") promulgated by the NAIC. As
of June 30, 2000, and December 31, 1999, BCBSUW's statutory and surplus exceeded
the minimum licensure level. The Association is entitled to terminate its
license agreement with BCBSUW, including the right to use the Blue
Cross-Registered Trademark- and Blue Shield-Registered Trademark- trademarks, if
BCBSUW's statutory capital and surplus falls below the company action level of
RBC.
RISING HEALTH CARE COSTS MAY REDUCE OUR PROFITABILITY.
Our profitability may be adversely affected by rising health care costs and
changes in the delivery of health care services. As such, our future results
will largely depend on our ability to accurately predict and manage future
health care costs. Much of the premium revenue we receive is based upon rates
set before services are delivered, and the related costs are usually incurred on
a prospective annual basis. Although we will attempt to base the premiums
charged on an estimate of future health care costs over the fixed premium
period, competition, regulations and other circumstances may limit our ability
to fully base premiums on these estimated costs.
WE ARE SUBJECT TO COMPETITION WHICH IMPACTS OUR ABILITY TO INCREASE OUR
PENETRATION OF THE MARKETS WE SERVICE.
We compete on the basis of size, price, quality of provider network,
benefits provided and quality of service. We have numerous types of competitors,
including other health plans, insurers and third-party administrators and
traditional state Medicaid programs that reimburse providers as care is
provided. Some of the health plans with which we compete have substantially
larger enrollments, greater financial and other resources and offer a broader
scope of products than we do.
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While many states mandate health plan enrollment for Medicaid eligible
participants, the programs are voluntary in other states, such as Illinois.
Subject to limited exceptions by federally approved state applications, the
federal government requires that there be choice for Medicaid recipients among
managed care programs. Voluntary programs and mandated competition will impact
our ability to increase our market share.
In addition, we rely to a large degree on creating name brand recognition
through our community-based programs. Where we have only recently entered a
market or compete with health plans much larger than we are, we may be at a
competitive disadvantage unless and until our community-based programs and other
promotional activities create brand awareness.
In certain markets we compete with organizations which have a substantial
market share. In other markets competing health plans may be owned by providers.
Organizations with sizable market share or provider-owned plans can obtain
favorable financial arrangements which are not available to us. Without such
arrangements, we cannot effectively compete in such markets.
THERE ARE ADDITIONAL MISCELLANEOUS RISKS THAT MAY AFFECT OUR FUTURE RESULTS
OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS.
Additional risks and uncertainties that may affect our future results of
operations, financial condition or business include, but are not limited to:
- demand for, and market acceptance of, our products and services;
- ability to develop and deliver new products and services and adapt
existing products and services to meet customer needs and expectations;
- ability to keep pace with technological change in order to provide better
service and remain competitive;
- ability to attract and retain capital for growth and operations on
competitive terms;
- government intervention in the health care industry; and
- changes in accounting policies and practices.
RISKS RELATED TO LITIGATION
We are not required to complete the combination if a court has issued a
temporary restraining order or injunction against completing the combination or
if someone files an action seeking a restraining order or injunction and that
action has not been dismissed. If someone brings an action, or a court enters a
restraining order or injunction, in connection with any litigation, any party
may choose not to complete the combination.
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FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus includes forward-looking statements relating
to, among other things, future results of operations, the impact of sales of
Cobalt common stock by the Foundation, tax consequences of the combination and
the effects of regulation of Cobalt's business. We use words such as believe,
expect, anticipate, could, plan, project, may, future, intend, should and
similar expressions to identify forward-looking statements. We have based these
forward-looking statements on our current expectations about future events.
These forward-looking statements are subject to a number of risks, uncertainties
and assumptions, including those we describe in the "Risk Factors" section of
this document beginning on page . However, actual results may differ
materially from those contemplated in forward-looking statements and
projections. Important assumptions and factors that could cause actual results
to differ materially from those contemplated, projected, forecasted, estimated
or budgeted in, or expressed or implied by, projections and forward-looking
statements include industry trends, government fiscal and monetary policy, the
success of new product introductions, general economic conditions, business
competition and the actions of competitors, the effects of health care reform,
the continuation and renewal of our provider arrangements, and other business
conditions, including but not limited to medical cost trends, changes in reserve
estimates, terms of provider contracts, premium rate changes, government
regulation, capital requirements, administrative costs and the retention of key
employees. All of these factors may affect our ability to sell or renew our
business and ability to implement our plans. Other factors and assumptions not
identified above were also involved in the derivation of these forward-looking
statements, and the failure of such other assumptions to be realized, as well as
other factors, may also cause actual results to differ materially from those
projected. We assume no obligation to update such forward-looking statements or
any projections to reflect actual results, changes in assumptions or changes in
other factors affecting such forward-looking statements.
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UWS HISTORICAL AND COBALT PRO FORMA PER SHARE DATA
The following table sets forth the book value per share as of September 30,
2000 and December 31, 1999 and earnings per share and cash dividends declared
per share for the nine months ended September 30, 2000 and the year ended
December 31, 1999 for historical UWS and on a pro forma basis after giving
effect to the combination. The pro forma data give effect to the combination on
a purchase basis. This data should be read in conjunction with the selected
historical financial information of UWS and BCBSUW, the pro forma unaudited
consolidated financial statements and the separate historical financial
statements of UWS and BCBSUW and the notes thereto included elsewhere in this
Proxy Statement/Prospectus. The pro forma unaudited consolidated financial
statements are not necessarily indicative of the actual consolidated results of
operations or the financial position that would have been reported had the
combination occurred on the date indicated, and should not be construed as
indicative of future operations.
<TABLE>
<CAPTION>
PRO FORMA COBALT
UWS AFTER GIVING EFFECT TO
HISTORICAL(1) THE COMBINATION(2)
------------- ----------------------
<S> <C> <C>
Book value per share:
September 30, 2000........................................ $ 1.46 $ 5.18
Earnings (loss) per share:
For the nine months ended September 30, 2000 (basic and
diluted)................................................ $ (0.43) $ (1.32)
For the year ended December 31, 1999 (basic and
diluted)................................................ $ (1.72) $ (2.00)
Cash dividends declared per share:
For the nine months ended September 30, 2000.............. N/A N/A
For the year ended December 31, 1999...................... $ 0.05 $ 0.05
Common shares outstanding:
At September 30, 2000..................................... 16,939,682 40,412,256
At December 31, 1999...................................... 16,939,682 40,412,256
</TABLE>
------------------------
(1) We computed historical book value per share information for UWS as of
September 30, 2000 by dividing the historical shareholders' equity of
$24.7 million by 16,939,682, the number of shares outstanding as of
September 30, 2000.
(2) We computed pro forma Cobalt book value per share information as of
September 30, 2000 by dividing the pro forma combined shareholders' equity
of $209.4 million by the number of shares assumed outstanding after the
combination. (For purposes of computing pro forma earnings per share, the
7,840,816 shares of UWS common stock owned by BCBSUW will not be treated as
outstanding if the combination is completed.)
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MARKET PRICE AND DIVIDENDS
UWS
The UWS common stock is traded on the New York Stock Exchange under the
symbol "UWZ." The following table sets forth the per share high and low sale
prices for the UWS common stock as reported on the New York Stock Exchange 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, 2000:
First Quarter.............................. $6.31 $3.94 --
Second Quarter............................. $5.81 $4.81 --
Third Quarter.............................. $6.00 $4.63 --
Fourth Quarter............................. $ $ $0.05(1)
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW CASH DIVIDENDS PAID
-------- -------- -------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
First Quarter.............................. $9.06 $5.75 --
Second Quarter............................. $8.94 $5.63 --
Third Quarter.............................. $9.38 $5.50 --
Fourth Quarter............................. $5.81 $4.00 $0.05
</TABLE>
<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(2)... $7.19 $5.81 --
Fourth Quarter............................. $9.31 $4.81 $0.05
</TABLE>
------------------------
(1) The dividend is payable on December 27, 2000 to shareholders of record as of
the close of business on December 20, 2000.
(2) UWS as currently structured commenced operation on September 28, 1998 as a
result of a spin-off from American Medical Security Group, Inc.
On December 21, 2000, the last full trading day prior to public announcement
of the execution of the exchange agreement, the reported closing price per share
of UWS common stock was $3.69. On , 2001, the most recent available
date prior to printing this Proxy Statement/Prospectus, the reported closing
price per share of UWS common stock was $ . UWS shareholders are urged to
obtain current market quotations.
Since the spin-off of UWS from American Medical Security Group, Inc., UWS
has paid an annual dividend of $0.05 per share. The future payment of dividends
at the historical level will be subject to the discretion of Cobalt's board of
directors and will depend upon Cobalt's operating results, financial condition,
and capital requirements, general business conditions, legal restrictions on the
payment of dividends and other factors Cobalt's board of directors deems
relevant.
BCBSUW
There will be no public market for shares of BCBSUW common stock after the
conversion. The Foundation (through BC Holdings) will be the sole shareholder of
BCBSUW until giving effect to the combination, after which Cobalt will be the
sole shareholder of BCBSUW common stock.
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<PAGE>
THE SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to shareholders of UWS in
connection with the solicitation of proxies by the board of directors for use at
the special meeting of shareholders of UWS. At the special meeting, shareholders
of UWS will consider a proposal to approve the exchange agreement, as it may be
amended from time to time, which provides for the exchange of 31,313,390 shares
of UWS common stock and $500,000 in cash, for all of the authorized capital
stock of BCBSUW. In the combination UWS will also change its name to "Cobalt
Corporation." As a result of the combination, BCBSUW will become a wholly owned
subsidiary of Cobalt. The exchange agreement is attached as ANNEX A to this
Proxy Statement/Prospectus.
THE UWS BOARD OF DIRECTORS, AFTER RECEIVING THE UNANIMOUS RECOMMENDATION OF
A SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS WHO ARE NOT AFFILIATED WITH BC
HOLDINGS OR BCBSUW, HAS UNANIMOUSLY (WITH THOMAS R. HEFTY, CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER OF BOTH BCBSUW AND UWS, ABSTAINING) APPROVED THE
EXCHANGE AGREEMENT AND THE COMBINATION, AND HAS DETERMINED THAT THE EXCHANGE
AGREEMENT AND THE COMBINATION ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE
SHAREHOLDERS OF UWS (OTHER THAN BCBSUW). THE BOARD OF DIRECTORS RECOMMENDS THAT
THE SHAREHOLDERS OF UWS VOTE "FOR" THE APPROVAL OF THE EXCHANGE AGREEMENT AT THE
SPECIAL MEETING. SEE "THE COMBINATION--UWS'S REASONS FOR THE COMBINATION."
TIME, PLACE AND DATE
The special meeting will be held at 10:00 a.m., local time, on March 23,
2001 at 401 West Michigan Street, Milwaukee, Wisconsin.
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
The close of business on February 9, 2001 has been fixed as the record date
for determining the holders of UWS common stock who are entitled to notice of
and to vote at the special meeting. As of the record date, there were
approximately beneficial holders of the shares of UWS common stock
then outstanding and entitled to vote. The holders of record on the record date
of UWS common stock are entitled to one vote per share of UWS common stock. The
presence in person or by proxy of the holders of shares representing a majority
of the voting power of UWS common stock entitled to vote is necessary to
constitute a quorum for the transaction of business at the special meeting.
Approval of the exchange agreement requires the affirmative vote of both:
(i) 80% of the outstanding shares of UWS common stock, and (ii) 66 2/3% of the
outstanding shares UWS common stock that are not owned by BCBSUW, its affiliates
or its benefit plans.
BCBSUW, which owns 7,840,817 shares of UWS common stock, representing 46.3%
of all the outstanding UWS common stock before giving effect to the combination,
has agreed to vote all of its shares of UWS common stock for approval of the
exchange agreement and the combination. As described in "THE
COMBINATION--Interests of Certain Persons in the Combination," BCBSUW and
certain officers and directors of UWS who are also officers and directors of
BCBSUW have interests in the combination which are different than your
interests.
Abstention from voting and broker nonvotes will have the same effect as
voting against the approval of the exchange agreement since they represent one
less vote for such approval.
PROXIES; PROXY SOLICITATION
Shares of UWS common stock represented by properly executed proxies received
at or prior to the special meeting that have not been revoked will be voted at
the special meeting in accordance with the instructions contained therein.
Shares of UWS common stock represented by properly executed proxies
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<PAGE>
for which no instruction is given will be voted "FOR" approval of the exchange
agreement and the combination. UWS's shareholders are requested to complete,
sign, date and return promptly the enclosed proxy card in the postage-prepaid
envelope provided for this purpose to ensure that their shares are voted. A
shareholder may revoke a proxy at any time before its exercise by submitting a
later-dated proxy with respect to the same shares, by delivering written notice
of revocation to the Corporate Secretary of UWS or by attending the special
meeting and voting in person. Mere attendance at the special meeting will not in
and of itself revoke a proxy.
If the special meeting is continued or adjourned for any reason, at any
subsequent reconvening of the special meeting all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the special meeting (except for any proxies that have theretofore effectively
been revoked or withdrawn), notwithstanding that they may have been effectively
voted on the same or any other matter at a previous meeting.
UWS does not expect that any matter other than approval of the combination
will be brought before the special meeting. If, however, other matters are
properly presented, the persons named as proxies will vote in accordance with
their judgment with respect to those matters, unless authority to do so is
withheld in the proxy.
UWS will bear the cost of soliciting proxies from its shareholders. UWS has
retained to assist us in distributing proxy materials and contacting
record and beneficial holders of UWS common stock. UWS will pay a fee
of $ plus reimbursement of out-of-pocket expenses in connection with
performing its services. In addition to solicitation by mail, directors,
officers and employees of UWS may solicit proxies by telephone, telegram,
facsimile or otherwise. Such directors, officers and employees will not be
additionally compensated for such solicitation, but may be reimbursed for
out-of-pocket expenses incurred in connection therewith. Brokerage firms,
fiduciaries and other custodians who forward soliciting material to the
beneficial owners of the UWS common stock held of record by them will be
reimbursed for their reasonable expenses incurred in forwarding such material.
RIGHTS OF DISSENTING SHAREHOLDERS
Under the exchange agreement, shareholders and beneficial owners are
entitled to dissenters' rights as set forth in Wisconsin law. Those shareholders
that perfect dissenters' rights according to the terms set forth in the
Wisconsin dissenters' rights statutes will be entitled to receive the fair value
of their shares as set forth in the dissenters' rights statutes. A copy of the
relevant provisions of Wisconsin law is attached as ANNEX E to this Proxy
Statement/Prospectus. These dissenters' rights are subject to a number of
restrictions and requirements described in ANNEX E and summarized below.
Sections 180.1301 to 180.1331 of Wisconsin law provide that any shareholder
may dissent from the combination and obtain payment of the fair value of his or
her shares as determined in accordance with Section 180.1301(4), provided that
such shareholder delivers to UWS, before the shareholder vote on the
combination, a written notice of such shareholder's intent to demand payment for
his or her shares if the combination is completed, does not vote his or her
shares in favor of the combination, and complies with all of the remaining
provisions of Sections 180.1301 to 180.1331. Wisconsin law provides that a
dissenting shareholder may not challenge the corporate action creating his or
her entitlement to dissent unless the action is unlawful or fraudulent with
respect to such shareholder or the issuer corporation.
The following is a brief summary of Sections 180.1301 to 180.1331 of
Wisconsin law, which set forth the procedures for demanding statutory
dissenters' rights. This summary is qualified in its entirety by reference to
the full text of Sections 180.1301 to 180.1331 which is attached to this Proxy
Statement/ Prospectus as ANNEX E. For purposes of this summary, "shareholder"
refers to shareholders of record and beneficial shareholders who comply with the
provisions of Section 180.1303 applicable to beneficial
26
<PAGE>
shareholders. For purposes of this summary, UWS also refers to Cobalt in the
event the combination is completed.
If the combination is approved and completed, shareholders who elect to
exercise their dissenters' rights and who properly and timely perfect such
rights will be entitled to receive the "fair value" in cash for their shares of
UWS common stock. "Fair value" means the highest closing sales price per share
of UWS common stock during the 30-day period immediately prior to the completion
of the combination.
A shareholder who elects to exercise his or her dissenters' rights must
perfect such rights by delivering to UWS prior to the vote at the special
meeting written notice of his or her intent to demand payment and must either
vote against the combination or abstain from voting on the combination. Neither
voting in person or by proxy against, abstaining from voting on or failing to
vote on the proposal to approve the exchange agreement will constitute a written
notice of intent to exercise dissenters' rights within the meaning of
Section 180.1321 of Wisconsin law. The written notice of intent to exercise
dissenters' rights must be in addition to, and separate from, any such proxy or
vote. Any shareholder who fails to deliver written notice prior to the vote on
the combination at the special meeting or votes in favor of the combination will
lose the right to receive the fair value of his or her shares.
If the combination is approved, then within ten days after such approval,
UWS will deliver to those shareholders who deliver the written notice described
above and who do not vote in favor of the combination (each, a "Dissenting
Shareholder") a written dissenters' notice (the "Dissenters' Notice"). The
Dissenters' Notice will set forth where the Dissenting Shareholder must send the
payment demand, where and when certificates for shares of UWS common stock must
be deposited and the date by which UWS must receive the payment demand, which
date must not be fewer than 30 nor more than 60 days from the date on which the
Dissenters' Notice is delivered. In addition, the Dissenters' Notice must
include a form for demanding payment which includes the date of first
announcement to the shareholders of the terms of the combination and requires
the Dissenting Shareholder to certify whether he or she acquired beneficial
ownership of the shares of UWS common stock before such date, and a copy of the
sections of Wisconsin law pertaining to dissenters' rights.
A Dissenting Shareholder who is sent a Dissenters' Notice must demand
payment in writing, certifying whether he or she acquired beneficial ownership
of the shares before the date specified in such notice and deposit his or her
certificates in accordance with such notice. A shareholder who does not demand
payment by the date set in the Dissenters' Notice or who does not deposit his or
her certificates where required by the date set forth in the Dissenters' Notice
is not entitled to payment of the fair value of his or her shares.
Upon the later of completion of the combination or receipt of the payment
demand, UWS will pay each Dissenting Shareholder who has complied with the above
the fair value of the Dissenting Shareholder's shares of UWS common stock, plus
accrued interest. The payment must be accompanied by the latest available
financial statements of UWS, an estimate of the fair value of the shares, an
explanation of how the interest was calculated, a statement of the dissenters'
rights if the Dissenting Shareholder is dissatisfied with the payment and a copy
of the Sections of the Wisconsin law pertaining to dissenters' rights.
If the Dissenting Shareholder believes that the amount paid by UWS is less
than the fair value of his or her shares or that the interest due was
incorrectly calculated, if UWS fails to make payment within 60 days after the
date set in the Dissenters' Notice for demanding payment, or if the combination
is not completed and UWS does not return the deposited certificates within
60 days after the date set in the Dissenters' Notice for demanding payment, the
Dissenting Shareholder may notify UWS of his or her estimate of the fair value
of his or her shares and the amount of interest due and demand payment of his or
her estimate, less any payment previously received. The Dissenting
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<PAGE>
Shareholder must notify UWS in writing within 30 days after UWS made payment for
the Dissenting Shareholder's shares. If within 60 days after receipt by UWS of a
demand described in this paragraph, the demand remains unsettled, UWS will bring
a special proceeding and will petition the court to determine the fair value of
the shares and accrued interest. If UWS does not bring the special proceeding
within such 60 day period, UWS will pay each Dissenting Shareholder whose claim
remains unsettled the amount demanded. The Dissenting Shareholder will be
entitled to judgment for the amount by which the court finds the fair value of
his or her shares exceeds the amount paid by UWS.
FAILURE TO COMPLY STRICTLY WITH ALL OF THE PROCEDURES SET FORTH IN SECTIONS
180.1301 TO 180.1331 OF WISCONSIN LAW WILL RESULT IN THE LOSS OF A SHAREHOLDER'S
DISSENTERS' RIGHTS. CONSEQUENTLY, ANY SHAREHOLDER WISHING TO EXERCISE
DISSENTERS' RIGHTS IS URGED TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO
EXERCISE SUCH RIGHTS.
SHAREHOLDERS CONSIDERING THE EXERCISE OF DISSENTERS' RIGHTS SHOULD BE AWARE
THAT THE FAIR VALUE OF THEIR SHARES AS DETERMINED UNDER SECTIONS 180.1301 TO
180.1331 COULD BE MORE THAN, THE SAME AS OR LESS THAN THE VALUE OF COBALT SHARES
AFTER THE COMBINATION IS COMPLETED.
THE COMBINATION
This section of the Proxy Statement/Prospectus describes material aspects of
the proposed combination, including the exchange agreement. While we believe
that the description covers the material terms of the combination and related
transactions, this summary may not contain all of the information that is
important to you. You should read this entire document and the other documents
we refer to carefully for a more complete understanding of the combination.
STRUCTURE OF THE COMBINATION
UWS and BCBSUW have agreed to combine under the terms of the exchange
agreement. Under the exchange agreement:
- BCBSUW will be converted from a non-stock service insurance corporation to
a stock insurance corporation and all of the issued and outstanding shares
of capital stock of BCBSUW will be issued to BC Holdings, which is wholly
owned by the Foundation;
- BC Holdings will exchange all of the issued and outstanding shares of
capital stock of BCBSUW for 31,313,390 shares of newly issued UWS common
stock and $500,000 in cash;
- BCBSUW will become a wholly owned subsidiary of UWS;
- BC Holdings will be dissolved and its 31,313,390 shares of UWS common
stock will be distributed to the Foundation;
- UWS's Articles of Incorporation and Bylaws will be amended and restated to
reflect changes necessary to effectuate the combination, including a
change in the composition of the board of directors after the combination;
and
- UWS will change its name to "Cobalt Corporation" and begin trading under
the ticker symbol "CBZ" on the New York Stock Exchange.
If the combination is approved, the Foundation will own approximately 77.5%
of the issued and outstanding shares of common stock of Cobalt after the
combination is completed.
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<PAGE>
UWS STOCK CERTIFICATES
If the combination is completed, certificates for shares of UWS common stock
which are issued and outstanding immediately prior to the combination will
continue to represent shares of Cobalt after the combination. Only BC Holdings
will receive new stock certificates. As described elsewhere in this Proxy
Statement/Prospectus, UWS will change its name to "Cobalt Corporation." However,
we will not replace existing stock certificates to reflect the name change until
you sell or otherwise transfer shares of common stock following the combination.
Because Cobalt will not issue new stock certificates, we ask that you do not
send us your stock certificates.
TREATMENT OF UWS STOCK OPTIONS
Options to purchase shares of UWS common stock that are outstanding at the
time the combination is completed will remain outstanding and will not be
converted, changed, repriced or otherwise modified in connection with the
combination. The number of shares available upon exercise, exercise price,
duration, and vesting schedule of these options will not be affected.
BACKGROUND OF THE APPLICATION FOR CONVERSION
THE NATURE OF BLUE PLANS AND THE ABILITY TO CONVERT
BCBSUW is one of approximately 47 independent Blue Plans across the United
States which provide coverage to over 75 million Americans. These Blue Plans are
all members of a national coordinating body and trade association, which we have
been referring to as the Association. The Association licenses the Blue
Cross-Registered Trademark- and Blue Shield-Registered Trademark- names and
marks to each individual Blue Plan. In addition, the licensing agreements
require each individual Blue Plan to maintain minimum capital and surplus
requirements, minimum liquidity levels, acceptable customer service levels, and
participation in certain core national initiatives and to adhere to specific
ownership limitations.
Until 1994, Association rules prevented Blue Plans from organizing as
shareholder-owned entities. In that year, however, the Association changed this
requirement in response to competitive forces in the health insurance market.
Since this restriction was removed from the Association rules, a number of other
plans have converted to stock ownership including Blue Plans in California,
Georgia, and Virginia. Blue Plans in Colorado, New York, and Missouri are also
in the process of converting, and legislation has been proposed which would
allow the Blue Plan in New Jersey to convert under a plan of conversion similar
to the plan of conversion adopted by BCBSUW.
The act of conversion itself provides a number of advantages to Blue Plans.
Using stock to make acquisitions helps to build economies of scale and thereby
drive costs down. The issuance of stock also helps to generate capital which can
be used for investment in products, systems, networks, and medical information
management required to deliver high quality, competitive services. These
advantages better enable Blue Plans to compete in the overall health insurance
market.
HISTORY OF BCBSUW AND THE ACTIONS LEADING TO A DECISION TO CONVERT
BCBSUW was originally founded in 1939 under the name Associated Hospital
Service, Inc. Its name changed in 1979 in conjunction with a merger between
Associated Hospital Service and an entity known as Surgical Care-Blue Shield.
Thereafter, the entity has been known as Blue Cross & Blue Shield United of
Wisconsin.
The Wisconsin market has changed since that time. Today, BCBSUW's
competitors are largely national plans and tax-exempt local HMO's. Although it
competes on a level playing field, BCBSUW differs from other health care payors
doing business in Wisconsin in two important respects. First, BCBSUW is a
tax-paying, Wisconsin-based health insurer, providing insurance services and
benefits to nearly 700,000 people in the State of Wisconsin. Second, because
BCBSUW cannot issue tax-exempt
29
<PAGE>
bonds or issue stock in its current form, it does not have the same access to
capital markets as most of its competitors, limiting the ability of BCBSUW to
grow.
In response to these concerns, the BCBSUW board of directors appointed a
special committee on December 9, 1998 to investigate the structuring options
available to BCBSUW and to make a recommendation to the full board of directors
regarding the advisability of such options. In mid-January, the BCBSUW special
committee set out to fulfill its mission of investigating alternatives to the
current legal and corporate structure of BCBSUW and ultimately to present its
findings, conclusions and recommendations to the BCBSUW board of directors by
July 1, 1999. The primary responsibility of the BCBSUW special committee was to
examine a broad range of reorganization alternatives available to BCBSUW.
The BCBSUW special committee convened on six separate occasions over a
five-month period to examine structuring alternatives and to develop a plan of
conversion. To assist in this extensive examination, the BCBSUW special
committee retained expert outside counsel to advise the members on structuring
alternatives and other issues relevant to a conversion. The BCBSUW special
committee retained the law firm of Foley & Lardner to provide legal counsel and
the investment firm of Donaldson, Lufkin & Jenrette to provide banking and
financial advice.
Several considerations influenced the examination conducted by the BCBSUW
special committee. The foremost consideration was to adhere to the BCBSUW
special committee's fiduciary duties and develop a corporate strategy that
advanced and protected the best interests of BCBSUW, its policyholders, and the
citizens of Wisconsin. Another significant consideration of the BCBSUW special
committee was to develop alternatives that were consistent with the corporate
mission of BCBSUW and its short-term and long-term corporate goals. The BCBSUW
special committee also considered the relative strengths of existing and
alternative corporate structures in adapting to and surviving in today's
competitive health care environment.
During the course of its five-month review, the BCBSUW special committee
examined three principal strategic alternatives available to BCBSUW: (i) to
convert to a mutual insurance company; (ii) to convert to a stock insurance
corporation; or (iii) to continue as a service insurance corporation. For each
alternative, the BCBSUW special committee identified and considered the various
interests that would be affected, including the potential impact, if any, of a
conversion on the policyholders and employees of BCBSUW. The BCBSUW special
committee also examined recent national trends in the delivery of health care
and in the managed care and health insurance industries. The conversion and
consolidation of certain Blue Plans and other health insurance carriers were
analyzed because of the possible impact of these actions on the future success
of BCBSUW. After weighing all the information and issues presented to the BCBSUW
special committee, the committee determined that converting to a stock insurance
corporation would best serve the long-term interests of BCBSUW. Thus, the BCBSUW
special committee focused its review on the actual conversion process and
discussed subsequent corporate reorganizations that would be possible following
a conversion to a stock insurance corporation, including a possible merger with
UWS, a partially owned affiliate of BCBSUW.
On June 2, 1999, the BCBSUW special committee made a report to the full
BCBSUW board of directors. The BCBSUW special committee found that BCBSUW's
inability to directly access capital markets resulted in a lack of flexibility
to acquire, merge or affiliate. These deficiencies made BCBSUW vulnerable to
larger and better capitalized competitors. Without a reorganization, BCBSUW
would be left with limited options to raise capital. Among those options is
incurring debt. This option is unattractive, however, because it can negatively
impact BCBSUW's insurance rating, cannot be directly counted as surplus, and
must ultimately be repaid. Thus, after extensive discussion, the full board of
directors adopted the findings of the BCBSUW special committee on June 2, 1999
and passed a resolution to undertake a plan of conversion pursuant to which
BCBSUW would convert to a stock insurance corporation.
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<PAGE>
REASONS FOR THE CONVERSION
The BCBSUW board of directors determined that the future success of BCBSUW
is dependent on its conversion from a not-for-profit service insurance company
to a stock insurance company that would ultimately be owned by a publicly traded
company. In doing so, the board of directors analyzed the current organizational
structure of BCBSUW and explored the available alternatives which would allow
BCBSUW both to meet its operational objectives and to serve the best interests
of its policyholders and the citizens of Wisconsin. In the final analysis, the
board of directors determined that the conversion would afford BCBSUW the best
option to achieve these goals. The board of directors' decision was based on a
number of underlying factors, including:
- the need for an insurer to have access to capital to compete in the
business of insurance (the conversion will allow BCBSUW direct access to
capital markets, eliminating barriers that currently exist due to its
organizational structure and providing BCBSUW with the ability to merge
with or acquire other stock companies);
- the desire to maintain current inter-company relationships and economies
of scale which benefit BCBSUW (the conversion will specifically afford
BCBSUW the opportunity to combine with its affiliate, UWS, thereby
preserving the benefits arising from this relationship); and
- the elimination of confusion in the investment community over corporate
strategy and operation arising from BCBSUW's relationship to UWS, which
adversely impacts BCBSUW's significant investment in UWS.
THE PLAN OF CONVERSION/TRANSACTION STRUCTURE/TIMING
The plan of conversion proposes to convert BCBSUW from a not-for-profit
service insurance corporation to a shareholder-owned stock insurance
corporation. The Wisconsin statutes specifically allow for a service insurance
corporation such as BCBSUW to convert to a stock insurer, subject to the prior
approval of the OCI, without any interruption in the corporate existence or to
the ongoing business of BCBSUW.
The following steps have been or will be taken as part of the plan of
conversion. First, OCI will issue BCBSUW a new certificate of authority as a
stock insurance corporation, thereby effecting the act of conversion. BCBSUW
then will issue 100% of its stock to BC Holdings, which is wholly owned by the
Foundation. The net of effect of these transactions is that the Foundation will
receive 100% of the equity of the converted BCBSUW. BC Holdings will exchange
all of its BCBSUW capital stock for 31,313,390 shares of UWS common stock and
$500,000 in cash. BC Holdings will then be dissolved, and the shares of UWS
common stock will be distributed to the Foundation. These steps will not occur
unless the UWS shareholders approve the combination.
In order to adhere to the requirements imposed by the Association on
ownership and voting of stock of Blue Cross-Registered Trademark- and Blue
Shield-Registered Trademark- licensees, the plan of conversion provides that the
Foundation will enter into two agreements with Cobalt. The first of these
agreements, the voting trust and divestiture agreement, will substantially
restrict the Foundation's ability to exercise judgment in voting its shares of
Cobalt stock, and will require the Foundation to divest itself of its
controlling position in Cobalt within a fixed period of time. See p. for a
summary of the terms of this agreement. The second of these agreements, the
registration rights agreement, essentially will allow the Foundation to live up
to its divestiture obligations by requiring Cobalt to register the Foundation's
shares for sale to third parties. See p. for a summary of the terms of this
agreement.
BCBSUW and UWS anticipate that the conversion and the combination will be
completed prior to March 28, 2001, or such later date as may be necessary to
receive all necessary governmental and third party approvals, including
approvals from OCI concerning the combination terms, the Association and the
Securities and Exchange Commission. If all necessary approvals are forthcoming,
the elected
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members of the BCBSUW board of directors, in their capacity as the members of
BCBSUW, must ratify the plan of conversion as modified by the conditions
required in the Commissioner's Order if the conversion plan is to take effect.
Assuming such action is taken, OCI will issue the new certificate of authority
which effects the act of conversion and will allow the combination to occur.
THE FOUNDATION--PURPOSE/MANAGEMENT/LIMITATIONS
A key issue in the conversion of any mutual or non-stock service corporation
to a stock corporation is who will be issued, or given the opportunity to
acquire, the newly issued stock. If, as the BCBSUW board of directors believes,
the goodwill inherent in the business has substantial value, then there may be
competition among institutions or groups claiming a right to part of this equity
value. The BCBSUW special committee and the BCBSUW board of directors
determined, in developing the plan of conversion, that the entire value of this
equity should be dedicated to a new organization, affiliated with existing
public health organizations in Wisconsin but independent and with input from
other constituencies.
Consequently, the Foundation is a significant aspect of the plan of
conversion and has been organized for the purposes of promoting the general
health, welfare and common good of the residents of Wisconsin. To achieve these
goals, the Foundation will sell its holdings in Cobalt common stock in order to
fund public health initiatives developed principally by the Medical Schools.
A nine-member board of trustees will direct the Foundation. The duties of
the board of trustees will be to ensure that the Foundation's voting trust
requirements are met and that the proceeds realized from the sale of Cobalt
shares are utilized to achieve the Foundation's mission. The plan of conversion
currently provides that members of the board of trustees will be appointed as
follows: five members appointed by BCBSUW; two members appointed by the
University of Wisconsin Medical School; and two members appointed by Medical
College of Wisconsin. Although the Commissioner has assumed the authority to
appoint the Foundation's trustees under her Order approving the conversion, the
initial nominees of BCBSUW, University of Wisconsin Medical School and Medical
College of Wisconsin, respectively, have been appointed by the Commissioner
under her Order.
In order to retain the right to use the Blue Cross-Registered Trademark- and
Blue Shield-Registered Trademark- names and service marks, BCBSUW is required to
comply with a number of requirements set forth by the Association in connection
with the conversion. These Association requirements include, among others, the
imposition of certain restrictions on the ownership of Cobalt stock, including:
- other than another licensed "Blue Plan," no institutional investor can own
more than 10% of Cobalt's stock and no individual may own more than 5% of
Cobalt's stock; and
- the Foundation must enter into a voting trust and divestiture agreement
restricting its right to vote the stock of Cobalt and requiring the
Foundation to sell at least 80% of its holdings in Cobalt stock over a
five to seven year period of time.
PROCEDURAL HISTORY OF THE CONVERSION APPLICATION
On June 14, 1999, BCBSUW filed its Application for Conversion with the OCI.
Over the course of the ensuing nine-month review, OCI requested, and BCBSUW
submitted, numerous supplements to the original application (including a
comprehensive review of the historical intercompany transactions between BCBSUW
and UWS). On November 3, 1999, OCI served notice on BCBSUW that a class 1
contested case hearing, or administrative hearing, concerning the application
would be held on November 29, 1999 in Milwaukee, Wisconsin before the
Commissioner as hearing examiner. At the same time, OCI caused a notice of
public and information hearing to be published in the official state newspaper
and in approximately 250 other newspapers throughout the state. In addition to
the printed notices, both OCI and BCBSUW posted the notice on their web sites.
The public hearing was
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scheduled to follow after the administrative hearing on November 29, 1999 in
Milwaukee, Wisconsin and then continue on November 30, 1999 in Stevens Point,
Wisconsin.
The notice contained a deadline for motions of November 19, 1999. On that
date, motions to intervene in the administrative hearing were filed by ABC for
Health, Inc., Wisconsin AARP, Wisconsin Coalition for Advocacy, and the Medical
Schools (the "movants"). Apart from the Medical Schools, who were interested in
the proceedings as named beneficiaries under the plan of conversion, the other
movants objected to the plan of conversion claiming that there was a better plan
to utilize the proceeds of the conversion. BCBSUW filed briefs in opposition to
the motions to intervene. On November 23, 1999, the Commissioner presided over a
pre-hearing conference regarding the pending motions. The Commissioner denied
the movants' respective motions to intervene. Although the motions were denied,
the Commissioner stated an ongoing interest in allowing participation by the
various organizations requesting party status in the proceedings by affording
each of the movants an opportunity in the future to offer expert testimony and
to examine BCBSUW officers, Association personnel, and OCI's own independent
investment banker, Deutsche Banc Alex. Brown.
The administrative hearing was held on November 29, 1999 and continued by
the Commissioner to allow for participation by the movants. At the public
hearings held on November 29 and 30, 1999, oral testimony was given by 95
persons in total, and an additional 73 persons submitted written testimony
during the public hearings. Following the hearings, the Commissioner allowed a
two week comment period, and received hundreds of comments from the public in
that time.
The administrative hearing was resumed on February 25, 2000 and March 10,
2000, involving the presentation by the movants of expert testimony and cross
examination of BCBSUW management, the Association Deputy General Counsel, and a
Deutsche Banc Alex. Brown representative. The continued administrative hearing
was preceded by a pre-hearing status conference held on February 25, 2000. The
Commissioner, in her pre-hearing memorandum, dated February 28, 2000, delineated
the scope of the hearing and procedure to be followed during the continued
administrative hearing as well as a briefing schedule. Simultaneous briefs were
received by the Commissioner from BCBSUW and the movants on March 10, 2000, with
supplemental briefs being submitted by all parties on March 20, 2000.
In addition to holding the administrative and public hearings, the
Commissioner appointed a three-member appraisal committee to review the
Conversion Application and advise the Commissioner concerning the value of
BCBSUW as of the conversion date. The appraisal committee members included:
Chair, Mark Femal, Executive Director of the Wisconsin Insurance Security Fund;
Ms. Patricia Lipton, Executive Director of the State of Wisconsin Investment
Board; and Mr. Randy Blumer, Deputy Commissioner of Insurance. To assist OCI
staff in reviewing the Conversion Application and the appraisal committee in
discharging its duties, the Commissioner retained the continuing services of
Deutsche Banc Alex. Brown. The appraisal committee met eight times between
November 1999 and February 2000. With the assistance of Deutsche Banc Alex.
Brown, the appraisal committee prepared a report to the Commissioner dated
February 14, 2000. All of the eight appraisal committee meetings were open to
the public and were attended by representatives of BCBSUW, the Wisconsin
Department of Justice, the Medical Schools, ABC for Health, Inc., Wisconsin
AARP, and the Wisconsin Coalition for Advocacy.
The due diligence review conducted by Deutsche Banc Alex. Brown in rendering
its services to both OCI and the appraisal committee included a comprehensive
review of the historical intercompany transactions between BCBSUW and UWS and
multiple day interviews of BCBSUW and UWS management. Deutsche Banc Alex. Brown
and the appraisal committee determined that the net impact of BCBSUW's
relationship with UWS was economically beneficial to BCBSUW.
The final report of the appraisal committee was delivered to BCBSUW on
February 15, 2000. The Commissioner allowed BCBSUW to file a written response,
which was submitted to OCI on February 22, 2000.
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During the period between BCBSUW's filing of the application for conversion
and continuing through March 23, 2000, OCI staff met with representatives from
various consumer groups, including ABC for Health, Inc., Wisconsin AARP, and the
Wisconsin Coalition for Advocacy, or the "coalition group," on numerous
occasions and received written correspondence with some degree of frequency.
Specifically, OCI staff met with coalition group representatives on at least
nine separate occasions, and OCI received numerous written comments and
materials from the coalition group during and after such time. During this time,
OCI staff also met with representatives of the Medical Schools on at least six
occasions during such time period. In addition, OCI received and reviewed
hundreds of written comments from organizations and individuals throughout the
State of Wisconsin, and the Commissioner and OCI staff met with numerous
organizations and individuals to hear their comments on the BCBSUW plan of
conversion.
SUMMARY OF COMMISSIONER O'CONNELL'S DECISION AND FINAL ORDER APPROVING
BCBSUW'S APPLICATION FOR CONVERSION.
General Overview.
Following a nine-month review process, the Commissioner issued a decision
and final order dated March 28, 2000 (the "Order") approving the BCBSUW
Application for Conversion, subject to numerous conditions. The Order
incorporated by reference the findings and recommendations made by the appraisal
committee in its final report dated February 14, 2000. The first section of the
Order summarizes the procedural history of the application for conversion. The
second section of the Order makes numerous findings of fact. These findings of
fact outline the statutory and organizational history of BCBSUW from its
beginning as Associated Hospital Services, Inc. to its current status as
Wisconsin's largest health insurer with a substantial downstream holding company
system. The findings of fact also highlight various aspects of the plan of
conversion, describe the Medical Schools' participation in that plan, summarize
the commentary received at the public hearings, and analyze the effect of the
plan of conversion on BCBSUW's policyholders.
The third section of the Order addresses the Commissioner's formal approval
of BCBSUW's plan of conversion, which is subject to certain enumerated
conditions. In addition to the approval of BCBSUW's desire to convert to a
shareholder-owned stock insurer, the Commissioner approved the board of
directors' selection of the Medical Schools as the beneficiaries of the
Foundation's conversion funds, and although the Commissioner assumed the right
to appoint the directors of the Foundation, the Commissioner appointed each of
the previously announced nominees identified in the BCBSUW conversion
application.
The Commissioner's Order approving the conversion contemplates that the
combination will be effected by the issuance of all the BCBSUW stock in the
conversion to a newly formed corporation, United Heartland Group, Inc. ("UHG"),
and the simultaneous merger of UHG into UWS. Subsequent negotiations between
BCBSUW and UWS have resulted in the transaction structure described in this
Proxy Statement/Prospectus. Under this structure, BCBSUW will become a wholly
owned subsidiary of UWS by virtue of an exchange between BC Holdings and UWS of
the stock of BCBSUW for UWS common stock, referred to as the "combination."
Overview of Conditions to the Commissioner's Approval.
The Commissioner's approval is conditioned upon certain modifications to the
plan of conversion adopted previously by the BCBSUW board of directors and
submitted as part of the Application for Conversion. These conditions fall into
three central categories: (i) conditions relating to the combination and initial
public offering ("IPO") options necessary to give effect to the conversion;
(ii) conditions relating to the post-conversion interaction between the
Foundation and Cobalt; and (iii) conditions relating to limitations on, and
oversight of, the medical schools' expenditure of the conversion funds. A
synopsis of these conditions follows.
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CONDITIONS RELATING TO MERGER, IPO AND SECONDARY OFFERING OPTIONS. The
conditions relating to BCBSUW's merger and IPO options include the following:
- Within six months from the date of the Commissioner's Order, BCBSUW is
required, contemporaneous with the conversion, to complete either an IPO
of the Foundation's holdings of UHG shares or a merger of UHG with and
into United Wisconsin Services, Inc. ("Merger"). BCBSUW has obtained a
six-month extension from the Commissioner as contemplated in the Order,
allowing it to complete the conversion and the required contemporaneous
transaction by March 28, 2001.
- The Merger or IPO must result in a public float of at least $75 million,
unless the Commissioner approves of a lesser amount (but in no case less
than $50 million), that reduces the Foundation's equity stake in either
UHG or the combined post-Merger entity (Cobalt) to less than 80%.
- The terms and conditions of either the IPO or Merger options are subject
to the Commissioner's prior review and approval.
- No officer, director or employee of BCBSUW or one of its affiliates may
receive an equity option until one year after UHG (or Cobalt) becomes a
publicly traded entity. Under certain circumstances, and with the
Commissioner's approval, equity options are allowed be awarded to
mid-level managers and new officers or directors.
- Any other issuance of stock by UHG or any affiliate or successor
(including Cobalt), such as a secondary offering, will be subject to the
Commissioner's prior approval until the Foundation has experienced a
definitive liquidation event.
CONDITIONS RELATING TO INTERACTION BETWEEN UHG AND THE FOUNDATION. The Order
imposes certain post-conversion obligations on the relationship between the
Foundation and UHG, which obligations will be binding on Cobalt after the
merger. These conditions include the following:
- The three year and five year divestiture deadlines for sale of Cobalt
shares held by the Foundation contained in the voting trust and
divestiture agreement must be extended by up to 365 and 730 days,
respectively, if the Foundation so requests.
- The Foundation is required to have unrestricted voting rights with regard
to all Cobalt change in control transactions, other than with respect to
the Merger. In addition, Cobalt is required to consult with the Foundation
in two situations: (a) prior to initiating any change-of-control
transaction process; and (b) after receiving any change-of-control
proposal (whether friendly or hostile).
- The Foundation will have the right to join in any litigation against
Cobalt that alleges that the Cobalt board of directors should solicit
acquisition proposals or change-of-control proposals or initiate a bidding
process seeking proposals to acquire all of the stock of Cobalt.
- The Foundation will not have a limit on the total number of demand
registrations; demands will be permitted unless a demand was already
requested in the current calendar year or unless Cobalt completed a
registration for itself or the Foundation within the last 120 days.
- Until the Foundation reduces its ownership in Cobalt to under 20%:
(i) Cobalt will grant the Foundation observation rights at all board
meetings including any executive sessions; (ii) Cobalt may not change its
Amended and Restated Articles of Incorporation or Bylaws without the
Commissioner's approval; and (iii) non-Foundation shareholders will be
permitted to elect up to 50% of the Cobalt directors.
- Cobalt shareholders may remove a director for cause with a vote of 75% of
common stockholders; the Foundation, however, is not permitted to
independently vote its shares on a removal.
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- Cobalt may only purchase its stock from the Foundation following a
registration for public sale at 100% of its recent trading price.
- BCBSUW is required to provide sufficient start-up operational funding for
the Foundation, but not in an amount to exceed $2,000,000.
- The name of the Foundation must be changed to a form acceptable to the
Commissioner.
To the extent that any of the conditions in the Order require BCBSUW to
amend documents that are part of the underlying application for conversion
(e.g., the UHG Articles of Incorporation and Bylaws, the voting trust and
divestiture agreement, and the registration rights agreement), such amendments
are subject to the prior review and approval of the Commissioner.
LIMITATION AND OVERSIGHT OF THE ROLE OF THE MEDICAL SCHOOLS.The Commissioner
has established an initial requirement that 35% of the conversion proceeds be
allocated by the medical schools to "public health" priorities. The Order
defines "public health" as "population health, rather than population medicine,
focused on the broader determinants of health in communities, such as prevention
efforts to promote healthy life styles for women, children and families; disease
prevention and control; and control of environmental agents that negatively
impact health." No portion of these funds may be expended for health care
provider education or medical research, unless it is substantially for public
health. To oversee the spending of the public health funds, the Commissioner is
requiring the creation of two Public and Community Health Oversight and Advisory
Committees ("PCHOAC"), one to oversee each Medical School. The public health
percentage allocation of the funds may only be expended by each Medical School
if its PCHOAC determines that:
- the funds will be expended for public health;
- the allocation for public community health based initiatives is
appropriate; and
- the standards for access to the funds for public health community based
initiatives, including matching requirements, are reasonable.
In addition to oversight of the public health funds, each PCHOAC will have a
number of other responsibilities, including:
- reviewing the Medical Schools' proposals to ensure that conversion funds
are not supplanting other resources that may be available to accomplish
the same purpose;
- preparation of an annual report which evaluates the effectiveness of
programs for health care provider and medical research; whether the funds
are supplanting resources otherwise available; the extent of funding of
community-based initiatives; whether funds are being expended in
accordance with the then current five-year plan; and the financial status
of the funds;
- adjustment, either upwards or downwards, of the portion of the conversion
funds to be allocated to public health priorities; and
- approval of any proposal to spend a material portion of the funds for real
estate or facilities.
COMPOSITION OF EACH MEDICAL SCHOOL PCHOAC.Each PCHOAC will be comprised of
nine members. Four members of University of Wisconsin Medical School's PCHOAC
will be appointed without restriction by the University of Wisconsin Medical
College Board of Regents; four members of Medical College of Wisconsin's PCHOAC
will be appointed without restriction by the Medical College of Wisconsin board
of trustees. The governing body of each school will initially select an
additional four members for its PCHOAC from a pool of health care advocate
candidates nominated by established Wisconsin-based non-profit or governmental
advocate organizations. Following the initial selection using this process,
vacancies for the health care advocate committee positions will be filled using
a similar
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methodology with a subcommittee of the PCHOAC nominating the pool of candidates.
The final member of each PCHOAC will be selected by the Commissioner.
APPEAL OF THE COMMISSIONER'S ORDER
On April 27, 2000, ABC For Health, Inc., Wisconsin Coalition For Advocacy
and AARP (collectively "Petitioners") initiated a judicial review of the
Commissioner's Order by filing their "Petition For Judicial Review Of An
Administrative Agency Decision" in the Circuit Court for Dane County, Wisconsin.
The petition requested the circuit court to review and reverse the
Commissioner's Order based upon allegations of "material errors of law,
erroneous exercises of discretion, exercises of discretion outside the range
delegated to the agency by the Legislature, erroneous findings of fact that are
not supported by substantial evidence in the record, and material irregularities
of agency procedure, which prejudiced the procedural and substantive due process
rights of the Petitioners." The Petitioners served the petition on OCI on
April 27, 2000, and OCI filed a response entitled "Notice of Appearance and
Statement of Position of Respondent Commissioner of Insurance," dated May 17,
2000. The Petitioners did not serve the petition on BCBSUW until May 18, 2000,
and BCBSUW filed its Notice of Appearance and Statement of Position in support
of the Commissioner's Order on May 19, 2000.
The judicial review proceeding initially was assigned to Dane County Circuit
Court Judge Sara O'Brien. On May 19, 2000, BCBSUW filed a request for
substitution, and the action was subsequently reassigned to Circuit Court Judge
Michael Nowakowski.
On May 31, 2000, BCBSUW filed motions and supporting briefs requesting the
court to dismiss the petition for review on the grounds that Petitioners lacked
standing to seek judicial review of the Commissioner's Order, and, furthermore,
because the court lacked subject matter jurisdiction over the petition as it
pertained to the Wisconsin Coalition for Advocacy. In addition, BCBSUW moved the
court for an expedited briefing schedule and/or an expedited hearing on its
motion to dismiss the petition for lack of standing. On June 6, 2000, the OCI
also filed a motion to dismiss for lack of standing.
The court held a hearing on BCBSUW's motion for an expedited hearing and/or
briefing schedule on June 7, 2000. At that hearing, Judge Nowakowski determined
that a prompt resolution of the case was warranted. Accordingly, Judge
Nowakowski established the following schedule: any request for a stay was to be
filed by June 23, 2000; Petitioners' brief in support of their petition was due
on or before July 5, 2000; briefs of respondents BCBSUW and OCI were due on or
before July 28, 2000; and Petitioners' reply brief was due on August 11, 2000.
The court scheduled oral argument for August 24, 2000.
On June 19, 2000, the Medical Schools filed pleadings seeking to intervene
in the proceeding, or, alternatively, to be allowed to file amicus curiae
briefs. By letter dated June 27, 2000, BCBSUW suggested to the court that,
consistent with the court's previous decision, it would be appropriate to
consider these motions simultaneously with the pending motions to dismiss and
the merits of the petition. On June 29, 2000, the court held a hearing on the
Medical Schools' motions to intervene, and determined that the motions would be
addressed simultaneously with the pending motions to dismiss and the merits of
the petition.
Petitioners did not file a motion seeking a stay prior to the June 23, 2000
deadline established by Judge Nowakowski. Rather, by letter dated June 23, 2000,
Petitioners advised the court of their decision not to seek a stay, but
purported to reserve the right to request a stay at a later date. By letter
dated June 26, 2000, BCBSUW advised the court that it was BCBSUW's position that
"the time for seeking a stay has now expired" and that the "Petitioners cannot
be permitted to modify the court's order by claiming to 'reserve' their rights."
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Petitioners filed a brief in support of their petition on July 5, 2000;
BCBSUW, the OCI and the Medical Schools filed briefs in opposition to the
petition on July 28, 2000; and Petitioners filed a reply brief on August 11,
2000. The principal issues briefed by the parties included whether the
charitable trust and cy pres doctrines were applicable to the proposed
conversion and, if so, whether the Commissioner's Order was consistent with
those doctrines; and whether Petitioners had standing to seek judicial review of
the Commissioner's Order.
Petitioners also filed a "motion to lodge" on August 11, 2000, seeking to
supplement the administrative record with certain briefs filed by BCBSUW's
predecessor in a lawsuit in 1961. BCBSUW filed a brief in response to that
motion on August 22, 2000.
On August 11, 2000, Community Catalyst, Inc. and Consumers Union filed
separate motions for leave to appear as amicus curiae, along with amicus briefs
in support of the petition. On August 16, 2000, BCBSUW filed a brief in
opposition to the amicus curiae motions and the briefs of Consumers Union and
Community Catalyst. On August 17, 2000, MCW also filed a brief in opposition to
the motions of Consumers Union and Community Catalyst.
On August 24, 2000, the Court heard oral argument on all pending motions and
the merits of the petition. At the conclusion of the hearing, Judge Nowakowski
announced on the record his decision to affirm the Commissioner's Order and to
dismiss the petition. Specifically, he concluded (among other things) that OCI
had correctly determined that "neither the charitable trust doctrine or the cy
pres doctrine apply" to the BCBSUW conversion. Judge Nowakowski also rejected
the Petitioners' arguments regarding certain findings of fact made by the
Commissioner, concluding that each of those findings was supported by
substantial evidence in the record. Furthermore, Judge Nowakowski upheld the
Commissioner's determination that the conversion is not illegal or contrary to
the interests of the public or policyholders.
On September 6, 2000, the court entered a formal order, confirming (among
other things) that for the reasons stated on the record: (i) the motions of
Consumers Union and Community Catalyst to file amicus curiae briefs were
granted, but factual materials included in their briefs which were not part of
the record would not be considered; (ii) Petitioners' motion to lodge briefs was
denied as unnecessary; (iii) the Commissioner's Order was affirmed, and the
petition for review dated April 27, 2000 was dismissed; (iv) the motions of
BCBSUW and OCI to dismiss the petition for lack of standing were denied as moot;
(v) the motions of the Medical Schools for leave to intervene were denied as
moot; and (vi) the motion of BCBSUW to dismiss the petition of Wisconsin
Coalition for Advocacy for lack of subject matter jurisdiction was denied.
On September 19, 2000, BCBSUW filed and served on all counsel of record a
notice of entry of order; therefore, under the applicable Wisconsin law, any
party desiring to appeal from Judge Nowakowski's order must file a notice of
appeal on or before October 23, 2000.
Petitioners filed a notice of appeal on October 23, 2000. In a docketing
statement filed on the same date, Petitioners indicated that they would ask the
Wisconsin Court of Appeals to address the following issues: (i) whether or not
Judge Nowakowski's decision to uphold the decision of the Commissioner was an
error of law; (ii) whether or not the decision was an abuse of discretion; and
(iii) whether or not Judge Nowakowski's decision was made without substantial
evidence in the record.
On November 21, 2000, BCBSUW filed a notice of cross-appeal, confirming that
BCBSUW would ask the Court of Appeals to also consider whether the Petitioners
lacked standing to even seek review of the Commissioner's Order.
Under the applicable rules, the following briefing schedule will apply to
this appeal unless altered by the court or by a voluntary dismissal by the
Petitioners: Petitioners' brief is to be filed and served on or before
December 20, 2000; the briefs of respondents OCI and BCBSUW (including a brief
in support of BCBSUW's cross-appeal) are due within 30 days after service of the
Petitioner's brief
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(approximately January 19, 2000); the Petitioner's reply brief and petitioners'
response to the cross-appeal are due within 15 days after service of the
respondents briefs (approximately February 5, 2001). Petitioners filed their
principal appellate brief on December 19, 2000.
BACKGROUND OF THE COMBINATION
The provisions of the exchange agreement are the result of negotiations
conducted among representatives of UWS and BCBSUW and their respective legal and
financial advisors. The following is a summary of the meetings, negotiations and
discussions between the parties that preceded execution of the exchange
agreement.
BACKGROUND OF UWS
In December 1998, in response to the appointment by the BCBSUW board of
directors of a special committee to investigate strategic options available to
it and, in consideration of the fact many of the possible options involved a
transaction with UWS, the UWS board of directors authorized its executive
committee of the UWS board of directors to appoint, in its discretion, a special
committee of the UWS board of directors to respond to any inquiry relating to
the possibility of a merger or other business combination with BCBSUW if BCBSUW
indicated that it was interested in pursuing such a transaction. The UWS board
of directors did not authorize the special committee, if created, to initiate
any discussions with BCBSUW, but rather only to respond to any discussion or
proposal initiated by BCBSUW.
Following that authorization, the executive committee determined that until
such time as BCBSUW approached UWS regarding a possible transaction, there was
no need to appoint a special committee.
As noted earlier, BCBSUW in June of 1999 filed with the OCI its application
for conversion and on March 28, 2000 the OCI issued the Order. As mentioned
above, the Commissioner's Order permits BCBSUW to convert to a stock form of
ownership through either an initial public offering of BCBSUW or a merger with
UWS. The board of directors expressed the belief that a merger or other business
combination with BCBSUW presented the possibility of significant benefits and
advantages to UWS, but required that any agreement between the parties be
negotiated on behalf of the board of directors by an independent special
committee. Following issuance of the Order, the executive committee of the UWS
board of directors noted that certain public interest groups had filed a
petition for judicial review of the Order and recognized that the results of
such judicial review could result in significant changes to the Order.
Accordingly, they determined not to appoint a special committee until the
judicial review process was underway and a determination could be made as to the
likely outcome.
At its regular quarterly meeting on May 31, 2000 the full UWS board of
directors discussed the status of the judicial review process and concluded that
it was timely to appoint a committee. The UWS board of directors then appointed
a special committee consisting of Barry K. Allen, Richard A. Abdoo and William
C. Rupp to negotiate a possible merger or other business combination with
BCBSUW. At that meeting the UWS special committee appointed Michael Best &
Friedrich LLP as its counsel.
On August 4, 2000, the UWS special committee met with Michael Best &
Friedrich. At the meeting, the committee spent considerable time discussing not
only a merger or other business combination with UWS, but also other strategic
alternatives for UWS. The committee recognized that due to BCBSUW's ownership
interest in UWS, its control of marketing, distribution and other systems
essential to UWS's operations and UWS's outstanding debt to BCBSUW, BCBSUW in
effect controlled UWS, and therefore UWS had more limited strategic alternatives
available than other, more independent companies might enjoy. At that meeting,
the committee members were advised by counsel of their duties, responsibilities
and prerogatives in connection with negotiating a merger or other
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business combination. The committee members discussed at length their
obligations and the procedures to be followed in connection with negotiating a
merger or other business combination. In particular, counsel advised the UWS
special committee that, in view of the relationship between BCBSUW and UWS, and
because of the overlap of management in the two companies and BCBSUW's ownership
interest in UWS, the UWS special committee and the UWS board of directors should
conduct themselves according to a standard higher than that required for arm's
length transactions with unrelated parties. The UWS special committee recognized
that the economic terms of any transaction approved by the UWS special committee
and the UWS board of directors should be fair to the UWS shareholders (other
than BCBSUW) and all negotiations must be procedurally fair. The committee also
was advised regarding procedures to be followed to maintain its independence. At
the August 4 meeting, the UWS special committee selected three financial
advisors for preliminary interviews, and it was determined that each of the
three possible financial advisors would be interviewed at a subsequent meeting.
On August 4, 2000, the UWS special committee met for the purpose of
interviewing financial advisors. The committee received presentations from each
of the three financial advisors that had been selected for interviews. At the
conclusion of the meeting, the committee selected Lehman Brothers as its
independent financial advisor based upon its expertise and the experience of
each of the individual "team" members who would be working on the project.
Lehman Brothers was retained by the UWS special committee to assist it in
reviewing any proposals received by the UWS special committee with respect to a
strategic transaction involving UWS, but Lehman Brothers was not authorized to
solicit indications of interest from third parties with respect to a possible
transaction with UWS.
Also at the August 30 meeting, the UWS special committee elected Barry K.
Allen, to serve as chairman.
On September 6, 2000, an organizational meeting was held with the UWS
special committee. Also present were personnel from Lehman Brothers and Michael
Best & Friedrich, Gail Hanson, Vice President, Treasurer and Chief Financial
Officer of each of BCBSUW and UWS, and Elizabeth Bartlett, Deputy General
Counsel of UWS. At the meeting, the parties discussed the role that Ms. Hanson
and Ms. Bartlett would play in the committee's activities. Ms. Hanson and
Ms. Bartlett had been designated representatives of UWS to work with the UWS
special committee and assist it in any way that the committee may request. It
was recognized that Ms. Hanson was an employee of both BCBSUW and UWS, and
Ms. Bartlett, while an employee of UWS, frequently performs legal services for
BCBSUW. The UWS special committee recognized the inherent conflict that
Ms. Hanson and Ms. Bartlett are subject to, and a decision was made that they
would be excused from all matters relating to strategy or negotiations. Rather,
their role would be primarily to serve as a source of information for such
matters as the committee might request.
The UWS special committee then turned to a review and discussion of the
Order, and during that discussion the committee identified several open issues
or questions relating to the Order and, in particular, discussed the requirement
of the UWS "public float." The committee noted that at current market prices,
that public float requirement would not be achieved and discussed means by which
it might be satisfied. The committee then discussed the Securities and Exchange
Commission filing requirements. Particularly, the parties discussed the
financial statements that would be required in any Securities and Exchange
Commission filings and discussed the time that would be required to prepare such
financial statements.
The chairman of the UWS special committee met on September 21, 2000, with
the committee's counsel and financial advisors. There was a discussion of the
process involved in completing any business combination. The chairman reported
on the status of the due diligence requests made by the committee's financial
advisor and BCBSUW's financial advisor, Bear, Stearns & Co. Inc. The chairman
asked Lehman Brothers to estimate when it might be reasonable for the BCBSUW
special committee
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to complete its due diligence review and be in a position to propose the terms
of an offer for a merger or other business combination.
The UWS special committee next met on September 24, 2000. The committee
discussed the status of due diligence negotiations. Based on the progress made
to date, the committee decided to tentatively schedule a full board of
directors' meeting for October 30 for the purpose of discussion of a business
combination and possible recommendation by the special committee assuming that
negotiations followed the timeline previously distributed by counsel. The
committee also directed Michael Best & Friedrich to prepare and distribute a
draft merger agreement. It was agreed that the merger agreement would contain
substantially all terms and conditions of the merger or other business
combination other than the economic terms of the transaction.
Following the September 24 meeting, Lehman Brothers, at the direction of the
UWS special committee, prepared materials for the committee to review regarding
valuation of the respective parties. On October 6, 2000 the committee met with
counsel and Lehman Brothers and reviewed in detail the materials previously
presented. The committee met for approximately three hours, reviewed the
materials and asked extensive questions of Lehman Brothers regarding the
valuation materials. The parties then continued the discussion of the public
float issue whereupon it was reaffirmed that UWS and the UWS special committee
must remain actively involved in any negotiations with the OCI regarding
resolution of the public float issue. Also on October 6, Michael Best &
Friedrich distributed the first draft of a merger agreement to all parties.
The committee met briefly on October 10 and discussed the status of
negotiations.
On October 20, Barry Allen received a telephone call from Janet Steiger,
chair of the BCBSUW special committee, stating that the BCBSUW special committee
was prepared to make an initial proposal regarding ownership structure for a
business combination.
Later on October 20, Lehman Brothers received a telephone call from Bear
Stearns. Bear Stearns indicated that while no written offer would be
forthcoming, the BCBSUW special committee would recommend an ownership structure
that resulted in the current UWS shareholders (other than BCBSUW) owning
approximately 14.5% of the combined company.
On October 22, Barry Allen, chairman of the UWS special committee, spoke
with representatives of Lehman Brothers regarding the proposed ownership
structure. Lehman Brothers reported that it did not have sufficient back-up
materials to be able to evaluate the methodology and the analysis behind the
offer and undertook to obtain additional information from Bear Stearns.
On October 23, various conference calls between Michael Best & Friedrich,
Lehman Brothers and Barry Allen took place. The parties, in general, discussed
the process and the steps that needed to be taken to analyze the proposal and to
be in a position to offer a counterproposal. Barry Allen directed Lehman
Brothers to provide written materials to educate all of the special committee
members for a meeting that would take place Wednesday, October 25.
On October 25 the UWS special committee met to discuss the proposal
communicated on October 20 by Bear Stearns on behalf of the BCBSUW special
committee. After review of the materials prepared by Lehman Brothers and an
extensive discussion of the proposal by the BCBSUW special committee, the UWS
special committee concluded that the BCBSUW special committee proposal was
inadequate and discussed the range of acceptable counterproposals.
The UWS special committee concluded that it would recommend a
counterproposal that resulted in the current UWS shareholders (other than
BCBSUW) owning 31% of the combined company on a post-transaction basis. The
committee directed Lehman Brothers to communicate that counterproposal to Bear
Stearns.
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The UWS special committee met on October 26, and reviewed a report from
Lehman Brothers. Lehman Brothers reported that Bear Stearns had not been
receptive to the 31% proposal, but indicated it would convey the proposal to the
BCBSUW special committee.
On November 15 the chairman of the BCBSUW special committee delivered a
letter to the chairman of the UWS special committee. That letter extended an
offer to UWS of a business combination that would result in the Foundation
receiving 35,331,780 shares of the combined entity representing 79.5% of the
equity of the combined entity.
On November 15, the chair of the UWS special committee sent that letter to
the other committee members and to Lehman Brothers and Michael Best & Friedrich.
The chairman directed Lehman Brothers to complete a detailed analysis comparing
that offer to the offer extended by the UWS special committee to the BCBSUW
special committee on October 25.
On November 16, Lehman Brothers met with the chairman and Michael Best &
Friedrich to discuss the conclusion rendered in its analysis. The entire UWS
special committee met on November 17 with Lehman Brothers and Michael Best &
Friedrich to discuss the proposal.
The UWS special committee concluded that the proposal was inadequate.
Accordingly, the committee directed Lehman Brothers to review all information
obtained and the history of resolutions to date and determine whether any
alternatives were available that could accommodate what appeared to be a
significant issue for BCBSUW relating to the ultimate percentage ownership of
the combined entity by the Foundation.
During the next ten days, Lehman Brothers reviewed its analysis and
considered alternative structures.
The entire UWS special committee met on November 28. At the meeting Lehman
Brothers reported the results of its examination. Lehman Brothers reported that
it could not issue a fairness opinion based on the November 15 proposal from
BCBSUW. Upon further discussion between the committee members and Lehman
Brothers, the UWS special committee concluded it could recommend, and Lehman
Brothers indicated that they believed they could issue a fairness opinion based
on, the shareholders of UWS (other than BCBSUW) receiving 25% of the outstanding
equity of the combined company, subject to review and approval by the Lehman
Brothers Fairness Opinion Committee. The committee decided that it would
recommend the proposal to BCBSUW but in particular also wanted to convey to
BCBSUW that it believed these offers represented the limit of UWS's ability to
negotiate and still receive a fairness opinion from Lehman Brothers.
The UWS special committee also directed Lehman Brothers to explore the
possibility of a transaction utilizing warrants to be issued to the Foundation.
The warrants would permit the Foundation to own a larger percentage of the
combined entity but would require the payment by the Foundation of additional
consideration upon exercise of the warrants.
On November 30, the UWS special committee, Lehman Brothers and Michael
Best & Friedrich met with counsel for the BCBSUW special committee and senior
management of both UWS and BCBSUW (consisting of Thomas R. Hefty, President and
Chief Executive Officer of both UWS and BCBSUW, Gail L. Hanson, Vice President,
Treasurer and Chief Financial Officer of both UWS and BCBSUW, and Stephen E.
Bablitch, Vice President and General Counsel of both UWS and BCBSUW). The
committee was counseled that the presence of senior management presented a
conflict of interest and the committee agreed that any comments from management
on matters other than responses to factual questions would be disregarded. At
that meeting, the UWS special committee outlined the proposal it was prepared to
make to the BCBSUW special committee. The UWS special committee also emphasized
that it believed this proposal represented the limit of the committee's
willingness to complete a transaction.
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At the meeting, counsel for the BCBSUW special committee reported that the
BCBSUW special committee was not interested in any proposal involving warrants
and that any such proposal would be immediately rejected. Based on such
statements, the UWS special committee elected not to include the warrant option
in its new proposal. The parties also discussed the fact that any proposal would
have to be approved by OCI. Stephen Bablitch and Foley & Lardner, the BCBSUW
special committee counsel, arranged meetings later that day with OCI to discuss
the relative positions of the parties and obtain OCI's position regarding the
proposals.
On December 1, the UWS special committee sent the BCBSUW special committee a
letter recommending a transaction in which the Foundation would receive 75% of
the equity of the combined company, or 27,295,000 shares. Later on December 1,
the BCBSUW special committee rejected that proposal. Following receipt of that
rejection, senior management of both companies suggested a meeting with
financial advisors and counsel for both sides for the purpose of examining
whether management could assist in providing clarification of facts or
information previously provided to the financial advisors which might provide a
basis for reaching a compromise. The UWS special committee was aware of the
conflict of interest that was presented by having senior management attend the
meeting and concluded that, for informational purposes, senior management could
attend that meeting.
On Saturday, December 2, representatives from Lehman Brothers and Bear
Stearns, Messrs. Hefty and Bablitch and Ms. Hanson, and representatives from
Michael Best & Friedrich and Foley & Lardner met in Chicago to discuss the
parties' relative positions. No agreement was reached at the meeting, but at the
conclusion of the meeting Bear Stearns proposed that the parties consider
"splitting the difference" between the current proposals recommended by each
party. The "splitting the difference" proposal would result in the Foundation
owning 31,313,390 shares of the combined company and the ownership of UWS
shareholders would remain unchanged. The proposal would result in the Foundation
owning 77.5% of the equity of the combined company and existing shareholders
(other than BCBSUW) owning 22.5% of the combined entity.
Immediately following that meeting, Lehman Brothers and Michael Best &
Friedrich reported the results of the meeting to the chairman of the UWS special
committee. The chairman asked Lehman Brothers whether it could deliver a
fairness opinion at the above ownership structure. Lehman Brothers stated that
they were not optimistic but would consider the request.
On Monday evening December 4, the UWS special committee met with Lehman
Brothers and Michael Best & Friedrich. Lehman Brothers reported that they would
be unable to deliver a fairness opinion with respect to any ownership structure
resulting in less than 25% of the equity of the combined company for
shareholders of UWS (other than BCBSUW).
The full board of directors met on December 6 with Messrs. Menden, Dunham
and Rupp absent. Dr. Rupp later joined the meeting by telephone. Michael Best &
Friedrich was also in attendance.
The UWS special committee provided an extensive summary of the negotiations.
Following extensive discussion by the board of directors, Lehman Brothers was
invited to join the meeting to present its findings. The Lehman Brothers'
representative reported that he believed Lehman Brothers generally could not
deliver a fairness opinion for a transaction that resulted in the current public
shareholders of UWS (other than BCBSUW) owning less than 25% of the equity of
the combined company. The Lehman Brothers' representative indicated that, if it
was important that the Foundation receive a greater percentage ownership,
increased ownership could be accomplished through the use of warrants issued to
the Foundation to purchase additional shares of the combined entity and still
permit Lehman Brothers to be able to deliver a fairness opinion.
Following additional discussion, the voting members of the UWS board of
directors continued to express their belief that pursuing a business combination
with BCBSUW was in the best interests of
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UWS and its shareholders. The board of directors then approved an offer to
BCBSUW with two alternatives:
(i) the Foundation would receive 27,295,000 newly issued shares of the
combined entity; or
(ii) the Foundation would receive 27,295,000 newly issued shares of the
combined entity plus two-year warrants to purchase an additional
4,018,390 newly issued shares at an exercise price of $5.00 per share.
The UWS board of directors also appointed Messrs. Forbes and Hickman, who
also are directors of BCBSUW, to act as "liaison" members to help facilitate
communication between the two special committees and/or boards of directors. The
UWS board of directors and UWS special committee were advised and recognized
that the participation of Messrs. Hickman and Forbes presented a conflict of
interest, as they are directors of both corporations, but concluded that, in
light of their business experiences and familiarity with the operations of both
companies, they were uniquely situated to provide assistance in the negotiating
process.
On Thursday, December 7, the UWS board of directors delivered the proposal
it had approved to BCBSUW. On Friday, December 8, the BCBSUW special committee
rejected the proposal and stated that the only transaction it would approve was
one in which the Foundation received 77.5% of the equity of the combined company
without any warrants.
The UWS special committee met Monday morning, December 11 with the
committee's counsel, with Messrs. Hickman, Forbes, Hefty, Bablitch, Ms. Hanson,
representatives of the BCBSUW special committee and counsel to the BCBSUW
special committee also were present. The UWS special committee again recognized
the potential conflict of interest presented by the attendance of those present.
The UWS special committee members discussed in detail the reason that they
continued to believe that a business combination was in the best interests of
the UWS and its shareholders (other than BCBSUW). That discussion included but
was not limited to:
- the ownership relationship of UWS to BCBSUW and the fact that BCBSUW
effectively controls UWS;
- the fact that UWS's Compcare HMO was licensed by the Association as a
controlled affiliate of BCBSUW to use the Blue-Registered Trademark- brand
and depended on that license to conduct its operations;
- the fact that the OCI had expressed concern about the continued financial
viability of UWS and BCBSUW;
- the fact that all of the UWS special committee members believed that at
the 77.5% ownership structure, the transaction was fair to the UWS
shareholders other than BCBSUW;
- the continuing strong opinion of all members of the UWS special committee
that, given all of their collective understanding of the operations and
prospects of both UWS and BCBSUW, the business combination was fair to,
and in the best interests of, UWS and its shareholders (other than BCBSUW)
and would result in a combined company with significantly greater
financial strength, market presence and prospects than UWS could realize
if it continued in its present structure; and
- the reaffirmation of the limited alternatives available to UWS as
discussed during the meeting of the UWS special committee on August 4,
2000.
The UWS special committee then asked Michael Best & Friedrich to outline
again the significance of receiving a fairness opinion from Lehman Brothers and
also asked counsel to outline the consequences of proceeding without a fairness
opinion if they were unable to obtain one.
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Michael Best & Friedrich again outlined the duties, responsibilities and
prerogatives of the UWS special committee and UWS board of directors, the
standard of conduct to which the UWS special committee and the UWS board of
directors had agreed to hold themselves, and the significance of a fairness
opinion from a reputable financial advisor. The UWS special committee members
then asked extensive questions of counsel relating to the implications of
proceeding without a fairness opinion. At the conclusion of the meeting, the
special committee decided that the benefits to UWS and to the shareholders of
UWS (other than BCBSUW) of completing the business combination at an ownership
structure of 77.5%/22.5% justified proceeding without a fairness opinion.
Accordingly, the UWS special committee approved and agreed to recommend to the
full UWS board of directors a business combination whereby the Foundation would
receive 77.5% of the equity of the combined entity and the shareholders of UWS
(other than BCBSUW) would receive 22.5% of the combined entity. The UWS special
committee asked Lehman Brothers again whether they could deliver a fairness
opinion with respect to that ownership structure, and Lehman Brothers advised
that it would again consider the matter.
The UWS special committee then requested that a full UWS board of directors
meeting be held on Wednesday, December 13, for the purpose of considering and
acting on the UWS special committee's recommendation.
On Tuesday evening December 12, Lehman Brothers informed the UWS special
committee that it could not deliver a fairness opinion but instead could deliver
an adequacy opinion, which, according to Lehman Brothers, meant that the
combination was the best alternative under the circumstances and therefore
adequate from a financial point of view.
On Wednesday, December 13, the entire UWS board of directors met.
Mr. Bablitch, Ms. Hanson and Ms. Bartlett were also present. At that meeting
counsel again advised the UWS board of directors of the standard of conduct to
which the UWS board of directors was holding itself and advised the UWS board of
directors regarding its duties, responsibilities and prerogatives in approving
and recommending to shareholders the business combination. Counsel further
summarized the significance and significance of receipt by the board of a
fairness opinion and the implications of proceeding without one. The UWS board
of directors then invited Lehman Brothers to join the meeting, and Lehman
Brothers explained its proposal to deliver an adequacy opinion. Lehman Brothers
reaffirmed that it was unable to conclude that the proposal recommended by the
UWS special committee was fair to the UWS shareholders (other than BCBSUW) from
a financial point of view.
The UWS board of directors asked extensive questions of Lehman Brothers and,
following additional discussion, Lehman Brothers was excused from the meeting.
The UWS board of directors then asked counsel to clarify the significance of an
adequacy opinion. Counsel further advised the board of directors that, until it
had the opportunity to examine and review the contents of the actual opinion
proposed by Lehman Brothers and to review the state of the law regarding similar
opinions, if any, the UWS board of directors should not assume that the opinion
provided any protection or assurance to it.
The UWS board of directors discussed the proposal extensively and agreed
(with Mr. Hefty abstaining) that proceeding with the proposal was fair to, and
in the best interests of, UWS and its shareholders (other than BCBSUW). The UWS
board of directors reiterated all of the reasons outlined by the UWS special
committee in its meeting of December 11. At the conclusion of the meeting, the
UWS board of directors approved (with Mr. Hefty abstaining) the proposal,
subject to final approval by the full board of directors of a definitive
agreement relating to the business combination.
On December 21, the full UWS board of directors, with Mr. Hefty abstaining,
unanimously approved the exchange agreement.
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UWS'S REASONS FOR THE COMBINATION
In concluding that the exchange agreement should be recommended to the UWS
board of directors and shareholders, respectively, and that the combination is
fair to, and in the best interests of, the shareholders of UWS (other than
BCBSUW), the UWS special committee and UWS board of directors considered a
number of factors. The UWS special committee and UWS board of directors
considered the following factors which supported their respective conclusions
that the combination is fair to, and in the best interests of, the shareholders
of UWS (other than BCBSUW):
- FORMATION OF SPECIAL COMMITTEE AND ARM'S-LENGTH NEGOTIATIONS. The
negotiations between the BCBSUW special committee and the UWS special
committee on behalf of UWS and the shareholders of UWS (other than
BCBSUW), and their respective advisors were conducted at arm's-length.
None of the members of the UWS special committee is employed by or
affiliated with UWS or BCBSUW, except in their capacities as directors and
shareholders of UWS.
- OWNERSHIP STRUCTURE. The UWS special committee concluded, based on its
negotiations with BCBSUW, that the agreed upon ownership structure
represented the lowest value that BCBSUW was willing to accept to exchange
all of the shares of BCBSUW common stock for shares of UWS common stock.
This determination was the result of the UWS special committee's
arm's-length negotiations with BCBSUW in an attempt to obtain the most
favorable ownership structure for the UWS shareholders (other than
BCBSUW), and the fact that the ownership structure for UWS shareholders
(other than BCBSUW) was increased by BCBSUW by 8.0% from the initial
proposal of 14.5% made by BCBSUW.
- BCBSUW'S CONVERSION PLAN. The combination was proposed by BCBSUW to UWS as
a result of BCBSUW's plan to convert from a service insurance corporation
which does not issue stock to a stock insurance corporation. The
Commissioner's Order requires that, among other things, in order to
accomplish the conversion, BCBSUW must either complete an initial public
offering or merge or otherwise combine with UWS.
- ENHANCEMENTS TO SHAREHOLDER VALUE. The UWS special committee and UWS board
of directors believe the combination will enhance value to the
shareholders of UWS (other than BCBSUW) by:
- combining the business and operations of UWS and BCBSUW;
- improving the public image of the combined entity by establishing a
large, public benefit foundation; and
- creating an entity with greater combined resources and prospects than
either company could achieve on a stand-alone basis.
- FIDUCIARY DUTIES. The exchange agreement does not unduly deter a third
party from making, or inhibit the UWS special committee and its advisors
from evaluating, negotiating or approving a transaction other than the
combination with BCBSUW. Specifically, the exchange agreement includes
provisions which permit the UWS special committee and its advisors to
receive unsolicited inquiries and proposals from third parties, and permit
the UWS special committee to provide information to, engage in discussions
and negotiate with, directly or through its advisors, any third party
making an unsolicited inquiry or proposal and permit the UWS board of
directors to terminate the exchange agreement in order to permit UWS to
enter into an alternative transaction with a third party. Thus, the
fairness of the terms of the transaction will be subject to a "market
test." In addition, the exchange agreement does not require UWS to pay a
"break up" fee to BCBSUW upon termination of the exchange agreement or
require UWS to reimburse BCBSUW or BC Holdings for their expenses upon
termination of the exchange agreement.
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- HISTORICAL AND PROJECTED FINANCIAL PERFORMANCE AND RELATED RISK AND
UNCERTAINTIES. The UWS special committee considered information with
respect to the financial condition, results of operations, business and
prospects of UWS and BCBSUW, including the financial projections supplied
by UWS and BCBSUW to Lehman Brothers and the inherent uncertainties and
contingencies associated with those financial projections, the relative
size of UWS and BCBSUW and the economic, market and regulatory conditions
affecting each of UWS and BCBSUW.
- LACK OF VIABLE ALTERNATIVES TO THE COMBINATION. Prior to the receipt of
any proposal from BCBSUW, the UWS board of directors had discussed options
available to maximize value to the shareholders of UWS (other than
BCBSUW), including the sale of UWS to a third party. In that regard, the
UWS board of directors did not identify any logical synergistic
purchasers, in large part because the existing relationship between UWS
and BCBSUW would impede any third party's attempt to purchase UWS,
including the facts that BCBSUW maintains effective voting control over
UWS, that UWS and BCBSUW share common facilities, common officers and
staff and the fact that UWS's corporate HMO was licensed to use the Blue
Cross-Registered Trademark- brand by virtue of being a controlled
affiliate of BCBSUW, and depended on that license to conduct its
operations. Following receipt of the proposal from BCBSUW and the
formation of the UWS special committee, in its consideration of strategic
alternatives, the UWS special committee considered the merits of
conducting an auction of UWS to third parties or authorizing Lehman
Brothers to solicit interest from third parties. After considering these
factors, the UWS special committee concluded that it would not be in the
best interests of the shareholders of UWS (other than BCBSUW) to attempt
to auction UWS or solicit interest from third parties. Accordingly, the
UWS special committee did not direct Lehman Brothers to solicit offers or
indications of interest from third parties. As a result, the UWS special
committee insisted that the UWS special committee and its advisors retain
the right to provide information to, and enter into negotiations and
discussions with, third parties that might express an interest in
acquiring, or entering into a transaction with, UWS. See "THE EXCHANGE
AGREEMENT--Fiduciary Responsibilities of Boards."
- POTENTIAL CONFLICTS OF INTEREST OF MEMBERS OF THE BOARD OF DIRECTORS. If
the combination is completed, certain members of the UWS board of
directors will continue in their capacities as directors of Cobalt. In
addition, if the combination is completed, each member of the UWS board of
directors who is a shareholder of UWS will continue as a shareholder of
Cobalt. The UWS board of directors, however, believes that its interests
are consistent with the interests of all other shareholders of UWS (other
than BCBSUW) in this regard. The members of the UWS special committee will
also receive compensation for their services as members of the UWS special
committee. See "THE COMBINATION--Interests of Certain Persons in the
Combination." The UWS special committee believes that this does not
present a conflict of interest because this compensation is payable
whether or not the combination is completed.
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- THE EXCHANGE AGREEMENT. The terms and conditions of the exchange agreement
require (i) approval of the combination by both (a) 80% of the outstanding
shares of UWS common stock, AND (b) 66 2/3% of the outstanding UWS common
stock which is not owned by BCBSUW, its affiliates or its benefit plans;
and (ii) that dissenters' rights be provided to UWS shareholders who vote
against the combination.
- ADEQUACY OPINION. The UWS special committee and UWS board of directors
considered the opinion of Lehman Brothers as to the adequacy, from a
financial point of view, of the aggregate ownership interest in Cobalt to
be retained by the shareholders of UWS (other than BCBSUW) upon
consummation of the combination.
- PROCEDURAL FAIRNESS. The UWS special committee and UWS board of directors
believe that the decision to approve the combination was made in a
procedurally fair fashion because, among other things:
- the UWS special committee consisted entirely of non-management,
non-affiliated independent directors appointed by the UWS board of
directors to represent solely the interests of the shareholders of UWS
(other than BCBSUW);
- the UWS special committee retained and was advised by its own independent
financial advisor, Lehman Brothers, to assist it in evaluating the
combination and provide it with financial advice;
- the UWS special committee engaged in extensive negotiations and
deliberations in evaluating the exchange agreement, the combination and
ownership interest to be retained by shareholders of UWS (other than
BCBSUW);
- the ownership interest to be retained by shareholders of UWS (other than
BCBSUW) and the other terms and conditions of the exchange agreement
resulted from active arm's-length bargaining between the UWS special
committee and BCBSUW and their respective advisors; and
- even though the UWS special committee consisted of directors of UWS and
was therefore not completely unaffiliated with UWS, committees of
independent directors are a commonly utilized mechanism which are
recognized under applicable law to ensure fairness in transactions of
this type.
In view of the foregoing, the UWS special committee and UWS board of
directors believe that sufficient procedural safeguards exist to ensure
fairness of the combination and to permit the UWS special committee to
effectively represent the interests of the shareholders of UWS (other than
BCBSUW), and therefore, additional unaffiliated representatives to act on
behalf of the shareholders of UWS (other than BCBSUW) are not necessary.
In addition to the factors described above, the UWS board of directors
considered the recommendation of the UWS special committee in deciding to
recommend that shareholders vote "FOR" the approval of the exchange agreement.
In view of all of the factors considered by the UWS special committee and
UWS board of directors in connection with the evaluation of the combination and
the complexity of these matters, the UWS special committee and UWS board of
directors did not consider it practicable to, nor did they attempt to, quantify,
rank or otherwise assign relative weights to the specific factors they
considered in reaching their decision. However, based upon these factors, the
evaluation of all the relevant information provided to them by the UWS special
committee's independent financial and legal advisors and taking into account the
existing trading ranges for the UWS common stock, the UWS special committee and
the UWS board of directors separately determined that the exchange agreement and
the combination, including the ownership interest to be retained by shareholders
of UWS (other than
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BCBSUW), is fair, from a financial point of view, to the shareholders of UWS
(other than BCBSUW). In considering the factors described above, individual
members of the UWS special committee and UWS board of directors may have given
different weights to different factors.
Based upon the reasons described above, the UWS special committee
unanimously recommended that the UWS board of directors approve the exchange
agreement, subject only to shareholder approval, the right of the UWS board of
directors to continue to consider proposals from third parties under the
exchange agreement, and the continuing exercise of the fiduciary duties of the
UWS board of directors.
The UWS board of directors considered and relied upon the conclusions and
unanimous recommendation of the UWS special committee that the full UWS board of
directors approve the exchange agreement and the transactions contemplated
thereby, including the combination. Based upon the reasons described above, the
UWS board of directors unanimously approved (with Thomas R. Hefty abstaining)
the exchange agreement and the combination, and has determined that the exchange
agreement and the combination are advisable, fair to and in the best interests,
of the public shareholders. ACCORDINGLY, THE UWS BOARD OF DIRECTORS RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE EXCHANGE AGREEMENT AT THE SPECIAL
MEETING.
To avoid any potential conflict of interest with respect to the approval of
the exchange agreement, Thomas R. Hefty, who is the Chairman, Chief Executive
Officer and President of both UWS and BCBSUW, abstained from voting in his
capacity as a director of UWS on the approval of the exchange agreement because
of his relationship with BCBSUW.
Under the exchange agreement, BCBSUW has agreed to vote all of its shares of
UWS common stock in favor of the combination.
ADEQUACY OPINION OF UWS'S FINANCIAL ADVISOR
Lehman Brothers acted as financial advisor to the UWS special committee in
connection with the combination. On December 21, 2000, Lehman Brothers rendered
its opinion to the special committee that as of such date, from a financial
point of view, the aggregate ownership interest in Cobalt to be retained by the
shareholders of UWS (excluding BCBSUW) (the "Non-Foundation Shareholders") upon
consummation of the combination was adequate.
THE FULL TEXT OF LEHMAN BROTHERS' OPINION, DATED DECEMBER 21, 2000, IS
ATTACHED AS ANNEX B TO THIS PROXY STATEMENT/PROSPECTUS. HOLDERS OF UWS COMMON
STOCK MAY READ THE LEHMAN BROTHERS OPINION FOR A DISCUSSION OF THE PROCEDURES
FOLLOWED, FACTORS CONSIDERED, ASSUMPTIONS MADE AND QUALIFICATIONS AND
LIMITATIONS OF THE REVIEW UNDERTAKEN BY LEHMAN BROTHERS IN CONNECTION WITH ITS
OPINION.
LEHMAN BROTHERS' OPINION WAS PROVIDED FOR THE INFORMATION AND ASSISTANCE OF
THE UWS SPECIAL COMMITTEE IN CONNECTION WITH ITS CONSIDERATION OF THE
COMBINATION. THE UWS SPECIAL COMMITTEE DID NOT REQUEST LEHMAN BROTHERS TO
ADDRESS THE MERITS OF OUR UNDERLYING DECISION TO PROCEED WITH OR EFFECT THE
TRANSACTIONS CONTEMPLATED BY THE EXCHANGE AGREEMENT. LEHMAN BROTHERS' OPINION IS
NOT A RECOMMENDATION TO ANY SHAREHOLDER OF UWS AS TO HOW HE OR SHE SHOULD VOTE
WITH RESPECT TO THE COMBINATION.
LEHMAN BROTHERS WAS ORIGINALLY REQUESTED BY THE UWS SPECIAL COMMITTEE TO
RENDER ITS OPINION WITH RESPECT TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW,
TO THE NON-FOUNDATION SHAREHOLDERS OF THE AGGREGATE OWNERSHIP INTEREST TO BE
RETAINED BY THE NON-FOUNDATION SHAREHOLDERS UPON CONSUMMATION OF THE
COMBINATION. LEHMAN BROTHERS ADVISED THE UWS SPECIAL COMMITTEE THAT IT WAS NOT
ABLE TO RENDER SUCH AN OPINION BASED UPON THE PROPOSED TERMS OF THE COMBINATION.
LEHMAN BROTHERS' OPINION SHOULD NOT BE DEEMED TO CONSTITUTE AN OPINION THAT THE
AGGREGATE OWNERSHIP INTEREST IN COBALT TO BE
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<PAGE>
RETAINED BY THE NON-FOUNDATION SHAREHOLDERS UPON CONSUMMATION OF THE COMBINATION
IS FAIR FROM A FINANCIAL POINT OF VIEW TO SUCH SHAREHOLDERS.
In arriving at its opinion, Lehman Brothers reviewed and analyzed:
- the exchange agreement and the specific terms of the combination;
- the Commissioner's Order;
- the report of the appraisal committee of BCBSUW dated February 14, 2000;
- the voting trust and divestiture agreement;
- the Amended and Restated Articles of Incorporation and Amended and
Restated Bylaws of Cobalt;
- a draft of this Proxy Statement/Prospectus (dated December 21, 2000);
- publicly available information concerning UWS it believed to be relevant
to its analysis, including UWS's Annual Report on Form 10-K for the fiscal
years ended December 31, 1999 and 1998 and Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2000, June 30, 2000 and September 30,
2000;
- annual statutory financial statements for 1999 and 1998 and quarterly
financial statements for the quarters ended March 31, 2000, June 30, 2000
and September 30, 2000 for BCBSUW and the insurance subsidiaries of UWS;
- financial and operating information relating to the business, operations
and prospects of UWS and BCBSUW furnished to it by UWS and BCBSUW;
- a trading history of UWS's common stock from January 1, 1999 to the
present and a comparison of that trading history with those of other
companies that it deemed relevant;
- a comparison of the historical financial results and present financial
condition of UWS and BCBSUW with those of other companies that it deemed
relevant;
- a comparison of the financial terms of the combination with the financial
terms of other transactions that it deemed relevant;
- the highly leveraged position of UWS (including the $70 million of debt
owed by UWS to BCBSUW) and the limited strategic and financial
alternatives available to UWS as a stand-alone business; and
- the strategic benefits of a combination of the businesses of UWS and
BCBSUW and the greater access to capital that will be afforded to Cobalt
following the consummation of the combination.
In addition, Lehman Brothers participated in discussions among the
management of UWS and BCBSUW concerning the business, operations, assets,
financial condition and prospects of each company and undertook such other
studies, analyses and investigations as it deemed appropriate.
In arriving at its opinion as to the adequacy of the aggregate ownership
interest to be retained by the Non-Foundation Shareholders upon consummation of
the combination, Lehman Brothers considered BCBSUW's significant leverage over
and control of UWS as a result of:
- BCBSUW's power to effectively vote a majority of the shares of UWS's
common stock;
- BCBSUW's control of certain marketing and distribution systems and other
operations that are essential to UWS's businesses;
- BCBSUW's ability to withdraw from UWS the Blue Cross/Blue Shield
trademarks under which UWS markets certain of its products; and
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<PAGE>
- BCBSUW's status as the holder of approximately $70 million of UWS's debt
that matures in April 2001.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of this
information. Lehman Brothers also relied upon the assurance of the managements
of UWS and BCBSUW that neither is aware of any facts or circumstances that would
make such information inaccurate or misleading. Upon advice of UWS and BCBSUW,
Lehman Brothers assumed that the financial projections of UWS and BCBSUW were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the managements of UWS and BCBSUW as to the future financial
performance of UWS and BCBSUW and that UWS and BCBSUW will perform substantially
in accordance with those projections. Lehman Brothers did not conduct a physical
inspection of the properties and facilities of UWS or BCBSUW and did not make or
obtain any evaluations or appraisals of the assets or liabilities of UWS and
BCBSUW. Lehman Brothers' opinion necessarily is based upon market, economic and
other conditions as they existed on, and could be evaluated as of, December 19,
2000.
In arriving at its opinion, Lehman Brothers did not ascribe a specific range
of value to UWS or Cobalt, but rather made its determination as to the adequacy,
from a financial point of view, of the aggregate ownership interest in Cobalt to
be retained by the Non-Foundation Shareholders upon consummation of the
combination on the basis of financial and comparative analyses described below.
The preparation of an adequacy opinion involved various determinations as to the
most appropriate and relevant methods of financial and comparative analysis and
the application of those methods to the particular circumstances, and therefore,
such an opinion is not readily susceptible to summary description. Furthermore,
Lehman Brothers did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that you should consider its analyses as a whole and that
considering any portion of such analyses and factors, without considering all
analyses and factors as a whole, could create a misleading or incomplete view of
the process underlying its opinion. In its analyses, Lehman Brothers made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
UWS and BCBSUW. None of UWS, BCBSUW, Lehman Brothers or any other person assumes
responsibility if future results are materially different from those discussed.
Any estimates contained in these analyses were not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than as set forth in the analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
In its opinion, Lehman Brothers noted that the Commissioner's Order
conditions the conversion of BCBSUW on either its completion of an initial
public offering or its merger with UWS, in either case by March 28, 2001. Lehman
Brothers assumed, with the UWS special committee's consent, that BCBSUW would
not be able to complete an initial public offering given current market
conditions and its recent financial results and therefore that the only way to
satisfy the condition of the Commissioner's Order is to effect the combination
contemplated by the exchange agreement.
In addition, Lehman Brothers expressed no opinion as to the prices at which
the shares of common stock of Cobalt may trade at any time following the
consummation of the combination. Its opinion should not be viewed as providing
any assurance that the market value of such shares to be retained by the
Non-Foundation Shareholders after consummation of the combination will be in
excess of the market value of the shares of UWS common stock owned by such
shareholders prior to such consummation.
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<PAGE>
The following is a summary of the material financial analyses used by Lehman
Brothers in connection with rendering its adequacy opinion to the UWS special
committee. Some of the summaries of the financial and comparative analyses
include information presented in tabular format. In order to fully understand
the methodologies used by Lehman Brothers and the results of its financial and
comparative analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial and comparative analyses. Accordingly, the information presented in
the tables and described below must be considered as a whole. Considering any
portion of such analyses and of the factors considered, without considering all
analyses and factors as a whole, could create a misleading or incomplete view of
the process underlying Lehman Brothers' opinion.
Comparable Company Analysis
Using publicly available information, Lehman Brothers compared selected
financial data of UWS and selected pro forma financial data of Cobalt with
similar data of selected companies engaged in businesses considered by Lehman
Brothers to be comparable to the business of UWS and the expected business of
Cobalt. Specifically, Lehman Brothers included in its review the following
companies:
- Coventry Health Care, Inc.
- Mid Atlantic Medical Services, Inc.
- RightCHOICE Managed Care, Inc.
- Trigon Healthcare, Inc.
- Sierra Health Services, Inc.
- WellPoint Health Networks, Inc.
For each of the selected companies listed above, Lehman Brothers calculated
the ratio of its:
- market value to its 2001 and 2002 estimated earnings per share;
- firm value to its revenues for the 12-month period ended September 30,
2000;
- firm value to its risk membership.
Firm value means market value of equity, plus debt, preferred stock, minority
interest, medical claims liabilities, and unearned premium revenues, minus cash
and investments.
Lehman Brothers based these calculations on market information as of
December 19, 2000, the latest publicly available information and estimates of
earnings and revenues based on I/B/E/S International Inc. ("IBES") consensus
estimates. IBES is a data service that monitors and publishes compilations of
earnings and revenue estimates by selected research analysts regarding companies
of interest to institutional investors.
Lehman Brothers then applied a range of selected multiples for the selected
companies to corresponding data of UWS and corresponding pro forma data of
Cobalt provided by the managements of UWS and BCBSUW to calculate ranges of
implied equity values of UWS and Cobalt. Lehman Brothers then calculated an
implied aggregate ownership interest of the Non-Foundation Shareholders
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<PAGE>
in Cobalt based on these valuations and their current aggregate ownership
interest in UWS. The following table sets forth the results of these
calculations:
<TABLE>
<CAPTION>
IMPLIED NON-
FOUNDATION SHAREHOLDERS
UWS VALUATION COBALT VALUATION OWNERSHIP INTEREST
-------------------------- --------------------------- -----------------------
LOW HIGH LOW HIGH LOW HIGH
--------------- -------- ---------------- -------- --------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Price/Earnings Multiple Approach........ $ 97.6 -- $205.9 $ 192.6 -- $310.1 27.2% 35.7%
Firm Value/Revenue Multiple Approach.... 43.3 -- 193.5 104.5 -- 354.5 22.3 29.3
Firm Value/Membership Approach.......... 54.4 -- 151.1 116.7 -- 274.0 25.0 29.6
</TABLE>
Because of the inherent differences between the actual and pro forma
business, operations, financial condition and prospects of UWS and Cobalt and
the businesses, operations, financial conditions and prospects of the companies
included in the selected companies, Lehman Brothers believed that it was
inappropriate to rely solely on the quantitative results of the analysis.
Accordingly, Lehman also made qualitative judgments concerning differences
between the financial and operating characteristics of UWS, Cobalt and the
selected companies that would affect the public trading values of UWS, Cobalt
and the selected companies. In particular, Lehman Brothers considered markets
served, products offered and rates of growth and profitability of UWS and BCBSUW
and of each of the selected companies.
Discounted Cash Flow Analysis
Lehman Brothers performed a discounted cash flow analysis to determine a
range of implied equity values for UWS and Cobalt. The ranges were determined by
adding:
- present values of dividends estimated to be paid on shares of UWS and
Cobalt common stock from 2001 through 2004; and
- terminal values for UWS and Cobalt as of December 31, 2004 based on a
multiple of estimated net income for the year ending December 31, 2005.
Lehman Brothers derived present values using discount rates ranging from 18%
to 22%. With respect to terminal values, Lehman Brothers used a range of 9.0x to
12.0x estimated net income for 2005. The estimates for net income for 2001 to
2005 were based on information provided to Lehman Brothers by the managements of
UWS and BCBSUW. To estimate dividends to be paid, Lehman Brothers relied on the
assumption that both UWS and Cobalt will maintain UWS's current annual dividend
of $0.05 per share.
Based on its discounted cash flow analysis, Lehman Brothers derived a range
of implied equity values of $166.9 million to $195.9 million for UWS and
$275.2 million to $322.8 million for Cobalt. Lehman Brothers then calculated an
implied aggregate ownership interest of the Non-Foundation Shareholders in
Cobalt of 32.6%, based on these valuations and their current aggregate ownership
interest in UWS.
Comparable Transaction Analysis
Lehman Brothers reviewed publicly available information for six merger and
acquisition transactions involving Blue Cross & Blue Shield targets announced
from January 1999 through December 15, 2000 and nine merger and acquisition
transactions in the health care industry involving
53
<PAGE>
private, non-Blue Cross targets from March 1998 through December 15, 2000. The
comparable transactions considered by Lehman Brothers were the following:
<TABLE>
<CAPTION>
TARGET ACQUIROR
------ --------
<S> <C>
BLUE CROSS & BLUE SHIELD TARGETS:
Cerulean Companies Inc................... WellPoint Health Networks Inc.
BCBS of New Mexico....................... Health Care Service Corp.
Blue Cross Blue Shield of Maine.......... Anthem
Blue Cross Blue Shield of Colorado....... Anthem
Blue Cross and Blue Shield of New
Hampshire.............................. Anthem
PRIVATE; NON BLUE TARGETS:
WellPath Community Health Plans.......... Coventry
Rush Prudential.......................... WellPoint
Memorial Sisters of Charity Health
Network................................ Humana Inc.
Harris Methodist Health Plan............. PacifiCare Health Systems
NYLCare Texas commercial operations...... Health Care Service Corporation
Prudential HealthCare.................... Aetna Inc.
Kaiser Foundation Health Plan of Texas... Sierra Health Services Inc.
HealthPartners of Arizona, Inc........... United HealthCare Corp.
NYLCare Health Plans..................... Aetna Inc.
</TABLE>
For each transaction, Lehman Brothers analyzed its transaction value (the
sum of purchase price, debt and medical claims liabilities, less cash and
investments) divided by the target's:
- latest twelve month revenues; and
- total number of medical members.
Lehman Brothers determined that the transaction value revenue multiple
ranges were 0.20x to 0.35x with respect to the Blue Cross transactions and 0.11x
to 0.60x with respect to the private transactions. The transaction value per
member ranged from $258 to $359 in the Blue Cross transactions and from $255 to
$1,049 in the private transactions.
Lehman Brothers then applied selected results of this analysis to
corresponding financial and other data of UWS and corresponding pro forma
financial and other data of Cobalt provided by the managements of UWS and BCBSUW
to calculate ranges of implied equity values of UWS and Cobalt. Lehman Brothers
then calculated an implied aggregate ownership interest of the Non-Foundation
Shareholders in Cobalt based on these values and their current aggregate
ownership interest in UWS. The following table sets forth the results of these
calculations:
<TABLE>
<CAPTION>
IMPLIED NON-
FOUNDATION
SHAREHOLDER
OWNERSHIP
UWS VALUATION COBALT VALUATION INTEREST
--------------------------- --------------------------- ----------------------------
LOW HIGH LOW HIGH LOW HIGH
---------------- -------- ---------------- -------- -------------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Blue Cross Transactions................ $ 62.5 -- $155.9 $ 128.8 -- $292.0 26.1% 28.7%
Private Transactions................... 118.4 -- 231.8 229.5 -- 403.1 27.7-- 30.9
</TABLE>
Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the actual and pro forma businesses, operations
and prospects of UWS and Cobalt and the acquired businesses analyzed, Lehman
Brothers believed that it was inappropriate to, and therefore did not, rely
solely on
54
<PAGE>
the quantitative results of the analysis. Accordingly, Lehman Brothers also made
qualitative judgments concerning differences between the characteristics of
these transactions and the Exchange that would affect the acquisition values of
UWS and such acquired companies.
Contribution Analysis
Lehman Brothers used estimates provided by the managements of UWS and BCBSUW
of the future financial performance of UWS and BCSBUW to calculate the relative
contributions of both companies to Cobalt on a pro forma basis with respect to
revenues, net income and risk members for the calendar years 2000 and 2001.
Lehman Brothers then determined, based on the aggregate ownership interest of
the Non-Foundation Shareholders in UWS, the relative contribution of this
interest to Cobalt on a pro forma basis. The following table shows the estimated
revenue, net income and risk members contribution in 2000 and 2001.
<TABLE>
<CAPTION>
RELATIVE CONTRIBUTION
------------------------------
NON-FOUNDATION
SHAREHOLDERS FOUNDATION
-------------- ----------
<S> <C> <C>
REVENUE
2000E.......................................... 32.4% 67.6%
2001E.......................................... 31.0 69.0
NET INCOME
2000E.......................................... NM NM
2001E.......................................... 26.1 73.9
RISK MEMBERS
2000E.......................................... 33.6 66.4
2001E.......................................... 33.1 66.9
</TABLE>
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The UWS special committee selected
Lehman Brothers because of its expertise, reputation and familiarity with the
company and the insurance and health care industry generally and because its
investment banking professionals have substantial experience in transactions
comparable to the combination.
As compensation for its services in connection with the combination, UWS
agreed to pay Lehman Brothers the following fees:
- $100,000 upon execution of its engagement agreement with us (creditable
against the $1,000,000 fee described below);
- $400,000 upon delivery of its opinion (creditable against the $1,000,000
fee described below);
- $1,000,000 contingent upon the closing of the combination during Lehman
Brothers' engagement or within 24 months after the termination of that
engagement; and
- $300,000 of additional incentive fees.
In addition, UWS has agreed to reimburse Lehman Brothers for reasonable
out-of-pocket expenses incurred in connection with the merger and to indemnify
Lehman Brothers for certain liabilities that may arise out of its engagement by
UWS and the rendering of the Lehman Brothers opinion.
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<PAGE>
In the ordinary course of its business, Lehman Brothers may actively trade
in the debt or equity securities UWS for its own account and for the accounts of
its customers and, accordingly, may at any time hold a long or short position in
such securities.
BACKGROUND OF BCBSUW
On June 7, 2000, the BCBSUW Board of directors authorized a special
committee, consisting of the same individuals that had acted as a special
committee for the Board's investigation and implementation of the conversion
filing with OCI, to negotiate the combination. BCBSUW then issued a press
release publicly announcing the formation of this committee. In view of the
resignation of James Hickman from the BCBSUW special committee due to his role
as a director of both UWS and BCBSUW, the board of directors unanimously
reconstituted the BCBSUW special committee to consist of Michael Joyce, Janet
Steiger and Dr. Kenneth Viste, and charged the BCBSUW special committee with the
express authority to negotiate the combination in order to implement the
conversion. The BCBSUW special committee met on 26 separate occasions between
September and December 2000, as well as to deliberate concerning negotiation of
the combination. The initial meetings held on September 6, October 10 and
October 13 involved the choice of legal and financial advisors, as well as
certain procedural decisions. Because the committee viewed its task as a natural
outgrowth of its previous responsibilities concerning conversion, it was
determined that continuity of advisors was desirable. Therefore, the law firm of
Foley & Lardner was chosen as legal counsel. The managing director of Donaldson,
Lufkin & Jenrette chiefly responsible for the financial advice to the committee
during its conversion deliberations, had since joined the investment banking
firm of Bear, Stearns & Co. Inc.; and after discussions with him, Bear Stearns
was engaged on September 5 to assist the committee.
During these first meetings, the committee also considered the role of
BCBSUW management and staff in its meetings. BCBSUW assigned Stephen E.
Bablitch, Vice President and General Counsel of BCBSUW and UWS, and Frank M.
Cino, Vice President of BCBSUW and Vice President and Controller of UWS, to act
as management liaison to the committee. In view of their dual roles, the
committee decided that the involvement of these two officers in committee
meetings would be limited to provision of requested information, and that they
would attend meetings upon invitation only, in order to preserve both the
independence and the confidentiality of the committee's deliberations.
The committee also received informational briefings from the BCBSUW special
committee's advisors regarding the conversion process, the limitations presented
by the Commissioner's Order in effecting the conversion by way of the
combination, and preliminary valuation issues with respect to BCBSUW and UWS,
arising from Bear Stearns' financial due diligence review conducted during the
months of September and October. The committee was advised that its duties
required the consideration of multiple interests including BCBSUW, its
policyholders, the Foundation and the public in general. The committee was also
advised that under the Commissioner's Order approving the conversion, the terms
and conditions of the transaction would need to be fair and reasonable to the
Foundation and, by extension, the public.
At the outset of the BCBSUW special committee's work, the committee
determined that Bear Stearns was not likely to be requested to render a fairness
opinion with respect to any transaction that might result from the negotiations,
but would be engaged to provide advisory services in evaluating and negotiating
the combination transaction. In making this determination, the Committee
considered, among other things, that it would be a legally imposed condition to
the closing of the combination transaction that OCI affirmatively and
independently determine the transaction to be fair to, and in the interests of,
the Foundation as a representative of the public interest. OCI had engaged an
independent investment banking firm, at the expense of BCBSUW, to consult with
OCI staff with respect to the transaction.
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<PAGE>
Bear Stearns' analysis of the transaction was based on the relative values
of the different businesses and components that BCBSUW and UWS would bring to
the combined entity. In conducting its diligence, Bear Stearns reviewed publicly
available data, internal financial information and operating data, including
historical and forecasted financial data prepared by management, as well as the
assumptions used by management in preparing such forecasts. Further, Bear
Stearns met with management, auditors and actuaries. In performing its financial
analysis, Bear Stearns used a number of techniques including, but not limited
to, the analyses of publicly traded comparable companies, the analyses of
relevant merger and acquisitions transactions, and discounted cash flow
analyses.
In performing its work, Bear Stearns held numerous meetings and conference
calls with senior management to discuss the material provided by management as
described above, including the past and current operations as well as the
prospects of BCBSUW and UWS. Bear Stearns also met on several occasions with
Lehman Brothers, financial advisor to the UWS special committee, to discuss the
firms' respective valuation approaches. Also, Bear Stearns often conducted
reviews with the BCBSUW special committee and provided the BCBSUW special
committee with details of the analyses performed, including valuation of the
businesses and components, valuation of outstanding options, analysis of
ownership structure sensitivities at different values of BCBSUW and UWS, and the
comparative analysis of various proposals.
On October 20, 2000, the BCBSUW special committee convened and received a
presentation from Bear Stearns setting forth its economic valuation of UWS and
BCBSUW, respectively, and a preliminary range of possible ownership structure
for the combination. Based upon this presentation and the advice of its
advisors, the BCBSUW special committee in turn adopted an initial ownership
structure offer for the combination pursuant to which the UWS public
shareholders would receive 14.5%, and the Foundation would receive 85.5%, of the
value of the combined UWS/BCBSUW, and the BCBSUW special committee authorized
Bear Stearns to communicate this initial offer to Lehman Brothers.
Following the communication of the initial ownership structure offer, the
BCBSUW special committee convened on nine separate occasions between October 25
and November 7 to address and discuss developments in the negotiation process
and receive informational reports regarding developments in Bear Stearns'
economic analysis arising from its continued financial due diligence. On
October 27, Bear Stearns reported to the BCBSUW special committee that Lehman
Brothers had provided a counterproposal for an ownership structure pursuant to
which the UWS public shareholders would receive 31% of the value of the combined
entity. This offer was rejected by the BCBSUW special committee and the
rejection was communicated to the UWS special committee. Discussions in
subsequent meetings, in part, focused on the different valuation methodologies
that were being advocated by Bear Stearns and Lehman Brothers, respectively. A
joint meeting of the UWS and BCBSUW special committees was convened on
November 8, during which Lehman Brothers and Bear Stearns presented their
respective valuation views to the two special committees. This joint meeting
resulted in a realization that (i) Lehman Brothers and Bear Stearns were
advocating differing valuation methodologies which had not resulted in a common
ground for ownership structure negotiations, (ii) both UWS and BCBSUW had
reported financial losses in the past two years, (iii) there were serious
challenges in balancing the combination in contrast to the potential value a
sale of BCBSUW could realize, and (iv) there were considerable challenges in
balancing the interests of the UWS public shareholders and the requirements of
the OCI Order approving the conversion which served to protect the interests of
the Foundation, and by extension, the public.
In response to the November 8 joint meeting, the BCBSUW special committee
convened on three occasions in an effort to develop a resolution to the impasse
in the ownership structure negotiations, resulting in the BCBSUW special
committee approving a counterproposal which represented the outer limits of Bear
Stearns' recommended valuation range. At a meeting on November 15, the BCBSUW
special committee authorized an ownership structure proposal to be communicated
to the UWS special
57
<PAGE>
committee pursuant to which the Foundation would receive 78% of the value of the
combined UWS/ BCBSUW, or in terms of shares, 35,331,780 shares of UWS. A written
communication of this offer was transmitted to the UWS special committee on the
same day. The BCBSUW special committee reconvened on November 27 and
November 28 to receive updates concerning the UWS special committee
deliberations and to consider a request from management for an additional joint
meeting of the UWS and BCBSUW special committees. On December 1, the BCBSUW
special committee received a written ownership structure counterproposal from
the UWS special committee which allocated 75% of the shares, or 27,295,000
shares, of the combined entity, to the Foundation, which the BCBSUW special
committee was told represented the outer limit of Lehman Brothers' recommended
valuation range.
On December 2, a meeting was convened involving senior management of UWS and
BCBSUW, counsel to the UWS and BCBSUW special committees, and representatives of
Bear Stearns and Lehman Brothers. Since both BCBSUW special committees believed
they were at their respective limits in ownership structure consideration as
recommended by their respective investment banking counsel, the meeting had been
called to ascertain whether, in view of the totality of the circumstances, the
committees could find common ground. Following discussion, Bear Stearns
suggested that the parties consider "splitting the difference" between the
current proposals recommended by each party. Under this compromise, 31,313,390
shares of the combined entity would be issued to the Foundation, approximating a
77.5%/22.5% ownership structure on a primary share basis ("Compromise").
The BCBSUW special committee convened on December 4 and 5 to consider the
Compromise proposed at the December 2 meeting and to obtain a briefing from Bear
Stearns on its economic analysis of the Compromise. Bear Stearns advised the
BCBSUW special committee that it could not guarantee that the Compromise could
be supported by a fairness opinion from Bear Stearns, if the BCBSUW special
committee had determined to seek such an opinion; but given the difficulty of
accurately projecting the future results of two companies engaged in a rapidly
changing business environment, and the apparent failure of the two investment
banking firms to find any common ground on valuation, the Compromise could be
viewed as a prudent exercise of the BCBSUW special committee's discretion. In
view of the importance of effecting the conversion by way of the combination and
in view of the advice of its advisors, the BCBSUW special committee on
December 5 agreed to communicate its willingness to advocate the Compromise to
the full BCBSUW Board of directors. The BCBSUW special committee also
determined, however, that it would reject the 75%/25% ownership structure
tendered by the UWS special committee on December 1, and that the BCBSUW special
committee would affirmatively reject any counterproposal from the UWS special
committee other than the Compromise.
The BCBSUW special committee convened on four additional occasions from
December 6 through 8, during which the BCBSUW special committee addressed both
(i) an ownership structure with a warrant alternative that was proposed by UWS
and (ii) a suggestion from management and Messrs. Hickman and Forbes, directors
who serve on both the UWS and BCBSUW boards of directors, for a final joint
meeting to ascertain whether negotiations were at an impasse. In a letter dated
December 7, the UWS board of directors formally communicated a counterproposal
which reiterated the previously communicated 75%/25% ownership structure, but
also included a warrant alternative which served to allow the Foundation to
purchase an additional approximately 4 million shares of UWS stock at a price
substantially in excess of the then market value of the shares on the New York
Stock Exchange. On December 8, following a briefing by Bear Stearns on the
valuation of such a warrant, the BCBSUW special committee rejected the warrant
alternative as a means to resolve the negotiation impasse. However, the BCBSUW
and UWS special committees concurred in attempting one last meeting involving
senior management, Messrs. Forbes and Hickman, counsel to the BCBSUW and UWS
special committees, and representatives from both the BCBSUW and UWS special
committees to discuss whether a resolution to the impasse could be reached. This
meeting occurred on December 11
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and resulted in an agreement in principle regarding the Compromise with the
BCBSUW and UWS special committee representatives that attended the meeting.
The BCBSUW special committee reconvened on December 12 to consider the
agreement in principle reached at the December 11 meeting, and the BCBSUW
special committee unanimously approved recommending to the full BCBSUW board of
directors the Compromise agreement in principle. At a meeting held on
December 13, the BCBSUW board of directors voted unanimously (with Mr. Hefty
abstaining) to accept the Compromise. BC Holdings will be dissolved following
completion of the combination and its shares of Cobalt common stock received in
the combination will be distributed to the Foundation.
BC HOLDINGS' AND BCBSUW'S REASONS FOR THE COMBINATION
BC Holdings is a limited liability company whose single member and managing
entity is the Foundation. BC Holdings has, and will have, no business operations
other than ownership of Cobalt common stock on behalf of the Foundation after
the combination. Receipt of Cobalt common stock and cash pursuant to the
combination will be the only source of assets for BC Holdings, and therefore the
only potential source of funding for the projected public health activities of
the Foundation.
BC Holdings did not participate in the deliberations of the BCBSUW special
committee or the negotiations with the UWS special committee. The Foundation
determined that its interests were adequately represented by (i) the BCBSUW
special committee, whose charge was to represent the interests of BCBSUW and, by
extension, the Foundation as the prospective owner of BCBSUW by virtue of the
conversion, and (ii) the OCI, whose statutory duty is to represent the interests
of the public and, by extension, the Foundation as the entity designated to
receive the value of BCBSUW in the conversion and apply the proceeds for the
public benefit.
BC Holdings and BCBSUW believe that, based on negotiations by the BCBSUW
special committee and subject to ultimate approval by the OCI, their decision to
approve the combination is supported by the following facts, among others:
- INDEPENDENCE OF THE BCBSUW SPECIAL COMMITTEE. The committee consisted
entirely of persons who were unaffiliated with either BCBSUW or UWS,
except in their capacity as directors.
- EXHAUSTIVE REVIEW PROCESS BY OCI. The process of obtaining initial
approval of the application for conversion from the Commissioner consumed
nine months and involved intensive public hearings. The order of approval
survived challenges by litigation filed by certain self-styled public
interest groups. In addition, the Commissioner imposed a number of very
specific conditions to her approval which materially changed the
conversion plan originally sought, all in the interests of the public.
- INVESTMENT BANKING ADVISORS. Both the BCBSUW special committee and the OCI
engaged investment banking firms of national stature to advise them as to
the respective enterprise valuations of BCBSUW and UWS, and the proper
range of ownership structure in the combination.
In addition, the Foundation considered the fact that the Commissioner's
Order mandates that the conversion be simultaneously accompanied by either an
initial public offering of stock of the converted company, or a combination with
UWS. Neither the public markets in general nor the recent operating history of
BCBSUW would make a successful public offering likely at this time. Therefore,
in the absence of a combination with UWS on the best available terms or an
amendment of the Commissioner's Order, the conversion of BCBSUW would fail and
the Foundation would never be funded.
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The BCBSUW special committee considered its fiduciary duties to be to BCBSUW
as an entity, to the Foundation as its prospective sole shareholder, and to the
public at large as mandated by Chapter 613 of the Wisconsin Statutes, under
which BCBSUW was organized. In recommending the terms of the combination to the
Foundation and the board of directors of BCBSUW, the special committee
considered, in addition to the above and certain other factors, the following:
- VIEWS OF INVESTMENT BANKING ADVISORS TO BOTH COMMITTEES. The BCBSUW
special committee consulted directly with, and had access to the work
product of, its own financial advisor, Bear Stearns. The committee also
met with the financial advisor to the UWS special committee (together with
its own financial advisor) at length on one occasion, and believes that
each special committee ultimately provided to the other accurate
information about its own financial advisor's recommended valuation
limits. The committee became convinced that the apparent complete lack of
overlap between these recommended ranges of fair transaction structures
was not the result of lack of candor, lack of competence, lack of
independence or the non-existence of any transaction structure fair to
both parties, but rather to the adoption of different valuation methods by
the two investment banking firms. This in turn led the committee to
believe it might be fair and prudent to accept a compromise position
between the respective financial advisors' recommended ranges, if other
factors favored the combination.
- SYNERGIES AND EFFICIENCIES. The BCBSUW special committee believes that
although the operations of BCBSUW and UWS are already in many respects
combined, the effort expended in differentiating the separate interests of
the UWS public shareholders from those of BCBSUW, and dealing with
regulation concerning related party transactions, is an unwelcome
distraction in managing the businesses of both companies. In addition, the
much larger size of a combined entity should enhance the liquidity of the
stock of UWS.
- IMPORTANCE OF ACHIEVING CONVERSION. The board of directors of BCBSUW
concluded in June, 1999 that conversion of BCBSUW from a service insurance
corporation to a stock corporation would be in the best interests of
BCBSUW and its constituencies. More recently, operating losses of both
BCBSUW and UWS have led the OCI to believe as well that creation of a
larger combined entity with access to the public capital markets should
provide the liquidity necessary to resolve any potential capital adequacy
problems for either company. Therefore, the committee believes that a
conversion in the near future will benefit the company by allaying the
OCI's concerns.
- FIDUCIARY DUTIES. The exchange agreement allows the BCBSUW special
committee and board of directors to receive unsolicited inquiries and
proposals from third parties prior to closing the combination and, if
required by the fiduciary duties imposed upon them, to enter into an
alternative transaction proposed by a third party. Thus, the fairness of
the terms of the combination will be subject to a "market test."
The BCBSUW special committee and board of directors did not attempt to rank
or assign relative weights to the specific factors they considered in
recommending and approving the exchange agreement.
INTERESTS OF CERTAIN PERSONS IN THE COMBINATION
In considering the recommendation of the UWS board of directors, UWS
shareholders should be aware that specific members of UWS's management and board
of directors have interests in the combination that are different from, or in
addition to, the interests of UWS shareholders generally. The members of the UWS
special committee and board of directors knew about these additional interests,
and considered them, when they approved the exchange agreement.
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DIRECTORS AND EXECUTIVE OFFICERS OF UWS
Each member of the UWS board of directors and each executive officer and
certain other employees of UWS own shares of UWS common stock and options to
purchase UWS common stock. To the extent of such ownership, the treatment of
members of the UWS board of directors and executive officers and such other
employees is identical to treatment of shareholders of UWS who are not members
of the board of directors, named executive officers or employees.
Barry K. Allen, the Chairman of the UWS special committee, will be paid a
retainer of $3,000, and each other member of the special committee will be paid
a fee of $1,100 for each meeting of the UWS Special Committee attended, plus
reimbursement of any reasonable travel expenses incurred in connection with
attending such meetings.
FOUNDATION AND BC HOLDINGS
The combination is being completed to permit the Foundation (through BC
Holdings) to acquire approximately 77.5% of outstanding Cobalt common stock
immediately after giving effect to the combination.
CHANGE OF CONTROL/EMPLOYMENT AGREEMENTS
BCBSUW is a party to several executive severance agreements which require
payments to be made to certain executive officers of BCBSUW in the event of a
"change of control" of either BCBSUW or Cobalt.
Under the agreements, after the conversion of BCBSUW to a stock corporation,
upon the occurrence of:
(i) a change of control (defined as (a) any person acquiring 20% or more of
the voting power of either BCBSUW or Cobalt; (b) a change in a majority
of the members of the board of directors of either Cobalt or BCBSUW
during any two-year period; or (c) the merger or sale of substantially
all of the assets of BCBSUW or Cobalt (or any similar transaction)); and
(ii) a qualifying termination (defined as either (a) termination of the
executive's employment by BCBSUW or Cobalt, as appropriate, for reason
other than "cause" (as defined in the agreement); or (b) termination by
the executive for "good reason" (as defined in the agreement)), then
the executive shall receive severance benefits of:
- an amount equal to between one and three times the executive's annual
salary, depending on the executive;
- an amount equal to between one and three times the executive's targeted
awards under bonus and profit sharing plans, depending on the
executive;
- continuation of health and welfare benefit plans for between one and
three years depending on the executive;
- amounts equal to the then current pro rata targeted annual bonus and
profit sharing plan allocation; and
- "gross up" payments to cover any excise taxes to which the executive
may be subject.
Nine BCBSUW executives are parties to the executive severance agreements.
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The persons named in the compensation table are parties to the BCBSUW
executive severance agreements at the level of payments as follows:
<TABLE>
<S> <C>
Stephen E. Bablitch....... Two years
Thomas R. Hefty........... Three years
Gail L. Hanson............ Two years
Penny J. Siewert.......... Two years
</TABLE>
UWS also has in place similar agreements with five executives. Mary I.
Traver is the only executive named in the Summary Compensation Table who is
party to an executive severance agreement with UWS (at the two year level of
severance benefits). The other persons named in the compensation table are
parties to BCBSUW executive severance agreements.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS OF THE COMBINATION
The following summary discusses the material United States federal income
tax consequences of the combination as it may effect holders of UWS stock and
BCBSUW, BC Holdings, the Foundation and UWS. This discussion does not consider
the potential effects of any state, local or foreign tax laws or tax
consequences that may vary with, or are contingent on, individual circumstances.
This summary also does not address the tax consequences of any transaction other
than the combination and share exchange.
No ruling has been requested from the Internal Revenue Service with respect
to any of the United States federal income tax consequences of the conversion or
the exchange and, as a result, there can be no assurance that the IRS will not
disagree with or challenge any of the conclusions described below.
The combination is structured as a taxable purchase of BCBSUW stock. On
, 2001, Foley & Lardner delivered its opinion to BCBSUW that the
conversion should constitute a tax-free reorganization and that none of BCBSUW,
BC Holdings or the Foundation should recognize a gain or loss as a result of the
conversion and combination.
On , 2001, Michael Best & Friedrich LLP delivered its
opinion to UWS that UWS will incur no tax upon issuance of its shares in the
combination and that UWS shareholders who retain their shares will incur no gain
or loss on the share exchange. Any UWS shareholder who exercises dissenters'
rights generally will have gain (or loss) based on the difference between the
amount of cash received by such dissenting shareholder and the shareholder's tax
basis in such UWS shares. Any shareholder exercising dissenters' rights is urged
to consult with a tax advisor to determine the particular federal, state, local
or foreign income or other tax consequences of such dissent under the
shareholder's particular situation.
The tax opinions described above are based upon the current state of the law
and on certain facts and representations that were provided by BCBSUW and UWS.
Any change in currently applicable law, which may or may not be retroactive, or
failure of any factual representations or assumptions to be true, correct and
complete in all material respects, could affect the continued validity of the
tax opinions.
Since January 1, 1987, BCBSUW generally has been treated as an organization
to which Section 833 of the Internal Revenue Code applies. An organization to
which Section 833 applies does not have to report 20% of its unearned premiums
as taxable income. On December 31, 1999, this amounted to $6.2 million. An
organization to which Section 833 applies also has an adjustment to the tax
basis of its assets for purposes of determining gain or loss in an amount equal
to the difference in their basis and their fair market value on January 1, 1987.
On December 31, 1999, the increase in the tax basis of BCBSUW assets as a result
of this provision was $117 million. An organization to which Section 833 applies
is entitled to a deduction for federal income tax purposes equal to the excess
of (i) 25% of the sum of (a) the claims incurred during the tax year and
(b) the expenses incurred during the tax year in connection with the
administration, adjustment or settlement of claims, over (ii) the
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adjusted surplus at the beginning of the tax year. For calendar year 1999, no
deduction was available for BCBSUW. If there is a material change in BCBSUW
operations or structure, it is no longer an organization to which Section 833
applies, and thus these special provisions will no longer apply. UWS believes
that it is likely that there will have been a "material change" after the
combination will have occurred. Therefore, these benefits will not be available
in the future.
ACCOUNTING TREATMENT OF THE COMBINATION
In accordance with generally accepted accounting principles, the combination
will be accounted for as the purchase by BCBSUW of the 53.7% of UWS it does not
already own. Due to the current ownership of UWS by BCBSUW, the combination will
not qualify for pooling of interest accounting treatment. Consideration under
purchase accounting will be calculated as the price of UWS common stock as of
the close of the market on the day prior to the effective date of the
combination multiplied by the 9,098,865 shares not owned by BCBSUW.
The difference between the amount of consideration and the fair value of the
53.7% of net assets of UWS acquired will be reported as goodwill arising from
the combination. In addition, as a result of the combination and BCBSUW's
federal income tax position, a full valuation allowance will be established for
the federal deferred tax assets of UWS. The portion of the valuation allowance
related to BCBSUW's 46.3% ownership of UWS will be recorded as additional
goodwill.
In the final purchase accounting, intangible assets may be identified which
will be amortized over their useful lives. The balance of goodwill, after
reduction by the identified intangible assets, will be amortized over fifteen
years.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE COMBINATION
The terms and conditions of the combination are subject to the prior review
and approval of OCI, and the Commissioner may only approve the combination if
its terms and conditions are fair and reasonable to the interests of the
Foundation. Additionally, the combination may not be completed until BCBSUW has
amended its conversion application materials consistent with the terms and
conditions of the Commissioner's Order approving the conversion which requires
modifications to certain application materials. Such modifications are subject
to the prior review and approval of the OCI.
Since the combination will result in a technical change in control of
certain UWS and AMSG insurance subsidiaries, certain other state regulatory
notices and/or approvals may be necessary in states where such insurers transact
business.
We do not believe that any other regulatory approvals must be obtained in
order to complete the combination.
NEW YORK STOCK EXCHANGE LISTING OF UWS COMMON STOCK TO BE ISSUED IN THE
COMBINATION
Under the exchange agreement, UWS will cause the shares of UWS common stock
to be issued in the combination to be approved for listing on the New York Stock
Exchange.
THE EXCHANGE AGREEMENT
The following describes certain aspects of the proposed combination,
including material provisions of the exchange agreement. The following
description of the exchange agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the exchange
agreement, which is attached as ANNEX A to this Proxy Statement/Prospectus and
incorporated herein by reference. All shareholders are urged to read the
exchange agreement carefully and in its entirety.
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BASIC TERMS
The exchange agreement will result in (i) BCBSUW becoming a wholly owned
subsidiary of Cobalt, and (ii) 77.5% of the outstanding shares of common stock
of Cobalt being owned by the Foundation. The Foundation will acquire its shares
of Cobalt stock through a holding company, BC Holdings, formed to hold the
Cobalt stock on the Foundation's behalf. BC Holdings will be dissolved after the
combination and the shares of Cobalt common stock held by BC Holdings will be
distributed to the Foundation. The shares of UWS common stock outstanding before
the combination will remain outstanding as shares of Cobalt common stock after
the combination, and shareholders will not be required to exchange or surrender
their UWS stock certificates for Cobalt stock certificates; but an additional
31,313,390 shares of Cobalt common stock will be issued to BC Holdings in
exchange for its 100% interest in BCBSUW. In addition, BC Holdings will receive
$500,000 in cash from UWS at the closing.
An integral part of the combination consists of substantial amendments to
the Articles of Incorporation and Bylaws of UWS as it becomes "Cobalt." Most of
these amendments are necessary because they are required by the Association of
all its for-profit licensees. A summary of some of the material differences
between the existing Articles of Incorporation and Bylaws of UWS and the
proposed Amended and Restated Articles of Incorporation and Bylaws of Cobalt
after the combination is set forth at pages .
REPRESENTATIONS AND WARRANTIES
BCBSUW, UWS and BC Holdings have each made a number of customary
representations and warranties in the exchange agreement regarding aspects of
their respective businesses, financial condition, structure and other pertinent
facts.
The representations and warranties given by BCBSUW and UWS cover the
following topics, among others, as they relate to each party and its
subsidiaries:
- corporate organization and authority to do business;
- authorization of the agreement;
- that the transactions contemplated by the agreement will not result in a
violation of BCBSUW's or UWS's organizational documents, laws or
contracts;
- consents and regulatory approvals necessary to complete the combination;
- identification and ownership of their respective subsidiaries;
- accuracy of historical financial statements;
- adequacy of statutory capital;
- the absence of material changes, events or effects;
- litigation;
- compliance with all applicable laws;
- taxes;
- certain environmental matters;
- contingent or undisclosed liabilities; and
- the accuracy of information supplied for inclusion in this Proxy
Statement/Prospectus.
In addition, UWS made a representation and warranty regarding timely
compliance with UWS's filing and reporting requirements under federal securities
laws.
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The representations and warranties given by BC Holdings cover the following
topics, among others:
- organization and authority to do business;
- authorization of the agreement;
- that the transactions contemplated by the agreement will not result in a
violation of BC Holdings' organizational documents, laws or contracts;
- that BC Holdings has engaged in no business other than its own
organization; and
- the Foundation's ownership of all outstanding interests in BC Holdings.
In general, the representations and warranties are not enforceable after the
closing of the combination. This means that unless fraud has been committed, UWS
will have no remedy after the closing if it later discovers that any
representations and warranties made by BCBSUW or BC Holdings are inaccurate.
COVENANTS OF THE PARTIES
BCBSUW and UWS have agreed, until closing of the combination, as follows:
- to conduct their businesses in the ordinary and usual course;
- to provide one another access to all relevant business information;
- to maintain the confidentiality of such information;
- to cooperate in the filing of all necessary documents with the Securities
and Exchange Commission;
- to use their best efforts to obtain all necessary consents and approvals
to the combination, and satisfy all other conditions;
- to deliver to one another monthly unaudited financial statements;
- to notify one another of the occurrence of events that might result in the
failure of conditions to closing; and
- to pay their respective expenses incurred in connection with the
combination.
BCBSUW also agreed to vote its shares of UWS common stock in favor of the
combination at the special meeting of shareholders. In addition, each of BCBSUW
and UWS has agreed not to sell, or enter into any agreement to sell, shares of
UWS stock before the closing of the combination, without the consent of the
other.
CONDITIONS TO COMPLETION OF THE COMBINATION
The obligations of UWS and BCBSUW to complete the combination are subject to
the satisfaction (or, in some instances, the mutual waiver) of each of the
following conditions:
- the S-4 registration statement must have been declared effective, and no
stop order suspending its effectiveness may be issued or threatened;
- the combination must be approved by the requisite vote of shareholders as
described in this Proxy Statement/Prospectus;
- the UWS common stock to be issued to BC Holdings in the combination must
have been approved for listing on the New York Stock Exchange;
- no action or proceeding may have been initiated by any governmental agency
or third party seeking to restrain, prohibit or invalidate or recover
damages arising out of the combination;
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- the conversion of BCBSUW must have been completed in accordance with the
Commissioner's Order, and the combination must in all other respects have
received the approval of the OCI;
- all other necessary approvals, including approval of the Association, must
have been obtained; and
- the holders of not more than 2.5% of the outstanding shares of UWS have
perfected dissenters' rights.
UWS's obligations to complete the combination are subject to the
satisfaction, or waiver by UWS, of each of the following additional conditions,
before completion of the combination:
- the representations and warranties made by BCBSUW and BC Holdings must be
true and correct in all material respects as of the date of closing;
- BCBSUW and BC Holdings must have performed or complied in all material
respects with all of their obligations under the agreement;
- BCBSUW and BC Holdings must have obtained all necessary waivers and
consents from third parties to complete the combination;
- all the capital stock of BCBSUW must have been issued to BC Holdings
pursuant to the conversion;
- UWS must have received a "comfort letter" from BCBSUW's independent
auditors with respect to certain information contained in this Proxy
Statement/Prospectus;
- no material adverse effect may have occurred with respect to BCBSUW
between the date of the agreement and the closing date;
- UWS must have received an opinion from BCBSUW's legal counsel with respect
to certain legal matters concerning BCBSUW; and
- UWS must have received an opinion from its own legal counsel as to certain
tax consequences of the combination.
BCBSUW's and BC Holdings' obligations to complete the combination are
subject to the satisfaction, or waiver by both BCBSUW and BC Holdings, of each
of the following additional conditions, before completion of the combination:
- the representations and warranties made by UWS must be true and correct in
all material respects as of the date of closing;
- UWS must have performed or complied in all material respects with all of
its obligations under the agreement;
- UWS must have obtained all necessary waivers and consents from third
parties to complete the combination;
- BCBSUW must have received a "comfort letter" from UWS's independent
auditors with respect to certain information contained in this Proxy
Statement/Prospectus;
- no material adverse effect may have occurred with respect to UWS between
the date of the agreement and the closing date; and
- BCBSUW and BC Holdings must have received an opinion from UWS's legal
counsel with respect to certain legal matters concerning UWS.
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FIDUCIARY RESPONSIBILITIES OF BOARDS
If either UWS or BCBSUW, through its board of directors, management or
special committee, receives a bona fide inquiry or proposal relating to a
combination between that party and some third party, the company receiving the
inquiry or proposal is not prohibited from engaging in third-party discussions
or negotiations if its special committee concludes, after consultation with its
legal counsel, that failure to do so would be inconsistent with the fiduciary
duties of the board of directors. In addition, after receiving such an inquiry
or proposal, either board of directors may modify or withdraw its approval of
the combination, approve a competing proposal and terminate the exchange
agreement if advised by legal counsel that failure to do so would be
inconsistent with the board of directors' fiduciary duties.
TERMINATION OF THE EXCHANGE AGREEMENT
The exchange agreement may be terminated at any time prior to completion of
the combination, whether before or after the approval of the combination by
UWS's shareholders, as follows:
- by mutual consent of UWS, BCBSUW and BC Holdings;
- by BCBSUW and BC Holdings, acting jointly, or by UWS, if the combination
has not taken place by March 28, 2001;
- by UWS, if any of the conditions to its obligation to close have not been
timely satisfied;
- by BCBSUW and BC Holdings, acting jointly, if any of the conditions to
their obligations to close have not been timely satisfied; or
- by either UWS or BCBSUW, if required by their fiduciary obligations as
provided above.
EXPENSES
Except as described below, each party has agreed to pay all expenses it
incurs in connection with the combination, whether or not the transaction is
completed. By prior agreement with the OCI, BCBSUW is responsible for the fees
of the financial advisors engaged by the OCI to provide counsel with respect to
the conversion and the combination.
EXTENSION, WAIVER AND AMENDMENT OF THE EXCHANGE AGREEMENT
UWS, BCBSUW and BC Holdings may amend the exchange agreement at any time
prior to the closing by mutual written agreement. However, after the approval of
the combination by the shareholders of UWS, the parties may not adopt any
amendment that would change the amount or form of consideration to be delivered
to BC Holdings in exchange for all the stock of BCBSUW.
At any time before the closing, BCBSUW and BC Holdings may extend the time
for performance of any obligation or other act of UWS, waive any inaccuracy in
the representations and warranties given by UWS, or waive compliance by UWS with
any agreement or condition contained in the exchange agreement. Likewise, UWS
may extend the time for performance of any obligation or other act of BCBSUW or
BC Holdings, waive any inaccuracy in the representations and warranties given by
either BCBSUW or BC Holdings, or waive compliance by either BCBSUW or
BC Holdings with any agreement or condition contained in the exchange agreement.
REGISTRATION RIGHTS AGREEMENT
The following is a summary of the registration rights agreement which is
attached as ANNEX C to this Proxy Statement/Prospectus and is incorporated in
this Proxy Statement/Prospectus by reference. The following description of the
registration rights agreement does not purport to be complete and is
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subject to, and is qualified in its entirety by reference to, the registration
rights agreement. All shareholders are urged to read the registration rights
agreement carefully and in its entirety.
PURPOSE
The registration rights agreement will give the Foundation the right to
require Cobalt to register with the Securities and Exchange Commission the
Foundation's shares of Cobalt common stock for sale so that the Foundation may
satisfy the divestiture deadlines contained in the voting trust and divestiture
agreement without having to rely on private or other nonregistered sales. As
discussed below, the registration rights agreement will also give Cobalt the
option to purchase shares of Cobalt common stock from the Foundation. The
registration rights agreement, as summarized below, incorporates the conditions
imposed by the Order approving the conversion.
DEMAND REGISTRATION RIGHTS
Under federal securities laws, every offer and sale of securities must be
either registered with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, or exempt from registration. The
registration rights agreement will give the Foundation the right to demand that
Cobalt effect a registration with the Securities and Exchange Commission of some
or all of the shares of Cobalt common stock beneficially owned by the
Foundation. This right will last for as long as the Foundation beneficially owns
shares of Cobalt common stock. However, Cobalt's obligations to effect a demand
registration will be subject to the limitations described below.
PURCHASE OPTION
If the Foundation requests a demand registration, Cobalt will have the
option to purchase any or all of the shares of Cobalt common stock of which the
Foundation requests registration before it must take any action. Cobalt will not
have the option to purchase less than all of the shares if the market value of
the shares that Cobalt elects not to purchase is less than $30 million. The
purchase price per share for the shares Cobalt elects to purchase will be the
average closing sale price per share of Cobalt common stock on the New York
Stock Exchange during the ten consecutive trading days ending on the second
trading day immediately preceding the date the Foundation requests the demand
registration. If Cobalt does not exercise this option in full, Cobalt must
file a registration statement for the remaining shares, subject to the
exceptions described below.
NO OBLIGATION TO EFFECT DEMAND REGISTRATION UNDER CERTAIN CIRCUMSTANCES
If the Foundation requests a demand registration and Cobalt does not elect
to exercise its demand purchase option, Cobalt will still not be required to
file a registration statement for the shares the Foundation desires to sell if:
- it previously registered shares of Cobalt common stock at the request of
the Foundation at any time during the immediately preceding 180-day
period;
- it previously registered shares of Cobalt common stock at the request of
the Foundation at any time during the calendar year in which the
Foundation made a demand;
- it previously effected a registration of shares of Cobalt common stock for
sale by Cobalt during the preceding 120 days, other than shares registered
pursuant to acquisitions or dividend reinvestment or similar employee
plans;
- the amount of Cobalt common stock that the Foundation seeks to register
has a market value of less than $30 million, unless the shares are all of
the remaining shares of Cobalt common stock the Foundation owns; or
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- it determines in good faith that a demand registration would materially
interfere with a previously announced business combination transaction in
which Cobalt intends to issue shares of Cobalt common stock, or would
result in the premature disclosure of any pending development involving
Cobalt, in which case the agreement does not require Cobalt to file a
demand registration for a 120-day period.
FAILED DEMAND REGISTRATIONS
A requested demand registration will not be deemed to count as a demand
registration for purposes of determining whether and when Cobalt must effect
another demand registration under the circumstances set forth above if:
- the Securities and Exchange Commission does not declare the demanded
registration effective;
- after becoming effective, any order or requirement of a regulatory
authority or court for reasons not attributable to the Foundation
interferes with the demanded registration and the demanded registration
does not become effective later;
- the parties do not satisfy or waive the closing conditions specified in
the underwriting agreement, if any, due to a failure on the part of
Cobalt; or
- the Foundation decides not to pursue the registration prior to the filing
of a registration statement, provided that it reimburses Cobalt for all of
its out-of-pocket expenses incurred in connection with the demand
registration.
If a registration statement filed as the result of a demand registration
does not become effective because the Foundation
- fails to perform its obligations under the registration rights agreement,
- fails to reach an agreement with the underwriters on price or other
customary terms for the transaction, or
- determines to withdraw its demand,
then the requested demand registration will count as a demand registration for
purposes of determining whether and when Cobalt must effect another demand
registration at the Foundation's request, and the Foundation will not be
obligated to reimburse Cobalt for any of the expenses that it incurred in
connection with the demand registration.
If a registration statement filed as the result of a demand registration
does not become effective because the Foundation fails to reach an agreement
with the underwriters on price or other customary terms for the transaction and
the current market value of the shares of Cobalt common stock included in such
demand registration, as of the date that the Foundation failed to reach
agreement with the underwriters, is 75% or less of the current market value of
the same shares on the date that such demand was made to Cobalt, then the
requested demand registration will not count as a demand registration for
purposes of determining whether and when Cobalt must effect another demand
registration at the Foundation's request, as long as the Foundation reimburses
Cobalt for all of the expenses that it incurred in connection with the demand
registration.
INCLUSION OF COBALT SHARES
If the Foundation requests a demand registration and as a result of its
request Cobalt must file a registration statement, Cobalt may include any number
of shares of Cobalt common stock that it desires to sell under the registration
statement, subject to possible reduction as described below.
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REDUCTION IN SHARES REGISTERED IN DEMAND REGISTRATION
If the lead managing underwriter in a public offering pursuant to a demand
registration concludes that marketing or other factors require a reduction of
the number of shares of Cobalt common stock that the Foundation can sell in the
offering within a price range acceptable to the Foundation, and if Cobalt
desires to register any shares of Cobalt common stock to sell in the offering,
then Cobalt must reduce the number of shares it desires to sell in the offering
until the total number of shares of Cobalt being sold equals the number of
shares of Cobalt common stock that the parties may sell at a price range
acceptable to the Foundation.
In the event that (i) Cobalt does not desire to register any shares of
Cobalt common stock to sell in the demand registration offering, or (ii) the
reduction in the number of shares Cobalt would register still does not result in
a total number of shares that the parties may sell at a price range acceptable
to the Foundation, then the Foundation must reduce the number of shares of
Cobalt common stock that it desires to sell in the offering.
The sale will constitute a demand registration for purposes of Cobalt's
obligations to make additional demand registrations only if the Foundation
receives at least $10 million in gross sale proceeds in the offering.
PIGGY-BACK REGISTRATION RIGHTS
In addition to granting the Foundation the right to demand registration of
its sales of shares, the registration rights agreement will also permit the
Foundation to "piggy-back" on any registrations made by Cobalt. Specifically,
the registration rights agreement provides that whenever Cobalt proposes to
file a registration statement for a public offering of shares of Cobalt common
stock, the Foundation will have the right (i) to have any or all of the shares
of Cobalt common stock that it beneficially owns included among the securities
Cobalt will register, and (ii) until it beneficially owns less than 50% of the
issued and outstanding shares of Cobalt common stock, to have any or all of its
shares of Cobalt common stock included among the securities Cobalt will register
so that the Foundation is entitled to receive up to 50% of the proceeds from the
offering.
If the lead managing underwriter for an offering for which the Foundation
requests piggy-back registration rights determines that marketing or other
factors require a limitation on the number of shares of Cobalt common stock the
parties can sell in the offering, then Cobalt will have priority over the
Foundation unless the Foundation beneficially owns more than 50% of the issued
and outstanding shares of Cobalt at the time of the offering and has elected to
exercise its right, as described above, to sell shares sufficient to receive up
to 50% of the proceeds.
CONTINUING OPTION TO PURCHASE THE FOUNDATION SHARES
In addition to the demand purchase option described above, beginning on the
date of the earliest of
- the consummation of a demand registration or an offering pursuant to a
piggy-back request which results in gross sale proceeds to the Foundation
of at least $10 million,
- the consummation of a private placement transaction by the Foundation
resulting in gross sale proceeds to the Foundation of at least
$10 million, or
- the purchase by Cobalt of Cobalt common stock in a private placement
resulting in gross sale proceeds to the Foundation of at least
$10 million,
Cobalt may purchase from the Foundation any or all of the shares of Cobalt
common stock beneficially owned by the Foundation at a price equal to (i) the
average sale price of Cobalt common stock on the New York Stock Exchange over a
prescribed period of time, or (ii) the sale price received in a private
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placement if the Foundation has not yet exercised its demand or piggy-back
registration rights. If Cobalt purchases shares of Cobalt common stock from the
Foundation pursuant to this option, it must hold the shares for 45 days before
reselling them in a public or private transaction.
HOLDBACK
It is possible that the Foundation may desire to sell its shares of Cobalt
common stock at a time when Cobalt is planning to sell additional shares for its
own benefit. In such a case, the Foundation may not sell any shares of Cobalt
common stock that it beneficially owns for a 90-day period following its receipt
of notice from Cobalt that Cobalt has filed a registration statement if the
Foundation's sale of Cobalt common stock would adversely affect Cobalt's
offering, or if the lead managing underwriter in the case of an underwritten
offering advises Cobalt that the Foundation's sale of Cobalt common stock would
adversely affect Cobalt's offering.
Similarly, it is possible that Cobalt may desire to sell shares of Cobalt
common stock for its own benefit at a time when the Foundation desires to make a
demand registration. In such a case, Cobalt may not file a registration
statement for Cobalt common stock or securities convertible into Cobalt common
stock during the 30-day period commencing on the effective date of a
registration statement filed on behalf of the Foundation under a demand
registration.
REGISTRATION EXPENSES
The registration process can be expensive because it involves lawyers,
accountants, investment bankers, and other professionals. Cobalt will pay all
registration expenses in connection with a demand registration or a piggy-back
registration by the Foundation except for the Foundation's legal fees and any
underwriting discounts or commissions or transfer taxes.
RULE 144
The registration rights agreement provides that the Foundation may not sell
any shares of Cobalt common stock that it beneficially owns pursuant to
Rule 144 under the Securities Act of 1933, as amended, until the Foundation has
sold at least $50 million of Cobalt common stock to purchasers that are not
affiliates of the Foundation. Thereafter, the Foundation may sell shares of
Cobalt common stock that it owns pursuant to Rule 144 if:
- the intended sale would not be to a person or entity that already owns
shares of Cobalt common stock in excess of the ownership limit for that
person or entity contained in Cobalt's Amended and Restated Articles of
Incorporation;
- the intended sale would not cause a person or entity to own shares of
Cobalt common stock in excess of the ownership limits for that person or
entity contained in Cobalt's Amended and Restated Articles of
Incorporation; and
- the intended sale would not otherwise violate the registration rights
agreement, the voting trust and divestiture agreement and Cobalt's Amended
and Restated Articles of Incorporation or Bylaws.
Under Rule 144, the amount of stock that a party can sell in any three-month
period is limited, and the party can sell the stock only in specified
unsolicited broker transactions or transactions with a market maker.
PRIVATE SALES
If the Foundation desires to sell any or all of its shares of Cobalt common
stock in a private sale transaction to qualified investors, Cobalt will have the
right of first refusal to purchase the shares of
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Cobalt common stock from the Foundation upon the same terms and conditions as
the Foundation proposes to sell the shares in the private sale.
VOTING TRUST AND DIVESTITURE AGREEMENT
The following is a summary of the voting trust and divestiture agreement
which is attached as ANNEX D to this Proxy Statement/Prospectus and is
incorporated in this Proxy Statement/Prospectus by reference. The following
description of the voting trust and divestiture agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the voting trust and divestiture agreement. All shareholders are urged to read
the voting trust and divestiture agreement carefully and in its entirety.
PURPOSE
The Association will continue to grant to Cobalt licenses to use the Blue
Cross-Registered Trademark- and Blue Shield-Registered Trademark- names and
service marks following completion of the combination only if the Foundation
(through BC Holdings) deposits all of its shares of Cobalt common stock in a
voting trust and sells those shares within prescribed time periods. The
Foundation's compliance with the terms of the voting trust and divestiture
agreement will satisfy these conditions. The Association designed this condition
to preserve Cobalt's independence from the Foundation. The voting trust and
divestiture agreement summarized below incorporates the conditions imposed by
the Order approving the conversion of BCBSUW.
DEPOSIT OF SHARES
The Foundation will deposit into a voting trust all of the shares of Cobalt
it will receive in the combination. The terms of the voting trust will
significantly limit the Foundation's voting rights, and the trustee of the
voting trust will vote those shares in the manner described below. In addition,
the Foundation may dispose of those shares only in a manner that would not
violate the ownership requirements contained in Cobalt's Amended and Restated
Articles of Incorporation and any other agreement to which the Foundation will
be a party.
WITHDRAWAL OF SHARES
As described below, the Foundation must sell its shares of Cobalt within
prescribed periods of time. In order to sell these shares, the Foundation will
need to withdraw shares from the voting trust from time to time. In order to
ensure that the Foundation is selling shares in a permitted manner, the
Foundation may withdraw shares from the voting trust only in order to sell such
shares and then only if:
- Cobalt registers the shares in the name of the purchaser before the
Foundation withdraws them from the voting trust, so that the Foundation
may not keep ownership of those shares;
- the Foundation does not sell the shares to an affiliate of the Foundation,
so that the Foundation may not keep indirect ownership of those shares;
- the Foundation does not sell the shares to a person or entity that already
owns shares of Cobalt common stock in excess of the ownership limits
contained in Cobalt's Amended and Restated Articles of Incorporation, so
that the ownership limits are not violated;
- the sale would not result in a person or entity owning shares of Cobalt in
excess of the ownership limits contained in Cobalt's Amended and Restated
Articles of Incorporation, so that the ownership limits are not violated;
and
- the voting trust and divestiture agreement, the registration rights
agreement and Cobalt's Amended and Restated Articles of Incorporation and
Bylaws permit the sale.
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VOTING OF SHARES HELD IN VOTING TRUST
In general, in order to maintain Cobalt's independence from the Foundation,
the trustee of the voting trust will vote the shares of Cobalt common stock
owned by the Foundation as directed by the directors of Cobalt, except that the
Foundation will decide how to vote these shares on a merger or similar business
combination proposal which would result in the then existing shareholders of
Cobalt owning less than 50.1% of the resulting company, or which would result in
any person or entity who owned 50.1% or less of Cobalt common stock owning more
than 50.1% of the voting securities of the resulting entity. Specifically, the
trustee of the voting trust will vote all of the Foundation's shares of Cobalt
in the voting trust in the following manner:
- If the matter is the election of directors of Cobalt, the trustee will
vote the shares in favor of each nominee whose nomination has been
approved by (i) a majority of the members of the Cobalt board of directors
who were not nominated at the initiative of the Foundation or of a person
or entity owning shares of Cobalt in excess of the ownership limits
contained in Cobalt's Amended and Restated Articles of Incorporation (such
directors being called "Independent Directors"), and (ii) a majority of
the entire Cobalt board of directors.
- The trustee will vote against the removal of any director of Cobalt, and
against any change to Cobalt's Amended and Restated Articles of
Incorporation or Bylaws, unless (i) a majority of the Independent
Directors, and (ii) a majority of the entire Cobalt board of directors,
initiates or consents to such removal or amendment action.
- In the event that any candidates are eligible for election to the board of
directors who, if elected, would not qualify as Independent Directors, the
trustee will vote the Foundation's shares in the same proportion and for
the same candidates as voted for by the Cobalt shareholders; PROVIDED,
HOWEVER, that if director seats are eligible for public shareholder
representation, the trustee will be directed to vote its shares in the
same proportion and for the same candidates voted for by the other Cobalt
shareholders. This provision will sunset at such time as the Foundation
owns less than 20% of the outstanding shares of Cobalt common stock.
- The trustee will vote as directed by the board of directors of the
Foundation on any proposed business combination transaction that if
consummated would result in (1) the then existing Cobalt shareholders,
including the Foundation, owning less than 50.1% of the outstanding voting
securities of the resulting entity, or (2) any person or entity who, prior
to the proposed transaction, owned less than 50.1% of the outstanding
common stock of Cobalt owning 50.1% or more of the outstanding voting
securities of the resulting entity.
- The trustee will vote in accordance with the recommendation of the Cobalt
board of directors on any action requiring prior approval of the Cobalt
board of directors as a prerequisite to becoming effective.
In addition, unless a majority of the Independent Directors and a majority
of the entire Cobalt board of directors initiates or consents to such action,
neither the Foundation nor the trustee of the voting trust may:
- nominate any candidate to fill any vacancy on the Cobalt board of
directors;
- call any special meeting of Cobalt shareholders; or
- take any action that would be inconsistent with the voting requirements
contained in the voting trust and divestiture agreement.
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STANDSTILL
As the largest shareholder of Cobalt following the combination, the
Foundation would ordinarily enjoy the benefits of control typically held by
majority shareholders. However, in order to maintain Cobalt's independence from
the Foundation, as required by the Association, the Foundation has agreed not to
take actions that a shareholder of a corporation ordinarily could take in its
capacity as a shareholder. Specifically, the voting trust and divestiture
agreement provides that the Foundation may not:
- individually, or as part of a group, acquire the right to vote or dispose
of any shares of Cobalt common stock or options to purchase shares of
Cobalt stock other than those shares issued to it in the combination,
unless it receives the shares in a stock split or other similar
transaction;
- enter into any agreement with any person or entity to sell shares of
Cobalt, except in accordance with the voting trust and divestiture
agreement and the registration rights agreement;
- sell any of its shares of Cobalt common stock to a person or entity if the
person or entity already owns, or would own as a result of the sale
transaction and any transactions related to the sale, Cobalt common stock
in excess of the ownership limit for the person or entity included in
Cobalt's Amended and Restated Articles of Incorporation;
- make any shareholder proposal for submission at an annual meeting of
shareholders of Cobalt;
- nominate any candidate to the Cobalt board of directors; or
- appoint any individual to fill a vacancy on the Cobalt board of directors.
OBSERVATION RIGHTS
For so long as the Foundation beneficially owns at least 20% of the
outstanding shares of Cobalt common stock, the Foundation, through an authorized
representative, will have a limited right to attend and observe all meetings and
executive sessions of the Cobalt board of directors. However, the authorized
representative of the Foundation will not observe any portion of a meeting
during which the board of directors addresses an item of business that would
pose a conflict of interest for the Foundation.
DIVESTITURE REQUIREMENTS
The Association requires its for-profit licensees to have limitations on the
ownership of their stock in order to maintain independence from the control of
any single shareholder or group of shareholders. The Foundation's ownership of
approximately 77.5% of the outstanding shares of Cobalt common stock following
completion of the combination would ordinarily exceed the ownership limitations
established by the Association. The Association has agreed to waive the
ownership limitations for the Foundation provided that the Foundation satisfies
a number of conditions, including selling the shares of Cobalt common stock that
it owns in the manner and within the time periods described below.
One-Year Divestiture Deadline
The Foundation must sell shares of Cobalt so that it beneficially owns less
than 80% of the outstanding common stock within one year following completion of
the combination. Because the Foundation will own approximately 77.5% of Cobalt's
outstanding shares immediately after the combination, it should not be necessary
for any sales to be effected during this period.
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Three-Year Divestiture Deadline
In addition to meeting the one year divestiture deadline, the Foundation
must sell shares of Cobalt common stock so that it beneficially owns less than
50% of the outstanding shares of Cobalt common stock within three years
following completion of the combination. This three-year period is extended day
for day, up to a maximum of 365 days, for each day that the Foundation does not
require Cobalt to register the Foundation's shares of Cobalt common stock under
a demand registration because Cobalt had recently effected a registration of
Cobalt common stock.
Five-Year Divestiture Deadline
In addition to meeting the one-year divestiture deadline and the three year
divestiture deadline, the Foundation must sell shares of Cobalt common stock so
that it beneficially owns less than 20% of the outstanding shares of Cobalt
within five years following completion of the combination. This five-year period
is extended day-by-day, up to a maximum of 730 days, for each day that the
Foundation does not require Cobalt to register the Foundation's shares of Cobalt
common stock under a demand registration because Cobalt had recently effected a
registration of Cobalt common stock.
Extension of Divestiture Deadlines
EXTENSION SOUGHT BY THE FOUNDATION. In the event that the Foundation cannot
meet the divestiture deadlines, it may be able to obtain an extension if it
receives Association approval. Specifically, Cobalt must extend the divestiture
deadlines if:
- the Foundation makes a good faith and reasonable determination that
compliance with the divestiture deadlines would have a material adverse
effect on the Foundation;
- the Foundation advises Cobalt of its determination and the reasons for the
determination and makes a reasonable request for an extension of the
pending divestiture deadline; and
- Cobalt receives written confirmation from the Association that the
Foundation's request for an extension of the divestiture deadline would
not cause a violation of the license agreement between Cobalt and the
Association.
EXTENSION SOUGHT BY COBALT. Similarly, Cobalt can extend the divestiture
deadline for the Foundation without a prior request by the Foundation. Any such
extension is subject to prior approval of the Association. Specifically, Cobalt
may extend the divestiture deadlines if Cobalt makes a good faith determination
that compliance with the divestiture deadlines would have a material adverse
effect on Cobalt or any of its shareholders, other than the Foundation, and if
Cobalt receives written confirmation from the Association that the extension of
the divestiture deadline requested by Cobalt would not cause a violation of the
license agreement between Cobalt and the Association.
Failure to Meet Divestiture Deadlines
It is possible that the Foundation will not be able to meet the divestiture
deadlines. If the Foundation fails to meet a divestiture deadline, Cobalt will
arrange for the sale of those shares of Cobalt common stock that the agreement
required the Foundation to sell and will pay the proceeds received in the sale
to the Foundation, after deducting the expenses incurred by Cobalt. The sale of
these shares would likely require registration with the SEC. Registration is an
expensive and time consuming process. Thus, the sale of these shares may take
considerable time to complete. The Foundation will pay the expenses of the sale.
Until sold, the trustee of the voting trust will vote those shares of Cobalt as
described in this document.
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If the Foundation is the sole shareholder of Cobalt at a time when the
Foundation has failed to meet any divestiture deadline and when a change of
control has been proposed, then the shares which the Foundation should have sold
will be voted in favor of the proposed change of control.
DIVIDENDS
In the future, Cobalt may declare and pay dividends on the outstanding
shares of Cobalt common stock. The Foundation will be entitled to receive all
cash dividends paid on the shares of Cobalt common stock held in the voting
trust, after the trustee deducts its fees and expenses. Any stock dividends paid
on the shares of Cobalt common stock held in the voting trust will be subject to
the voting trust as if originally deposited in the voting trust.
TRUSTEE COMPENSATION AND QUALIFICATIONS
Cobalt and the Foundation will each pay one-half of the trustee's annual fee
which the parties will agree upon prior to the closing of the combination.
At all times, the trustee must:
- be authorized to act as a trustee under Wisconsin law;
- not own more than 1% of Cobalt's outstanding stock other than the stock
held for the Foundation; and
- not have any director or officer that serves as a director or officer of
Cobalt.
TERMINATION OF VOTING TRUST AND DIVESTITURE AGREEMENT
The voting trust and divestiture agreement will terminate once the trustee
receives notice from Cobalt and the Foundation that the Foundation beneficially
owns less than 5% of the outstanding shares of Cobalt common stock. At that
point, the restrictions and deadlines in the voting trust and divestiture
agreement will no longer apply, and the Foundation will have satisfied the
divestiture deadlines.
LITIGATION
In order to further ensure that Cobalt will remain independent from the
Foundation after the combination, the Foundation may not participate in
litigation against Cobalt that challenges the ownership limitations and other
provisions required by the Association for its for-profit licensees.
Specifically, the Foundation may not join as a party in any litigation that
alleges that:
- a party may not enforce any provisions of the voting trust and divestiture
agreement or Cobalt's Amended and Restated Articles of Incorporation or
Bylaws in accordance with their terms;
- the Cobalt board of directors should not enforce any of the provisions of
Cobalt's Amended and Restated Articles of Incorporation or Bylaws in any
particular case or circumstances; or
- the Cobalt board of directors should approve or abandon any proposal
concerning an extraordinary business combination involving Cobalt.
The Foundation may, however, participate in any litigation that alleges that
the Cobalt board of directors should solicit proposals from third parties or
initiate a bidding process for the acquisition of Cobalt.
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ACQUISITION PROPOSALS
The voting trust and divestiture agreement provides that the Foundation may
not solicit or encourage inquiries or proposals with respect to, or provide any
confidential information to or have any discussions, meetings, or communications
with, a person relating to a merger, tender offer, or other business
combination, involving Cobalt. However, the Foundation may:
- have discussions with the counter-party to a business combination
transaction after the Cobalt board of directors submits the transaction to
the Cobalt shareholders for approval; and
- have discussions with any person or entity concerning the sale of Cobalt
common stock as permitted by the voting trust and divestiture agreement
and the registration rights agreement.
In addition, under the voting trust and divestiture agreement, for so long
as the Foundation beneficially owns at least 20% of the outstanding shares of
Cobalt common stock, Cobalt must consult with the Foundation before soliciting,
or upon receiving, a business combination proposal in which the then existing
Cobalt shareholders including the Foundation will own less than a majority of
the outstanding shares of the resulting entity.
OPERATIONS AFTER THE COMBINATION
Following the combination, BCBSUW will continue its operations as a wholly
owned subsidiary of UWS, which will change its name to "Cobalt Corporation."
However, the membership of Cobalt's board of directors will change as a result
of the combination. If the combination is approved by the UWS shareholders,
Ms. Skornicka and Messrs. Dunham, Hickman and Menden, current directors of UWS,
will resign from the board of directors upon completion of the combination.
Ms. Steiger and Messrs. Joyce, Ness and Viste, current members of the board of
directors of BCBSUW, will join Cobalt's board of directors. IF THE COMBINATION
IS COMPLETED, THE RIGHTS OF COBALT SHAREHOLDERS WILL BE GOVERNED BY THE AMENDED
AND RESTATED ARTICLES OF INCORPORATION AND AMENDED AND RESTATED BYLAWS OF COBALT
WHICH ARE ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEXES F AND G. SEE
"COMPARISON OF RIGHTS OF UWS SHAREHOLDERS BEFORE AND AFTER THE COMBINATION."
DESCRIPTION OF UWS SECURITIES
The authorized capital stock of UWS currently consists of 50,000,000 shares
of common stock, no par value per share, and 1,000,000 shares of preferred
stock, no par value per share, issuable in series. The following summary
description of the capital stock of UWS is qualified in its entirety by
reference to the current Articles of Incorporation and Bylaws of UWS, before
giving effect to the combination.
COMMON STOCK
Holders of shares of UWS common stock are entitled to one vote for each
share held on all matters submitted to a vote of shareholders. Holders of shares
of UWS common stock do not have cumulative voting rights in the election of
directors and have no preemptive, subscription or redemption rights. All
currently issued and outstanding shares of UWS common stock are validly issued,
fully paid and non-assessable, except for certain statutory liabilities which
may be imposed by Section 180.0622 of Wisconsin law for unpaid employee wages.
Section 180.0622 provides that no par value shares held by shareholders of
corporations incorporated in Wisconsin may be assessed up to the full amount
paid by the original subscriber to satisfy obligations to employees for services
rendered, but not exceeding six months' service in the case of any individual
employee. Holders of shares of UWS common stock are entitled to such dividends
as may be declared by the UWS board of directors out of funds legally available
therefor. Upon liquidation, dissolution or winding up of UWS, the assets legally
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available for distribution to shareholders are distributable ratably among the
holders of shares of UWS common stock at that time outstanding subject to prior
distribution rights of creditors of UWS.
PREFERRED STOCK
The Articles of Incorporation provide that the UWS 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 UWS. The rights, preferences and privileges of holders of
shares of UWS 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 UWS may
designate and issue in the future. UWS has no present plans to issue any shares
of preferred stock.
CERTAIN PROVISIONS OF UWS'S ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of the Articles of Incorporation and Bylaws 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 UWS board of directors. In
addition, these provisions also are intended to ensure that the UWS board of
directors will have sufficient time to act in what the UWS board of directors
believes to be the best interests of UWS 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 UWS 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 UWS board of
directors.
SHAREHOLDER NOTICE REQUIREMENTS
The Bylaws provide that for nominations for the UWS 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 UWS. 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 WISCONSIN LAW PROVISIONS
RESTRICTIONS ON BUSINESS COMBINATIONS
Sections 180.1130 to 180.1134 of Wisconsin law provide generally that in
addition to the vote otherwise required by law or the articles of incorporation
of a "resident domestic corporation," such as UWS, 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
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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 resident domestic
corporation (or any subsidiary thereof) with, or the sale or other disposition
of substantially all of the property and assets of the resident domestic
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
resident domestic corporation. These statute sections also restrict the
repurchase of shares and the sale of corporate assets by a resident domestic
corporation in response to a takeover offer.
Sections 180.1140 to 180.1144 of Wisconsin law prohibit certain "business
combinations" between a "resident domestic corporation," such as UWS, 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.
CONTROL SHARE VOTING RESTRICTIONS
Under Section 180.1150(2) of Wisconsin law, the voting power of shares of a
"resident domestic corporation," such as UWS, which are held by any person in
excess of 20% of the voting power in the election of directors shall be limited
(in voting on any matter) to 10% of the full voting power of such excess shares,
unless otherwise provided in the articles of incorporation or unless full voting
rights have been restored at a special meeting of the shareholders called for
that purpose. This statute is a "scaled voting rights/control share acquisition"
statute and is designed to protect corporations against uninvited takeover bids
by reducing to one-tenth of their normal voting power all shares in excess of
20% 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 UWS and shares acquired
in a merger or share exchange to which UWS is a party. The Articles of
Incorporation of UWS provide that shares of UWS common stock held by BCBSUW are
not subject to the voting power restrictions provided by Section 180.1150(2) of
Wisconsin law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the UWS common stock is Firstar Bank,
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 UWS board of directors. In
addition, the Bylaws 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 UWS board of directors could prevent any
shareholder from enlarging the board of directors and filling the new
directorships with such shareholder's own nominees.
Under Wisconsin law, shareholders may remove one or more directors with or
without cause unless the Articles of Incorporation or Bylaws provide that a
director may be removed only for cause. The Bylaws provide that directors may be
removed with or without cause and only upon the affirmative
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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 Bylaws provide that any action required or
permitted to be taken at a meeting of UWS'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. UWS 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 use the written consent procedure to take shareholder action.
SPECIAL MEETINGS
The Bylaws provide that special meetings of shareholders may be called by
the Chairman of the UWS board of directors, a majority of the UWS 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 UWS.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
The Bylaws 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 UWS (the "Shareholder
Notice Procedure").
The Shareholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the board of directors, or by a
shareholder who has given adequate written notice to the Secretary of UWS prior
to the meeting at which directors are to be elected, will be eligible for
election as directors of UWS. 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 of directors or
by a shareholder who has given adequate written notice to the Secretary of UWS
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 UWS 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 date 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 (i) the 90th day prior to such annual meeting, or (ii) 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 (i) the 60th
day prior to such special meeting, or (ii) 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 UWS
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 UWS beneficially owned by such shareholder or
beneficial owners; a representation that such shareholder is a holder of record
of shares of UWS entitled to vote
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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 UWS 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 UWS beneficially owned by
such shareholder; a representation that such shareholder is a holder of record
of shares of UWS 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 Bylaws, the language of the proposed amendment; the
reasons for conducting such business at such meeting; any material interest of
such shareholder in the business so proposed; and any other information required
to be provided by the shareholder pursuant to Regulation 14A under the Exchange
Act of 1934, as amended, 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 affords the board of directors an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the board of directors, to inform shareholders about such
qualifications. By requiring advance notice of other proposed business, the
Shareholder Notice Procedure also provides a more orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the board of directors, provides the board of directors 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 of directors' 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 Bylaws do not give the board of directors 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 UWS and its shareholders.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of UWS authorized at the time of the
combination will have any preemptive right to subscribe for or purchase any kind
or class of securities of UWS.
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LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF UWS
Under the Bylaws and Wisconsin law, directors and officers of UWS are
entitled to mandatory indemnification from UWS against certain liabilities and
expenses (i) to the extent such officers or directors are successful in the
defense of a proceeding, and (ii) 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 UWS
and such breach or failure constituted: (a) a willful failure to deal fairly
with UWS or its shareholders in connection with a matter in which the director
or officer had a material conflict of interest; (b) 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; (c) a transaction from which the director or officer derived an
improper personal profit; or (d) willful misconduct. Wisconsin law 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 Wisconsin law, unless the Articles of Incorporation provide otherwise,
directors of UWS are not subject to personal liability to UWS, 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; (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
Wisconsin law. 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.
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COBALT ARTICLES OF INCORPORATION AND BYLAWS
The following is a summary of Cobalt's Amended and Restated Articles of
Incorporation and Bylaws, which are ANNEXES F AND G to this Proxy
Statement/Prospectus. Upon completion of the combination, the Amended and
Restated Articles of Incorporation and Bylaws of Cobalt will replace those that
currently govern your rights as a shareholder of UWS. For this reason, and
because the Amended and Restated Articles of Incorporation and Bylaws are
complex documents that are not easily summarized, we encourage you to read
ANNEXES F AND G in their entirety. In the following summary, the term "person"
includes any individual or entity.
AUTHORIZED STOCK
Cobalt will be authorized to issue 76,000,000 shares of stock, consisting of
75,000,000 shares of common stock and 1,000,000 shares of preferred stock. Upon
completion of the combination, approximately 40,412,256 shares of common stock
and no shares of preferred stock will be outstanding.
COMMON STOCK
On all matters shareholders will vote on, each shareholder will have one
vote for each share of Cobalt stock owned. In addition, shareholders will
receive dividends and other distributions in cash, stock or property of Cobalt
if and as declared by the board of directors, subject to the rights of holders
of any outstanding preferred stock. In the event of liquidation or dissolution
of Cobalt, the common shareholders will share in the assets that are legally
available for distribution after the rights of Cobalt's creditors and any
preferred shareholders have been satisfied.
PREFERRED STOCK
Immediately after the combination, no shares of preferred stock will be
issued or outstanding. The Cobalt board of directors will be authorized to issue
preferred stock and to fix the number of shares and the rights and restrictions
of any series of preferred stock. Depending upon the rights designated to the
preferred stock, an issuance of preferred stock could have an adverse effect on
the owners of common stock by:
- delaying or preventing a change in control of Cobalt;
- otherwise diluting the voting rights of the owners of common stock;
- making removal of the management of Cobalt by the common shareholders more
difficult; or
- resulting in restrictions on the payment of dividends or other
distributions to the owners of common stock.
In addition, certain rights that could be given to the holders of preferred
stock by the board of directors might cause the New York Stock Exchange to
delist the common stock of Cobalt. There are no current plans to issue preferred
stock.
CLASSIFIED BOARD
After the combination, the Cobalt board of directors will continue to be
divided into three classes. Each class will serve for a three-year period and
will consist, as nearly as possible, of one-third of the total number of
directors. At each annual meeting of shareholders, the shareholders will elect
for a three-year term the successors to the class of directors whose term
expires at that annual meeting.
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QUALIFICATION OF DIRECTORS
No one will be able to become a director of Cobalt after the combination
unless (i) he or she is an "Independent Director" (as defined below), or
(ii) immediately after he or she becomes a director, at least a specified
percentage of the directors would be Independent Directors. Immediately after
the combination, at least 80% of the directors must qualify as Independent
Directors. Since there will initially be nine directors, this means that there
can be a maximum of one non-Independent Director at the outset. The percentage
of directors that must be Independent Directors will decrease to 50% as the
Foundation's stock ownership decreases, according to a formula described below.
A person will qualify as an "Independent Director" if he or she:
- is not a "major participant" (as defined below);
- has not been nominated to be a director at the initiative of a major
participant;
- has not announced a commitment to a proposal made by a major participant
that has not been approved by an "independent board majority" (as defined
below); and
- has not been determined by an independent board majority to have been
subject to any relationship or arrangement which those directors deem to
be likely to interfere with his or her exercise of independent judgment.
As used above, an "independent board majority" means a group of directors
consisting of a majority of all Independent Directors AND a majority of all
directors. A "major participant" means:
- the Foundation, or any other person, in the judgment of an independent
board majority, that succeeds to the Foundation's position;
- a person that owns shares of Cobalt common stock in excess of the
ownership limitations described below;
- a person that has filed proxy materials with the Securities and Exchange
Commission supporting a candidate for election to the board of directors
in opposition to candidates approved by an independent board majority;
- a person that has taken actions deemed by an independent board majority to
indicate that such person will seek to become a major participant; or
- a person that is an affiliate or associate of a major participant.
If, however, an independent board majority has given prior approval to an
acquisition of Cobalt common stock by a person and that acquisition would
otherwise have caused that person to become a major participant, the acquiring
person will nevertheless not be a major participant so long as the person
(i) makes no subsequent acquisition of Cobalt common stock not approved by an
independent board majority, and (ii) takes no other action that would make that
person a major participant, without the prior approval of an independent board
majority. The Foundation will always be a major participant.
The board of directors composition specified by the Cobalt Amended and
Restated Articles of Incorporation will change as the Foundation's ownership of
Cobalt common stock decreases. For each 1% reduction in the percentage of the
outstanding common stock of Cobalt owned by the Foundation, the percentage of
board seats that must be occupied by Independent Directors will be reduced by
one-half of 1%. For example, when the Foundation's holdings have been reduced to
50% of the outstanding stock, the Amended and Restated Articles of Incorporation
will require that at least 68 3/4% of the directors be Independent Directors.
However, the minimum percentage of board seats allocable to Independent
Directors will never be reduced to 50% or below.
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QUALIFIED CANDIDATES
The Amended and Restated Bylaws of Cobalt provide that shareholders will
elect directors by a plurality vote and that shareholders may only elect
"qualified candidates" to the board of directors. A qualified candidate is an
individual nominated by an independent board majority or properly nominated as
provided below under "Shareholder Proposals," and, in either event, who is not
disqualified by virtue of being a "non-independent candidate" for whom there is
no board seat available because of the requirement that at least a specified
percentage (between 50% and 80%) of the directors be Independent Directors. A
"non-independent candidate" is a candidate who would not qualify as an
"Independent Director," as described above.
If there are more qualified candidates in any election of directors than
available board seats, then the independent candidates receiving the greatest
number of votes will win the seats reserved for Independent Directors, and the
remaining candidate(s) (whether independent or non-independent candidates)
receiving the greatest number of votes will win any seat(s) available for
non-Independent Directors. (However, under the terms of the voting trust and
divestiture agreement, the trustee of the voting trust is required, in an
election involving board seats not reserved for Independent Directors, to vote
the Foundation's shares in proportion to the votes cast by shareholders other
than the Foundation. See "THE COMBINATION--Voting Trust and Divestiture
Agreement--Voting of Shares Held in Voting Trust.")
REMOVAL OF DIRECTORS
A director may be removed only for gross negligence or willful misconduct in
the performance of his or her duty in a matter of substantial importance to
Cobalt. The vote of the holders of 75% or more of the outstanding shares of
common stock will be required in order to effect a removal.
SPECIAL MEETINGS OF SHAREHOLDERS
A special meeting of shareholders may be called only by the Chairman of the
Board, the Chief Executive Officer or the President of Cobalt, by an independent
board majority or by any other person or group specifically given the authority
to call a special meeting by Wisconsin law. Wisconsin law requires that a
special meeting of shareholders occur if demanded in writing by the holders of
at least 10% of all the votes entitled to be cast at the proposed meeting.
Shareholders may not act by written consent in lieu of a meeting.
SHAREHOLDER PROPOSALS
The Amended and Restated Bylaws of Cobalt provide that a shareholder may
only submit a proposal at an annual meeting if:
- the proposal is a proper subject for shareholder action;
- the proposal is made by a person that was the record holder of shares on
the record date fixed for the meeting;
- the shareholder has delivered to Cobalt a written notice identifying the
proposal not less than 90 nor more than 120 days before the first
anniversary date of the prior year's annual meeting (subject to special
rules if the annual meeting is held more than 30 days before or after the
anniversary date of the prior year's meeting);
- the notice contains
-- a description of the proposal, the reasons for the proposal and any
material interest the proposing shareholder has in the proposal,
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-- an affirmation that the proposing shareholder satisfies the
requirements for presentation of the proposal, and
-- certain other specified information about the proposing shareholder;
and
- the proposing shareholder provides such other information as any officer
of Cobalt considers relevant.
If the proposal is to be made at a special meeting of shareholders, the
proposing shareholder's notice will be timely if it is delivered to Cobalt
within 10 days following public announcement of the meeting.
If the shareholder proposal concerns the nomination of a candidate for the
board of directors, in addition to the requirements just described, the
shareholder's notice to Cobalt must:
- set forth as to each nominee all personal information required to be
disclosed under the proxy rules of the Securities and Exchange Commission
if that person were a nominee of the existing board;
- be accompanied by the nominee's written consent to be named as a nominee
and to serve if elected;
- contain the name, address and telephone number of the proposing
shareholder; and
- set forth the class and number of shares of Cobalt stock owned by the
nominating shareholder.
As explained above, only a "qualified candidate" may be nominated in this
manner. The Amended and Restated Bylaws further provide that no matter may be
acted on by shareholders at a special meeting that has not been approved by the
board of directors for a vote.
INDEMNIFICATION
DIRECTORS AND OFFICERS
Cobalt will be required to indemnify any director or officer of Cobalt, if
he or she is made or threatened to be made a party to any action in that
capacity, against all expenses, judgments and fines and amounts paid in
settlement in connection with the action, unless he or she is unsuccessful on
the merits of the action and the liability was incurred because he or she
breached or failed to perform a duty owed to Cobalt and the breach or failure
constituted any of the following:
- a willful failure to deal fairly with Cobalt or its shareholders in
connection with a matter in which the director or officer had a material
conflict of interest;
- 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;
- a transaction from which the director or officer derived an improper
personal profit; or
- willful misconduct.
EMPLOYEES
Cobalt will be required to indemnify any employee of Cobalt if he or she is
made or threatened to be made a party to any action in that capacity, to the
same extent as if the employee were a director or officer, except that Cobalt
will have no duty to indemnify if liability was incurred because the employee's
breach or failure to perform a duty constituted material negligence or material
misconduct in the performance of his or her duties to Cobalt.
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LIMITATION ON LIABILITY FOR BREACH OF FIDUCIARY DUTY
Under Wisconsin law and the Amended and Restated Articles of Incorporation
of Cobalt, a director of Cobalt after the combination will have no liability to
Cobalt, its shareholders, or any person asserting rights on their behalf, for
damages, fines or other monetary liabilities for breach of or failure to perform
any duty to Cobalt, unless such breach or failure constitutes either (i) a
matter as to which Cobalt is not required to provide indemnification, as
provided above, or (ii) approval of an illegal dividend, but only if the
approval is a breach of duty not subject to indemnification. The Amended and
Restated Articles of Incorporation also provide that no director will be held in
breach of his or her fiduciary duty by reason of:
- voting against, or failing to vote for, a proposal or course of action
that the director believes would breach any requirement imposed by the
Association or could lead to termination of any license granted by the
Association to Cobalt or any of its subsidiaries or affiliates; or
- voting in favor of any proposal or course of action that the director
believes is necessary to prevent a breach of any requirement imposed by
the Association or to prevent termination of any license granted by the
Association to Cobalt or any of its subsidiaries or affiliates.
LIMITATIONS ON COMMON STOCK OWNERSHIP
GENERAL
Cobalt's Amended and Restated Articles of Incorporation will contain the
following ownership limitations required by the Association for its for-profit
licensees. These limitations are imposed to protect the licensee's independence
from any single shareholder or concerted group of shareholders. Under these
ownership limitations:
- no institutional owner may beneficially own 10% or more of the combined
voting power of all outstanding Cobalt securities;
- no non-institutional owner may beneficially own 5% or more of the combined
voting power of all outstanding Cobalt securities; and
- no person may own 20% or more of all outstanding equity securities of
Cobalt (regardless of voting power).
The Amended and Restated Articles of Incorporation define "beneficial
ownership" to include securities:
- in which a person has a direct or indirect ownership interest;
- which a person has a right or option to purchase;
- which a person has the right to vote;
- with respect to which a person would be required to file a Schedule 13D or
13G under the Securities Exchange Act of 1934, as amended; or
- which are owned by any affiliate or associate of the person, or by anyone
else with which the person has any agreement or understanding.
The Amended and Restated Articles of Incorporation include a number of
exceptions to the definition of beneficial ownership, set forth in full in ANNEX
G attached to this Proxy Statement/ Prospectus.
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VIOLATION OF LIMITATIONS ON OWNERSHIP
Except as set forth below, if after the combination any person beneficially
owns Cobalt securities in excess of the ownership limits, then (i) the person
will not receive any rights to the excess shares, and (ii) the excess shares
will immediately be deemed to be transferred to a "share escrow agent" appointed
by Cobalt to perform the duties discussed below. However, a person's beneficial
ownership will not violate the ownership limits if the person's excess shares do
not exceed the lesser of 1% of the voting power of the capital stock or 1% of
the ownership interest of Cobalt, and the person disposes of the excess shares
within fifteen days of becoming aware of the ownership of excess shares.
VOTING OF EXCESS SHARES
The Amended and Restated Articles of Incorporation require the share escrow
agent to vote all excess shares that it holds in the following ways:
- in favor of each nominee to the board of directors nominated by an
independent board majority;
- against any candidate for the board of directors for whom an independent
board majority has not nominated or selected a competing candidate;
- unless the action is initiated by or with the consent of the board of
directors,
-- against the removal of any director,
-- against any change to the Amended and Restated Articles of
Incorporation or Bylaws,
-- against nominating any candidate to fill a vacancy on the board of
directors,
-- against the holding of any special meeting of shareholders, and
-- against any action that would have the effect of defeating those
voting requirements;
- on any proposal requiring the approval of the board of directors as a
prerequisite to become effective, and not provided for above, in the same
proportion as the owners vote all other Cobalt securities on such
proposal; and
- on all other matters, as recommended by the board of directors.
DIVIDENDS AND DISTRIBUTIONS ON EXCESS SHARES
The share escrow agent will be entitled to receive all dividends and
distributions on excess shares that it holds, subject to distribution after it
sells the excess shares, as described below. An owner of excess shares must
repay to Cobalt or turn over to the share escrow agent any dividends or
distributions received on excess shares. In the event of any liquidation,
dissolution or winding up of Cobalt, the share escrow agent will be entitled to
receive its PRO RATA share of the assets of Cobalt based on the number of excess
shares it holds compared to the total number of shares outstanding.
SALE OF EXCESS SHARES
The share escrow agent is required to sell the excess shares at a time and
price determined by Cobalt. It is expected that the sale of excess shares will
require registration with the Securities and Exchange Commission, which is a
time consuming and expensive process. As described below, the excess owner will
be responsible for all the costs and expenses of the sale, including
registration fees and expenses. Excess shares that a party purchases from the
share escrow agent without violating the ownership limits will become ordinary
outstanding securities of Cobalt, freely transferable except in the hands of an
affiliate of Cobalt. To the extent permitted by law, neither Cobalt, the share
escrow agent nor anyone else will have any liability to the owner of the excess
shares for any action or inaction taken in good faith when selling the excess
shares.
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PROCEEDS FROM SALE OF EXCESS SHARES
The share escrow agent will distribute the proceeds from the sale of excess
shares, along with dividends received on excess shares, as follows:
- first, to the share escrow agent for any costs and expenses incurred in
administering the excess shares that have not been reimbursed;
- second, to Cobalt for all costs and expenses incurred in connection with
the sale of the excess shares; and
- finally, the remainder to the owner of the excess shares.
EXCEPTIONS TO OWNERSHIP LIMITS
The ownership limits described above will not apply to shares received by
the Foundation (through BC Holdings) in the combination, or any shares acquired
by the Foundation as a result of a subsequent stock dividend, stock split,
conversion or similar distribution. The ownership limits will also not apply to
the trustee(s) of the voting trust described at page under "THE
COMBINATION--Voting Trust and Divestiture Agreement." However, the ownership
limits will apply to shares transferred by the Foundation or the voting trust to
any other person.
CHANGE IN OWNERSHIP LIMITS
In addition, an independent board majority together with the holders of 75%
or more of the outstanding shares of common stock may change the ownership
limits, without regard to the terms of the license agreement, by amending the
articles of incorporation as described below.
CUMULATIVE VOTING
Shareholders will not have cumulative voting rights in the election of
directors.
PREEMPTIVE RIGHTS
Shareholders will not have any preemptive or preferential rights to purchase
any other new securities of Cobalt.
CONTROL SHARE VOTING RESTRICTIONS
Cobalt's Amended and Restated Articles of Incorporation provide that shares
of Cobalt common stock owned by the Foundation, BC Holdings or the Trustee are
not subject to the voting power restrictions provided by Section 180.1150(2) of
Wisconsin law, which would otherwise limit the voting power of Cobalt shares
owned by the Foundation, BC Holdings and the Trustee that exceed 20% of the
voting power in the election of directors to 10% of the full voting power of
such excess shares.
AMENDMENTS TO AMENDED AND RESTATED ARTICLES OF INCORPORATION
Cobalt's Amended and Restated Articles of Incorporation provide that the
approval of an independent board majority and of the holders of 75% or more of
the outstanding shares of common stock will be required in order to amend
various sections of the Amended and Restated Articles of Incorporation,
including the sections dealing with:
- the number, qualifications, limitations on liability and removal of
directors;
- the inability of shareholders to act by written consent;
- special shareholder meetings;
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- the ownership limitations;
- amendments to the Amended and Restated Bylaws;
- the prohibition on cumulative voting; and
- the right to amend the Amended and Restated Articles of Incorporation.
The supermajority votes described above will not be necessary if any of the
following applies:
- Cobalt no longer has any license agreements with the Association;
- the amendment in question is an amendment to the ownership limitation and
transfer restriction provisions of the Amended and Restated Articles of
Incorporation which has been proposed in order to conform to a change in
the terms of any Association license agreement;
- the amendment in question is any other amendment to the ownership
limitation and transfer restriction provisions that is required or
permitted by the Association, whether or not it constitutes a change to
any license agreement; or
- the amendment in question is an amendment to the ownership limitation and
transfer restriction provisions which has been approved by an independent
board majority in connection with a proposal to acquire all the
outstanding capital stock of Cobalt.
For so long as the Foundation (through BC Holdings) owns at least 20% of the
outstanding shares of common stock, any amendment of the Amended and Restated
Articles of Incorporation will be subject to the prior review and approval of
the OCI.
AMENDMENTS TO AMENDED AND RESTATED BYLAWS
A majority of the Cobalt board of directors will have the power to amend the
Amended and Restated Bylaws, except that the approval of an independent board
majority is required to amend any provision of the Amended and Restated Bylaws
that relates to:
- special meetings of shareholders;
- voting for directors and qualification of nominees;
- shareholder action without a meeting;
- qualifications for valid shareholder proposals at meetings;
- indemnification and limited liability of directors and others; and
- the amendment provisions themselves.
The shareholders may only amend the Bylaws through a vote of the holders of
at least 75% of the then outstanding shares.
For so long as the Foundation owns at least 20% of the outstanding shares of
common stock, any amendment of the Bylaws will be subject to the prior review
and approval of the OCI.
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COMPARISON OF RIGHTS OF UWS
SHAREHOLDERS BEFORE AND AFTER THE COMBINATION
This section of the Proxy Statement/Prospectus describes the material
differences between the rights of holders of UWS common stock before and holders
of Cobalt common stock after the combination. While UWS and BCBSUW believe that
the description covers the material differences between the two, this summary
may not contain all of the information that is important to you. You should
carefully read this entire document and the other documents we refer to for a
more complete understanding of the differences between being a shareholder of
UWS before and holders of Cobalt common stock after the combination.
INTRODUCTION
Upon completion of the combination, the Amended and Restated Articles of
Incorporation and Bylaws of Cobalt will replace those that currently govern your
rights as a shareholder of UWS. Cobalt's Amended and Restated Articles of
Incorporation and Bylaws are materially different from UWS's present Articles of
Incorporation and Bylaws, especially as they relate to the election of directors
after the combination. The purpose of these new restrictions is to comply with
the licensing requirements of the Association.
Set forth below is a brief comparison between certain provisions of Cobalt's
Amended and Restated Articles of Incorporation and Bylaws, on one hand, and
those of UWS, on the other hand. UWS is, and Cobalt after the combination will
continue to be, a Wisconsin corporation, and therefore there are no differences
in applicable statutes. The provisions compared below are limited to those that,
in our view, are materially different from one another; this summary is not an
exhaustive list of differences. The Amended and Restated Articles of
Incorporation and Bylaws of Cobalt are included as ANNEXES F AND G to this Proxy
Statement/Prospectus. Copies of UWS's current Articles of Incorporation and
Bylaws are available for inspection at UWS's main office, or UWS will send them
to you upon request.
NOMINATION AND ELECTION OF DIRECTORS
The current Articles of Incorporation and Bylaws of UWS provide that any
shareholder who wishes to nominate a candidate for the board of directors must
comply with the notice and other requirements contained in the Shareholder
Notice Procedure in order to effectively nominate such candidate. See
"DESCRIPTION OF REGISTRANT'S SECURITIES--Advance Notice Provision for
Shareholder Nomination and Shareholder Proposals." The Shareholder Notice
Procedure generally provides that a shareholder's notice must be delivered to
UWS not later than 90 days nor more than 120 days prior to the last Tuesday in
May in the event of an annual meeting, and, in the event of a special meeting,
not earlier than the 90th day prior to such meeting and not later than the close
of business of the later of (i) the 60th day prior to such special meeting or
(ii) the tenth day after public announcement of the date of such special meeting
is first made. The notice must also contain, among other things, certain
information about the shareholder delivering the notice and, as applicable,
background information about each nominee. There are no restrictions contained
in the Articles of Incorporation or Bylaws of UWS regarding who may serve as a
director of UWS.
Following the combination, the Amended and Restated Bylaws of Cobalt will
contain similar provisions regarding notification by shareholders for nominating
candidates to the board of directors. See "COBALT ARTICLES OF INCORPORATION AND
BYLAWS--Shareholder Proposals." However, there are additional restrictions on
shareholder nominations that do not currently exist under the Articles of
Incorporation and Bylaws of UWS. For example, the Amended and Restated Articles
of Incorporation and Bylaws of Cobalt generally provide that only "qualified
candidates" may serve on the Cobalt board of directors. See "COBALT ARTICLES OF
INCORPORATION AND BYLAWS--
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Qualification of Directors" and "COBALT ARTICLES OF INCORPORATION AND BYLAWS--
Qualified Candidates" for a description of what constitutes a "qualified
candidate." Additionally, immediately after the combination, at least 80% of the
Cobalt directors must qualify as Independent Directors (as defined in "COBALT
ARTICLES OF INCORPORATION AND BYLAWS--Qualification of Directors"). The
percentage of Cobalt directors that must be Independent Directors will decrease
to 50% as the Foundation's stock ownership (through BC Holdings) decreases,
according to a formula described above in "COBALT ARTICLES OF INCORPORATION AND
BYLAWS--Qualification of Directors."
There are also conditions contained in the voting trust and divestiture
agreement regarding the voting of shares of Cobalt common stock owned by the
Foundation and held in the voting trust with respect to the nomination and
election of directors. In general, the trustee will vote those shares in favor
of each nominee whose nomination has been approved by (i) a majority of the
Independent Directors and (ii) a majority of the entire Cobalt board of
directors. If any candidates are eligible for election to the board of directors
who, if elected, would not qualify as Independent Directors, then the trustee
will vote the Foundation's shares for any such candidates in the exact
proportion as Cobalt shareholders vote all shares of Cobalt common stock not
held in the voting trust; PROVIDED, HOWEVER, that if director seats are eligible
for public shareholder representation, the trustee will be directed to vote its
shares in the same proportion and for the same candidates voted for by the other
Cobalt shareholders. This provision will terminate at such time as the
Foundation owns less than 20% of the outstanding shares of Cobalt common stock.
In addition, unless a majority of the Independent Directors and a majority of
the entire Cobalt board of directors initiates or consents to such action,
neither the Foundation nor the trustee of the voting trust may nominate any
candidate to fill any vacancy on the Cobalt board of directors. See "THE
COMBINATION--Voting Trust and Divestiture Agreement--Voting of Shares Held in
Voting Trust."
REMOVAL OF DIRECTORS
Under the current Bylaws of UWS, the shareholders may, by vote of a majority
of a quorum in a meeting called for this purpose, remove one or more directors,
with or without cause. Under the Amended and Restated Articles of Incorporation
of Cobalt, a vote of the holders of 75% of all outstanding voting shares is
required for removal of a director. In addition, a director of Cobalt may be
removed only for cause, which means gross negligence or willful misconduct in
the performance of the director's duty to the company in a matter of substantial
importance to the company.
NUMBER OF DIRECTORS
The Bylaws of UWS fix the number of directors at nine. This number is
subject to change through amendment of the Bylaws as described at page below.
The Amended and Restated Bylaws of Cobalt allow an independent board majority to
change from time to time the number of directors, as well as the number of board
seats in each class. However, unless the Amended and Restated Articles of
Incorporation of Cobalt are amended, the number of directors must be between 3
and 9, and each class of directors must be as nearly as possible equal in size.
QUORUM OF DIRECTORS
Under the Bylaws of UWS, a quorum of directors consists of a majority of the
directors then in office. Under the Amended and Restated Articles of
Incorporation of Cobalt, a quorum of directors consists of a majority of the
total authorized number of directors, regardless of whether vacancies exist.
This means it may be more difficult to achieve a quorum of directors of Cobalt
after the combination.
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LIMITATION OF LIABILITY OF DIRECTORS
In general, the articles of incorporation and bylaws of both UWS and Cobalt
provide the full limitation of director liability specified by Wisconsin law.
For a discussion of this limitation, see page . As discussed above, the
Amended and Restated Articles of Incorporation of Cobalt also absolve a director
of any liability for breach of fiduciary duty arising out of any act or vote
that the director believes is necessary to avoid endangering the licenses
granted to Cobalt or its affiliates by the Association, or that he or she
believes is otherwise required by the Association. It is possible this provision
could increase the influence of the Association over Cobalt, or reduce the
influence of the shareholders over the composition of the board of directors or
other fundamental acts or issues.
RESTRICTIONS ON STOCK OWNERSHIP AND TRANSFER
The Amended and Restated Articles of Incorporation of Cobalt contain very
substantial restrictions on the number of shares of common stock and other
securities of Cobalt that may be beneficially owned by any person other than the
Foundation. These restrictions are summarized on page under "COBALT ARTICLES
OF INCORPORATION AND BYLAWS--Limitations on Common Stock Ownership." These
restrictions have been imposed at the insistence of the Association, to further
its policy that no shareholder or group of shareholders in concert should gain
substantial influence over a licensee.
The ownership restrictions, especially viewed together with the restrictions
on nomination and election of directors described above, may limit the
marketability of, and consequently the market value of, shares of common stock
of Cobalt in one or more of the following ways:
- The value of outstanding shares may decline, or be deterred from
increasing, because certain persons who already own shares are prohibited
from purchasing more.
- The value of outstanding shares may decline, or be deterred from
increasing, because persons who might otherwise consider trying to acquire
Cobalt in a transaction that would provide a premium to existing
shareholders will be discouraged by the inability of shareholders to gain
control, or substantial influence, over management.
- Forced sales of "excess shares" by the share escrow agent may have a
depressing effect on the market for common stock of Cobalt.
SHAREHOLDER ACTION WITHOUT MEETING
The Articles of Incorporation of UWS permit shareholder action to be taken
without a meeting, by written consent of the holders of the number of shares
that could have accomplished the same action if a meeting had been held. The
Amended and Restated Articles of Incorporation and Bylaws of Cobalt specifically
deny the shareholders the power to act by written consent. This denial may make
it more difficult for the shareholders to act on a matter not supported by the
board of directors of Cobalt.
AMENDMENT OF ARTICLES OF INCORPORATION
Except as otherwise required by Wisconsin law in certain circumstances, the
Articles of Incorporation of UWS may be amended in any respect by action of a
majority of a quorum of the board of directors, together with the affirmative
vote of the holders of at least a majority of all the outstanding shares of UWS.
Under the Amended and Restated Articles of Incorporation of Cobalt,
amendment of any of a long list of provisions contained in the articles requires
the approval of both an independent board majority and the holders of at least
75% or more of the outstanding shares of stock eligible to vote. The provisions
subject to the supermajority vote requirement are listed on page . The purpose
and
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effect of these limitations is to make it substantially harder to repeal or
otherwise affect the provisions intended to perpetuate control in the
Independent Directors.
After the combination, and for so long as the Foundation beneficially owns
at least 20% of the outstanding common stock of Cobalt, amendments to the
Amended and Restated Articles of Incorporation will be subject to the prior
approval of the OCI.
AMENDMENT OF BYLAWS
The Bylaws of UWS may be amended by vote of shareholders holding shares
constituting a majority of a quorum. The Bylaws may also be amended by a
majority of a quorum of the directors of UWS, but the shareholders have the
power to adopt Bylaws that explicitly may not be amended or repealed by the
board of directors.
The Amended and Restated Bylaws of Cobalt provide that the shareholders may
not amend the Amended and Restated Bylaws without the affirmative vote of the
holders of at least 75% of the outstanding voting shares. The shareholders of
Cobalt will not have the power to adopt a bylaw that is not subject to amendment
or repeal by the board of directors. Any amendment by the board of directors
touching on a variety of issues, as listed at page above, requires the vote of
an independent board majority.
After the combination, and for so long as the Foundation beneficially owns
at least 20% of the outstanding common stock of Cobalt, amendments to the
Amended and Restated Bylaws will be subject to the prior approval of the OCI.
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BUSINESS OF UWS
GENERAL
United Wisconsin Services, Inc. is a Wisconsin corporation organized in May
of 1998 for the purpose of owning and operating the managed care companies and
specialty business of UWS's predecessor, American Medical Security Group, Inc.
(formerly United Wisconsin Services, Inc.). On May 27, 1998, the board of
directors of AMSG approved a formal plan to contribute the managed care
companies and specialty business to UWS and spin off UWS to AMSG's shareholders.
The new corporation originally was named Newco/UWS, Inc., and subsequently was
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. AMSG received a
private letter ruling from the Internal Revenue Service that the spin-off was
tax free to AMSG, UWS and their shareholders.
UWS'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 term "UWS" includes United Wisconsin
Services, Inc. and its subsidiaries.
UWS is a leading provider of managed health care services and employee
benefit products sold primarily in Wisconsin, but also serving markets in 49
other states and the District of Columbia. The products and services offered by
UWS 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 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. UWS also offers various specialty products and
services including prepaid dental care, life, disability and other products,
managed care workers' compensation, cost containment, health care electronic
data interchange, pharmaceutical management, managed care consulting and
receivables management.
Compcare Health Services Insurance Corporation ("Compcare"), a wholly owned
subsidiary of UWS, 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 UWS in 1992. Its major provider is
Midelfort Clinic Ltd., Mayo Health Systems ("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 UWS effective October 1, 1994. Community Physicians'
Network, Inc. ("CPN") and the University of Wisconsin-Madison Medical Foundation
constitute the provider networks for Unity.
UWS's HMO products are sold primarily by a salaried sales force to employers
and other groups. 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 owns approximately 46.3% of the outstanding common stock of UWS as of
September 30, 2000, and is UWS's largest shareholder.
UWS'S STRATEGY
UWS 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. UWS also believes there are significant niches
offering opportunities for companies that are responsive to
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consumer demand for affordable health care. UWS 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. UWS also believes there are opportunities to develop or enhance
specialty managed care products and services which will leverage UWS's expertise
in the health care market. To take advantage of market opportunities, UWS has
developed the following business strategy:
- EMPHASIZE COST-EFFECTIVE ACCESS TO QUALITY HEALTH CARE OPTIONS. UWS
believes that rising health care costs continue to cause buyers to seek
cost-effective quality health care options for employees. UWS 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. UWS markets, in
selected Wisconsin counties, its "United 24" product, which combines
health, disability and workers' compensation coverage into a single lower
premium product.
- PURSUE ACQUISITIONS AND DEVELOP STRATEGIC ALLIANCES. UWS 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, UWS 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. In 1999,
UWS acquired three specialty businesses--Allegro, Ltd., HCX and
Comprehensive Collection Services, Inc. In 2000, UWS expanded its workers'
compensation case management business through the acquisition of Seltzer/
Delman, Inc.
Effective November 1, 2000, UWS completed its negotiations leading to the
takeover of the insurance operations of Family Health Plan Cooperative,
Inc., an HMO in Milwaukee, Wisconsin. Further, UWS believes that
additional strategic alliances will enable UWS to provide additional
products and services in its existing markets.
- EXPAND GEOGRAPHICALLY. UWS 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. UWS 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 UWS seeks additional opportunities to expand the workers'
compensation business through acquisitions or strategic joint ventures. In
1999, UWS formed a joint venture with Health Care Service Corporation, a
Mutual Legal Reserve Company, doing business as Blue Cross Blue Shield of
Illinois ("HCSC") to manage and sell workers' compensation business. In
addition, UWS may acquire other managed care companies or related lines of
business in order to enter new markets both inside and outside of
Wisconsin.
- LEVERAGE THE BLUE-REGISTERED TRADEMARK- BRAND. Effective in August, 1999,
UWS began utilizing the Blue Cross-Registered Trademark- and Blue
Shield-Registered Trademark- trademarks for its Compcare and Blue
products. Branding at Compcare has afforded UWS marketing opportunities
that were not available to an unbranded product. UWS's relationship with
BCBSUW has provided the individual specialty businesses the ability to
expand their markets for specialty products and services to other Blue
Cross and Blue Shield plans nationwide. UWS currently has business
contracts with other Blue Cross and Blue Shield plans, including Empire
Blue Cross & Blue Shield, Blue Cross & Blue Shield of Arizona, Inc. and
Blue Cross & Blue Shield of Kansas City.
In addition to the strategic initiatives outlined above, during 2000, UWS
formed an alliance to create a comprehensive set of e-commerce services. This
gives UWS a competitive market advantage in leveraging the Blue
Cross-Registered Trademark- brand and enables individuals and small group
employers to use the
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Internet for real-time price quotes, plan comparisons and online enrollment.
This effort is expected to enhance marketing efforts and reduce administrative
expenses in the future.
Also, effective June 1, 2000, UWS expanded on an existing clinical services
contract with WellPoint Pharmacy Management to include pharmacy claims
processing services. As of September 30, 2000 this contract covered
approximately 168,000 lives.
On April 1, 2000, UWS terminated its unprofitable contract with the State of
Wisconsin for Compcare HMO's participation in the state's Medicaid program,
including the BadgerCare segment. Unity's and Valley's participation in the
program was also significantly reduced.
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 combine a traditional HMO plan and an
out-of-network benefit with deductible and coinsurance; (iv) a Medicare
Supplement product, which is designed to cover all or part of health care costs
incurred and the government program's allowed payments; (v) a small group
product, combining managed care with deductibles and co-payments; (vi) an HMO
Medicaid plan, which is a comprehensive HMO plan for Medicaid recipients; and
(vii) BadgerCare, which is a comprehensive HMO for uninsured families on
Medicaid with income below specified federal poverty levels.
Unity markets comprehensive managed care products to employer groups and
individuals in 28 counties in central and southwestern Wisconsin. Unity's
product offerings include HMO, POS, and third party administrator ("TPA")
services. The HMO product includes a variety of benefit coverage options with
multiple co-pay and deductible options tailored to meet customer needs. Coverage
primarily requires the use of providers within the network. The POS product
offers flexible insurance options with three levels of benefit coverage
available. Options to access health care services can vary from HMO to
traditional indemnity coverage. TPA services sold under the brand name TPA Plus
offer employers self-funded benefit plan administration. In addition to
traditional administrative services, options are available to select network and
medical management services, which lower costs through the use of participating
providers.
The POS plans provide significant incentives for members to utilize the
plans' managed care benefits and provide reduced benefits and increased
deductibles and co-payments when providers outside of the POS network render
services. 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, UWS then directly
solicits members from the employee base.
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During periodic "open enrollments," when employees are permitted to change
health care programs, UWS 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 the OCI and the
federal government, UWS can offer an employer a wide spectrum of benefit
options, including federally qualified and non-federally qualified products. To
address rising health care costs, some employers now consider a variety of
health care options to encourage employees to use the most cost-effective form
of health care services. These options, which include HMO and POS plans, may
either be self-funded or provided by third parties.
As of September 30, 2000, HMO insured membership consisted of the following
(in numbers of individuals):
<TABLE>
<CAPTION>
HMO POS MEDICAID TOTAL
-------- -------- -------- --------
COMMERCIAL
-------------------
<S> <C> <C> <C> <C>
Compcare................................. 112,288 55,224 -- 167,512
Valley................................... 25,234 9,980 835 36,049
Unity.................................... 58,031 19,394 3,309 80,734
------- ------ ----- -------
195,553 84,598 4,144 284,295
======= ====== ===== =======
</TABLE>
Trends in membership over the last several years have shown that there is
strong growth in UWS's commercial products. The reduction in the number of
Medicaid members during 2000 is a result of UWS terminating Compcare's
participation in Wisconsin's Medicaid program, including the BadgerCare segment.
Unity and Valley's participation in the program was also significantly reduced.
Compcare's operations in the six counties included in the southeastern
Wisconsin region comprise approximately 85% 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. In addition, UWS has 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 under-served 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. UWS believes that expansion
efforts will contribute to increased enrollment by attracting new employer
groups and by increasing penetration with existing employer groups.
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The following table identifies the top ten group contracts with the highest
HMO earned premium for the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
PERCENTAGE OF
EARNED PREMIUMS
---------------
<S> <C>
State of Wisconsin.......................................... 15.6%
Federal Employee Health Benefits Program.................... 4.5
Medicaid.................................................... 4.4
Milwaukee County............................................ 3.4
Milwaukee Public Schools.................................... 2.5
Briggs & Stratton Corporation............................... 2.4
CSM Alliance................................................ 2.1
Construction Worker Health Fund............................. 1.7
Catholic Archdiocese........................................ 1.5
Milwaukee County Transit System............................. 1.4
-----
Subtotal.................................................. 39.5
Other employer groups (3,140 in number)..................... 60.5
-----
100.0%
=====
</TABLE>
The HMOs have significant enrollment among federal, state and municipal
government employees, as well as employees represented by collective bargaining
units. UWS believes that health care will continue to be an important
negotiating issue with organized labor groups and that the reputation of UWS's
HMOs will be advantageous to its future marketing efforts. For information
regarding segment information for UWS, see Note 12, "Segment Reporting", on page
F-29 of the UWS Consolidated Financial Statements attached to this Proxy
Statement/Prospectus.
Pursuant to a service agreement, UWS utilizes BCBSUW's salaried sales force
that as of September 30, 2000, consisted of 31 account executives, one agency
manager, seven agency consultants, four sales directors, one Internet sales
manager and two Internet sales representatives to market HMO products. UWS
directly employs a sales staff of six account executives, one sales director,
one agency manager and one agency consultant 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. Compcare has an extensive provider network in
southeastern Wisconsin, which included 4,520 physicians as of September 30,
2000. 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. 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 53.4% of Valley's medical and other benefits are provided
under an arrangement with Midelfort and its affiliate, Luther Hospital, which
UWS believes are the leading medical services providers in Eau Claire,
Wisconsin. Arrangements with three smaller area clinics and five other hospitals
provide a majority of the other medical and other benefits for Valley. As of
September 30, 2000, Valley's provider network consisted of 361 physicians.
Approximately 79% of Valley's physician services are provided under the
Midelfort arrangement. The relationship with Midelfort is generated by the
Valley provider arrangement, which extends through December 31, 2002. Valley's
contracts with its
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other providers renew annually. UWS 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 Community Physicians' Network, Inc. ("CPN"), an IPA,
and University Health Care, Inc. ("UHC"). UHC is a non-profit-tax-exempt
corporation which contracts on behalf of the University of Wisconsin Hospital
and Clinics, the University of Wisconsin Medical Foundation and the University
of Wisconsin School of Medicine. CPN and UHC provide the majority of physician
services for Unity's membership throughout its 28 county service area. CPN and
UHC collectively contract with approximately 640 primary care providers and
2,400 specialists and ancillary health care providers. In addition, Unity
contracts directly with approximately 43 acute care and specialty care
hospitals.
Compcare, Valley and Unity manage the cost of health care provided to
members through the method of payment and risk-sharing programs with physician
groups and hospitals and through their respective utilization management
programs. The method of payment consists of a combination 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 the
level of services provided, which stabilizes medical and dental costs. For the
nine months ended September 30, 2000, approximately 25.3%, 23.4% and 55.5% 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, UWS 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 the 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.
OPERATIONS OF PROVIDER ARRANGEMENTS
Valley has a provider arrangement with Midelfort. The current term of the
provider arrangement is through December 31, 2002, with options for additional
renewal terms of one year each. During the initial five-year term of the
provider arrangement, after-tax profits or losses were shared equally with
Midelfort. The second amended and restated joint venture effective as of
January 1, 2000 changed the profit sharing between UWS and Midelfort. A final
settlement for the prior arrangement with Midelfort equaled $0.4 million for the
nine months ended September 30, 2000.
Under the new provider agreement, Midelfort shares in 50% of the net profits
(losses) relating to the HMO and POS products. Net profit/loss of HMO products
and POS products are separately calculated on an annual basis. Midelfort's
profit (loss) sharing on the POS product is capped at $100,000 for 2000
increasing to $200,000 for 2002. Midelfort has an option to repurchase all the
capital stock of Valley on December 31, 2002 for Valley's net equity plus
$400,000. If Midelfort exercises its repurchase option, UWS would have no
ongoing interest in Valley.
Prior to January 1, 2000, Unity had provider agreements with Community
Health Systems, LLC ("CHS") and UHC that provided for profit-sharing. These
agreements were renegotiated in 1999 with an effective date of January 1, 2000.
Under the original agreements, 50% of the pre-tax profits were shared, with CHS
receiving 30% and UHC receiving 20%. The combined profit-sharing earned by CHS
and UHC equaled $6.4 million for the five years ended December 31, 1999. CHS and
UHC had
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options to repurchase the businesses originally sold to UWS on November 1, 1999.
Under the renegotiated agreements, the repurchase options can be exercised on
November 1, 2004.
Under the renegotiated agreements, which are effective on January 1, 2000,
profit-sharing payments were eliminated with the exception of payments due to
UHC for the years 2001 through 2004. During each of these years, UHC is eligible
to receive a portion of the pre-tax income as an annual performance bonus,
however the payments for the four-year period are limited to $650,000. The
renegotiated agreements are in effect for five years beginning January 1, 2000
and automatically renew for an additional five years unless either CHS or UHC
exercises its purchase option or there is a termination of the agreement for
cause.
CHS and UHC have options to repurchase the business originally sold to UWS
including the increased membership relative to their respective provider
networks on December 31, 2004. CHS has the option to repurchase its
proportionate share of Unity for the current net worth of the business being
repurchased. UHC has the option to purchase its share of Unity for $500,000 plus
the proportionate share of the net worth of Unity attributable to the UHC
business less any unpaid amount of the maximum performance bonus ($650,000).
Exercise of the repurchase option ends the agreement with respect to that party.
If both repurchase options are exercised UWS would have no ongoing interest in
Unity.
COST CONTAINMENT
The majority of medical management and cost containment services for
Compcare are provided by UWS's wholly-owned subsidiary, Innovative Resource
Group, Inc. ("IRG"). Cost containment for Valley and Unity is coordinated by
medical directors in conjunction with the medical staffs of their providers.
MANAGEMENT INFORMATION SERVICES
Each of UWS'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.
UWS continually evaluates, upgrades and enhances the information systems
that support its operations. Certain information system functions utilized by
Compcare and Valley are outsourced to third parties.
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES
In the last few years, UWS has focused on growing the specialty products and
services it offers. Such products and services include prepaid dental care,
life, disability and other products, managed care workers' compensation,
consulting and cost containment, health care electronic data interchange,
pharmaceutical management, managed care consulting, 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. For additional
information on UWS's specialty managed care products, see Note 12, "Segment
Reporting", on page F-29 of the UWS Consolidated Financial Statements attached
to this Proxy Statement/Prospectus.
DENTAL HMO
In 1997, a separate corporate entity, Heartland Dental Plan, Inc.
("Heartland Dental"), was established to manage UWS's dental HMO operations
(formerly known as Dentacare). Prepaid dental services were provided to 178,075
members as of September 30, 2000, which makes Heartland Dental
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the largest dental HMO in Wisconsin. Premium revenues attributable to Heartland
Dental were $24.0 million for the nine months ended September 30, 2000.
Heartland Dental contracts with group dental practices on a capitated basis
throughout Wisconsin and northern Illinois. Members receive services through
their selected dental center. In addition, Heartland Dental offers POS and
out-of-area products. The Heartland Dental provider network had 257 dental
providers as of September 30, 2000. 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 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, DISABILITY AND OTHER
UWS 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. UWS's
Rapid Pay plan is a unique short-term disability product by which claimants
receive benefits on a timely basis with minimal up-front paperwork. As of
September 30, 2000, UWS had a total of 273,600 life and disability certificates.
Insured premium revenue related to life and disability products was
$42.1 million for the nine months ended September 30, 2000. 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"), a wholly-owned subsidiary of UWS which is licensed
in five states and has applications pending in six additional states. UWLIC is
licensed to do business in 39 states and the District of Columbia. United
Wisconsin Insurance Company ("UWIC"), a wholly owned subsidiary of UWS which
sells disability products, is licensed in 35 states and the District of
Columbia. UWS 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 1999, UWIC, UWLIC and UHLIC were assigned ratings of
"A-" (Excellent) by A.M. Best Company, Inc. ("A.M. Best"). The "A-" rating is
the fourth highest rating given to insurance companies.
MANAGED CARE WORKERS' COMPENSATION
Through United Heartland, Inc. ("United Heartland"), a wholly owned
subsidiary of UWS, UWS 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 assumes risk for coverage in
those states where UWIC is not licensed to provide workers' compensation
coverage. Health services revenue attributable to United Heartland approximated
$23.2 million for the nine months ended September 30, 2000. During 2000, UWS
retained 80% of the workers' compensation risk and ceded the other 20% to a
reinsurer. The workers' compensation market, both nationally and in Wisconsin,
is extremely competitive. Competition has primarily come from the large,
national multi-line property and casualty insurance companies.
UWS 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 to developing or improving
light duty/return to work programs, safety awareness programs, supervisor
training in accident investigation and enforcement of
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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 UWS for United
Heartland clients; and (iii) access to the hospital bill audit and medical staff
of UWS as needed in claims handling. UWS 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
evidenced by the fact that United Heartland's customers have experienced an
average claim cost that was 40% lower than the industry average in Wisconsin for
the nine months ended September 30, 2000.
United Heartland has formed a joint venture with HCSC to manage and sell
workers' compensation business through a new managing general agency, United
Heartland Illinois. All new workers' compensation business sold under the joint
venture and that renewed from Illinois' prior workers' compensation insurance
company, Third Coast Insurance Company ("TCIC"), is being insured by UWIC.
Profits and losses incurred by United Heartland Illinois and UWIC related to the
joint venture are being shared with HCSC. For the nine months ended
September 30, 2000, the joint venture has recorded earned premiums of
$2.6 million. Sales in the second half of 2000 have increased significantly as
the workers' compensation market has tightened and several competing carriers
had their A.M. Best ratings downgraded. The joint venture will capitalize on
United Heartland's expertise in applying managed care techniques to workers'
compensation business.
COST CONTAINMENT SERVICES
Through Meridian Resource Corporation ("Meridian"), UWS specializes in
providing cost containment services to insurance companies, third party
administrators, HMO's, employers, providers, government agencies, coalitions and
other organizations to assist them in reducing their expenses and provide more
cost effective health care delivery. Cost containment services include hospital
bill audit, claim repricing, DRG validation, claims audit subrogation recovery,
collection and fraud investigation and recovery services. UWS competes against
other stand-alone companies that provide similar cost reduction strategies and
other large insurance companies that provide these services. Revenues from
managed care cost containment services totaled $6.9 million for the nine months
ended September 30, 2000.
HEALTH CARE ELECTRONIC DATE INTERCHANGE ("EDI") SERVICES
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 200 home health agencies nationwide. Proservices
electronically transmits more than eight million medical claims and other health
care transactions 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.
PHARMACY MANAGEMENT SERVICES
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 pharmacy benefit
management. The pharmacy services division within Innovative Resource
Group, Inc. ("IRG") manages the pharmacy benefits for Compcare and BCBSUW, which
approximates 0.5 million members.
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MANAGED CARE CONSULTING
IRG provides clients with a broad array of coordinated care management
services. The primary products include medical utilization management and large
case management, disease management, employee assistance programs, behavioral
health management, integrated behavioral health and employee assistance
programs, behavioral health networks and claims administration, disability and
workers' compensation case management, prenatal education programs, pharmacy
management services and drug rebate programs, and health care consulting and
data analysis. IRG's customers include self-funded employer groups, insurance
companies, reinsurance companies, third party administrators and governmental
agencies. In June 2000, IRG expanded its workers' compensation case management
business through the acquisition of Seltzer/Delman, Inc. Revenues from managed
care consulting services totaled $32.7 million for the nine months ended
September 30, 2000.
The aggregation of these entities has enabled UWS to consolidate operating
facilities, merge management information system resources and improve
profitability.
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RECEIVABLES MANAGEMENT
Comprehensive Receivables Group, Inc. ("CRG"), formerly known as Ladd
Enterprises, Inc., is a health care receivables management firm based in
Michigan serving health care providers in the Midwest and Southeast and
insurance providers on a national level. CRG provides collections and
receivables management services to hospitals and other commercial clients.
Receivables management services provided within the health care industry
represents 95% of CRG's total revenues of $3.9 million for the nine months ended
September 30, 2000.
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. UWS 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, market presence and reputation.
Although UWS is a leading provider of managed care services in Wisconsin, UWS
may experience increased competition in the future. Humana, Inc. and United
Health Group are among UWS's national competitors. The Unity HMO competes with
Dean Health Plan, Inc. in the Madison area and surrounding counties. Many of
UWS's competitors are larger, have considerably greater financial resources and
distribution capabilities and offer more diversified types of insurance coverage
than UWS.
REINSURANCE
UWS manages its risks through the use of reinsurance. UWS 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. UWS's quota share reinsurance treaties
allocate the total amount of business subject to the treaties between UWS and
the respective parties to the treaties. Through quota share reinsurance, UHLIC
assumes 100% of certain life coverages underwritten by UWLIC. In addition, UWIC
cedes to BCBSUW 100% of certain medical coverages. Approximately 20% of UWS's
workers' compensation business during 2000 is ceded to an independent
non-affiliated reinsurer. Excess of loss reinsurance is used to limit the amount
of loss retained by UWS on individual claims or a series of claims. Excess of
loss reinsurance is utilized by UWS's HMOs to limit their exposure to inpatient
hospital claims or, in the case of Compcare, to organ transplants. UWS limits
its retention per claim to $75,000 on its life and disability business. For
workers' compensation claims, UWS retains the first $250,000 of a loss, which it
shares with its quota share reinsurer, and cedes losses above $250,000 on an
individual excess of loss basis to third-party reinsurers. Except for affiliates
of UWS, all reinsurers with which UWS contracts are rated "A-" (Excellent) or
better by Best.
SERVICE AGREEMENTS
UWS 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 outlined in the Service 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, the OCI
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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 nine months ended September 30, 2000, UWS paid approximately
$8.7 million for such services, and received approximately $8.8 million from
BCBSUW for the provision of such services.
INVESTMENTS
UWS attempts to minimize its business risk through conservative investment
policies. Investment guidelines set quality, concentration and return
parameters. UWS'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, Yankee securities, equity securities and mutual funds. The minimum
average rating of the fixed income portfolio must be "A" or better, based on
ratings of Standard & Poor's Corporation or another nationally recognized
securities rating organization. UWS invests in securities authorized by
applicable state laws and regulations and follows investment policies designed
to maximize yield, preserve principal and provide liquidity. UWS's portfolio
contains no investments in mortgage loans or non-publicly traded securities,
except for investments in affiliates. At September 30, 2000, $31.2 million of
UWS's investment portfolios was invested in investment-grade mortgage-backed
securities.
With the exception of short-term investments and securities on deposit with
various state regulators, investment responsibilities have been delegated to
external investment managers. Such investment responsibilities, however, must be
carried out within the investment parameters established by UWS, which may be
amended from time to time.
Securities which may be sold prior to maturity to support UWS'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 fair value with unrealized gains and losses reported as a
component of shareholders' equity. Securities for which UWS has both the
positive intent and ability to hold to maturity are recorded at amortized cost.
Bonds, which are held to meet deposit requirements of the various states, are
classified as held-to-maturity. All other bonds are classified as
available-for-sale.
The table below reflects investment results for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average invested
assets(1)............... $142,567 $167,893 $161,872 $185,249 $179,505
Net investment
income(2)............... 6,639 7,044 9,413 10,240 10,317
Average yield............. 6.21% 5.59% 5.82% 5.53% 5.75%
Net realized gains
(losses)................ (589) 2,539 2,145 9,123 11,921
Net unrealized gains
(losses) on stocks &
bonds................... (2,490) (4,848) (4,982) 1,895 4,795
</TABLE>
------------------------
(1) Average of aggregate investment amounts at the beginning and end of each
period.
(2) Amounts are calculated net of investment expenses, but exclude other
interest income and expense.
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REGULATION
GENERAL
Government regulation of employee benefit plans, including health care
coverage, health plans and UWS'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. UWS 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 UWS 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 UWS's compliance or otherwise affect UWS's operations, products,
profitability or business prospects.
Federal legislation has significantly expanded regulation of group health
plans and health care coverage. The laws place restrictions on the use of
pre-existing conditions and eligibility restrictions based upon health status
and prohibit cancellation of coverage due to claims experience or health status.
Federal regulations also prohibit insurance companies from declining coverage to
small employers. Additional federal laws, which 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. UWS 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. UWS 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 UWS 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 UWS'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.
HIPAA
The federal Health Insurance Portability and Accountability Act of 1996
("HIPAA") contained provisions requiring mandatory standardization of certain
communications between health plans, electronic clearinghouses and providers who
submit certain health information electronically. HIPAA requires health plans to
use specific data content standards, mandates the use of specific identifiers
(e.g., national provider identifiers and national employer identifiers) and
requires specific privacy and security procedures. Final regulations pertaining
to data content standards were published on August 17, 2000 and compliance is
mandated by October of 2002. Although the new regulations will have a
significant impact on UWS, the impact will be no greater, and in some instances
less, than the impact the regulations will have on other insurance companies
across the country. Final regulations on the privacy and security of health
information have been released and will be published on December 28, 2000.
Health plans have two years to comply with these new regulations.
HMOS
Wisconsin and the other states in which UWS 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 UWS's
subsidiaries are required by state regulatory agencies to maintain restricted
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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 Office of Prepaid Health Care at the
Health Care Financing Administration.
UWS'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 UWS's
operations.
Several of UWS'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.
UWS's health plans, which have contracted with FEHBP, are subject to such audits
and may be requested to make such refunds.
INSURANCE REGULATION
UWS'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 capital which must be
maintained; the approval of forms and insurance policies used; the nature of,
and limitation on, an insurance company's investments; periodic examination of
the operations of insurance companies; the form and content of annual statements
and other reports required to be filed on the financial condition of insurance
companies; and the establishment of capital requirements for insurance
companies. UWS'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. UWS intends
to make capital contributions on an ongoing basis to satisfy all promulgated
capital and surplus requirements, as needed.
Under Wisconsin law, insurance companies must provide the 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, the 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.
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Based upon the financial results of UWS's combined insurance subsidiaries
for the year ended December 31, 1999, $1.3 million is available for 2000
dividend payments to their parent without regulatory approval.
INSURANCE HOLDING COMPANY REGULATIONS
UWS 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 UWS, and thereby indirect control of
its insurance subsidiaries, requires the prior approval of the 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 the OCI, upon application,
determines otherwise.
Each of UWS's combined insurance entities is subject to regulation under
state insurance holding company regulations. Such insurance holding company laws
and regulations generally require registration with that state's department of
insurance and the filing of certain reports describing capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations. Various notice and reporting requirements generally apply
to transactions between companies within an insurance holding company system,
depending on the size and nature of the transactions. Certain state insurance
holding company laws and regulations require prior regulatory approval or, in
certain circumstances, prior notice of, certain material intercompany transfers
of assets as well as certain transactions between the regulated companies, their
parent holding companies and affiliates, and acquisitions.
UTILIZATION REVIEW REGULATIONS
A number of states have enacted laws and/or adopted regulations governing
the provision of utilization review activities. Generally, these laws and
regulations require compliance with specific standards for the delivery of
services, confidentiality, staffing, and policies and procedures of private
review entities, including the credentials required of personnel. Some of these
laws and regulations may affect certain operations of UWS'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. UWS
provides utilization review services through IRG 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. IRG
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
UWS's business units may do business with employers covered by ERISA,
particularly employers that maintain self-funded plans. The Department of Labor
is charged with the enforcement of ERISA and has promulgated new regulations
which will expand the claim review process. Given that the current state
insurance law governing health insurers contains stringent claim appeal process
requirements, UWS does not anticipate that the anticipated rules will
significantly impact UWS's operations. 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 UWS's liability exposure under state
law-based suits relating to employee health benefits offered by UWS's health
plans and specialty businesses and may permit greater state regulation of other
aspects of those businesses' operations.
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EMPLOYEES
As of September 30, 2000, UWS employed 1,315 full-time and 90 part-time
employees, of whom 212 were managerial and supervisory personnel. In addition,
UWS leases the services of 72 people who manage and operate one of its
subsidiaries. UWS considers its relations with its employees to be good.
TRADEMARKS
Compcare-Registered Trademark- is a federally registered service mark of
UWS. UWS has filed for and maintains various other service marks and trade names
at the federal level and in Wisconsin. Although UWS considers its registered
service marks, trademarks and trade names important in the operation of its
business, the business of UWS is not dependent on any individual service mark,
trademark or trade name. Compcare uses the Blue Cross-Registered Trademark- and
Blue Shield-Registered Trademark- trademarks in its business, pursuant to a
license agreement with the Association as a controlled affiliate of BCBSUW.
PROPERTIES
UWS occupies common facilities with BCBSUW and is charged a proportionate
share of the cost of such facilities under the Service Agreements. UWS's
corporate headquarters are located in Milwaukee, Wisconsin in a 235,000 square
foot building leased by BCBSUW. UWS also occupies 45,000 square feet of leased
office space located in New Berlin, Wisconsin, approximately 12,000 square feet
located in Platteville, Wisconsin, and 32,000 combined square feet at two
locations in Waukesha, Wisconsin. In addition, UWS'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. IRG and CRG both lease
facilities including 9,900 square feet in Hartford, Wisconsin and 12,500
combined square feet at three locations in Michigan, respectively.
In addition, in conjunction with UWS's acquisition of the insurance
operations of Family Health Plan Cooperative, Inc. in November 2000, UWS assumed
a 10-year lease for a 60,000 square-foot facility in Brookfield, Wisconsin. UWS
is in the process of negotiating sub-lease agreements for the Brookfield
facility.
LEGAL PROCEEDINGS
UWS 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, UWS believes that the
ultimate resolution of these proceedings will not have a material adverse effect
on its financial condition or results of operations.
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UWS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
UWS is a leading provider of managed health care services and employee
benefit products. UWS's two primary product lines are (i) Health Maintenance
Organization ("HMO") products sold primarily in Wisconsin, 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 services, pharmaceutical management,
managed behavioral health services, case management and receivables management
services, sold throughout the United States. Operating results and statistics
for these product groups are presented below for the periods indicated.
The following Management's Discussion and Analysis should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1999 and footnotes thereto included on page F-1 of this Proxy
Statement/Prospectus. In the discussion below, the number of "members" is
equivalent to the number of persons covered by contracts in force.
SUMMARY OF OPERATING RESULTS AND STATISTICS
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
--------------------- ---------------------------------
2000 1999 1999 1998 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Members at end of period:
HMO members by business unit:
Compcare............................ 167,512 175,755 184,462 175,037 173,241
Valley.............................. 36,049 41,978 42,814 41,282 37,906
Unity............................... 87,192 86,749 89,773 87,924 85,117
--------- --------- --------- --------- ---------
Total HMO products members........ 290,753 304,482 317,049 304,243 296,264
========= ========= ========= ========= =========
Specialty managed care products and
services:
Life/AD&D........................... 159,007 166,275 166,197 160,619 129,406
Dental HMO.......................... 179,741 175,900 181,236 169,709 169,823
Behavioral health................... 1,103,966 971,535 1,023,722 992,216 863,538
Workers' compensation............... 76,858 53,677 57,358 53,025 54,928
Disability and other................ 128,791 134,028 136,070 125,357 97,727
--------- --------- --------- --------- ---------
Total specialty managed care
products and services members... 1,648,363 1,501,415 1,564,583 1,500,926 1,315,422
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Health services revenue (as a percentage of the
total):
HMO products................................... 79.0% 80.3% 80.0% 81.2% 81.7%
Specialty managed care products and services:
Service products............................. 7.1 7.8 8.1 6.9 6.8
Risk products................................ 16.5 14.3 14.3 14.7 14.3
Intercompany eliminations...................... (2.6) (2.4) (2.4) (2.8) (2.8)
----- ----- ----- ----- -----
Total...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
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<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Statistics:
HMO Products:
Medical loss ratio(1)............................... 94.2% 94.8% 99.8% 88.8% 90.1%
Selling, general and administrative expense ratio
(2)............................................... 9.5% 10.4% 10.4% 9.6% 9.3%
Specialty managed care products and services:
Service products:
Operating expense ratio(3)........................ 86.8% 92.8% 91.1% 90.9% 95.7%
Risk products:
Loss ratio(1)..................................... 76.6% 75.2% 75.2% 70.9% 71.5%
Selling, general and administrative expense
ratio(2)........................................ 23.6% 25.1% 25.1% 24.8% 23.3%
Consolidated:
Loss ratio(1)......................................... 91.1% 91.2% 95.5% 85.3% 86.5%
</TABLE>
------------------------
(1) Medical and other benefits as a percentage of premium revenue.
(2) Selling, general and administrative expenses as a percentage of premium
revenue.
(3) Operating expense as a percentage of other revenue.
UWS'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.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
Total Revenues
Despite exiting substantially all of UWS's Medicaid HMO business effective
April 1, 2000, total revenues for the nine months ended September 30, 2000
increased 13.5% to $593.8 million, compared to $523.2 million for the nine
months ended September 30, 1999. These increases were due to significant rate
increases and additional membership on commercial HMO business, along with a
significant increase in the volume of workers' compensation business written due
to market opportunities as a result of rating downgrades of competitors.
HEALTH SERVICES REVENUES. HMO health services revenues for the nine months
ended September 30, 2000 increased 12.6% to $464.4 million, compared to
$412.6 million for the nine months ended September 30, 1999, despite the
reduction in Medicaid members. The increase is primarily due to an increase in
average HMO premium revenue per member. Average insured HMO medical premium per
member for the nine months ended September 30, 2000 increased 11.4% from the
same period in 1999. The average number of insured HMO medical members for the
nine months ended September 30, 2000 increased 1.0% to 299,947 compared to
297,095 for the nine months ended September 30, 1999.
Health services revenue for specialty managed care products and services for
the nine months ended September 30, 2000 increased 22.6% to $138.9 million,
compared to $113.3 million for the nine months ended September 30, 1999. This
was the result of increases in covered lives for managed
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behavioral health services and workers' compensation products and premium rates
on insurance products, a decrease in the percentage of workers' compensation
business ceded and a significant increase in the volume of workers' compensation
business written. In the second quarter of 2000, UWS expanded its specialty
service business through the acquisition of Seltzer/Delman, Inc. ("Seltzer"), a
workers' compensation case management company, resulting in an increase in
health services revenues of $0.4 million for the nine months ended
September 30, 2000. Also in 2000, under a "quota share" arrangement, the amount
of business ceded to the workers' compensation reinsurer was reduced from 30% to
20%, representing an increase of $2.4 million for the nine months ended
September 30, 2000. 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. UWS's
quota share reinsurance treaties allocate the total amount of business subject
to the treaties between UWS and the respective parties to the treaties.
NET INVESTMENT RESULTS. Investment results include investment income and
realized gains and losses on investments. Investment results for the nine months
ended September 30, 2000 decreased 36.8% to $6.0 million, compared to
$9.5 million for the nine months ended September 30, 1999. The decrease in
investment income during the third quarter of 2000 was the result of lower
invested asset balances. The reduction in investments resulted from liquidating
a portion of the bond portfolio to generate cash to fund ongoing operations.
Average invested assets for the nine months ended September 30, 2000
decreased 15.1% to $142.6 million, compared to $167.9 million for the nine
months ended September 30, 1999. Changes in the levels of average invested
assets relate to ongoing operations, including the timing and level of claim
payments.
Investment gains and losses are realized when investments are liquidated to
fund operations and in the normal investment process in response to market
opportunities. Realized losses for the nine months ended September 30, 2000 were
$0.6 million, compared to realized gains of $2.5 million for the nine months
ended September 30, 1999.
Expense Ratios
LOSS RATIO. The consolidated loss ratio represents the ratio of medical and
other benefits to premium revenue on an aggregate basis, and is therefore a
blended ratio for medical, life, dental, disability and other product lines. The
consolidated loss ratio was 91.1% for the nine months ended September 30, 2000,
compared to 91.2% for the nine months ended September 30, 1999. The consolidated
loss ratio is influenced by the component loss ratios for each of UWS's primary
product lines, as discussed below.
The medical loss ratio for HMO products for the nine months ended
September 30, 2000 was 94.2%, compared to 94.8% for the nine months ended
September 30, 1999. This improvement is primarily due to premium rate increases
on July group renewals and exiting the Medicaid business April 1, 2000. In
general, the medical loss ratio in any quarter will be impacted by the
development of prior period reserves which are re-evaluated each quarter.
The loss ratio for the risk products within specialty managed care products
and services for the nine months ended September 30, 2000 was 76.6%, compared to
75.2% for the nine months ended September 30, 1999. 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.
Therefore, the loss ratio can exhibit significant volatility due to varying
levels of claim frequency and severity. Generally, the anticipated aggregate
loss ratio for specialty risk products should range between 70% and 75%. The
higher loss ratios in 2000 are attributable to increased reported life claims
and higher-than-anticipated short-term disability claims, along with additional
case reserves on the long-term disability line of business.
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SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE RATIO. The selling, general and
administrative ("SGA") expense ratio includes commissions, administrative
expenses, premium taxes and other assessments. The SGA expense ratio for HMO
products for the nine months ended September 30, 2000 was 9.5%, compared to
10.4% for the nine months ended September 30, 1999. This improvement was due to
an increase in membership and premium rates over the prior year in combination
with reduced costs. Also in 1999, additional costs were incurred to reduce claim
backlog and process claims adjustments, which were attributed to the system
conversion as part of an implementation of a Year 2000 readiness program.
The SGA expense ratio related to the risk products within specialty managed
care products and services for the nine months ended September 30, 2000 was
23.6%, compared to 25.1% for the nine months ended September 30, 1999. In 1999,
UWS incurred costs attributable to the implementation of its Year 2000 readiness
program.
The operating expense ratio related to the service products within specialty
managed care products and services for the nine months ended September 30, 2000
was 86.8%, compared to 92.8% for the nine months ended September 30, 1999. The
improvement in the operating expense ratio during 2000 is due primarily to
growth in the electronic claims clearing and software business.
In addition, UWS recorded charges of approximately $2.8 million for
reorganization costs during 1999. These charges consisted primarily of expenses
associated with the proposed debt-for-equity swap transaction with BCBSUW (which
was discontinued by BCBSUW in favor of market purchases), an unfavorable
appellate court judgment in a dissenter's lawsuit relating to the 1994
acquisition of Unity, costs associated with the start-up of a new Compcare
processing office and the combination of various specialty managed care service
businesses into a single operating unit.
Other Expenses
Profit (loss) sharing on joint ventures for the nine months ended
September 30, 2000 was $0.4 million, compared to $(0.8) million for the nine
months ended September 30, 1999. The change in profit (loss) sharing in 2000
resulted from a final settlement relative to Valley's prior joint venture
agreement. UWS is a party to certain provider arrangements in conjunction with
Unity and Valley, which include profit-sharing payments to certain providers.
The Unity and Valley provider agreements were renegotiated at the end of 1999
and the profit-sharing provisions for Unity were eliminated beginning in 2000,
except for certain limited profit-sharing provisions with a provider. In
October 1999, UWS formed a joint venture with Health Care Service Corporation, a
mutual legal reserve company doing business as Blue Cross Blue Shield of
Illinois ("HCSC"). UWS shares equally in all profits and losses on this
newly-formed joint venture, United Heartland of Illinois, Inc., which provides
workers' compensation administration services. As of September 30, 2000, the
workers' compensation joint venture completed its first year of operations.
Amortization of goodwill and other intangibles for the nine months ended
September 30, 2000 was $0.7 million, compared to $0.6 million for the nine
months ended September 30, 1999. This increase is due to goodwill arising from
the acquisition of Seltzer in the second quarter of 2000.
Included in other operations is interest expense of $4.9 million for the
nine months ended September 30, 2000 and $3.8 million for the nine months ended
September 30, 1999. Interest expense related to the $70.0 million debt to
BCBSUW(which matures on April 30, 2001) was $4.1 million for the nine months
ended September 30, 2000 and $3.5 million for the nine months ended
September 30, 1999. Management expects to refinance the entire note obligation
for a term extending beyond December 31, 2001. The remainder of the interest
expense relates to UWS's participation in a bank line of credit with BCBSUW. The
increase in interest expense is primarily due to the increase in the variable
interest rate on the debt to BCBSUW.
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Net Loss from Operations
Consolidated net loss from operations for the nine months ended
September 30, 2000 improved by $2.7 million to $7.3 million from $10.0 million
for the nine months ended September 30, 1999.
UWS's effective tax rate was 43.2% for the nine months ended September 30,
2000, compared to 42.2% for the nine months ended September 30, 1999. The
increase in the effective tax rate in 2000 is primarily due to a tax benefit of
$0.5 million recorded at UWS's life subsidiary for the small life insurance
company deduction and prior period tax refunds, which was recorded in the third
quarter of 2000. This rate fluctuates based upon the relative profitability of
UWS's two reportable business segments and the differing effective tax rates for
each subsidiary within those reportable segments. The effective tax rates by
subsidiary range from 32% to 43%.
1999 COMPARED WITH 1998, AND 1998 COMPARED WITH 1997
Total Revenues
Total revenues in 1999 increased 7.1% to $704.5 million from $657.6 million
in 1998. Total revenues in 1998 increased 8.0% from $609.1 million in 1997.
These increases were due primarily to increased membership in most of the major
product lines, general premium and rate increases and acquisitions of specialty
businesses since July of 1998.
HEALTH SERVICES REVENUE. HMO health services revenue in 1999 increased 6.9%
to $554.7 million from $518.7 million in 1998. HMO health services revenue in
1998 increased 8.2% from $479.2 million in 1997. 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 1999 increased 4.7% from 1998 and increased 4.3% in 1998
from 1997, as a result of premium increases. The average number of HMO medical
members in 1999 increased 2.8% to 306,007 from 297,737 in 1998. The average
number of HMO medical members in 1998 increased 3.5% from 287,534 in 1997. This
increase in 1998 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.
Health services revenue for specialty managed care products and services in
1999 increased 12.6% to $155.1 million from $137.7 million in 1998. This was the
result of a decrease in the percentage of ceded reinsurance, along with
increases in covered lives, premium rates on insurance products and additional
revenue of $4.5 million from recent acquisitions. During the third quarter of
1999, UWS formed Innovative Resources Group, Inc. ("IRG"), which is comprised of
three of UWS's recent acquisitions and two existing specialty managed care
subsidiaries. IRG provides medical and behavioral health management services,
case management, employee assistance programs, and workers' compensation case
management and pharmacy management services. Health services revenue in 1998
increased 11.1% from $123.9 million in 1997. The increase was due to an increase
of $8.4 million relative to life and disability products, an increase of
$1.4 million in dental premiums and an increase in managed behavioral health and
managed care consulting. The increases in life and disability premiums were
driven by membership increases of 24.1% in 1998. In addition, acquisitions
during 1998 provided $1.0 million of additional revenue.
NET INVESTMENT RESULTS. Investment results include investment income and
realized gains on the sale of investments. Investment results in 1999 decreased
40.0% to $11.4 million from $19.0 million in 1998. Investment results in 1998
increased 14.4% from $22.3 million in 1997. Average annual investment yields,
excluding net realized gains, were 5.8%, 5.5% and 5.8% for 1999, 1998 and 1997,
respectively. The decrease in investment results during 1999 is the result of
fewer invested assets. Fewer invested assets resulted from UWS liquidating a
portion of the bond portfolio (which were primarily in unrealized loss
positions) to generate cash to fund operations.
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Average invested assets in 1999 decreased 12.6% to $161.9 million from
$185.2 million in 1998. The decrease in average invested assets during 1999 is a
result of cash requirements necessary to fund operating losses and increased
cash payments relative to medical and other benefits payable. Average invested
assets in 1998 increased 3.2% from $179.5 million in 1997. Changes in levels of
average invested assets during 1998 relate to ongoing operations, including
collection of receivables and timing of claim payments.
Investment gains are realized in the normal investment process in response
to market opportunities. Realized gains decreased to $2.1 million in 1999 from
$9.1 million in 1998. Realized gains in 1998 decreased from $11.9 million in
1997.
Expense Ratios
LOSS RATIO. The consolidated loss ratio represents the ratio of medical and
other benefits to premium revenue on a consolidated basis, and is therefore a
blended ratio for medical, life, dental, disability and other product lines. The
consolidated loss ratio was 95.5% in 1999 compared with 85.3% in 1998 and 86.5%
in 1997. The 1999 consolidated loss ratio is influenced by the component loss
ratios for each of UWS's two primary product lines, as discussed below.
The medical loss ratio for HMO products for 1999 was 99.8%, compared with
88.8% for 1998 and 90.1% for 1997. The increase in the medical loss ratio in
1999 for HMO products is primarily the result of $15.6 million in prior year
adverse reserve development, along with $16.1 million in current year adverse
reserve development and $0.9 million of premium deficiency reserve for
anticipated future losses related to the Medicaid business. Although the claims
inventory remains stable following UWS's conversion to a Year 2000 compliant
computer system, actuarial data indicate an increase in the lag between the time
some HMO services were provided and the date the claims for those services were
submitted by providers for payment. The increase in claim reserves is intended
to cover the higher level of outstanding claims. 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 loss ratio for the risk products within specialty managed care products
and services in 1999 was 75.2%, compared with 70.9% in 1998 and 71.5% in 1997.
The loss ratios principally relate to the life, disability, workers'
compensation and dental product lines of business. These products represent
relatively small blocks of business, and as a result, the loss ratio can exhibit
significant volatility due to varying levels of claim frequency and severity.
Generally, the anticipated aggregate loss ratio for specialty risk products
should range between 70% and 75%. The higher loss ratios in 1999 are
attributable to an increase in the life and disability claims, along with lower
premium and rate increases in 1999 given the competitive marketplace conditions
for disability and workers' compensation products. In addition, United
Heartland, Inc.'s workers' compensation block of business had achieved better
than expected results during 1998, while the 1999 results represent an increased
loss ratio that is more in line with industry and targeted results.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO. The selling, general and
administrative ("SGA") expense ratio includes commissions, administrative
expenses, and premium taxes and other assessments. The SGA expense ratio for HMO
products in 1999 was 10.4%, compared with 9.6% in 1998 and 9.3% in 1997. The
majority of the increase in the SGA expense ratio related to costs incurred to
reduce Compcare's claim backlog and process claim adjustments, which were
attributed to the system conversion as part of UWS's implementation of its Year
2000 readiness program, and to increased customer service demands.
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SGA expense ratio related to the risk products within specialty managed care
products and services in 1999 was 25.1%, compared with 24.8% in 1998 and 23.3%
in 1997. Increases in SGA expenses correlate to premium and other revenue
increases which were 5.9% in 1999 compared with 1998 and 11.7% in 1998 compared
with 1997. In addition, UWS incurred higher Year 2000 readiness expenses during
1999. The mix of business shifted between 1998 and 1997, as a result of greater
growth in ancillary lines of business that have higher SGA expense ratios.
The operating expense ratio related to the service products within specialty
managed care products and services in 1999 was 91.1% compared with 90.9% in 1998
and 95.7% in 1997. The deterioration in 1999 compared to 1998 is mainly
attributable to an increase in the allowance for doubtful accounts. The
improvement in 1998 compared to 1997 is due to successful product pricing
strategies within the Behavioral Health line of business.
Other Expenses
Profit (loss) sharing on provider arrangements was $(4.1) million in 1999,
compared with $2.8 million in 1998 and $3.4 million in 1997, 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 (loss) sharing expenses related to the Unity and Valley
provider arrangements are calculated based on the profitability of the HMO,
which amounted to $(2.4) million, $3.2 million and $4.0 million in 1999, 1998
and 1997, respectively.
Included in other operations in 1999 is $5.3 million of interest expense
compared to $1.4 million in 1998. UWS assumed a $70.0 million debt owed to
BCBSUW as of September 11, 1998. Interest expense related to the $70.0 million
debt was $4.8 million and $1.4 million in 1999 and 1998, respectively. Interest
expense related to the bank line of credit was $0.5 million and $0.1 million in
1999 and 1998, respectively.
Amortization of goodwill and other intangibles was $0.8 million for 1999
compared with $0.5 million for 1998 and $0.8 million for 1997. The increase in
1999 is due to goodwill arising from acquisitions. The reduction in 1998 is due
to full amortization of certain intangibles.
Net Income
Consolidated net income (loss) in 1999 decreased to $(29.0) million from
$18.1 million in 1998. Consolidated net income in 1998 increased 14.5% from
$15.8 million in 1997. The decrease in 1999 was impacted primarily by
$15.6 million in prior year reserve development and an increase of
$12.6 million in the allowance for doubtful accounts largely resulting from the
financial condition of CPN. In addition to these charges, 1999 included
$2.8 million of charges for various transactions and reorganization costs. The
charges are included in other operations.
UWS's effective tax rate was 38.0% in 1999, compared with 39.4% in 1998 and
37.4% in 1997. UWS's effective tax rate fluctuates based upon the relative
profitability of UWS's two reportable business segments and the differing
effective tax rates for each subsidiary within those reportable segments. The
effective tax rates range from 32% to 46%.
LIQUIDITY AND CAPITAL RESOURCES
UWS'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. UWS's
investment policies are designed to maximize yield, preserve principal and
provide liquidity to meet anticipated payment obligations.
UWS's cash flow continues to improve over the previous year. For the nine
months ended September 30, 2000, net cash provided by operating activities was
$4.5 million, compared to net cash
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used in operating activities of $43.1 million for the nine months ended
September 30, 1999. This improvement was due to a significant increase in the
volume of business written as a result of an improved market and increases in
medical and other benefits payable resulting from fewer capitated provider
arrangements and the associated funding requirements in relation to the
comparable prior period. Due to periodic short-term cash flow needs of certain
subsidiaries, UWS made borrowings under its bank line of credit ranging up to
$24.6 million during the first nine months of 2000, compared to $14.8 million
during the first nine months of 1999. The outstanding balance on the line of
credit at September 30, 2000 was $20.8 million, compared to $11.6 million at
December 31, 1999.
In 1999, net cash used in operating activities amounted to $45.2 million,
compared with net cash provided by operating activities of $21.9 million for
1998. In addition to the net loss from operations, the decrease in cash flows
from operations in 1999 was due primarily to increased cash payments relative to
medical and other benefits payable and an increase in current prepaid tax
receivable. Due to periodic cash flow requirements of certain subsidiaries, UWS
made borrowings under its bank line of credit ranging up to $20.2 million during
1999 and $10.0 million during 1998 to meet short-term cash needs. The
outstanding balance was $11.6 million at December 31, 1999, while no balance was
outstanding at December 31, 1998.
As a Larger Controlled Affiliate Licensee of the Association, Compcare is
required to maintain a prescribed liquidity ratio of certain liquid assets to
average monthly expenses, as defined, in accordance with licensure requirements
of the Association.
During 2000, the Association has included Compcare in its Plan Performance
Response Monitoring Process ("PPRMP") because Compcare's liquidity ratio was
below a prescribed Association threshold. See "BUSINESS OF BCBSUW--Risk-Based
Capital Requirements." As of September 30, 2000, Compcare's liquidity ratio
exceeded the minimum licensure level required by the Association by
$10.0 million.
UWS's investment portfolio consists primarily of investment grade bonds and
U.S. Government securities, and has a limited exposure to equity securities. At
September 30, 2000, $100.5 million, or 80.3%, of UWS's total investment
portfolio was invested in bonds, compared to $105.0 million, or 80.9%, at
December 31, 1999. The bond portfolio had an average quality rating by Moody's
Investor Service of "Aa3" at September 30, 2000 and December 31, 1999. The
majority of the bond portfolio was classified as available-for-sale. The market
value of the total investment portfolio, which includes stocks and bonds, was
less than amortized cost by $2.5 million at September 30, 2000 and was less than
amortized cost by $5.0 million at December 31, 1999. UWS has no investments in
mortgage loans, non-publicly traded securities, real estate held for investment
or financial derivatives (except for principal-only strips of U.S. Government
securities).
At December 31, 1999, $105.0 million or 80.9% of UWS's total investment
portfolio was invested in bonds compared with $133.1 million or 80.0% at
December 31, 1998. The bond portfolio had an average quality rating by Moody's
Investor Service of "Aa3" at December 31, 1999 and 1998. The majority of the
bond portfolio was classified as available-for-sale. The market value of the
total investment portfolio, which includes stocks and bonds, was less than
amortized cost by $5.0 million at December 31, 1999 and exceeded amortized cost
by $1.9 million at December 31, 1998. 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.
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. In accordance with requirements of the NAIC and
the State of Wisconsin, insurance subsidiaries are required to maintain certain
levels of capital and surplus. In Wisconsin, where a large percentage of UWS's
premium is written, these levels are based upon the amount and type of premiums
written and are calculated separately for each subsidiary. During 2000, UWS
contributed assets having an approximate net book
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value of $48 million to Compcare to bring Compcare's statutory capital and
surplus above required levels.
The amount of dividends that may be paid to UWS from insurance subsidiaries
is limited by state regulation. In the past, the insurance subsidiaries have
been allowed, with prior notification to the OCI, to pay dividends in excess of
the ordinary dividend levels prescribed by regulation.
In addition to internally generated funds and periodic borrowings on its
bank line of credit, UWS 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.
UWS is a party to certain provider arrangements in conjunction with Unity
and Valley, wholly-owned HMO subsidiaries included in UWS'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, 2002, at a price equal to Valley's net assets plus $0.4 million.
Pursuant to the terms of the Unity purchase agreements, as amended, the
sellers retained options to repurchase the net assets of the acquired companies
as of December 31, 2004. One seller has the option to repurchase a portion of
Unity's business for $0.5 million plus the proportionate share of the net worth
of such business less any unpaid amount of the maximum annual performance
bonuses. The maximum annual performance bonuses are limited to $0.7 million in
total. 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 $220.2 million, $207.0 million and
$186.3 million for 1999, 1998 and 1997, respectively. Profit (loss) sharing
expenses related to these provider arrangements are calculated based on the
profitability of the HMO subsidiary and totaled $(2.4) million, $3.2 million and
$4.0 million in 1999, 1998 and 1997, respectively. Net income (loss) subject to
repurchase options, pursuant to the various acquisition agreements, totaled
$(1.1) million, $2.4 million and $2.4 million for 1999, 1998 and 1997,
respectively. Total assets and total net assets subject to repurchase options
were $39.4 million and $17.0 million, respectively, at December 31, 1999 and
$44.8 million and $21.4 million, respectively, at December 31, 1998.
Should the buyback options be exercised, UWS would lose rights to the future
profits on the HMO. The cash received by UWS 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 UWS's liquidity and capital resources.
During the third quarter of 2000, BCBSUW entered into an agreement to
purchase a 25% interest in a Wisconsin-based health plan for $12.5 million. The
purchase is subject to a right of first refusal under an agreement with existing
shareholders and has not yet been consummated.
INFLATION
Health care costs have been rising and are expected to continue to rise at a
rate that exceeds the consumer price index. UWS'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, UWS utilizes its ability to apply
appropriate underwriting criteria in selecting groups and individuals and in
controlling the utilization of health care services.
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However, there can be no assurance that UWS's efforts will fully offset the
impact of inflation or that premium revenue increases will equal or exceed
increasing health care costs.
IMPACT OF YEAR 2000
In prior years, UWS discussed the nature and progress of its plans to become
Year 2000 ready. In late 1999, UWS completed its remediation and testing of
systems. As a result of those planning and implementation efforts, UWS
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. UWS expensed approximately
$3.6 million during 1999 in connection with remediating its systems. UWS is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Of the $146.1 million of cash and investments held by UWS at December 31,
1999, approximately $16.3 million were cash and cash equivalents and
$9.1 million were securities that were being held-to-maturity. The remaining
$120.7 million representing available-for-sale securities is comprised of
$15.7 million in equities and $105.0 million of principally US domestic fixed
income securities with an average quality of "Aa3." UWS also has access to an
adjustable-rate line of credit and has an adjustable-rate loan with BCBSUW, its
majority shareholder. The total borrowings as of December 31, 1999 were
$81.6 million.
Because of UWS's investment policies, the primary market risks associated
with UWS'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 UWS's
bond portfolio; however, because UWS considers it unlikely that UWS would need
or choose to substantially liquidate its portfolio, UWS believes that such an
increase in interest rates would not have a material impact on future earnings
or cash flows. In addition, UWS is exposed to the risk of loss related to
changes in credit spreads. Credit spread risk arises from the potential that
changes in an issuer's credit rating or credit perception may affect the value
of financial instruments.
The overall goal of the investment portfolios is to support the ongoing
operations of UWS's business units. UWS's philosophy is to actively manage
assets to maximize total return over a multiple-year time horizon, subject to
appropriate levels of risk. UWS manages these risks by establishing gain and
loss tolerances, targeting asset-class allocations, diversifying among asset
classes and segments within various asset classes, and using performance
measurement and reporting.
UWS uses a sensitivity model to assess the inherent rate risk of its fixed
income investments. The model includes all fixed income securities held 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. Since last reported as of
June 30, 2000, no significant changes have occurred in the determination of the
reduction in the fair value of UWS's modeled financial assets as a result of a
hypothetical instantaneous 100 basis point increase in market interest rates.
BUSINESS OF BC HOLDINGS
BC Holdings is a member-managed Wisconsin limited liability company that was
organized in December of 2000 for the sole purpose of becoming the holding
company of BCBSUW following the conversion and consummating the transactions
contemplated by the exchange agreement. The Foundation is the sole member of BC
Holdings. As of the date of this Proxy Statement/Prospectus, BC Holdings has no
employees and no operations. BC Holdings will be dissolved upon completion of
the combination.
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BUSINESS OF BCBSUW
GENERAL
BCBSUW is a Wisconsin corporation which was organized in 1939. BCBSUW's
principal executive offices are located at 401 West Michigan Street, Milwaukee,
Wisconsin 53203 and its telephone number at that address is (414) 226-5000.
BCBSUW offers traditional indemnity and other managed health care products and
services to groups and individuals in Wisconsin. BCBSUW is the largest health
insurer in the state. United Government Services, LLC ("UGS"), which processes
Medicare claims from providers in all 50 states and Medicaid for the State of
Wisconsin, is a wholly-owned subsidiary of BCBSUW. On January 1, 1999, UGS was
established as a separate legal entity with its own board of directors.
Previously, UGS operated as a separate division of BCBSUW.
BCBSUW'S STRATEGY
BCBSUW believes current market conditions in health care favor companies
that provide quality health care products and services. BCBSUW 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. To take advantage of market opportunities, BCBSUW has
developed the following business strategy:
- REGIONAL PRESENCE. BCBSUW sees the value of meeting the various needs of
each community throughout Wisconsin. Therefore, BCBSUW has segmented
Wisconsin into five regional markets and is the only health insurer in the
state to operate regional service centers. These offices put BCBSUW close
to customers and providers, allowing BCBSUW to build beneficial and
lasting relationships. In 2001, each region will be responsible for
effectively developing, managing, and implementing marketing plans, which
focus on the specific needs of each market while portraying a consistent
corporate image.
- STRENGTH OF BLUE CROSS-REGISTERED TRADEMARK- BRAND. BCBSUW believes that
its right to the exclusive use of the Blue Cross-Registered Trademark- and
Blue Shield-Registered Trademark- brands in its service area is a
significant marketing tool and intends to continue emphasizing this brand
awareness among prospective members.
- PRICING STRATEGY. Consumers consider many factors including price when
shopping for a health insurance product, therefore, BCBSUW strives to
offer quality individual and group products and services at a competitive
price. BCBSUW offers products that carry flexibility and diversity,
wherein the consumers can customize a health plan that meets both their
insurance and financial needs.
- INCREASE MARKET SHARE. BCBSUW continually seeks to gain market share,
whether through the introduction of a new product, service or program, the
entrance into a new market or through a new channel of distribution such
as purchasing products online. BCBSUW consistently gathers and analyzes
competitive intelligence information to strategize a marketing plan to
better penetrate/target each market. The small group market segment is
currently experiencing significant increases in premium rates. To maintain
and gain small group market share, BCBSUW has designed a quality product
to meet various group's economic level.
- INTERNET STRATEGY. BCBSUW launched the new Website
WWW.BLUECROSSWISCONSIN.COM in the third quarter of 2000. BCBSUW looks to
gain a positive presence both statewide and nationally through the
Internet. The products available online target small businesses and
younger individual consumers. Here individuals, small employer groups and
small businesses can purchase health insurance online at a discounted
rate. The site also allows BCBSUW members to view their personal claim
status, deductible and out-of-pocket amounts, hospital inpatient and
outpatient authorization status and eligibility. In addition, members can
request new ID cards, access benefit booklets, select physicians and other
providers and download provider directories.
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PRODUCTS
BCBSUW offers diversity in a wide range of group and individual products.
BCBSUW offers the following plans: (i) Group Plans--PPO; Comprehensive Major
Medical, which is a traditional fee-for-service health plan; Traditional
Full-pay, which is a plan covering full base and major medical care; a variety
of dental plans including comprehensive and PPO; and a Pharmacy Benefit Plan,
which is a prescription drug card program; and (ii) Individual
Products--Personal Choice and TempPlan, which cover individuals not covered by a
group plan; Youth Med, which provides coverage for children; Value Plus, which
is a Medicare supplement plan; Long-term Care, which provides coverage for care
needed on a long-term basis; and Medicare Blue, which is a Medicare HMO.
BCBSUW continues to develop managed care products designed to meet the needs
of its niche customers. Over the past five years, BCBSUW has introduced a dental
Preferred Provider Option ("PPO"), an HMO plan for Wisconsin Medicare
recipients, and a prescription drug cost containment program, and redeveloped
its medical PPO product. BCBSUW has also expanded its provider networks to bring
managed care plans to new areas of the state.
BCBSUW products make available to group customers insured or self-funded
arrangements. Insured customers pay a monthly premium which allows members
access to care through BCBSUW's extensive network as outlined in their contract.
Under the self-funded arrangement, BCBSUW pays claims on behalf of the group and
is reimbursed for the claims and paid an administrative fee. Group coverage
options and access to care are the same as those available to insured customers.
One of BCBSUW's products which extends beyond the Wisconsin borders is the
Interplan Teleprocessing Services ("ITS") system, which utilizes technology
linking Blue Cross plans throughout the United States. This broadens BCBSUW's
national exposure and allows BCBSUW to target prospects headquartered in
Wisconsin with out-of-state and overseas locations. Almost anywhere in the world
a Blue Cross member travels, he or she receives the same level of benefits
available at home through the Blue Cross worldwide network of providers. BCBSUW
believes the ITS system will enhance sales opportunities in the national market
going forward.
BCBSUW participates in BlueCard, a national network of Blue Cross & Blue
Shield plans, which allows members access to care while away from home. Through
electronic communications the "host" plan verifies eligibility, pays the claim
based on its local fee arrangement and is then reimbursed by the "home" plan for
the claim as well as an administrative fee. Absent an agreement between two
plans, the Association determines the amount of the administrative fee. Both
insured and self-funded BCBSUW customers have access to the BlueCard network.
In 1999 BCBSUW began marketing a long-term care insurance plan, which offers
consumers assistance with daily care and protects against the potentially
catastrophic costs of long-term care. BCBSUW entered this market with an
experienced partner, MedAmerica Insurance Co., a subsidiary of Blue Cross and
Blue Shield of Rochester, N.Y. BCBSUW and MedAmerica have entered into a
reinsurance agreement in which MedAmerica will quota share reinsure the policy
liabilities of BCBSUW on a 50% quota share basis.
DISTRIBUTION
BCBSUW has a streamlined sales organization, which sells BCBSUW products
along with the products of BCBSUW's affiliates. By integrating the marketing of
BCBSUW products with the affiliate products, BCBSUW is able to offer complete
one-stop shopping to health care consumers.
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PROVIDERS
BCBSUW offers the largest provider network in Wisconsin, which statewide
includes 124 hospitals, 665 ancillaries and 10,818 health care professionals.
BCBSUW provides a diverse selection of primary care and specialty care
physicians to meet everyone's health care needs.
MARKETING AND CUSTOMERS
Marketing group products generally is a two-step process. Presentations are
first made to employers and then once selected by the employer, BCBSUW directly
solicits members from the employee base using advertising and work site
presentations to educate and attract new members. Virtually all of the group
contracts are renewable annually.
The following table identifies the top ten group contracts based on
membership counts as of September 30, 2000:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL MEMBERS
--------------
<S> <C>
Federal Employee Health Benefits Program(1)................. 11.5%
Milwaukee Public Schools.................................... 7.6
State of Wisconsin.......................................... 6.5
Menards, Inc.(1)............................................ 4.5
Wisconsin Bankers Association............................... 3.7
Alterra Health Care Corporation(1).......................... 2.8
Wisconsin Dairy Programs(1)................................. 2.3
Milwaukee Electric Tool, Inc................................ 2.1
Harley-Davidson Motor Company............................... 1.7
Appleton Area School District(1)............................ 1.7
-----
Subtotal.................................................. 44.4
Other employer groups....................................... 55.6
-----
100.0%
=====
</TABLE>
------------------------
(1) Insured programs.
BCBSUW has significant enrollment among federal, state and municipal
government employees, as well as employees represented by collective bargaining
units. BCBSUW believes that health care will continue to be an important
negotiating issue with organized labor groups and the reputation of BCBSUW is
advantageous to its future marketing efforts.
COST CONTAINMENT
The majority of medical management and cost containment services for BCBSUW
are provided by Innovative Resource Group, Inc. ("IRG"), a wholly owned
subsidiary of UWS. Cost containment is done for BCBSUW on insured products in
order to keep costs down and is performed on behalf of the customer on group
self-funded business. BCBSUW believes that cost containment continues to be
valued by customers as health care costs continue to rise.
MANAGEMENT INFORMATION SERVICES
BCBSUW utilizes information systems developed and/or customized specifically
to meet its needs. The information systems support marketing, sales,
underwriting, contract administration, billing, financial and other
administrative functions as well as claims administration, provider management,
quality management and utilization review. BCBSUW continually evaluates,
upgrades and enhances the
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information systems that support its operations. On October 1, 1998, BCBSUW
began a five-year agreement with a service bureau to obtain certain electronic
data processing services. The agreement has options to extend for two additional
one-year renewal periods.
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 pharmacy benefit
management. The pharmacy services division within IRG manages the pharmacy
benefits for BCBSUW, which approximates 0.3 million members.
GOVERNMENT PROGRAMS
UGS, a wholly owned subsidiary of BCBSUW, provides program administration
and benefit integrity services for publicly funded health care programs and is
100% dependent on government health care programs. UGS is (i) a Medicare Fiscal
Intermediary for Wisconsin, (ii) a Medicare Regional Home Health Intermediary
("RHHI") which processes home health and hospice claims for the states of
Wisconsin, Minnesota, Michigan, New York, New Jersey, Puerto Rico and the U.S.
Virgin Islands, (iii) a Medicare Intermediary for Federally Qualified Health
Centers ("FQHC"), and (iv) a Part A Medicare Intermediary for the states of
Wisconsin, Michigan, Virginia and West Virginia.
Effective December 1, 2000, UGS was awarded the contract to process Medicare
Part A claims in California, Nevada and Hawaii, and home health and hospice
claims for providers and Medicare beneficiaries in California, Nevada, Hawaii,
Arizona, Oregon, Idaho, Washington and Alaska. The $40 million contract was
awarded to UGS after Blue Cross of California, a wholly owned subsidiary of
WellPoint Health Networks Inc. announced it was exiting the Medicare
fee-for-service business. With this contract, UGS assumed 400 employees working
at two California locations.
In 1999, UGS was awarded an Indefinite Delivery-Indefinite Quantity (IDIQ)
contract for the Program Safeguard Contractor (PSC) effort by the Health Care
Financing Administration to provide Medicare medical review, fraud
investigation, cost report audit and other program integrity support efforts.
In addition to processing the above Medicare Part A business, on January 1,
1997 UGS became the Medicaid subcontractor for Electronic Data Services, Inc.
("EDS") to process Medicaid claims under the state of Wisconsin Medicaid
contract. UGS is responsible for providing services related to claims, claims
support, customer service, provider maintenance and prior authorizations. In
conjunction with the Medicaid contract, UGS began processing claims for the
Wisconsin Health Insurance Risk Sharing Plan ("HIRSP") on July 1, 1998. In
addition to claims processing, UGS also supports HIRSP customer service,
underwriting and accounting.
UGS plans to continue to grow as a Medicare and Medicaid contractor by
bidding, either independently or through joint venture arrangements, on Medicare
and Medicaid contracts in other states as they become available.
COMPETITION
The managed care industry is highly competitive. During the past few years,
the managed care industry in Wisconsin has experienced consolidation. BCBSUW
believes the principal competitive features affecting its ability to retain and
increase its 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, market presence and reputation. Although BCBSUW is a leading
provider of managed care services in Wisconsin, BCBSUW
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may experience increased competition in the future. BCBSUW's key competitors
include United HealthCare, Dean Health Plan, Physicians Plus, Humana and
Wisconsin Physician Service.
UGS's primary competitors in the Medicare arena are other Blue plans and
some commercial insurance companies, such as Mutual of Omaha. UGS, like its
competitors, continues to pursue growth individually and through joint venture
and/or strategic partnering arrangements.
REINSURANCE
BCBSUW has catastrophic reinsurance coverage from Swiss Re Life and Health
Company of America, Inc., which covers claims in excess of $500,000 per claim.
BCBSUW also has a reinsurance agreement with MedAmerica for Long-Term Care
Business. MedAmerica will quota share reinsure 50% of the policy liabilities of
BCBSUW under the reinsured policies. Effective June 2000, BCBSUW assumed 100% of
the Wellmark individual products block of business from United Wisconsin
Insurance Corporation, a wholly owned subsidiary of UWS. All reinsurers with
which BCBSUW contracts are rated "A-" (Excellent) or better by A.M. Best.
SERVICE AGREEMENTS
BCBSUW and UWS purchase services from, or provide services to one another
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. 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 outlined in the service agreements.
If the recipient can obtain any of the services under more favorable terms 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
nine months ended September 30, 2000, BCBSUW allocated costs of approximately
$8.7 million to affiliates and incurred costs of approximately $8.8 million to
its affiliates for the provision of such services.
INVESTMENTS
BCBSUW attempts to manage its investment risk through conservative
investment policies. Investment guidelines set quality, concentration and return
parameters. BCBSUW'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, Yankee securities, equity securities and mutual funds. The minimum
average rating of the fixed income portfolio must be "A" or better, based on
ratings of Standard & Poor's Corporation or another nationally recognized
securities rating organization. BCBSUW invests in securities authorized by
applicable state laws and regulations and follows investment policies designed
to maximize yield, preserve principal and provide liquidity. BCBSUW's portfolio
contains no investments in mortgage loans or non-publicly traded securities,
except for investments in affiliates. At September 30, 2000, $11.2 million of
BCBSUW's investment portfolios was invested in investment-grade mortgage-backed
securities.
With the exception of short-term investments and securities on deposit with
various state regulators, investment responsibilities have been delegated to
external investment managers. Such investment responsibilities, however, must be
carried out within the investment parameters established by BCBSUW, which may be
amended from time to time.
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Securities which may be sold prior to maturity to support BCBSUW'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 fair value with unrealized gains and losses
reported as a component of shareholders' equity. Securities for which BCBSUW has
both the positive intent and ability to hold to maturity are recorded at
amortized cost. Bonds, which are held to meet deposit requirements of the
various states, are classified as held-to-maturity. All other bonds are
classified as available-for-sale.
The table below reflects investment results for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average invested assets(1)................... $48,615 $82,924 $75,665 $103,661 $113,343
Net investment income(2)..................... 2,616 4,050 4,623 5,514 6,870
Average yield................................ 7.17% 6.51% 6.11% 5.32% 6.06%
Net realized gains........................... 76 8,490 8,014 1,615 6,539
Net unrealized gains (losses) on stocks &
bonds...................................... (431) (1,666) 610 6,672 4,980
</TABLE>
------------------------
(1) Average of aggregate investment amounts at the beginning and end of each
period.
(2) Amounts are calculated net of investment expenses, and exclude investment
income from affiliates.
REGULATION
GENERAL
Government regulation of employee benefit plans, including health care
coverage, health plans and BCBSUW'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. BCBSUW 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 BCBSUW 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 BCBSUW's compliance or otherwise affect BCBSUW's operations, products,
profitability or business prospects.
Federal legislation has significantly expanded regulation of group health
plans and health care coverage. The laws place restrictions on the use of
pre-existing conditions and eligibility restrictions based upon health status
and prohibit cancellation of coverage due to claims experience or health status.
Federal regulations also prohibit insurance companies from declining coverage to
small employers. Additional federal laws, which 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. BCBSUW 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. BCBSUW 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 BCBSUW 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.
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HIPAA
The federal Health Insurance Portability and Accountability Act of 1996
("HIPAA") contained provisions requiring mandatory standardization of certain
communications between health plans, electronic clearinghouses and providers who
submit certain health information electronically. HIPAA requires health plans to
use specific data content standards, mandates the use of specific identifiers
(e.g., national provider identifiers and national employer identifiers) and
requires specific privacy and security procedures. Final regulations pertaining
to data content standards were published on August 17, 2000 and compliance is
mandated by October of 2002. Although the new regulations will have a
significant impact on BCBSUW, the impact will be no greater, and in some
instances less, than the impact the regulations will have on other insurance
companies across the country. Final regulations on the privacy and security of
health information have been released and will be published on December 28,
2000. Health plans have two years to comply with the new regulations.
RISK-BASED CAPITAL REQUIREMENTS
BCBSUW is subject to risk-based capital ("RBC") requirements promulgated by
the National Association of Insurance Commissioners ("NAIC") for life and health
insurance companies. The formula for calculating such risk-based capital
requirements, set forth in the instructions adopted by the NAIC, is designed to
take into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to the individual insurance company's business.
Under these laws, life and health insurance companies and health maintenance
organizations must submit a report of their risk-based capital level as of the
end of the previous calendar year. In addition, the Association requires BCBSUW
to meet more stringent RBC requirements than those required under the NAIC and
Wisconsin guidelines.
As of December 31, 1999, BCBSUW's total adjusted capital exceeded the
minimum regulatory and licensure requirements of the NAIC and the Association.
During 2000, the Association has included BCBSUW in its Plan Performance
Response Monitoring Process ("PPRMP") as a result of the financial performance
of BCBSUW. As result, the Association has requested that BCBSUW regularly submit
additional interim financial information to the Association. In addition, the
PPRMP monitoring thresholds require that BCBSUW maintain a prescribed level of
escrowed assets as a financial guarantee for its transactions with other Blue
Cross plans. The PPRMP monitoring process also requires that BCBSUW provide
certain notices to the Association regarding its transactions with other Blue
Cross plans. BCBSUW will not be required to submit such interim financial
information and maintain any escrowed assets when its capital improves above the
prescribed monitoring threshold.
To maintain its Association licenses, BCBSUW is required to maintain a
minimum level of statutory capital and surplus. As of June 30, 2000, and
December 31, 1999, BCBSUW's total adjusted capital exceeded the minimum
licensure amount by $30.8 million and $65.0 million, respectively. The
Association is entitled to terminate BCBSUW's license agreement with the
Association, including the right to use the Blue Cross-Registered Trademark- and
Blue Shield-Registered Trademark- trademarks, if BCBSUW falls below the minimum
level of statutory capital and surplus.
As of September 30, 2000, approximately $14.2 million of invested assets are
maintained under an escrow agreement with the Association.
INSURANCE REGULATION
BCBSUW is subject to regulation by the OCI. The OCI, through regulation and
state statutes, exercises 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
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other reports required to be filed on the financial condition of insurance
companies; and the establishment of capital requirements for insurance
companies, for which BCBSUW has been permitted to treat its investment in AMSG
as non-affiliate common stock. Additionally, the OCI periodically conducts
market conduct and financial statement audits of BCBSUW.
Under Wisconsin law, insurance companies must provide the 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, the 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.
BCBSUW actively markets insurance products to Medicare eligible individuals.
Medicare Supplement (or Medigap) policies are regulated by the OCI and the
subject of increasing regulation at the state level, as well as additional
legislation at the federal level. BCBSUW continues to monitor and alter
procedures to comply with new laws and regulations. Currently, BCBSUW is also
subject to regulation by the federal Health Care Financing Administration
("HCFA") by virtue of its participation in the Medicare+Choice program. Given
BCBSUW's participation in this federal program, and other federal health care
programs, BCBSUW has implemented, and places great importance upon, an effective
compliance program.
INSURANCE HOLDING COMPANY REGULATIONS
By virtue of its controlling interests in UWS and AMSG and, indirectly,
their respective insurance subsidiaries, BCBSUW is subject to insurance holding
company laws and regulations. Under Wisconsin law, acquisition of control of
BCBSUW, and thereby indirect control of its insurance affiliates, requires the
prior approval of the 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
the OCI, upon application, determines otherwise.
BCBSUW 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.
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
BCBSUW's business units may do business with employers covered by ERISA,
particularly employers that maintain self-funded plans. The Department of Labor
is charged with the enforcement of ERISA and has promulgated new regulations,
which will expand the claim review process. Given that current state insurance
law governing health insurers contains stringent claim
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appeal process requirements, BCBSUW does not expect that the anticipated rules
will significantly impact BCBSUW's operations. 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 BCBSUW's liability exposure
under state law-based suits relating to employee health benefits offered by
BCBSUW's health plans and specialty businesses and may permit greater state
regulation of other aspects of those businesses' operations.
EMPLOYEES
As of September 30, 2000, BCBSUW employed 1,612 full-time and 45 part-time
employees, of whom 171 were managerial and supervisory personnel. Of these
employees, 328 were represented by a union. BCBSUW considers its relations with
its employees to be good.
TRADEMARKS
Blue Cross-Registered Trademark- is a federally registered service mark of
the Association. BCBSUW has filed for and maintains various other service marks
and trade names at the federal level and in Wisconsin. Although BCBSUW considers
its registered service marks, trademarks and trade names important in the
operation of its business, the business of BCBSUW is not dependent on any
individual service mark, trademark or trade name.
PROPERTIES
BCBSUW occupies common facilities with UWS and bears a proportionate share
of the cost of such facilities under the Service Agreements. BCBSUW's corporate
headquarters are located in Milwaukee, Wisconsin in a 235,000 square foot
building leased by BCBSUW. In addition, BCBSUW business is sold and serviced in
five other Wisconsin regional offices located in Eau Claire, Fond du Lac,
Evansville, Stevens Point and Oshkosh in 104,000 combined square feet. BCBSUW
also owns a 61,000 square foot facility in Pewaukee, Wisconsin. UGS, a wholly
owned subsidiary of BCBSUW, occupies additional space in Michigan of 11,000
square feet in Virginia and West Virginia of 32,000 square feet.
LEGAL PROCEEDINGS
BCBSUW 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, BCBSUW believes that
the ultimate resolution of these proceedings will not have a material adverse
effect on its financial condition or results of operations.
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BCBSUW MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
BCBSUW is a Wisconsin corporation which was organized in 1939. BCBSUW
provides health and dental insurance coverage and related services to both the
private and public sectors. BCBSUW offers full coverage, co-payment, preferred
provider organization, Medicare supplement and interim coverage options to
groups and individuals. BCBSUW is the only health insurer in the state operating
full-service regional sales and customer service centers. Through its
wholly-owned subsidiary, United Government Services LLC ("UGS"), BCBSUW is a
government contractor and processes Medicare claims for providers in all 50
states and is currently the largest Part A Medicare processor in the nation.
In the discussion below, the number of "members" is equivalent to the number
of persons covered by contracts in force.
SUMMARY OF MEMBERSHIP AND RATIOS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Health insurance members at end of period:
Insured medical members...................... 395,726 363,807 372,737 347,272 336,876
Self-funded medical members.................. 234,494 299,156 298,799 334,835 332,888
------- ------- ------- ------- -------
Total health insurance members............. 630,220 662,963 671,536 682,107 669,764
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Health insurance members (as a percentage of the total):
Insured medical members................................ 62.8% 54.9% 55.5% 50.9% 50.3%
Self-funded medical members............................ 37.2 45.1 44.5 49.1 49.7
----- ----- ----- ----- -----
Total health insurance members....................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
SUMMARY OF OPERATING RESULTS AND RATIOS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue (in thousands):
Insured premium......................... $395,448 $306,579 $420,357 $361,965 $345,903
Government contract fees................ 49,910 36,747 52,259 31,667 23,333
Self-funded administrative fees......... 18,168 19,581 25,970 25,302 20,606
Intercompany eliminations............... (1,837) (903) (1,408) -- --
-------- -------- -------- -------- --------
Total health services revenue......... 461,689 362,004 497,178 418,934 389,842
Investment results...................... 7,494 16,318 18,510 13,501 18,347
-------- -------- -------- -------- --------
Total revenue......................... $469,183 $378,322 $515,688 $432,435 $408,189
======== ======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Health services revenue (as a percentage of the total):
Insured premium........................................ 85.7% 84.7% 84.5% 86.4% 88.7%
Government contract fees............................... 10.8 10.2 10.5 7.6 6.0
Self-funded administrative fees........................ 3.9 5.4 5.2 6.0 5.3
Intercompany eliminations.............................. (0.4) (0.3) (0.2) -- --
----- ----- ----- ----- -----
Total................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Self-funded admin. fees per member per month........ $ 8.60 $ 7.27 $ 7.24 $ 6.17 $ 4.98
Operating ratios:
Insured medical loss ratio(1)..................... 95.9% 88.1% 89.9% 82.3% 86.2%
Selling, general, and administrative expense:
Insured SGA ratio(2).............................. 13.5% 15.0% 15.1% 16.8% 16.0%
Self-funded SGA per member per month.............. $12.42 $12.20 $12.10 $10.26 $10.16
</TABLE>
------------------------
(1) Insured medical and other benefits as a percentage of premium revenue.
(2) Insured selling, general and administrative expenses as a percentage of
premium revenue.
BCBSUW'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.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999
Total Revenues
Total revenues for the nine months ended September 30, 2000 increased 24.0%
to $469.2 million from $378.3 million for the nine months ended September 30,
1999. The increase was due primarily to increased membership in the insured
product line, premium rate increases on medical insurance business and new
government contracts, offset by a decrease in realized gains. The strong revenue
growth within insured and government contracts for the nine months ended
September 30, 2000 compared to September 30, 1999, caused the percentage of
health services revenue derived from self-funded products to decrease from 5.4%
to 3.9% for the same period.
HEALTH SERVICES REVENUE. Insured premium for the nine months ended
September 30, 2000 increased 29.0% to $395.4 million from $306.6 million for the
nine months ended September 30, 1999. The increase is due to increases in
average premium revenue per member and increases in the number of medical
members. Average insured medical premium per member for the nine months ended
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September 30, 2000 increased 18.6% from the nine months ended September 30, 1999
as a result of premium increases. The number of insured medical members as of
September 30, 2000, increased 8.8% to 395,726 from 363,807 as of September 30,
1999.
Government contract fees for the nine months ended September 30, 2000
increased 36.0% to $49.9 million from $36.7 million for the nine months ended
September 30, 1999. The increase is attributed to becoming the Medicare Part A
Intermediary for the states of Virginia and West Virginia as of September 1,
1999.
Self-funded administrative fees for the nine months ended September 30, 2000
decreased 7.1% to $18.2 million from $19.6 million for the nine months ended
September 30, 1999. This decrease is due to the decrease in membership as a
result of aggressive pricing in an effort to improve profitability. The average
self-funded administrative fee per member per month for the nine months ended
September 30, 2000 increased 18.3% to $8.60 from $7.27 for the nine months ended
September 30, 1999. The number of medical members as of September 30, 2000
decreased 21.6% to 234,494 from 299,156 as of September 30, 1999.
NET INVESTMENT RESULTS. Investment results include investment income and
realized gains on the sale of investments. Investment results for the nine
months ended September 30, 2000 decreased 54.0% to $7.5 million from
$16.3 million for the nine months ended September 30, 1999. Average annual
investment yields, excluding net realized gains, investment income from
affiliates and other interest income were 7.17% and 6.51% for the nine months
ended September 30, 2000 and September 30, 1999, respectively.
Average invested assets for the nine months ended September 30, 2000
decreased 19.9% to $48.6 million from $60.7 million for the nine months ended
September 30, 1999. The decrease is a result of cash requirements necessary to
fund operating losses and increased cash payments relative to medical and other
benefits payable.
Investment gains are realized in the normal investment process in response
to market opportunities. Realized gains decreased to $0.1 million for the nine
months ended September 30, 2000 from $8.5 million for the nine months ended
September 30, 1999.
BCBSUW received interest income of $4.1 million and $3.5 million for the
nine months ended September 30, 2000 and September 30, 1999, respectively, on a
$70.0 million note from UWS.
Expense Ratios
LOSS RATIO. The medical loss ratio for the nine months ended September 30,
2000 was 95.9%, compared with 88.1% for the nine months ended September 30,
1999. The increase in the medical loss ratio for the nine months ended
September 30, 2000 is primarily the result of greater-than-anticipated medical
utilization, along with an $11.3 million premium deficiency reserve ("PDR"). The
PDR is associated entirely with the Medicare Risk line of business and
represents management's best estimate of anticipated future losses on the
Medicare Risk line of business resulting from estimated future claim costs and
marginal administrative expenses in excess of estimated future premium revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO. The selling, general and
administrative ("SGA") expense ratio includes commissions, administrative
expenses, premium taxes and other assessments and claim interest expense. The
insured SGA expense ratio for the nine months ended September 30, 2000 was
13.5%, compared with 15.0% for the nine months ended September 30, 1999.
BCBSUW's average self-funded SGA expense per member per month increased for the
nine months ended September 30, 2000 to $12.4 from $12.2 for the nine months
ended September 30, 1999. The insured SGA expense ratio decreased for the nine
months ended September 30, 2000 due to premium increases and an increase in
membership. Included in 2000 is a write-off of approximately $2.4 million in
deferred acquisition costs ("DAC") associated with the Medicare Risk line of
business. The self-funded SGA
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expense per member per month increased for the nine months ended September 30,
2000 due to the decrease in membership.
Other Expenses
BCBSUW participates with UWS in a bank line of credit, which permits
aggregate borrowings up to $20 million. Interest expense related to the bank
line of credit for the nine months ended September 30, 2000 and September 30,
1999 was $0.3 million and $0.4 million, respectively.
In 1999, BCBSUW purchased 1.4 million additional shares of UWS stock. The
excess of cost over the fair value of net assets acquired has been recorded as
goodwill and is being amortized on a straight-line basis over a period of
15 years. Amortization expense for the nine months ended September 30, 2000 was
$0.4 million and was less than $0.1 million for the nine months ended
September 30, 1999.
In June of 2000, BCBSUW purchased group business from Wellmark, Inc. at a
cost of $1.0 million. The cost is being amortized on a straight line basis over
a period of 5 years. Amortization expense for the nine months ended
September 30, 2000 was less than $0.1 million.
Net Income
The consolidated net results decreased for the nine months ended
September 30, 2000 to a loss of $41.1 million compared to loss of $20.8 million
for the nine months ended September 30, 1999. This decrease is due primarily to
increased losses on insured business and is partially offset by decreased losses
on equity in affiliates. BCBSUW recorded an $11.3 million PDR to accrue for
anticipated fourth quarter and 2001 losses on the Medicare Risk line of
business. During the second half of 2000, DAC of approximately $2.4 million,
which were associated with lines of business that are not expected to
demonstrate future profitability, were also written off.
BCBSUW had no current income tax expense or benefit for the nine months
ended September 30, 2000 or September 30, 1999 due to operating losses. In 2000,
BCBSUW recorded deferred tax expense of $0.5 million in order to increase the
valuation allowance for a deferred tax asset from a prior period. There was no
deferred tax expense or benefit for the nine months ended September 30, 1999.
1999 COMPARED WITH 1998, AND 1998 COMPARED WITH 1997
Total Revenues
Total revenues in 1999 increased 19.3% to $515.7 million from
$432.4 million in 1998. Total revenues in 1998 increased 5.9% from
$408.2 million in 1997. These increases were due primarily to increased
membership in the insured product line, premium rate increases on medical
insurance business and new government contracts.
HEALTH SERVICES REVENUE. Insured premium in 1999 increased 16.1% to
$420.4 million from $362.0 million in 1998. Insured premium in 1998 increased
4.7% from $345.9 million in 1997. The increases in both years are due to
increases in average premium revenue per member and increases in the average
number of medical members. Average insured medical premium per member in 1999
increased 8.2% from 1998 and increased 1.5% in 1998 from 1997, as a result of
premium increases. The number of insured medical members as of December 31,
1999, increased 7.3% to 372,737 from 347,272 as of December 31, 1998. The number
of insured medical members as of December 31, 1998, increased 3.1% from 336,876
as of December 31, 1997.
Government contract fees in 1999 increased 65.5% to $52.3 million from
$31.6 million in 1998. Government contract fees in 1998 increased 35.6% from
$23.3 million in 1997. The increase from 1998 to 1999 is attributed to becoming
the Medicare Part A Intermediary for the states of Virginia and West
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Virginia as of September 1, 1999. The growth from 1997 to 1998 is due to
becoming the Medicare Part A Intermediary for Michigan.
Self-funded administrative fees in 1999 increased 2.8% to $26.0 million from
$25.3 million in 1998. Self-funded administrative fees in 1998 increased 22.8%
from $20.6 million in 1997. The increases in both years are due to increases in
self-funded administrative fees per member. The average self-funded
administrative fee per member per month in 1999 increased 17.3% to $7.24 from
$6.17 in 1998. The average self-funded administrative fee per member per month
increased 23.9% in 1998 from $4.98 in 1997. The number of medical members as of
December 31, 1999 decreased 10.8% to 298,799 from 334,835 as of December 31,
1998. This decrease is due to aggressive pricing on targeted group contracts and
subsequent loss of unprofitable business. The number of self-funded medical
members as of December 31, 1998, increased 0.1% from 332,888 as of December 31,
1997.
NET INVESTMENT RESULTS. Investment results include investment income and
realized gains on the sale of investments. Investment results in 1999 increased
37.0% to $18.5 million from $13.5 million in 1998. Investment results in 1998
decreased 26.2% from $18.3 million in 1997. Average annual investment yields,
excluding net realized gains, investment income from affiliates and other
interest income were 6.11%, 5.23% and 6.06% for 1999, 1998 and 1997,
respectively.
Average invested assets in 1999 decreased 27.0% to $75.7 million from
$103.7 million in 1998. The decrease in average invested assets during 1999 is a
result of cash requirements necessary to fund operating losses and increased
cash payments relative to medical and other benefits payable. Average invested
assets in 1998 decreased 8.5% from $113.3 million in 1997. The decrease in 1998
from 1997 relates to ongoing operations, including collection of receivables and
timing of claim payments.
Investment gains are realized in the normal investment process in response
to market opportunities. Realized gains increased to $8.0 million in 1999 from
$1.6 million in 1998. Realized gains in 1998 decreased from $6.5 million in
1997.
BCBSUW received interest income of $4.8 million and $1.4 million in 1999 and
1998, respectively, on a $70.0 million note from UWS.
Expense Ratios
LOSS RATIO.The medical loss ratio for 1999 was 89.9%, compared with 82.3%
for 1998 and 86.2% for 1997. The increase in the medical loss ratio in 1999 is
primarily the result of greater than anticipated medical utilization and cost
trends.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO. The selling, general and
administrative ("SGA") expense ratio includes commissions, administrative
expenses, premium taxes and other assessments and claim interest expense. The
insured SGA expense ratio in 1999 was 15.1%, compared with 16.8% in 1998 and
16.0% in 1997. BCBSUW's average self-funded SGA expense per member per month
increased 17.9% in 1999 to $12.10 from $10.26 in 1998. The average self-funded
SGA expense per member per month in 1998 increased marginally from $10.16 in
1997. The SGA expense ratio for both insured and self-funded products increased
in 1998 due to costs incurred to convert to a new claim processing system. These
costs continued into 1999, but were offset for insured products by premium rate
increases and an increase in membership. The decrease in self-funded membership
caused the self-funded SGA to increase in 1999.
Other Expenses
BCBSUW, along with UWS, has a bank line of credit that permits aggregate
borrowings up to $20 million. Interest expense related to the bank line of
credit in 1999, 1998 and 1997 was $0.5 million, $0.1 million and $0.2 million,
respectively.
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In 1999, BCBSUW purchased 1.4 million additional shares of UWS stock. The
excess of cost over the fair value of net assets acquired has been recorded as
goodwill and is being amortized on a straight-line basis over a period of
15 years. Amortization expense for 1999 was $0.2 million.
Net Income
Consolidated net results decreased in 1999 to a loss of $42.7 million
compared to net income of $5.4 million in 1998. Consolidated net income in 1998
increased from $0.6 million in 1997. The decrease in 1999 was the result of a
$20.1 million operating loss and $22.7 million equity in net loss of affiliates,
net of tax. The $20.1 million operating loss is due to the $17.4 million loss,
before investment results, on self-funded business and the insured business
experiencing greater than anticipated medical utilization and cost trends.
Because of operating losses, BCBSUW had no income tax expense or benefit in
1999. Current tax benefit in 1998 and 1997 was $0.1 million and $2.8 million,
respectively. There was no deferred tax benefit in 1998 or 1997.
LIQUIDITY AND CAPITAL RESOURCES
BCBSUW'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. BCBSUW's investment policies are designed to maximize yield, preserve
principal and provide liquidity to meet anticipated payment obligations.
BCBSUW's cash flow improved for the nine months ended September 30, 2000
compared to the same period in 1999. For the nine months ended September 30,
2000, BCBSUW's net cash used in operating activities amounted to $11.7 million,
compared with net cash used in operating activities of $34.9 million for the
nine months ended September 30, 1999. The improvement is primarily due to the
decrease in cash payments relative to medical and other benefits payable. Due to
periodic cash flow requirements, BCBSUW made borrowings under its bank line of
credit. The line of credit is with a commercial bank and has a rate equal to the
London Interbank Offered Rate ("LIBOR") plus 1.5%, adjusted monthly with
interest payments due monthly. BCBSUW's outstanding line of credit balance was
$4.1 million and $9.5 million at September 30, 2000 and September 30, 1999,
respectively. The interest expense on the line of credit was $0.3 million and
$0.4 million for the first nine months of 2000 and 1999, respectively.
In 1999, BCBSUW's net cash used in operating activities amounted to
$34.3 million, compared with net cash provided by operating activities of
$5.0 million for 1998. In addition to the net loss from operations, the decrease
in cash flows from operations in 1999 was due primarily to increased cash
payments relative to medical and other benefits payable. BCBSUW's outstanding
line of credit balance was $11.2 million and $13.6 million at December 31, 1999
and 1998, respectively. The interest expense on the line of credit was
$0.6 million and $0.1 million in 1999 and 1998, respectively.
As a Primary Licensee of the Association, BCBSUW is required to maintain a
prescribed liquidity ratio of certain liquid assets to average monthly expenses,
as defined, in accordance with licensure requirements of the BCA.
BCBSUW's investment portfolio consists primarily of investment-grade bonds
and Government securities and has a limited exposure to equity securities. At
September 30, 2000, $35.4 million or 77.8% of BCBSUW's total investment
portfolio was invested in bonds compared with $42.6 million or 68.2% at
December 31, 1999. The bond portfolio had an average quality rating by Moody's
Investor Service of "Aa3" at September 30, 2000 and December 31, 1999. The
majority of the bond portfolio was classified as available-for-sale. The market
value of the total investment portfolio, which includes stocks and bonds, was
less than amortized cost by $0.4 million at September 30, 2000 and by
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$0.5 million at December 31, 1999. Unrealized holding gains and losses on bonds
classified as available-for-sale are included as a component of surplus, net of
applicable deferred taxes. BCBSUW has no investments in mortgage loans, no
non-publicly traded securities, real estate held for investment or financial
derivatives (except for principal-only strips of U.S. Government securities).
As of September 11, 1998, UWS assumed a $70.0 million note obligation to
BCBSUW in connection with the spin-off in 1998 of AMSG's managed care companies
and specialty business. The spin-off involved the creation of a new corporation
that subsequently became UWS. UWS pledged the common stock of certain
subsidiaries as collateral for the note obligation. Interest is payable
quarterly at a rate equal to LIBOR plus 1.25%, adjusted quarterly. On
October 13, 1999, the maturity date of the principal balance was extended from
October 30, 1999 to April 30, 2001.
BCBSUW has an outstanding line of credit in the amount of $15.0 million
available to Health Professionals of Wisconsin, Inc. The balance was
$4.6 million and $3.0 million as of September 30, 2000 and December 31, 1999,
respectively. Interest on the line of credit is calculated using prime rate.
BCBSUW is required to maintain certain levels of statutory capital and
surplus under the NAIC Health Organization Risk-Based Capital ("HORBC")
requirements. Wisconsin insurers are also subject to compulsory and security
surplus requirements based upon the amount and type of premiums written. In
addition to statutory capital requirements, BCBSUW is required to maintain
certain levels as determined by the Association.
In addition to internally generated funds and periodic borrowings on its
bank line of credit, BCBSUW believes that additional financing to facilitate
long-term growth could be obtained through offerings, debt offerings, or bank
borrowings, as market conditions may permit or dictate.
During the third quarter of 2000, BCBSUW entered into an agreement to
purchase a 25% interest in a Wisconsin-based health plan for $12.5 million. The
purchase is subject to a right-of-first-refusal under an agreement with existing
shareholders of the health plan and has not yet been consummated.
IMPACT OF THE YEAR 2000
In late 1999 BCBSUW completed its remediation and testing of systems. As a
result of those planning and implementation efforts, BCBSUW experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date. BCBSUW expensed approximately $5.4 million
during 1999 in connection with remediating its systems. BCBSUW is not aware of
any material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties.
INFLATION
Health care costs have been rising and are expected to continue to rise at a
rate that exceeds the consumer price index. BCBSUW'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, BCBSUW 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 these efforts will fully offset the impact of inflation or that
premium revenue increases will equal or exceed increasing health care costs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because of BCBSUW's investment policies, the primary market risks associated
with BCBSUW'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
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value of BCBSUW's bond portfolio; however, because BCBSUW considers it unlikely
that BCBSUW would need or choose to substantially liquidate its portfolio,
BCBSUW believes that such an increase in interest rates would not have a
material impact on future earnings or cash flows. In addition, BCBSUW is exposed
to the risk of loss related to changes in credit spreads. Credit spread risk
arises from the potential that changes in an issuer's credit rating or credit
perception may affect the value of financial instruments.
The overall goal of the investment portfolio is to support the ongoing
operations of BCBSUW. BCBSUW's philosophy is to manage assets to maximize total
return over a multiple-year time horizon, subject to appropriate levels of risk.
BCBSUW manages these risks by establishing gain and loss tolerances, targeting
asset-class allocations, diversifying among asset classes and segments within
various asset classes, and using performance measurement and reporting.
In 1999, BCBSUW had an external study done of the asset allocation and
restructured their portfolio, moving from actively managed equities to mutual
funds.
BCBSUW uses a sensitivity model to assess the inherent rate risk of its
fixed income investments. The model includes all fixed income securities held as
of June 30, 2000 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 BCBSUW's modeled financial assets resulting from
a hypothetical instantaneous 100 basis point increase in the U.S. Treasury yield
curve is estimated at $1.6 million as of June 30, 2000.
CERTAIN TRANSACTIONS
SERVICE AGREEMENT
UWS and BCBSUW have entered into a 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, UWS agreed to purchase claims
processing services from BCBSUW pursuant to certain arrangements with Electronic
Data Systems Corporation ("EDS"). Pursuant to the service agreement, UWS
received payments of $9.3 million, $9.0 million, and $11.7 million from BCBSUW
for the years ended December 31, 1997, 1998 and 1999, respectively. BCBSUW
received payments of $14.6 million, $14.8 million and $12.0 million from UWS for
the years ended December 31, 1997, 1998 and 1999, respectively. The original
term of the service agreement ended on December 31, 1998 and the service
agreement has since automatically renewed 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 OCI 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 a servicing agreement (the "EDS Servicing
Agreement") with Electronic Data Corporation ("EDS") 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
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<PAGE>
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 Blue Cross and Blue Shield of South Carolina ("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, 1997, 1998, and 1999, UWS paid approximately
$3.7 million, $2.7 million and $1.3 million, respectively, for services pursuant
to the EDS Servicing Agreement. UWS paid approximately $1.6 million and
$3.2 million, respectively, for claims processing services obtained from BSSC
for the years ended December 31, 1998 and 1999.
SPECIALTY SERVICES
Certain subsidiaries of UWS provide services to BCBSUW at market rates,
including hospital bill audits, investigation recovery services, electronic
claims clearing and nurseline phone services. BCBSUW made payments to UWS and
its subsidiaries of $4.5 million, $4.5 million and $4.9 million for the years
ended December 31, 1997, 1998 and 1999, respectively.
BCBSUW has an agreement with UWIC, whereby UWIC underwrites BCBSUW's United
Dairy Trust insured product. BCBSUW assumes 100% of the premium revenue of these
products from UWIC. The assumed premium revenue was $8.4 million, $6.1 million,
and $1.8 million for the years ended December 31, 1997, 1998 and 1999,
respectively.
HEALTH AND OTHER BENEFITS TO THE EMPLOYEES OF BCBSUW OR UWS
Certain subsidiaries of UWS provide health, life and other insurance
benefits to the employees of BCBSUW. Premium revenue received from BCBSUW for
these services totaled $4.5 million, $4.5 million and $4.9 million in 1997, 1998
and 1999, respectively. In addition, BCBSUW provides health insurance to certain
of UWS's employees. Premium revenue received from UWS for these services totaled
$1.8 million, $2.2 million and $4.1 million in 1997, 1998 and 1999,
respectively.
BCBSUW LOAN
UWS has a debt obligation to BCBSUW in the principal amount of
$70.0 million. On October 30, 1996, the predecessor corporation to UWS borrowed
$70.0 million from BCBSUW to fund the cash portion of the merger consideration
in connection with the merger of American Medical Security, Inc. into the
predecessor corporation. UWS assumed that obligation and has 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. On October 13, 1999, the maturity date of the principal balance of
this loan was extended from October 30, 1999 to April 30, 2001.
REGISTRATION RIGHTS
Pursuant to an agreement with UWS, 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
UWS register at least 50% of the then outstanding shares of common stock
held by them, which UWS 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
UWS's own registration of shares of common stock pertaining to an
underwritten public offering, (b) UWS has already effected two such
registrations pursuant to Messrs. Hilliard's and Weyers' requests,
(c) the filing of the registration statement could jeopardize or delay a
material transaction contemplated by UWS or would require the disclosure
of material information that UWS needs to preserve as confidential, or
(d) UWS is unable to comply with the requirements of the Commission; and
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<PAGE>
(ii) Messrs. Hilliard and Weyers are entitled to make up to two requests
that UWS include Messrs. Hilliard's and Weyers' shares of common stock
in an offering of shares of common stock otherwise being registered
upon being notified by UWS that UWS 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' 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. As reported on
Schedules 13G dated February 14, 2000, for the year-ended December 31, 1999,
each of Messrs. Hilliard and Weyers owns less than 5% 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 UWS 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
Securities Exchange Act of 1934, as amended. 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
under the Securities Exchange Act of 1934, as amended) or initiate any
shareholder proposals with respect to UWS, (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 UWS, or (iii) form,
join, or participate in a "group" (within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended) with respect to UWS securities or
seek to exercise control or influence over management, the board of directors,
or the corporate policies of UWS. Finally, Messrs. Hilliard and Weyers agreed
that, until December 3, 2006, they will vote their shares of common stock in
accordance with BCBSUW's directions on matters submitted to a shareholder vote
which pertain to, or are a result of, Association rules, regulations, or
marketing issues.
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SECURITY OWNERSHIP
The following table sets forth the beneficial ownership of shares of the UWS
common stock as of December 15, 2000, by each shareholder known by UWS to
beneficially own more than 5% of the shares of the UWS common stock outstanding,
by each director of UWS, each of the executive officers of UWS who appear in the
Summary Compensation Table below, and all directors and officers of UWS as a
group. Unless otherwise indicated, each shareholder listed below has sole voting
and dispositive power with respect to shares of the UWS common stock
beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED(3) CLASS
---- --------------------- ----------
<S> <C> <C>
Blue Cross & Blue Shield United of Wisconsin(1)............. 7,840,816 46.3%
Putnam Investments, Inc.(1)(5).............................. 1,312,053 7.8
Dimensional Fund Advisors, Inc.(1).......................... 868,900 5.2
Thomas R. Hefty(3)(4)....................................... 278,015 1.6
Stephen E. Bablitch(3)(4)................................... 99,305 *
James E. Hartert, M.D.(4)................................... 36,170 *
Mary I. Traver(4)........................................... 80,927 *
Penny J. Siewert(4)......................................... 117,605 *
Richard A. Abdoo............................................ 12,426 *
Barry K. Allen.............................................. 10,000 *
Michael D. Dunham........................................... 11,626 *
James L. Forbes............................................. 8,126 *
James C. Hickman............................................ 6,826 *
Michael S. Joyce............................................ 0 *
Eugene A. Menden............................................ 8,126 *
D. Keith Ness, M.D.......................................... 0 *
William C. Rupp, M.D........................................ 2,000 *
Carol N. Skornicka.......................................... 6,926 *
Janet D. Stieger............................................ 0 *
Kenneth M. Viste, Jr., M.D.................................. 1,000 *
All directors and executive officers as a group
( persons)(4)(6)........................................ %
----------- ------
</TABLE>
------------------------
* Amount represents less than 1% of the total shares of the UWS common stock
issued and outstanding.
(1) Based on Schedules 13D and 13G delivered to UWS by such beneficial owner
pursuant to the Securities Exchange Act of 1934, as amended. BCBSUW's
address is 401 West Michigan Street, Milwaukee, Wisconsin 53203; Putnam
Investments, Inc.'s address is One Post Office Square, Boston, Massachusetts
02109; and Dimensional Fund Advisors, Inc.'s address is 1299 Ocean Avenue,
11th Floor, Santa Monica, California 90401.
(2) Includes the following number of shares covered under options exercisable
within 60 days of , 2001: Mr. Hefty, 247,768; Ms. Siewert, 112,232;
Mr. Bablitch, 93,542; Ms. Traver, 74,820; Dr. Hartert, 34,534; Mr. Abdoo,
6,626; Mr. Dunham, 6,626; Mr. Forbes, 6,626; Mr. Hickman, 6,626;
Mr. Menden, 6,626; and Ms. Skornicka, 6,626; and all directors and executive
officers as a group, .
(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, 14,000 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, 750 shares owned by spouse.
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<PAGE>
(4) Includes the following shares held under UWS's 401(k) plan, as to which such
person has dispositive power: Mr. Hefty, 5,247; Ms. Siewert, 4,023;
Mr. Bablitch, 1,763; Ms. Traver, 4,107; Dr. Hartert, 1,636; and all
directors and executive officers as a group, 16,776.
(5) Includes the following shares with respect to which such person shares
voting power: 124,000 shares held by The Putnam Advisory Company, Inc. Also
includes the following shares as to which such person shares dispositive
power: 146,448 shares held by Putnam Investment Management, Inc. and
1,165,605 shares held by The Putnam Advisory Company, Inc. Putnam
Investments, Inc. wholly owns Putnam Investment Management, Inc. and The
Putnam Advisory Company, Inc. Marsh & McLennan Companies, Inc. wholly owns
Putnam Investments, Inc.
(6) Excludes shares owned by persons who will become directors of Cobalt upon
completion of the combination.
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DIRECTORS AND EXECUTIVE OFFICERS OF COBALT
DIRECTORS OF COBALT
The Amended and Restated Bylaws of Cobalt fix the initial number of
directors at nine. The board of directors will be divided into three classes,
whose members each serve terms of three years (and until their successors are
elected and qualified). The terms of one of the three classes will expire at
each annual meeting of shareholders. The terms of Ms. Steiger and Messrs. Hefty
and Viste will expire at the Annual Meeting of the Shareholders in 2001. The
terms of Messrs. Forbes, Ness and Rupp will expire at the Annual Meeting of
Shareholders in 2002. The terms of Messrs. Abdoo, Allen and Joyce will expire at
the Annual Meeting of Shareholders in 2003. There are no family relationships
among any of the directors, nominees and/or executive officers of UWS.
If the combination is completed, the members of the board of directors of
Cobalt, Inc. will be as follows:
<TABLE>
DIRECTORS WHOSE TERMS WILL CONTINUE UNTIL 2001
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- ------------------------------------------------------------
Thomas R. Hefty Director of UWS since 1998. Director of AMSG from 1983
Age: 53 through 1998; Chairman of the Board, President and Chief
Executive Officer of UWS since 1998; President of AMSG from
1986 through 1998 and Chairman of the Board and Chief
Executive Officer of AMSG from 1991 through 1998; Chairman
of the Board and Director of BCBSUW since 1988; President of
BCBSUW since 1982; Deputy Insurance Commissioner for the
Office of the Commissioner of Insurance for the State of
Wisconsin from 1979 to 1982; Director of Artisan
Funds, Inc., an investment company registered under the
Investment Company Act of 1940, as amended.
<S> <C>
Janet D. Steiger Director of BCBSUW since 1998. Member of the United States
Age: 61 Federal Trade Commission from 1989 to 1997; Chairman of the
Federal Trade Commission from 1989 to 1995; Chairman of the
Postal Rate Commission from 1982 to 1989; Chairman of the
Congressional Commission to Assess Veterans Education Policy
from 1987 to 1989; Postal Rate Commissioner from 1980 to
1989.
Kenneth M. Viste, Jr. Director of BCBSUW since 1992; Practicing physician in
Age: 59 neurology; Principal of Lakeside Neurocare, Limited, Oshkosh
and Fond du Lac, Wisconsin; President of the American
Academy of Neurology from 1995 to 1997; President of the
State Medical Society of Wisconsin from 1987 to 1988;
Director of the Physical Rehabilitation Unit of Mercy
Medical Center, Oshkosh, Wisconsin since 1974, and of the
Physical Rehabilitation Unit of St. Agnes Hospital, Fond du
Lac, Wisconsin, since 1983; Clinical Professor of Neurology
at the University of Wisconsin Medical School since 1995.
</TABLE>
142
<PAGE>
<TABLE>
<S> <C>
DIRECTORS WHOSE TERMS WILL CONTINUE UNTIL 2002
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- ------------------------------------------------------------
<S> <C>
James L. Forbes Director of UWS since 1998. Director of AMSG from 1991
Age: 68 through 1998; Director of Blue Cross since 1974; Chairman
and Chief Executive Officer and Director of Badger
Meter, Inc., a manufacturer of products using flow
measurement technology, since 1999; President and Chief
Executive Officer from 1987 to 1999; Director of Universal
Foods Corporation and Journal Communications, Inc.
D. Keith Ness Director of BCBSUW since 1998. Practicing family physician
Age: 52 since 1978; Director, President and interim Chief Executive
Officer of Community Physician's Network, a group of primary
care physicians, since 1998; Medical Director for Heritage
Manor Nursing Home since 1996;
William C. Rupp, M.D. Director of UWS since 1998. Director of AMSG from 1997
Age: 54 through 1998; President and Chief Executive Officer of
Luther/Midelfort Mayo Health System since 1994; President of
Midelfort Clinic since 1991; practicing physician in
oncology since 1982.
DIRECTORS WHOSE TERMS WILL CONTINUE UNTIL 2003
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- ------------------------------------------------------------
<S> <C>
Richard A. Abdoo Director of UWS since 1998. Director of AMSG from 1991
Age: 56 through 1998; Chairman of the Board, President and Chief
Executive Officer of Wisconsin Energy Corporation, a
diversified energy services holding company since May 1991;
Chairman of the Board and Chief Executive Officer of
Wisconsin Electric Power Company since 1990; Director of
Wisconsin Energy Corporation since 1988; Director of
Wisconsin Electric Power Company since 1989; Chairman of the
Board and Chief Executive Officer of Wisconsin Natural Gas
Company from 1990 to 1995; Director of Wisconsin Natural Gas
Company from 1989 to 1995; Director of Marshall & Ilsley
Corporation, a bank holding company, and Universal Foods
Corporation, an ingredient manufacturer.
Barry K. Allen President of Ameritech Corporation since October of 1999;
Age: 52 Executive Vice President of Ameritech from 1997 to 1999;
Senior Vice President of Ameritech from 1995 to 1997;
President and Chief Operating Officer of Marquette
Electronics, Inc. from 1993 to 1995; President and Chief
Executive Officer of Wisconsin Bell, Inc. from 1989 to 1993;
President and Chief Executive Officer of Ameritech
Publishing, Inc. from 1987 to 1989. Director of
Harley-Davidson Inc.; Fiduciary Management, Inc., an
investment advisory firm; and First Business Bank-Milwaukee.
Michael S. Joyce Director of BCBSUW since 1996; President and Chief Executive
Age: 58 Officer of the Lynde and Harry Bradley Foundation,
Milwaukee, Wisconsin, since 1986; President of the John M.
Olin Foundation, New York, New York, from 1978 to 1986;
President of the Goldseker Foundation, Baltimore, Maryland,
from 1975 to 1978.
</TABLE>
143
<PAGE>
COMPENSATION OF DIRECTORS
Members of the UWS board of directors who are officers or employees of UWS
receive no additional compensation for their service as members of the
UWS board of directors or committees of the UWS board of directors. Members of
the UWS board of directors who are not officers or employees of UWS receive a
fee of $1,100 for each board or committee meeting attended, and a monthly
retainer of $1,250. In addition, each committee chairman receives a monthly fee
of $250. Also, pursuant to the UWS Equity Incentive Plan, each member of the
UWS board of directors is granted in connection with his or her services as a
member of the board of directors, a single option to purchase 6,626 shares of
UWS common stock at an exercise price equal to the fair market value of the
UWS common stock on the date of grant. In addition, members of the UWS special
committee will receive cash payments for their services as members of the
UWS special committee. See "THE COMBINATION--Interests of Certain Persons in the
Combination--Directors and Executive Officers of UWS."
144
<PAGE>
EXECUTIVE OFFICERS
The name, age, title and business backgrounds of each of the persons who
will be the executive officers of Cobalt are set forth below. Certain
individuals named below previously were officers of American Medical Security
Group, Inc. and various of its subsidiaries prior to the spin-off of UWS from
AMSG in September of 1998, and each such individual had resigned from all
positions held at AMSG or its remaining subsidiaries as of the effective date of
the spin-off. The business address of each of the executive officers is 401 West
Michigan Street, Milwaukee, Wisconsin 53203.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- -------- ----------------------------------------------
<S> <C> <C>
Thomas R. Hefty......... 53 Chairman of the Board, President and Chief
Executive Officer
Stephen E. Bablitch..... 46 Vice President, General Counsel and Secretary
Michael E. Bernstein.... 40 Senior Vice President
Frank M. Cino........... 43 Vice President and Controller
Timothy F. Cullen....... 56 Vice President
Gail L. Hanson.......... 45 Vice President; and President of IRG
Catherine S. Harvey..... 38 Senior Vice President
James E. Hartert........ 46 Vice President
Terrance L. Knecht...... 52 Vice President and Chief Information Officer
Thomas E. Liechty....... 49 Vice President; and President of UWIC and
UHLIC
Emil E. Pfenninger...... 49 Vice President; and President of United
Heartland
Penny J. Siewert........ 43 Vice President of Regional Services
Mary I. Traver.......... 49 Vice President; and President of Compcare
</TABLE>
Under the proposed Bylaws of Cobalt, officers of Cobalt will be 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
proposed directors and/or executive officers of Cobalt.
Thomas R. Hefty is the Chairman of the Board, President and Chief Executive
Officer of UWS. Mr. Hefty was elected President of UWS in 1986 and was elected
Chairman of the Board and Chief Executive Officer of UWS in 1991. Since 1987, he
has served in various capacities with UWS's subsidiaries. Mr. Hefty has been
Chairman of the Board and a director of BCBSUW since 1988, having joined BCBSUW
in 1982 and later serving as President. From 1979 to 1982, Mr. Hefty was Deputy
Insurance Commissioner for OCI.
Stephen E. Bablitch is Vice President, General Counsel and Secretary of UWS.
Mr. Bablitch joined UWS in 1996 as General Counsel, Vice President and
Secretary. Mr. Bablitch has been Senior Vice President of BCBSUW since December,
2000. He has also been General Counsel and Secretary of BCBSUW since 1996.
Mr. Bablitch was Vice President of BCBSUW since 1996. He has also served in
various capacities with UWS's subsidiaries since 1996. Prior to joining UWS and
BCBSUW, Mr. Bablitch was an attorney with Dewitt, Ross and Stevens, Madison,
Wisconsin from 1991 to 1996.
Michael E. Bernstein is Senior Vice President of UWS. Mr. Bernstein was
elected a Senior Vice President in February of 2000. Mr. Bernstein was elected
Senior Vice President of BCBSUW in March of 2000. Prior to joining UWS and
BCBSUW, Mr. Bernstein served as executive vice president for the University of
Wisconsin Medical Foundation in Madison, Wisconsin from 1998 through 1999. From
1996 to 1998, Mr. Bernstein was senior vice president at University Health
Care, Inc.
Frank M. Cino is Vice President and Controller of UWS. Mr. Cino was elected
a Vice President in December of 1999. Mr. Cino was elected Vice President of
BCBSUW in December 1999. Prior to joining UWS and BCBSUW, Mr. Cino was employed
with Ernst & Young LLP, New York, in various positions from 1985 to 1999, most
recently as senior manager of health care industry services.
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<PAGE>
Timothy F. Cullen is the Chairman of United Government Services, Inc., a
wholly owned subsidiary of BCBSUW, and Vice President of BCBSUW. Mr. Cullen was
elected Chairman of UGS in 1999 and was elected Vice President of BCBSUW in
1988. He joined BCBSUW in 1988 as Vice President of its southwestern region.
From 1987 to 1988, Mr. Cullen was Secretary of the Wisconsin Department of
Health and Human Services. From 1974 to 1987, Mr. Cullen served as a Wisconsin
State Senator, in which he served three terms as Senate Majority Leader.
Gail L. Hanson is Vice President, Chief Financial Officer and Treasurer of
UWS. Ms. Hanson was named Chief Financial Officer of UWS effective August 2,
1999 to fill a vacancy created by the retirement of the previous CFO.
Ms. Hanson has been Treasurer of UWS since 1987 and was elected a Vice President
in 1996. She has served in various capacities with UWS's subsidiaries since
1984. Ms. Hanson was elected Senior Vice President of BCBSUW in December of
2000. Ms. Hanson was elected Vice President, Treasurer and Chief Financial
Officer of BCBSUW in December of 1999. Ms. Hanson was elected Vice President and
Treasurer of BCBSUW in 1996. Ms. Hanson had been Assistant Vice President and
Treasurer since 1987, having joined BCBSUW in 1984 as the Controller of UWIC.
James E. Hartert, M.D. is Vice President of UWS. Dr. Hartert was elected a
Vice President in May of 1999. He was elected President of IRG in July of 1999.
He has also served in various capacities with UWS's subsidiaries since 1996.
Dr. Hartert was elected Vice President of BCBSUW in March of 1999. Prior to
joining UWS and BCBSUW, Dr. Hartert was employed by Humana Health Care Plans as
Chief Medical Officer for the Kentucky market from 1994 to 1996.
Catherine S. Harvey is Senior Vice President of UWS. Ms. Harvey was elected
a Senior Vice President in February of 2000. Ms. Harvey was elected Senior Vice
President of BCBSUW in March of 2000. Prior to joining UWS and BCBSUW,
Ms. Harvey was vice president of health services operations/ delivery systems
management at United HealthCare in Minneapolis, Minnesota from 1997 to 1999.
From 1995 to 1996, Ms. Harvey was employed with Towers Perrin Integrated
Healthsystems Consulting in Minneapolis, Minnesota as a senior consultant.
Terrance L. Knecht is the Vice President and Chief Information Officer of
UWS. Mr. Knecht was elected Vice President and Chief Information Officer of both
UWS and BCBSUW in December of 2000. Prior to joining UWS and BCBSUW, Mr. Knecht
was the Chief Information Officer of United Payors & United Providers,
Rockville, Maryland, from 1997 to 2000.
Thomas E. Liechty is Vice President of UWS. Mr. Liechty was elected a Vice
President in August of 1999. He was elected President of UWIC and UHLIC in July
of 1999. Mr. Liechty was previously Regional Vice President for the Northeastern
Region of BCBSUW from 1988 to 1999.
Emil E. Pfenninger is Vice President of UWS. Mr. Pfenninger was elected a
Vice President of UWS in 1995 and President of United Heartland in 1990.
Mr. Pfenninger was the Underwriting Manager with CNA Insurance Companies from
1987 to 1990.
Penny J. Siewert is Vice President of Regional Services of UWS. Ms. Siewert
was elected Vice President of Regional Services of UWS in 1995. Ms. Siewert
joined BCBSUW in 1977 and has served in various capacities. Ms. Siewert was
elected Vice President of Operations for BCBSUW in 1990, Vice President of
Special Markets for BCBSUW in 1992, Vice President of Regional Services for
BCBSUW in 1995 and Senior Vice President for BCBSUW in 1999.
Mary I. Traver is Vice President of UWS. Ms. Traver was elected Vice
President of 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 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 was elected President of Compcare in
February of 1999.
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EXECUTIVE COMPENSATION
Pursuant to the service agreement, certain executive officers of UWS 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 UWS for services rendered to UWS
and BCBSUW. Also, American Medical Security Group, Inc. ("AMSG"), the
predecessor to UWS, had a similar service agreement with BCBSUW. The following
table summarizes the total compensation paid by UWS or its subsidiaries to the
Chief Executive Officer and the four other most highly compensated officers of
UWS for services rendered to UWS and BCBSUW for the year ended December 31,
1999. Information for 1998 reflects the total compensation for the Chief
Executive Officer and the four other most highly compensated officers of UWS for
services rendered in all capacities to AMSG and BCBSUW and to UWS and BCBSUW.
Information for 1997 reflects the total compensation for the Chief Executive
Officer and the four other most highly compensated officers of UWS at
December 31, 1999 for services rendered in all capacities to AMSG and BCBSUW for
the year ended December 31, 1997. Those executive officers performed
substantially identical services for AMSG and BCBSUW during 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------------------
ANNUAL COMPENSATION AWARDS
--------------------------------------------------- SECURITIES PAYOUTS
NAME AND OTHER ANNUAL UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS(1,2) COMPENSATION(3) OPTIONS PAYOUTS(1,4) COMPENSATION(5)
------------------ -------- --------- ---------- --------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas R. Hefty............ 1999 $577,506 -- $28,887 $147,500 -- $4,000
CHAIRMAN OF THE 1998 525,000 $154,350 11,570 198,200 $64,985 4,000
BOARD, PRESIDENT & 1997 475,008 97,377 7,885 35,000 5,294 4,000
CHIEF EXECUTIVE OFFICER
Penny J. Siewert........... 1999 229,077 -- 12,425 49,200 -- 4,000
VICE PRESIDENT OF 1998 206,784 44,873 6,659 90,217 26,536 4,000
REGIONAL SERVICES 1997 174,576 18,190 -- 33,130 2,061 4,000
Stephen E. Bablitch........ 1999 214,761 -- 11,678 41,000 -- 4,000
VICE PRESIDENT & 1998 184,044 36,073 -- 79,174 11,646 4,000
GENERAL COUNSEL 1997 166,416 21,634 615 33,130 -- 1,040
James E. Hartert, M.D...... 1999 210,006 -- -- 18,000 -- 4,000
VICE PRESIDENT & 1998 193,740 37,954 -- 29,700 -- 4,000
CHIEF MEDICAL OFFICER 1997 182,004 18,928 -- 5,522 -- 1,517
AND PRESIDENT
INNOVATIVE RESOURCE
GROUP, INC.
Mary I. Traver............. 1999 185,997 -- 4,417 -- -- 4,000
VICE PRESIDENT AND 1998 168,836 48,963 4,332 -- 55,166 3,985
PRESIDENT OF 1997 162,516 9,751 2,134 -- -- 4,000
COMPCARE HEALTH
SERVICES INSURANCE
CORPORATION
</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 UWS's Profit Sharing Plan and
Management Incentive Plan.
(3) Amounts represent reimbursement for the payment of taxes, the payout for
unused personal days and a lump sum payment for deferring a merit increase.
The amounts indicated do not include perquisites and the other personal
benefits to the named executive officers which for each such officers did
not exceed the lesser of $50,000 or 10% of the officer's total annual salary
and bonus.
(4) Amounts represent payments for the 1995-1997 LTIP Plan and prorata payments
for the 1996-1998 and 1997-1999 LTIP Plans which were discontinued effective
December 31, 1997.
(5) Amounts represent UWS's matching contributions to the UWSI/BCBSUW 401(k)
Plan.
147
<PAGE>
The following table details the options granted to the executive officers
listed in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------------------- AT ASSUMED ANNUAL RATES
# OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------------
EXECUTIVE GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
--------- ---------- ------------ ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas R. Hefty............. 147,500 31.01% 8.50 01/25/2011 $997,805 $2,681,055
Penny J. Siewert............ 49,200 10.34% 8.50 01/25/2011 332,827 894,291
Stephen E. Bablitch......... 41,000 8.62% 8.50 01/25/2011 277,356 745,242
James E. Hartert, M.D....... 18,000 3.78% 8.50 01/25/2011 121,766 327,180
Mary I. Traver.............. -0- -0- N/A N/A N/A N/A
</TABLE>
------------------------
(1) Options granted vest at the rate of 25% each year on the anniversary of the
grant date. All options for Messrs. Hefty, Bablitch, Hartert, and
Ms. Siewert were granted on 01/26/1999
No options or Stock Appreciation Rights ("SARs") were exercised by any of
the executive officers listed in the Summary Compensation Table during 1999. The
number of unexercised options and SARs and the total value of unexercised
in-the-money options and SARs at December 31, 1999 are shown in the following
table.
AGGREGATED OPTION/SAR EXERCISES IN
THE LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END (#) AT FY-END ($)
---------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
---- ---------------------------- -------------------------
<S> <C> <C>
Thomas R. Hefty.................................. 211,354/321,150 -0-/-0-
Penny J. Siewert................................. 67,280/137,293 -0-/-0-
Stephen E. Bablitch.............................. 52,923/122,468 -0-/-0-
James E. Hartert, M.D............................ 18,468/45,797 -0-/-0-
Mary I. Traver................................... 79,013/5,522 -0-/-0-
</TABLE>
------------------------
(1) Options become immediately exercisable upon change in control of UWS. A
change in control includes: the acquisition by certain persons or groups of
25% or more of the outstanding Common Stock; a change in the membership of a
majority of the board of directors, if not approved by the incumbent
Directors; or the approval by UWS's shareholders of a plan of liquidation,
an agreement to sell substantially all of UWS's assets, or certain
combinations, consolidations or reorganizations. This combination is not
considered a change in control.
DEFINED BENEFIT PENSION PLANS
UWS 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
148
<PAGE>
year. UWS has assumed sponsorship (with BCBSUW) of the Pension Plan and the
related trust and will continue to provide benefits for all individuals who were
participants in the Pension Plan with AMSG, taking into account all service with
AMSG.
In addition, UWS 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). UWS has assumed sponsorship (with BCBSUW) 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:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------
REMUNERATION 15 20 25 30 OR MORE
------------ -------- -------- -------- ----------
<S> <C> <C> <C> <C>
$125,000 $37,500 $50,000 $62,500 $75,000
150,000 45,000 60,000 75,000 90,000
175,000 52,500 70,000 87,500 105,000
200,000 60,000 80,000 100,000 120,000
225,000 67,500 90,000 112,500 135,000
250,000 75,000 100,000 125,000 150,000
275,000 82,500 110,000 137,500 165,000
300,000 90,000 120,000 150,000 180,000
400,000 120,000 160,000 200,000 240,000
500,000 150,000 200,000 250,000 300,000
600,000 180,000 240,000 300,000 360,000
</TABLE>
The persons named in the Summary Compensation Table have the following years
of credited service which includes all years of service with AMSG: Mr. Hefty,
eighteen years; Ms. Siewert, twenty-four years; Mr. Bablitch, four years;
Dr. Hartert, four years; and Ms. Traver, seventeen years.
LEGAL MATTERS
The validity of the shares of UWS common stock offered by this Proxy
Statement/Prospectus will be passed upon for UWS by Michael Best & Friedrich
LLP, Milwaukee, Wisconsin.
EXPERTS
The consolidated financial statements of UWS at December 31, 1999 and 1998
and for each of the three years in the period ended December 31, 1999 appearing
in this registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of BCBSUW at December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999
appearing in this registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
149
<PAGE>
SHAREHOLDER PROPOSALS FOR 2001 ANNUAL MEETING
Any shareholder who desires to submit a proposal pursuant to Rule 14a-8 of
the Exchange Act for the 2001 Proxy Statement and Annual Meeting should submit
the proposal in writing to Corporate Secretary, United Wisconsin
Services, Inc., 401 West Michigan Street, Milwaukee, Wisconsin 53203. The
proposal, together with any supporting statement, may not exceed 500 words in
length. UWS must receive a proposal by , 2001, in order to consider
it for inclusion in the 2001 Proxy Statement. Proposals submitted other than
pursuant to Rule 14a-8 will be considered untimely if received after ,
2001, and UWS will not be required to present any such proposal at the 2001
Annual Meeting of Shareholders. If the board of directors decides to present a
proposal despite its untimeliness, the people named in the proxies will have the
right to exercise discretionary voting power with respect to such proposal.
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION
UWS is subject to the information and reporting requirements of the
Securities and Exchange Act of 1934, as amended. UWS files reports, proxy
statements and other information with the Securities and Exchange Commission.
Copies of UWS's reports, proxy statements and other information may be inspected
and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and at certain regional offices
of the SEC located at Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such information can be obtained at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an
internet web site (HTTP://WWW.SEC.GOV) that contains reports, proxy and
information statements and other information regarding registrants such as UWS
that file electronically with the SEC. In addition, the Common Stock is included
for quotation on the New York Stock Exchange and such reports, proxy and
information statements, registration statements and other information concerning
UWS should be available for inspection and copying at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
If you have any additional questions about the combination, please call
UWS's Investor Relations at (414) .
This Proxy Statement/Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this Proxy
Statement/Prospectus, or the solicitation of a proxy, in any jurisdiction to or
from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction. Neither the
delivery of this Proxy Statement/ Prospectus nor any distribution of securities
pursuant to this Proxy Statement/Prospectus shall, under any circumstances,
create any implication that there has been no change in the information set
forth or incorporated into this Proxy Statement/Prospectus by reference or in
our affairs since the date of this Proxy Statement/Prospectus. The information
contained in this Proxy Statement/Prospectus with respect to BC Holdings and its
subsidiaries was provided by BC Holdings and the information contained in this
Proxy Statement/Prospectus with respect to UWS and its predecessors was provided
by UWS.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH UWS OR BC HOLDINGS HAS REFERRED YOU. NEITHER UWS NOR BC HOLDINGS HAS
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
150
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
UNITED WISCONSIN SERVICES, INC.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999, AND
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
F-1
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999, AND
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-3
Consolidated Financial Statements
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Changes in Shareholders' Equity
and
Comprehensive Income (Loss)............................... F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1999 and 1998, and
the related statements of operations, changes in shareholders' equity and
comprehensive income (loss) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
February 11, 2000
F-3
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 31,196 $ 16,254 $ 26,385
Investments--available-for-sale, at fair value........... 115,848 120,721 158,463
Due from affiliates...................................... 6,614 1,575 567
Premium receivables...................................... 34,857 24,215 20,137
Due from clinics and providers........................... 15,167 16,629 17,087
Other receivables........................................ 28,353 29,156 27,673
Prepaid expenses and other current assets................ 25,024 29,438 6,778
-------- -------- --------
Total current assets....................................... 257,059 237,988 257,090
Noncurrent assets:
Investments--held-to-maturity, at amortized cost......... 9,272 9,153 7,710
Property and equipment, net.............................. 10,602 9,938 8,963
Goodwill................................................. 11,629 10,492 7,751
Other noncurrent assets.................................. 44,857 29,583 16,694
-------- -------- --------
Total assets............................................... $333,419 $297,154 $298,208
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical and other benefits payable....................... $ 88,344 $ 74,238 $ 70,659
Advance premiums......................................... 45,326 36,248 30,584
Note payable to affiliates............................... 70,000 -- 70,000
Due to affiliates--other................................. 14,455 13,037 7,513
Payables and accrued expenses............................ 13,189 15,033 19,129
Debt..................................................... 21,132 11,890 941
Other current liabilities................................ 13,277 10,274 9,586
-------- -------- --------
Total current liabilities.................................. 265,723 160,720 208,412
Noncurrent liabilities:
Note payable to affiliates............................... -- 70,000 --
Non-current other benefits payable....................... 30,549 24,104 19,375
Other noncurrent liabilities............................. 12,489 11,298 5,962
-------- -------- --------
Total liabilities.......................................... 308,761 266,122 233,749
Shareholders' equity:
Preferred stock (no par value, 1,000,000 shares
authorized)............................................ -- -- --
Common stock (no par value, no stated value, 50,000,000
shares authorized, 16,939,682, 16,939,682 and
16,812,081 shares issued and outstanding at
September 30, 2000, December 31, 1999 and 1998,
respectively).......................................... 14,052 14,052 13,378
Retained earnings........................................ 12,943 20,242 50,088
Accumulated other comprehensive income (loss)............ (2,337) (3,262) 993
-------- -------- --------
Total shareholders' equity................................. 24,658 31,032 64,459
-------- -------- --------
Total liabilities and shareholders' equity................. $333,419 $297,154 $298,208
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Health services revenues:
Premium............................... $554,069 $484,207 $651,567 $608,917 $560,825
Other................................. 33,812 29,477 41,586 29,728 26,046
Investment results...................... 5,967 9,509 11,371 19,029 22,340
-------- -------- -------- -------- --------
Total revenues............................ $593,848 $523,193 704,524 657,674 609,211
Expenses:
Medical and other benefits.............. 504,976 441,505 621,916 519,636 485,198
Selling, general and administrative..... 57,997 54,877 73,507 65,376 58,393
Other operating......................... 37,740 40,615 53,897 38,141 36,103
Profit (loss) sharing on provider
arrangements.......................... 420 (820) (4,096) 2,762 3,380
Interest................................ 4,876 3,780 5,293 1,464 102
Amortization of goodwill................ 716 571 796 450 818
-------- -------- -------- -------- --------
Total expenses............................ 606,725 540,528 751,313 627,829 583,994
-------- -------- -------- -------- --------
Income (loss) before income tax........... (12,877) (17,335) (46,789) 29,845 25,217
Income tax expense (benefit).............. (5,578) (7,309) (17,785) 11,767 9,433
-------- -------- -------- -------- --------
Net income (loss)......................... $ (7,299) $(10,026) $(29,004) $ 18,078 $ 15,784
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMMON INVESTMENTS BY COMPREHENSIVE TOTAL
SHARES COMMON RETAINED AND ADVANCES INCOME (LOSS), SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS FROM AMSG NET OF TAXES EQUITY
----------- -------- -------- -------------- ------------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............ -- $ -- $ -- $119,923 $ 3,959 $123,882
Comprehensive income:
Net income.......................... -- -- -- 15,784 -- 15,784
Change in unrealized gains/losses on
investments....................... -- -- -- -- (748) (748)
--------
Comprehensive income.............. 15,036
--------
Change in investment by and advances
from AMSG........................... -- -- -- (15,302) -- (15,302)
---------- ------- -------- -------- ------- --------
Balance at December 31, 1997............ -- -- -- 120,405 3,211 123,616
Comprehensive income:
Net income.......................... -- -- 3,572 14,506 -- 18,078
Change in unrealized gains/losses on
investments....................... -- -- -- -- (2,218) (2,218)
--------
Comprehensive income.............. 15,860
--------
Cash dividends paid on common stock... -- -- (839) -- -- (839)
Change in investment by and advances
from AMSG........................... -- -- -- (76,133) -- (76,133)
Distribution of equity to the Company
from AMSG........................... -- 11,423 47,355 (58,778) -- --
Issuance of common stock, no par
value, in connection with the
Spin-off............................ 16,573,202 -- -- -- -- --
Issuance of common stock, no par
value, related to acquisition and
dividend reinvestment plan.......... 238,879 1,955 -- -- -- 1,955
---------- ------- -------- -------- ------- --------
Balance at December 31, 1998............ 16,812,081 13,378 50,088 -- 993 64,459
Comprehensive loss:
Net loss............................ -- -- (29,004) -- -- (29,004)
Change in unrealized gains/losses on
investments....................... -- -- -- -- (4,255) (4,255)
--------
Comprehensive loss................ (33,259)
--------
Cash dividends paid on common
stock............................... -- -- (842) -- -- (842)
Issuance of common stock, no par
value, related to acquisition and
dividend reinvestment plan.......... 127,601 674 -- -- -- 674
---------- ------- -------- -------- ------- --------
Balance at December 31, 1999............ 16,939,682 14,052 20,242 -- (3,262) 31,032
(2000 amounts unaudited)
Comprehensive loss:
Net loss............................ -- -- (7,299) -- -- (7,299)
Change in unrealized gains/losses on
investments....................... -- -- -- -- 925 925
--------
Comprehensive loss................ (6,374)
---------- ------- -------- -------- ------- --------
Balance at September 30, 2000........... 16,939,682 $14,052 $12,943 $ -- $(2,337) $ 24,658
========== ======= ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ (7,299) $(10,026) $(29,004) $ 18,078 $ 15,784
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 3,422 2,652 3,585 3,199 1,964
Realized investment losses (gains).............. 588 (2,539) (2,145) (9,123) (11,921)
Deferred income tax (benefit) liability......... (5,898) (1,777) (12,383) 839 (1,023)
Changes in other operating accounts net of
acquisitions:
Premium receivables........................... (10,642) (2,603) (4,078) (1,983) 227
Other receivables............................. 890 (1,684) (7,046) (3,495) (5,246)
Due from clinics and providers................ 1,462 (2,101) 458 (6,784) (338)
Medical and other benefits payable............ 20,551 (16,428) 8,308 8,392 6,501
Advance premiums.............................. 9,078 (806) 5,664 6,524 (1,983)
Due to/from affiliates........................ (3,621) 1,146 4,516 3,392 7,782
Prepaid taxes--current........................ 3,817 (9,039) (9,395) -- --
Other, net.................................... (7,843) 125 (3,718) 2,814 (10,128)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities...................................... 4,505 (43,080) (45,238) 21,853 1,619
INVESTING ACTIVITIES
Acquisition of subsidiaries (net of cash and cash
equivalents acquired)........................... (1,977) (3,605) (3,605) (1,181) --
Purchases of available-for-sale investments....... (16,864) (108,500) (119,594) (241,661) (452,906)
Proceeds from sale of available-for-sale
investments..................................... 20,355 125,388 143,761 233,974 433,012
Proceeds from maturity of available-for-sale
investments..................................... 2,960 8,650 8,650 6,500 34,252
Purchases of held-to-maturity investments......... (2,450) (1,359) (1,460) (313) (2,894)
Proceeds from maturity of held-to-maturity
investments..................................... 2,325 -- -- 405 3,567
Additions to property and equipment, net.......... (3,147) (1,960) (3,140) (3,569) (1,244)
Purchase of minority interest in subsidiary....... -- -- -- -- (2,218)
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities...................................... 1,202 18,614 24,612 (5,845) 11,569
FINANCING ACTIVITIES
Cash dividends paid............................... -- -- (842) (839) --
Issuance of common stock.......................... -- 5 394 316 --
Proceeds from debt................................ 9,350 6,565 11,550 -- --
Decrease in investments by and advances from
AMSG............................................ -- -- -- (6,133) (15,302)
Repayment of debt................................. (115) (557) (607) -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities...................................... 9,235 6,013 10,495 (6,656) (15,302)
-------- -------- -------- -------- --------
Cash and cash equivalents:
Increase (decrease) during period............... 14,942 (18,453) (10,131) 9,352 (2,114)
Balance at beginning of year.................... 16,254 26,385 26,385 17,033 19,147
-------- -------- -------- -------- --------
Balance at end of period........................ $ 31,196 $ 7,932 $ 16,254 $ 26,385 $ 17,033
======== ======== ======== ======== ========
</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, case management 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.
At December 31, 1999, BCBSUW owned approximately 46% of the Company's common
stock. In addition, the Company is affiliated with Blue Cross & Blue Shield
United of Wisconsin ("BCBSUW") through certain common officers and directors. On
August 17, 1999, BCBSUW completed a purchase of 1.4 million shares of the
Company's common stock in the open market in connection with a previously
disclosed plan for BCBSUW to increase its ownership in the Company. The
ownership by BCBSUW, in combination with the ownership by the Company's 401(K)
and pension plans enables Compcare Health Services Insurance Corporation
("Compcare"), a wholly-owned subsidiary of the Company, to use the Blue Cross
and Blue Shield brand on its products.
PENDING TRANSACTION (UNAUDITED)
BCBSUW's Board of Directors announced in June of 1999 its intention to
convert BCBSUW from a service insurance corporation to a stockholder owned
corporation. On March 28, 2000 the Wisconsin Commissioner of Insurance issued an
order which allows BCBSUW to convert to a stock form of ownership by completing
a merger with the Company. In conjunction with the planned change in corporate
structure of BCBSUW, a special committee of the Company's board of directors has
been elected to negotiate the terms of the merger with BCBSUW.
BASIS OF PRESENTATION
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 intercompany transactions
have been eliminated. The Company consolidates subsidiaries for which repurchase
options exist (see Note 2) 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 because
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.
F-8
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited financial information presented as of and for the nine month
periods ended September 30, 1999 and 1998 include all adjustments, consisting of
normal recurring accruals, which the Company considers necessary for fair
presentation of financial position and results of operations and are accumulated
in a manner consistent with amounts as of and for each of the years in the
period ended December 31, 1999.
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 fair value.
INVESTMENTS
Investments are classified as either held-to-maturity or available-for-sale.
Investments which the Company has the intent and ability to hold to maturity are
designated as held-to-maturity and are stated at amortized cost. All other
investments are classified as available-for-sale and are stated at fair value
based on quoted market prices, with unrealized gains and losses excluded from
earnings and reported as a component of accumulated other comprehensive income
(loss), net of income tax effects. Realized gains and losses from the sale of
available-for-sale debt and equity securities are calculated using the first-in,
first-out basis.
PREMIUM RECEIVABLES
Premium receivables are stated at net realizable value, net of allowances
for uncollectible amounts of $2,858,000 and $719,000 at December 31, 1999 and
1998, respectively, based upon historical collection trends and management's
judgment of the ultimate collectibility.
DUE FROM CLINICS AND PROVIDERS
Amounts due from clinics and providers are stated at net realizable value,
net of an allowance for uncollectible amount of $7,015,000 at December 31, 1999
based upon management's best estimate of the ultimate collectibility. In late
December 1998, Compcare issued interest-bearing notes to certain contracted
health care providers. Notes outstanding to providers at December 31, 1999 and
1998 were $1,009,000 and $13,421,000, respectively, and are included in due from
clinics and providers on the accompanying consolidated balance sheets.
OTHER RECEIVABLES
Other receivables are stated at net realizable value, net of allowances for
uncollectible amounts of $3,498,000 and $27,000 at December 31, 1999 and 1998,
respectively, based upon historical collection trends and management's best
estimate of the ultimate collectibility.
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 of
the related assets, which range from 3 to 5 years for computer equipment and
software, 3 to 10 years for furniture and other equipment, 20 to 30 years for
land improvements and 10 to 40 years for buildings and building improvements.
F-9
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets
acquired. Goodwill is being amortized on a straight-line basis over a period of
15 years or less. Accumulated amortization was $2,951,000 and $2,006,000 at
December 31, 1999 and 1998, 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 goodwill. At December 31, 1999, the Company's management
believed that no material impairment of goodwill 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. Case
management and receivables management revenues are recognized when cash is
received.
MEDICAL AND OTHER BENEFITS
Medical and other benefits expense consists principally of capitation
expenses, health and disability benefit claims and life insurance benefits. In
addition to actual paid claims and capitation, medical and other benefits
expense includes the change in estimates for reported and unreported claims and
accrued capitation fees and adjustments, which are unpaid as of the balance
sheet date. The estimates for reported and unreported claims and accrued
capitation fees and adjustments, which are unpaid as of the balance sheet date,
are based on historical payment patterns using standard 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 payments on a
per member per month basis 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.
Estimated settlements relating to these arrangements are developed based on
historical payment patterns using standard actuarial techniques. The portion of
medical and other benefits payable pertaining to long-term disability, workers'
compensation and certain life insurance products which is estimated to be paid
more than one year from the balance sheet date are classified as noncurrent
liabilities on the accompanying balance sheets.
PREMIUM DEFICIENCY RESERVES
Premium deficiency reserves are recognized when it is probable that the
future costs associated with a group of existing contracts will exceed the
anticipated future premiums on those contracts. The Company calculates expected
premium deficiency reserves based on budgeted revenues and expenses, excluding
investment income. Premium deficiency reserves are evaluated quarterly for
adequacy.
F-10
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Amounts assumed from and ceded to other insurance companies are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Reinsurance assumed:
Insurance premiums............................. $28,895 $28,682 $33,514
Medical and other benefits..................... 21,576 22,694 28,213
Reinsurance ceded:
Insurance premiums............................. $29,905 $45,755 $49,522
Medical and other benefits..................... 25,507 35,038 42,003
</TABLE>
The Company has reinsurance recoverable amounts outstanding of $18,356,000
and $17,827,000 as of December 31, 1999 and 1998, respectively. These balances
are included in other current and other noncurrent assets based on the expected
settlements.
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 for 1998 and 1997,
since the Company was not a separate entity with its own capital structure.
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 1997, and is
adjusted in 1998 and 1997 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-11
<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,
---------------------------
1998 1997
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
Net income as reported............................... $ 18,078 $ 15,784
Pro forma adjustment--interest expense, net of tax... 2,215 3,062
---------- ----------
Pro forma net income................................. $ 15,863 $ 12,722
========== ==========
Pro forma basic weighted average common shares....... 16,560,382 16,423,270
Pro forma dilutive weighted average common
shares(1).......................................... 16,563,165 16,423,270
EPS on net income as reported--basic and
diluted(2)......................................... $ 1.09 $ 0.96
========== ==========
EPS on pro forma net income--basic and diluted(3).... $ 0.96 $ 0.77
========== ==========
</TABLE>
------------------------
(1) Pro forma calculations for dilutive securities for the period January 1,
1997 through 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.
(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.
USE OF ESTIMATES
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
("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.
RECENT PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted SOP 97-3, ACCOUNTING FOR
INSURANCE AND OTHER ENTERPRISES FOR INSURANCE RELATED ASSESSMENTS ("SOP 97-3").
SOP 97-3 provides guidance on accounting by insurance and other enterprises for
assessments related to insurance activities including recognition, measurement
and disclosure of guaranty fund and other insurance related assessments.
Adoption of SOP 97-3 did not have a material effect on the Company's
consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for 1998 and 1997 to conform with the 1999 presentation.
F-12
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROVIDER ARRANGEMENTS
The Company is a 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, 2002, at a price equal to Valley's net assets plus $400,000.
Pursuant to the terms of the Unity purchase agreements, as amended, the
sellers retained options to repurchase the net assets of the acquired companies
as of December 31, 2004. One seller has the option to repurchase a portion of
Unity's business for $500,000 plus the proportionate share of the net worth of
such business less any unpaid amount of the maximum annual performance bonuses.
The maximum annual performance bonuses are limited to $650,000 in total. 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 $220,235,000, $207,014,000 and $186,318,000 for
1999, 1998 and 1997, respectively. Profit (loss) sharing expenses related to
these provider arrangements is calculated based on the profitability of the HMO
subsidiary and totaled $(2,366,000), $3,171,000 and $3,960,000 in 1999, 1998 and
1997, respectively. Total net income (loss) subject to repurchase options,
pursuant to the various acquisition agreements, totaled $(1,071,000), $2,358,000
and $2,395,000 for 1999, 1998 and 1997, respectively. Total assets and total net
assets subject to repurchase options were $39,409,000 and $16,970,000,
respectively, at December 31, 1999 and $44,798,000 and $21,362,000,
respectively, at December 31, 1998.
3. INVESTMENTS
Investment results comprise the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest on bonds................................ $ 8,058 $ 8,223 $ 9,075
Dividends on equity securities................... 867 916 1,103
Realized gains................................... 6,509 12,518 15,317
Realized losses.................................. (4,364) (3,395) (3,396)
Interest on cash equivalents and other
investments.................................... 1,033 1,609 473
------- ------- -------
Gross investment results......................... 12,103 19,871 22,572
Investment expenses.............................. (545) (455) (322)
Other interest income (expense).................. (187) (387) 90
------- ------- -------
$11,371 $19,029 $22,340
======= ======= =======
</TABLE>
Proceeds from sales of stocks during 1999, 1998 and 1997 were $65,031,000,
$73,156,000 and $89,681,000. Proceeds from sales of bonds classified as
available-for-sale during 1999, 1998 and 1997, excluding maturities, were
$78,730,000, $160,818,000 and $343,331,000. 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 change in unrealized
F-13
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
gains/losses, less deferred income taxes, which is included in accumulated other
comprehensive income (loss), is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities................................... $(6,068) $(1,248) $ 1,582
Equity securities................................. (452) (1,837) (3,134)
Provision for deferred income tax (benefit)....... 2,265 867 804
------- ------- -------
$(4,255) $(2,218) $ (748)
======= ======= =======
</TABLE>
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, 1999:
Available-for-sale:
U.S. Treasury securities........................ $ 13,119 $ -- $ (999) $ 12,120
State and municipal securities.................. 9,174 -- (337) 8,837
Foreign government securities................... 4,900 2 (313) 4,589
Corporate debt securities....................... 52,796 13 (2,697) 50,112
Government agency mortgage-backed securities.... 30,320 23 (1,004) 29,339
Equity securities............................... 15,321 1,444 (1,041) 15,724
-------- ------ ------- --------
125,630 1,482 (6,391) 120,721
Held-to-maturity:
U.S. Treasury securities........................ 9,153 6 (79) 9,080
-------- ------ ------- --------
$134,783 $1,488 $(6,470) $129,801
======== ====== ======= ========
</TABLE>
<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
======== ====== ======= ========
</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, 1999, 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............................... $ 1,264 $ 1,259
Due after one through five years...................... 32,642 31,476
Due after five through ten years...................... 35,482 33,024
Due after ten years................................... 10,601 9,899
-------- --------
79,989 75,658
Government agency mortgage-backed securities.......... 30,320 29,339
-------- --------
$110,309 $104,997
======== ========
Held-to-maturity:
Due in one year or less............................... $ 2,328 $ 2,332
Due after one through five years...................... 6,825 6,748
-------- --------
$ 9,153 $ 9,080
======== ========
</TABLE>
At December 31, 1999, the insurance subsidiaries had debt securities and
cash equivalents on deposit with various state insurance departments with
carrying values of approximately $9,071,000, which are included in investments
held-to-maturity on the balance sheet.
The Company and certain subsidiaries participate in securities lending
programs whereby blocks of securities, which are returnable to the Company on
short-term notice and included in investments, are loaned to third parties,
primarily major brokerage firms. The Company requires a minimum of 102% of the
fair value of the loaned securities to be separately maintained as collateral
for the loans. Securities with a cost or amortized cost of $15,030,000 and
$20,936,000 and estimated fair value of $14,377,000 and $21,565,000 were on loan
under the program at December 31, 1999 and 1998, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements............................... $ 398 $ 398
Building and building improvements....................... 3,961 3,766
Computer equipment and software.......................... 10,866 9,953
Furniture and other equipment............................ 5,307 4,365
-------- -------
20,532 18,482
Less accumulated depreciation............................ (10,594) (9,519)
-------- -------
$ 9,938 $ 8,963
======== =======
</TABLE>
Depreciation expense totaled $2,221,000 and $2,242,000 in 1999 and 1998,
respectively.
F-15
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT
The Company participates with BCBSUW in a bank line of credit, which permits
aggregate borrowings up to $30,000,000. Periodic borrowings have been made on
these lines of credit. The Company's outstanding line of credit balance was
$11,550,000 at December 31, 1999. The interest expense on the line of credit was
$441,300, $53,300 and $102,300 in 1999, 1998 and 1997, respectively. The 1999
weighted average interest rate on the line-of-credit was 6.4%.
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; 7.33% as of December 31, 1999. On
October 13, 1999, the maturity date of the principal balance was extended from
October 30, 1999 to April 30, 2001; and therefore, it is classified as
noncurrent in the 1999 consolidated balance sheet. BCBSUW intends to refinance
this $70,000,000 note obligation with a maturity date subsequent to
December 31, 2001. This obligation has been classified as non-current in the
accompanying September 30, 2000 balance sheet. Interest expense and interest
paid totaled $4,804,000 and $1,411,000 in 1999 and 1998, respectively.
The Company provides marketing, underwriting, actuarial and certain
administrative services to BCBSUW. In addition, BCBSUW provides office space to
the Company. These activities are reimbursed at amounts approximating cost,
which resulted in allocations to the Company of $11,959,000, $14,757,000 and
$14,564,000 in 1999, 1998 and 1997, respectively, and allocations to BCBSUW of
$11,659,000, $8,964,000 and $9,278,000 in 1999, 1998 and 1997, respectively.
These amounts are included in selling, general and administrative expenses.
Certain subsidiaries of the Company provide health, life and other insurance
benefits to the employees of BCBSUW. Premium revenue received from BCBSUW
totaled $4,921,000, $4,547,000 and $4,537,000 in 1999, 1998 and 1997,
respectively. In addition, BCBSUW provides health insurance to certain of the
Company's employees. Premium revenue paid by the Company totaled $4,061,000,
$2,025,000 and $1,814,000, 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
$15,562,000, $26,875,000 and $27,014,000 in 1999, 1998 and 1997, 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"), a wholly-owned subsidiary. 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 Innovative Resource Group, Inc., all wholly-owned subsidiaries.
The Company assumes 100% of the premium revenues on these products from UWLIC.
The assumed premium revenue approximated $18,182,000, $23,295,000 and
$27,213,000 in 1999, 1998 and 1997, respectively.
F-16
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED-PARTY TRANSACTIONS (CONTINUED)
United Wisconsin Insurance Company ("UWIC"), a wholly-owned subsidiary, has
an agreement with BCBSUW whereby UWIC underwrites BCBSUW's United Dairy Trust
insured product. UWIC cedes 100% of the premium revenue of these products to
BCBSUW. The ceded premium revenue was $1,843,000, $6,122,000 and $8,430,000 in
1999, 1998 and 1997, respectively.
Prior to the Spin-off, the Company's operations were financed through its
operating cash flows and investments by and advances from AMSG.
Due to affiliates--other relates 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.
Management believes all related-party activity has been entered into on a
reasonable basis and includes all costs of doing business.
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 was 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 receivable of $7,621,000 included
in other current assets on the accompanying balance sheet and a net federal
income tax payable of $1,650,000 included in other current liabilities on the
accompanying balance sheet at December 31, 1999 and 1998, respectively. Federal
and state income tax payments, net of refunds, totaled $3,486,000, $2,327,000
and $3,243,000 in 1999, 1998 and 1997, respectively.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal....................................... $ (6,207) $ 8,994 $ 8,870
State......................................... 721 1,934 1,586
-------- ------- -------
(5,486) 10,928 10,456
Deferred:
Federal....................................... (8,657) 737 (651)
State......................................... (3,642) 102 (372)
-------- ------- -------
(12,299) 839 (1,023)
-------- ------- -------
$(17,785) $11,767 $ 9,433
======== ======= =======
</TABLE>
F-17
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The differences between taxes computed at the federal statutory rate and
recorded income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at federal statutory rate.................... $(16,301) $10,446 $8,826
Goodwill amortization............................ 301 136 154
Tax-exempt interest and dividends received
deduction...................................... (143) (141) (230)
State income and franchise taxes, net of federal
benefit........................................ (1,454) 1,161 827
Other, net....................................... (188) 165 (144)
-------- ------- ------
$(17,785) $11,767 $9,433
======== ======= ======
</TABLE>
The components of deferred income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Reserve discounting............................... $ (546) $ 161 $ --
Employee benefits................................. 515 (698) --
Depreciation and amortization..................... 120 272 (1,299)
Net operating loss carryforwards.................. (6,754) 414 --
Prepaid expenses.................................. (493) 683 --
Reserve allowance................................. (5,510) -- --
Other, net........................................ 369 7 276
-------- ----- -------
$(12,299) $ 839 $(1,023)
======== ===== =======
</TABLE>
In reaching its conclusion that the tax benefit of the NOL's will be
realized, management has considered the tax planning strategy of selling certain
non-insurance subsidiaries to supplement its taxable income from operations.
However, future levels of operating income as well as the fair value of the
subsidiaries are dependent upon economic conditions beyond the Company's
control. Consequently, management periodically reviews its tax planning
strategies based upon changes in facts and circumstances and, accordingly,
considers potential adjustments to the deferred tax asset or the establishment
of a valuation allowance. At present, the Company is unaware of any
circumstances or events which would adversely effect the deferred tax assets.
Current tax laws and regulations relating to specified changes in ownership
may limit the Company's ability to utilize its NOL's.
F-18
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Significant components of the Company's federal and state deferred tax
liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- -------------------
FEDERAL STATE FEDERAL STATE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Depreciation........................................... $ (545) $ (108) $ (944) $ (203)
Claims-based receivables............................... (1,416) (241) (1,864) (303)
Pension accrual........................................ (2,201) (470) (2,350) (449)
Unrealized gains on investments........................ -- -- (516) (104)
Prepaid expenses....................................... (1,559) (317) (1,077) (119)
Federal effect of state taxes.......................... (1,374) -- -- --
Other, net............................................. (102) (7) (268) (36)
------- ------- ------- -------
(7,197) (1,143) (7,019) (1,214)
Deferred tax assets:
Postretirement benefits other than pensions............ 1,552 343 1,465 311
Advance premium discounting............................ 1,499 337 1,303 265
Deferred compensation.................................. 1,414 308 2,063 421
Medical and other benefits payable discounting......... 1,364 245 1,004 117
Unrealized losses on investments....................... 1,710 288 -- --
Business loss carryforwards............................ 4,872 3,630 127 241
Bad debt reserve allowance............................. 4,647 1,048 -- --
Other, net............................................. 657 135 564 148
Valuation allowance.................................... (290) (1,061) -- --
------- ------- ------- -------
17,425 5,273 6,526 1,503
------- ------- ------- -------
Net deferred tax assets (liabilities).................... $10,228 $ 4,130 $ (493) $ 289
======= ======= ======= =======
</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.
UWS and its affiliates have a federal net operating loss ("NOL")
carryforward of $13,900,000 which expires in the year 2019. UWS and its
affiliates have state net operating loss carryforwards totaling $46,355,000,
which expire in the years 2011 through 2014.
The Company's net operating loss carryovers for the year ending
December 31, 1999 and the nine month period ending September 30, 2000 expire in
2019 and 2020, respectively. SFAS No. 109, ACCOUNTING FOR INCOME TAXES, requires
that the tax benefit of NOL's be recorded as an asset to the extent that
management believes it is "more likely than not" that such tax benefits will be
realized. Based on the Company's expectations and available tax planning
strategies, management believes there will be sufficient taxable income to
realize the entire tax benefit of the federal NOL carryovers and substantially
all of the state NOL carryovers prior to their expiration.
F-19
<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.
Unity is in the process of negotiating a final settlement on its five-year
joint venture joint venture agreements that ended December 31, 1999. In the
opinion of management, adequate provision has been made for losses which may
result from this negotiation and, accordingly, the outcome of these negotiations
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, 1999 and 1998 aggregated $76,958,000
and $106,369,000, respectively. The statutory net income (loss) of insurance
subsidiaries aggregated $(25,512,000), $15,884,000 and $17,380,000 in 1999, 1998
and 1997, respectively.
During 1998, the National Association of Insurance Commissioners ("NAIC")
adopted Codification of Statutory Accounting Principals ( "Codification") which
provide interpretive guidance on statutory accounting principles and will
replace the current manual of Accounting Practices and Procedures adopted by the
NAIC commissioners. In addition, the NAIC is now considering amendments to
Codification that would be effective on the recommended implementation date of
January 1, 2001. Such amendments could have a significant impact on Codification
guidelines. Codification provides new interpretive guidance for some existing
statutory accounting principles in some areas, and requires the filing of new
insurance reports for statutory purposes. Management believes Codification will
have a significant negative impact on the statutory surplus of certain of the
insurance subsidiaries of UWS. Depending on the final resolution of pending
amendments to Codification and collection of provider receivables, UWS may be
required to obtain additional capital or implement other measures, such as
securing new reinsurance treaties, to mitigate the impact of Codification on
surplus and risk-based capital.
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 NAIC. The RBC requirements establish minimum
levels of capital and surplus based upon the insurer's operations. As of
September 30, 2000, statutory compulsory surplus and regulatory minimum
compulsory surplus, as calculated and permitted by OCI, were $36,226,000 and
$29,549,000, respectively. The Company intends to make capital contributions on
an ongoing basis to satisfy all promulgated capital and surplus requirements, as
needed.
F-20
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
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, 1999, as filed
with the insurance regulators, the aggregate amount available for dividends in
2000 without regulatory approval is $1,318,000.
10. EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS
The Company and certain of its subsidiaries participate with BCBSUW in a
multiple employer defined benefit pension plan ("the Plan"). The Plan provides
retirement benefits to covered employees based primarily on compensation and
years of service. Since the Plan is overfunded, no contributions were made in
1999, 1998 or 1997.
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.
The Company has postretirement benefit plans to provide certain medical,
dental, and vision benefits and life insurance for certain groups of retired
employees. Such plans were amended in 1997 to limit the Company's financial
contribution in future periods. No benefits will be provided for individuals
hired after the effective dates of these amendments.
The following table summarizes the change in the pension and postretirement
benefit obligations as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Accumulated benefit obligation at beginning of year....... $20,876 $17,568 $3,069 $2,373
Service cost............................................ 1,765 1,849 210 182
Interest cost........................................... 1,342 1,362 213 186
Plan amendments......................................... -- -- (101) --
Actuarial (gains) losses................................ (1,579) 1,662 (215) 368
Company transfers....................................... (890) 270 -- --
Benefits paid........................................... (1,137) (1,835) (54) (40)
------- ------- ------ ------
Accumulated benefit obligation at end of year............. $20,377 $20,876 $3,122 $3,069
======= ======= ====== ======
</TABLE>
F-21
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The pension and postretirement plans' assets are comprised primarily of
debt, equity and other marketable securities, including 700,000 shares of UWS
stock with a fair value of $2,975,000 at December 31, 1999. The plan received
dividends on UWS stock in the amount of $35,000 during 1999. The plan did not
own any UWS stock at December 31, 1998. The following table summarizes the
change in the pension and postretirement plan assets as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning of year............. $33,988 $36,082 $ -- $ --
Employer contributions................................... -- -- 54 40
Actual return on plan assets............................. 5,371 (529) -- --
Company transfers........................................ (890) 270 -- --
Benefits paid............................................ (1,137) (1,835) (54) (40)
------- ------- ---- ----
Fair value of plan assets at end of year................... $37,332 $33,988 $ -- $ --
======= ======= ==== ====
</TABLE>
The following table provides a reconciliation of the funded status of the
plans to the prepaid pension and (accrued) postretirement costs at December 31,
1999 and 1997:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Funded status of plan at end of year..................... $16,955 $13,112 $(3,122) $(3,069)
Unrecognized net transition asset...................... (531) (777) -- --
Unrecognized prior service cost........................ (4,766) (5,456) (1,063) (1,052)
Unrecognized net (gain)................................ (4,207) (169) (259) (54)
------- ------- ------- -------
Prepaid (accrued) at end of year......................... $ 7,451 $ 6,710 $(4,444) $(4,175)
======= ======= ======= =======
</TABLE>
Weighted-average assumptions used as of September 30, 1999, the measurement
date, in developing the projected benefit obligations are as follows:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Discount rate.................................... 7.00% 7.00% 7.00% 7.00%
Rate of compensation increase.................... 4.75 4.75 N/A N/A
Health care cost trend rate...................... N/A N/A 5.00 5.00
Expected rate of return on plan assets:.......... 9.00 9.00 N/A N/A
</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 effect of a 1% increase in the medical trend rate would be a $93,000
increase in the benefit obligation as of September 30, 1999.
F-22
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The components of the pension credit and postretirement benefit cost, which
are included in selling, general and administrative expenses, for the years
ended December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost................................... $1,765 $ 1,849 $ 1,335 $210 $182 $194
Interest cost.................................. 1,342 1,362 1,260 213 186 182
Expected return on plan assets................. (2,919) (2,791) (2,553) -- -- --
Net amortization of transition asset........... (245) (274) (274) N/A N/A N/A
Amortization of prior service cost............. (690) (690) (690) N/A N/A N/A
Amortization of unrecognized (gain) loss....... 7 -- -- (90) (90) (80)
Postretirement benefit cost.................... N/A N/A N/A (10) (14) (12)
------ ------- ------- ---- ---- ----
Pension (credit) and accumulated benefit
obligation for the year...................... $ (740) $ (544) $ (922) $323 $264 $284
====== ======= ======= ==== ==== ====
</TABLE>
After giving effect to all administrative expense allocations between the
Company and BCBSUW, the pension credit was $1,127,000, $622,000 and $945,000 in
1999, 1998 and 1997, 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 participate with BCBSUW
in various other profit sharing and bonus programs. Expenses related to all of
these plans, after giving effect to all administrative expense allocations
between the Company and BCBSUW, totaled $1,356,000, $2,475,000 and $2,042,000 in
1999, 1998 and 1997, respectively.
STOCK-BASED COMPENSATION PLANS
The Company has a stock-based compensation plan covering employees and
directors that allows for option grants of up to 4,500,000 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
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.
F-23
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company follows Accounting Principles Board Opinion No. 25 under which
no compensation expense is recorded when the 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,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net income (loss)..................... $(29,418) $18,021 $12,722
Pro forma earnings per common share:
Basic......................................... $ (1.75) $ 1.09 $ 0.77
Diluted....................................... $ (1.75) $ 1.09 $ 0.77
</TABLE>
In determining compensation cost pursuant to SFAS 123, the fair values 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 1999: risk-free interest rate of 5.33%;
dividend yield of .57%; volatility factor of the expected market price of the
Company's common stock of .45; and a weighted average expected life of the
options of 6 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 $4.27 per share for 1999.
F-24
<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,
---------------------------------
1999 1998
--------- ---------------------
<S> <C> <C>
TOTAL NUMBER OF NQSOS
Outstanding at beginning of year.................... 2,689,034 --
Conversion of AMSG options.......................... -- 2,232,334
Granted............................................. 475,700 456,700
Exercised........................................... -- --
Forfeited........................................... (459,047) --
--------- ---------------------
Outstanding at end of year.......................... 2,705,687 2,689,034
========= =====================
Exercisable at end of year.......................... 1,877,109 1,640,637
Available for grant at end of year.................. 1,794,313 1,810,966
WEIGHTED AVERAGE EXERCISE PRICE OF NQSOS
Outstanding at beginning of year.................... $ 11.58 --
Conversion of AMSG options--range of exercise
prices............................................ -- $ 9.61 - 16.81
Granted--Exercise price equals market price on grant
date.............................................. $ 8.85 $ 7.19
Exercised........................................... -- --
Forfeited........................................... $ 10.61 --
Outstanding at end of year.......................... $ 11.21 $ 11.58
Exercisable at end of year.......................... $ 12.17 $ 11.61
NQSOS BY EXERCISE PRICE RANGE
Exercise price...................................... $ 7.19 $ 7.19
Weighted average exercise price..................... $ 7.19 $ 7.19
Weighted average remaining contractual life......... 10.75 11.75
Outstanding at end of year.......................... 400,900 456,700
Exercisable at end of year.......................... 128,725 --
Weighted average exercise price of options
exercisable at end of year........................ $ 7.19 --
</TABLE>
F-25
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
<S> <C> <C>
NQSOS BY EXERCISE PRICE RANGE (CONTINUED)
Exercise price.............................................. $ 8.50 - $9.19 N/A
Weighted average exercise price............................. $ 8.85 N/A
Weighted average remaining contractual life................. 11.31 N/A
Outstanding at end of year.................................. 375,700 N/A
Exercisable at end of year.................................. 49,200 N/A
Weighted average exercise price of options exercisable at
end of year............................................... $ 8.50 N/A
Exercise price.............................................. $ 9.61 - $13.42 $ 9.61 - $12.85
Weighted average exercise price............................. $ 11.25 $ 11.25
Weighted average remaining contractual life................. 7.95 8.95
Outstanding at end of year.................................. 887,591 1,166,437
Exercisable at end of year.................................. 683,993 613,002
Weighted average exercise price of options exercisable at
end of year............................................... $ 11.25 $ 11.36
Exercise price.............................................. $ 13.53 $ 13.53
Weighted average exercise price............................. $ 13.53 $ 13.53
Weighted average remaining contractual life................. 1.93 2.93
Outstanding and exercisable at end of year.................. 1,000,000 1,000,000
Weighted average exercise price of options exercisable at
end of year............................................... $ 13.53 $ 13.53
Exercise price.............................................. $ 14.04 - $16.81 $ 14.94 - $16.81
Weighted average exercise price............................. $ 15.44 $ 15.66
Weighted average remaining contractual life................. 8.58 9.58
Outstanding at end of year.................................. 41,496 65,897
Exercisable at end of year.................................. 25,191 27,635
Weighted average exercise price of options exercisable at
end of year............................................... $ 15.58 $ 15.56
</TABLE>
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.
F-26
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
Selected quarterly financial data is as follows:
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
2000
Total revenues............................ $205,553 $190,715 $197,580
Loss before income tax.................... (3,914) (2,166) (6,797)
Net loss.................................. (2,566) (1,208) (3,525)
Loss per common share(1):
Basic................................... $ (0.15) $ (0.07) $ (0.21)
Diluted................................. $ (0.15) $ (0.07) $ (0.21)
1999
Total revenues............................ $173,009 $174,943 $175,241 $181,331 $704,524
Income (loss) before income tax........... 4,158 (13,481) (8,012) (29,454) (46,789)
Net income (loss)......................... 2,672 (7,985) (4,713) (18,978) (29,004)
Earnings (loss) per common share(1):
Basic................................... $ 0.16 $ (0.47) $ (0.28) $ (1.13) $ (1.72)
Diluted................................. $ 0.16 $ (0.47) $ (0.28) $ (1.13) $ (1.72)
1998
Total revenues............................ $159,158 $163,782 $165,093 $169,588 $657,621
Income before income tax.................. 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(2):
Basic................................... -- -- -- $ 0.22 --
Diluted................................. -- -- -- $ 0.21 --
1997
Total revenues............................ $146,993 $150,790 $154,479 $156,847 $609,109
Income before income tax.................. 6,607 6,141 6,091 6,378 25,217
Net income................................ 3,998 3,889 3,859 4,038 15,784
</TABLE>
------------------------
(1) When the Company reports a net loss, potentially dilutive securities are not
included in the calculation of earnings per share ("EPS") because their
inclusion would have an antidilutive effect.
(2) EPS 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. A further description of the Spin-off is included in Note 1.
12. SEGMENT REPORTING (UNAUDITED)
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, case management and receivables management, sold
throughout the United States.
F-27
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT REPORTING (UNAUDITED) (CONTINUED)
"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. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
Financial data by segment is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Health services revenue:
HMO products............................ $464,381 $412,636 $554,659 $518,700 $479,182
Specialty managed care products and
services.............................. 138,913 113,334 155,132 137,652 123,859
Other operations........................ (15,413) (12,286) (16,638) (17,707) (16,170)
-------- -------- -------- -------- --------
Total consolidated.................. $587,881 $513,684 $693,153 $638,645 $586,871
======== ======== ======== ======== ========
Investment results:
HMO products............................ $ 2,293 $ 4,129 $ 4,565 $ 9,182 $ 6,889
Specialty managed care products and
services.............................. 3,555 5,288 6,700 9,516 17,309
Other operations........................ 119 92 106 278 (1,960)
-------- -------- -------- -------- --------
Total consolidated.................. $ 5,967 $ 9,509 $ 11,371 $ 18,976 $ 22,238
======== ======== ======== ======== ========
Income (loss) before income tax:
HMO products............................ $(15,165) $(16,614) $(48,033) $ 15,145 $ 6,355
Specialty managed care products and
services.............................. 8,872 7,637 10,748 17,693 23,257
Other operations........................ (6,584) (8,358) (9,504) (2,993) (4,395)
-------- -------- -------- -------- --------
Total consolidated.................. $(12,877) $(17,335) $(46,789) $ 29,845 $ 25,217
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets:
HMO products............................................. $137,217 $115,448 $138,272
Specialty managed care products and services............. 193,917 168,993 151,845
Other operations......................................... 2,285 12,713 8,091
-------- -------- --------
Total consolidated..................................... $333,419 $297,154 $298,208
======== ======== ========
</TABLE>
F-28
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT REPORTING (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Health services revenue from transactions with
other operating segments:
HMO products............................... $ 1,104 $ 1,471 $ 1,960 $ 1,853 $ 1,726
Specialty managed care products and
services................................. $14,309 $10,815 $14,456 $15,488 $14,417
</TABLE>
13. NEW BUSINESS (UNAUDITED)
Effective November 1, 2000, the Company completed its negotiations leading
to the takeover of the insurance operations of Family Health Plan
Cooperative, Inc. ("FHP"), a health maintenance organization in Milwaukee,
Wisconsin. In conjunction with this transaction, the Company will receive
certain assets totaling approximately $15,000,000 (primarily cash and accounts
receivable) and assume certain liabilities totaling approximately $23,000,000
(primarily medical claim liabilities). The final determination of assets
received and liabilities assumed is subject to liquidation proceedings for FHP
and, therefore, is subject to a significant degree of uncertainty. The
transaction will be recorded in accordance with the purchase method of
accounting. Management estimates that goodwill of approximately $8,000,000 will
be recorded in conjunction with the transaction, which will be amortized over a
period of 20 years. As a result of the FHP transaction, the Company expects to
maintain approximately 40,000 additional members at premium rates that have been
increased from those previously offered by FHP.
F-29
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
BLUE CROSS & BLUE SHIELD
UNITED OF WISCONSIN
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999, AND
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
F-30
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999,
AND YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-34
Consolidated Financial Statements
Consolidated Balance Sheets................................. F-35
Consolidated Statements of Operations....................... F-36
Consolidated Statements of Changes in Surplus and
Comprehensive Income (Loss)............................... F-37
Consolidated Statements of Cash Flows....................... F-38
Notes to Consolidated Financial Statements.................. F-39
</TABLE>
F-31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Blue Cross & Blue Shield United of Wisconsin
We have audited the accompanying consolidated balance sheets of Blue
Cross & Blue Shield United of Wisconsin (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations, changes in
surplus and comprehensive income (loss) and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
February 11, 2000
except for Note 14, as to which the date is
March 28, 2000
F-32
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (overdrafts)................... $(10,882) $ (5,054) $ (4,656)
Investments- available-for-sale, at fair value........... 45,484 61,782 113,443
Note receivable from affiliate........................... -- -- 70,000
Due from affiliates...................................... 13,840 11,034 5,071
Other receivables........................................ 27,218 22,036 21,541
Prepaid expenses and other current assets................ 16,310 17,784 19,115
-------- -------- --------
Total current assets....................................... 91,970 107,582 224,514
Investments- held-to-maturity, at amortized cost........... -- 655 660
Investments in affiliates.................................. 106,350 103,847 125,773
Property and equipment, net................................ 22,310 23,597 29,410
Goodwill, net.............................................. 8,202 7,629 --
Note receivable from affiliate............................. 70,000 70,000 --
Prepaid pension............................................ 35,256 31,610 27,145
Deferred income taxes...................................... 20,974 20,122 17,041
Other non-current assets................................... 14,151 16,358 18,643
-------- -------- --------
Total assets............................................... $369,213 $381,400 $443,186
======== ======== ========
LIABILITIES AND SURPLUS
Current liabilities:
Medical and other benefits payable....................... $ 94,108 $ 65,772 $ 73,576
Due to affiliates........................................ 433 660 340
Advance premiums......................................... 34,608 31,147 25,903
Payable and accrued expenses............................. 22,403 24,529 23,853
Debt..................................................... 4,217 11,175 13,615
Other current liabilities................................ 4,581 3,948 6,079
-------- -------- --------
Total current liabilities.................................. 160,350 137,231 143,366
Deferred income taxes...................................... 20,974 21,169 20,678
Post-retirement benefits other than pension................ 12,354 11,915 11,194
Other non-current liabilities.............................. 11,650 10,976 16,957
-------- -------- --------
Total liabilities.......................................... 205,328 181,291 192,195
-------- -------- --------
Surplus:
General unassigned surplus............................... 168,663 206,315 246,083
Accumulated other comprehensive income (loss)............ (4,778) (6,206) 4,908
-------- -------- --------
Total surplus.............................................. 163,885 200,109 250,991
-------- -------- --------
Total liabilities and surplus.............................. $369,213 $381,400 $443,186
======== ======== ========
</TABLE>
See accompanying notes.
F-33
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Premium................................. $393,611 $305,677 $418,949 $361,965 $345,903
Government contract fees................ 49,910 36,746 52,259 31,667 23,333
Investment results...................... 7,494 16,318 18,510 13,501 18,347
Other................................... 18,168 19,581 25,970 25,302 20,606
-------- -------- -------- -------- --------
Total revenues............................ 469,183 378,322 515,688 432,435 408,189
Expenses:
Medical and other benefits.............. 377,474 269,403 376,814 297,885 297,979
Selling, general and administrative..... 129,183 115,025 158,187 133,153 119,036
Interest.................................. 280 448 553 115 215
Amortization of goodwill.................. 440 48 191 -- --
-------- -------- -------- -------- --------
Total expenses............................ 507,377 384,924 535,745 431,153 417,230
-------- -------- -------- -------- --------
Operating income (loss)................... (38,194) (6,602) (20,057) 1,282 (9,041)
Equity in net income (loss) of affiliates,
net of tax.............................. (2,358) (14,173) (22,690) 3,991 6,857
-------- -------- -------- -------- --------
Income (loss) before income taxes......... (40,552) (20,775) (42,747) 5,273 (2,184)
Income tax expense (benefit).............. 548 -- -- (78) (2,785)
-------- -------- -------- -------- --------
Net income (loss)......................... $(41,100) $(20,775) $(42,747) $ 5,351 $ 601
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-34
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE
UNASSIGNED INCOME (LOSS),
SURPLUS NET OF TAXES TOTAL SURPLUS
---------- ----------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1996......................... $240,904 $ 5,617 $246,521
Comprehensive income:
Net income....................................... 601 -- 601
Change in unrealized gains/losses on
investments.................................... -- (391) (391)
--------
Comprehensive income........................... 210
--------
Change in ownership of affiliates.................. (874) -- (874)
-------- -------- --------
Balance at December 31, 1997......................... $240,631 $ 5,226 $245,857
Comprehensive income:
Net income....................................... 5,351 -- 5,351
Change in unrealized gains/losses on
investments.................................... -- (318) (318)
--------
Comprehensive income........................... 5,033
--------
Change in ownership of affiliates.................. 101 -- 101
-------- -------- --------
Balance at December 31, 1998......................... 246,083 4,908 250,991
Comprehensive loss:
Net loss......................................... (42,747) -- (42,747)
Change in unrealized gains/losses on
investments.................................... -- (11,114) (11,114)
--------
Comprehensive loss............................. (53,861)
Change in ownership of affiliates.................. 2,979 2,979
-------- -------- --------
Balance at December 31, 1999......................... 206,315 (6,206) 200,109
(2000 amounts unaudited)
Comprehensive loss:
Net loss......................................... (41,100) (41,100)
Change in unrealized gains/losses on
investments.................................... 1,428 1,428
--------
Comprehensive loss............................. (39,672)
Change in ownership of affiliates.................. 3,448 -- 3,448
-------- -------- --------
Balance at September 30, 2000........................ $168,663 $ (4,778) $163,885
======== ======== ========
</TABLE>
See accompanying notes.
F-35
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- -------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- ---------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................... $(41,100) $(20,775) $(42,747) $ 5,351 $ 601
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization......... 6,408 6,502 8,709 6,329 5,032
Impairment of data warehouse software
asset............................... -- -- 2,398 -- --
Equity in (income) loss of
affiliates.......................... 2,358 14,173 22,690 (3,991) (6,857)
Realized investment gains............. (76) (8,490) (8,014) (1,615) (6,539)
Changes in other operating accounts:
Other receivables................... (5,182) (1,323) (495) (16,504) (1,947)
Medical and other benefits
payable........................... 28,336 (14,745) (7,804) 18,845 (4,070)
Advance premiums.................... 3,461 21 5,244 2,339 121
Due to/from affiliates, net......... (3,033) (1,584) (5,643) (3,698) 1,319
Other, net.......................... (2,838) (8,662) (8,686) (2,056) (12,505)
-------- -------- -------- -------- ---------
Net cash provided by (used in) operating
activities.............................. (11,666) (34,883) (34,348) 5,000 (24,845)
INVESTING ACTIVITIES
Acquisition of business................... (1,013) -- -- -- --
Acquisition of shares of affiliate........ -- (12,214) (12,214) -- --
Purchases of investments.................. (3,075) (53,824) (73,537) (95,540) (90,363)
Proceeds from sale and maturity of
investments............................. 20,342 106,627 125,629 90,902 116,381
Dividend from affiliate................... -- -- -- 757 1,490
Additions to property and equipment,
net..................................... (3,421) (2,256) (3,488) (5,967) (14,082)
-------- -------- -------- -------- ---------
Net cash provided by (used in) investing
activities.............................. 12,833 38,333 36,390 (9,848) 13,426
FINANCING ACTIVITIES
Net borrowings under line-of-credit
agreement............................... (6,995) (4,115) (2,440) 2,515 14,100
Draw on extended line-of-credit
agreement............................... -- -- -- -- (3,000)
-------- -------- -------- -------- ---------
Net cash provided by (used in) financing
activities.............................. (6,995) (4,115) (2,440) (2,515) 11,100
Cash and cash equivalents (overdrafts)
Decrease during period.................. (5,828) (665) (398) (2,333) (319)
Balance at beginning of period.......... (5,054) (4,656) (4,656) (2,323) (2,004)
-------- -------- -------- -------- ---------
Balance at end of period................ (10,882) (5,321) $ (5,054) $ (4,656) $ (2,323)
======== ======== ======== ======== =========
</TABLE>
See accompanying notes.
F-36
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") offers traditional
indemnity and other managed health care products and services to groups and
individuals in Wisconsin. United Government Services, LLC ("UGS"), which
processes Medicare claims from providers in all 50 states and Medicaid for the
State of Wisconsin, is a wholly-owned subsidiary of BCBSUW. Effective
January 1, 1999, the United Government Services division was reorganized as a
wholly-owned licensed affiliate of the Company and named United Government
Services, LLC ("UGS"). The reorganization had no impact on the Company's net
income or surplus.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of BCBSUW and its
majority-owned subsidiary, UGS (collectively, the "Company"). All intercompany
balances have been eliminated in consolidation.
The unaudited financial information presented as of and for the nine month
periods ended September 30, 1999 and 1998 include all adjustments, consisting of
normal recurring accruals, which the Company considers necessary for fair
presentation of financial position and results of operations and are accumulated
in a manner consistent with amounts as of and for each of the years in the
period ended December 31, 1999.
Investments in affiliates in which the Company does not have control, but
has the ability to exercise significant influence over operating and financial
policies (generally 20-50% ownership), are accounted for by the equity method.
Investments in United Wisconsin Services, Inc. ("UWS") and American Medical
Security Group, Inc. ("AMSG") are accounted for on the equity method.
CASH AND CASH EQUIVALENTS
The Company actively manages its cash and cash equivalents position to
maintain optimal asset levels. 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 fair value.
INVESTMENTS
Investments are classified as either held-to-maturity or available-for-sale.
Investments that BCBSUW has the intent and ability to hold to maturity are
designated as held-to-maturity and are stated at amortized cost. All other
investments are classified as available-for-sale and are stated at fair value
based on quoted market prices, with unrealized gains and losses excluded from
earnings and reported as a component of accumulated other comprehensive income
(loss), net of income tax effects. Realized gains and losses from the sale of
available-for-sale debt and equity securities are calculated using the first-in,
first-out basis.
F-37
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER RECEIVABLES
Receivables are stated at net realizable value, net of allowances for
uncollectible amounts of $5,615,000 and $5,213,000 at December 31, 1999 and
1998, respectively, based upon historical collection trends and management's
judgment of the ultimate collectibility.
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 of
the related assets, which range from 3 to 5 years for computer equipment and
software, 3 to 10 years for furniture and other equipment, 20 to 30 years for
land improvements and 10 to 40 years for buildings and building improvements.
GOODWILL
Goodwill represents the excess of cost over the fair value for additional
shares of UWS stock purchased during 1999. Goodwill is being amortized on a
straight-line basis over a period of 15 years. Accumulated amortization was
$191,000 at December 31, 1999.
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 goodwill. At December 31, 1999, the Company's management
believed that no material impairment of goodwill existed.
DEFERRED ACQUISITION COSTS (UNAUDITED)
Certain costs of acquiring new insured insurance policies have been
deferred. Deferred acquisition costs of $8,929,000 and $8,075,000 at
December 31, 1999 and 1998, respectively, are included in other non-current
assets and are being amortized over the estimated premium-paying periods of the
related policies. Acquisition costs of $2,946,000, $2,892,000 and $1,842,000
were capitalized in 1999, 1998 and 1997, respectively. Deferred acquisition
costs of $2,092,000, $1,619,000 and $1,259,000 were amortized during 1999, 1998
and 1997, respectively.
During the third quarter of 2000, the Company wrote-off $2,434,000 of
deferred acquisition costs associated with the Medicare Risk line-of-business
(See "Medical and Other Benefits" below).
REVENUE RECOGNITION
Health services premiums and managed behavioral health fees are recognized
as revenue in the period in which enrollees are entitled to care.
The Company acts as a regional fiscal intermediary in the administration of
Medicare health benefits, and is reimbursed for claims paid and administrative
costs incurred in providing this service. The Company receives administrative
fees and reimbursement costs for providing various services to the Medicare and
Medicaid programs and other uninsured contracts. These revenues are recognized
as the services performed are completed.
F-38
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Retrospective premium adjustments are recognized for certain groups for
which actual claims experience differs from that which was anticipated when the
related premium rates were established. The amount of premium that was subject
to retrospective premium adjustments in 1999, 1998 and 1997, respectively, was
$35,179,000, $29,076,000 and $22,436,000.
MEDICAL AND OTHER BENEFITS
The Company contracts with various health care providers for the provision
of certain medical care services to its members and generally compensates those
providers on a capitation basis, fee-for-service basis, or pursuant to certain
risk-sharing arrangements. In addition to actual paid claims and capitation,
medical and other benefits expense includes the change in estimates of reported
and unreported claims and accrued capitation fees and adjustments, which are
unpaid as of the balance sheet date. The estimates of reported and unreported
claims and accrued capitation fees and adjustments, which are unpaid as of the
balance sheet date, are based on historical payment patterns using standard
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.
PREMIUM DEFICIENCY RESERVES (UNAUDITED)
Premium deficiency reserves are recognized when it is probable that the
future costs associated with a group of existing contracts will exceed the
anticipated future premiums on those contracts. The Company calculates expected
premium deficiency reserves based on budgeted revenues and expenses excluding
investment income. Premium deficiency reserves are evaluated quarterly for
adequacy.
As a result of management's assessment of the profitability of its Medicare
Risk line of business, the Company recorded a provision for probable future
losses (premium deficiency) of $11,349,000 during the third quarter of 2000. The
provision for probable future losses was calculated based on a comparison of
anticipated premiums to health care related costs, including estimated payments
for providers, commissions and cost of collecting premiums and processing
claims. Inadequate compensation from the Health Care Financing Administration
and increased medical benefits contributed to the requirement for a provision
for future losses.
REINSURANCE
The Company has certain reinsurance agreements that provide increased
capacity to write larger risks and maintain its exposure to loss within its
capital resources. The Company is contingently liable on reinsurance ceded in
the event that the reinsurers do not meet their contractual obligations.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. A valuation allowance is
recorded on deferred tax assets that management believes, more likely than not,
will not be realized.
F-39
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNINSURED BUSINESS
The Company administers the health insurance programs for numerous
organizations on an uninsured basis. This administration includes maintenance of
membership records, claim processing and payment, coordination of benefits,
billing/cash collection and other services. Reimbursement is received for claims
paid and a fee is received for the administrative costs associated with
providing these services. In addition, the Company acts as a regional fiscal
intermediary in the administration of Medicare health benefits, and is
reimbursed for claims paid and administrative costs incurred in providing this
service.
The benefits paid under these programs and liability for incurred but not
reported claims are not recorded in the accompanying consolidated financial
statements, which is in conformity with accounting principles generally accepted
in the United States ("GAAP"). Claims paid on uninsured programs were
$527,987,000, $450,616,000 and $436,357,000 in 1999, 1998 and 1997,
respectively. Claims paid on behalf of Medicare were $8,867,562,000,
$5,349,064,000 and $4,663,953,000 in 1999, 1998 and 1997, respectively.
Administrative fees received related to these programs totaled $71,551,000,
$52,759,000 and $40,154,000 in 1999, 1998 and 1997, respectively, and are
included in government contract fees and other revenue.
As a fiscal intermediary for various government programs, the Company is
subject to regulations covering allowable cost reimbursements and operating
procedures. The laws and regulations governing fiscal intermediaries are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation, as
well as significant regulatory actions including fines, penalties and exclusion
from being a government contractor for these programs.
USE OF ESTIMATES
The accompanying consolidated financial statements have been prepared in
accordance with 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.
RECENT PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted SOP 97-3, ACCOUNTING FOR
INSURANCE AND OTHER ENTERPRISES FOR INSURANCE RELATED ASSESSMENTS ("SOP 97-3").
SOP 97-3 provides guidance on accounting by insurance and other enterprises for
assessments related to insurance activities including recognition, measurement
and disclosure of guaranty fund and other insurance related assessments.
Adoption of SOP 97-3 did not have a material effect on the Company's
consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for 1998 and 1997 to conform with the 1999 presentation.
F-40
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS
Investment results comprise the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest on bonds................................ $ 4,171 $ 5,318 $ 6,504
Dividends on equity securities................... 697 721 670
Realized gains................................... 10,393 5,874 9,743
Realized losses.................................. (2,379) (4,259) (3,204)
------- ------- -------
Gross investment results......................... 12,882 7,654 13,713
Investment expenses.............................. (245) (525) (653)
Investment income from affiliates................ 4,804 1,411 --
Other interest income............................ 1,069 4,961 5,287
------- ------- -------
$18,510 $13,501 $18,347
======= ======= =======
</TABLE>
Proceeds from sales of equity securities during 1999, 1998 and 1997 were
$43,096,000, $41,990,000 and $55,945,000, respectively. Proceeds from sales of
bonds classified as available-for-sale during 1999, 1998 and 1997, excluding
maturities, were $82,529,000, $48,907,000 and $59,931,000, respectively.
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 change in
unrealized gains/losses, less deferred income taxes, which is included in
accumulated other comprehensive income (loss), is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities.................................. $ (3,392) $ (127) $ 1,104
Equity securities................................ (4,021) 1,806 (1,418)
Provision for deferred income taxes.............. 2,909 (658) 123
Unrealized gain/losses of affiliates (net of
taxes)......................................... (6,610) (1,339) (200)
-------- ------- -------
$(11,114) $ (318) $ (391)
======== ======= =======
</TABLE>
F-41
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of investments are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1999:
Available-for-sale:
U.S. Treasury securities..................... $ 3,350 $ -- $ (154) $ 3,196
Foreign government securities................ 3,278 1 (180) 3,099
Corporate debt securities.................... 22,462 39 (1,155) 21,346
Government agency mortgage-backed
securities................................. 14,398 17 (139) 14,276
Equity securities............................ 19,029 1,150 (314) 19,865
------- ------ ------- -------
62,517 1,207 (1,942) 61,782
Held-to-maturity:
Corporate securities......................... 655 -- (3) 652
------- ------ ------- -------
$63,172 $1,207 $(1,945) $62,434
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1998:
Available-for-sale:
U.S. Treasury securities..................... $ 7,157 $ 335 $ (25) $ 7,467
Foreign government securities................ 4,638 136 (170) 4,604
Corporate debt securities.................... 56,368 1,721 (427) 57,662
Government agency mortgage-backed
securities................................. 9,689 251 -- 9,940
Equity securities............................ 28,914 5,222 (365) 33,771
-------- ------ ----- --------
106,766 7,665 (987) 113,444
Held-to-maturity:
Corporate securities......................... 660 -- (6) 654
-------- ------ ----- --------
$107,426 $7,665 $(993) $114,098
======== ====== ===== ========
</TABLE>
F-42
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair values of debt securities at
December 31, 1999, 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>
ESTIMATED FAIR
AMORTIZED COST VALUES
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Available-for-sale:
Due in one year or less......................... $ 700 $ 699
Due after one through five years................ 9,645 9,275
Due after five through ten years................ 12,206 11,527
Due after ten years............................. 6,539 6,140
------- -------
29,090 27,641
Government agency mortgage-backed securities.... 14,398 14,276
------- -------
$43,488 $41,917
======= =======
Held-to-maturity:
Due in one year or less......................... $ 655 $ 652
------- -------
$ 655 $ 652
======= =======
</TABLE>
The Company and its subsidiary participate in securities lending programs
whereby blocks of securities, which are returnable to the Company on short-term
notice and included in investments, are loaned to third parties, primarily major
brokerage firms. The Company requires a minimum of 102% of the fair value of the
loaned securities to be separately maintained as collateral for the loans.
Securities with a cost or amortized cost of $3,593,000 and $13,624,000 and
estimated fair value of $3,479,000 and $13,156,000 were on loan under the
program at December 31, 1999 and 1998, respectively.
3. INVESTMENTS IN AFFILIATES
Investments in affiliates for 1999 and 1998 consist of the equity investment
in UWS, a leading provider of managed health care services and employee benefit
products, and AMSG, a leading provider of small group PPO products and life
products.
The Company owned approximately 46% and 38% of total UWS shares outstanding
and 41% and 38% of total AMSG shares outstanding at December 31, 1999 and 1998,
respectively. The Company's recorded investment in UWS was $14,400,000 and
$24,300,000 at December 31, 1999 and 1998, respectively. The Company's recorded
investment in AMSG was $89,400,000 and $101,500,000 at December 31, 1999 and
1998, respectively.
F-43
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AFFILIATES (CONTINUED)
Summarized financial information for UWS is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CONDENSED CONSOLIDATED BALANCE SHEET
Current assets.......................................... $237,988 $257,090
Non-current assets...................................... 59,166 41,118
-------- --------
Total assets.......................................... $297,154 $298,208
======== ========
Current liabilities..................................... $160,720 $208,412
Non-current liabilities................................. 105,402 25,337
Shareholders' equity.................................... 31,032 64,459
-------- --------
Total liabilities and shareholders' equity............ $297,154 $298,208
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Revenues:
Health services revenues:
Premium revenue............................. $651,567 $608,917 $560,825
Other revenue............................... 41,586 29,728 26,046
Investment results............................ 11,371 18,976 22,238
-------- -------- --------
Total revenues................................ 704,524 657,621 609,109
Expenses:
Medical and other benefits.................... 621,916 519,636 485,198
Selling, general and administrative........... 127,404 103,517 94,496
Profit (loss) sharing on provider
arrangements................................ (4,096) 2,762 3,380
Interest...................................... 5,293 1,411 --
Amortization of goodwill...................... 796 450 818
-------- -------- --------
Total expenses................................ 751,313 627,776 583,892
Income (loss) before income taxes............. (46,789) 29,845 25,217
Income tax expense (benefit).................. (17,785) 11,767 9,433
-------- -------- --------
Net income (loss)............................. $(29,004) $ 18,078 $ 15,784
======== ======== ========
</TABLE>
UWS is a party to certain provider arrangements in conjunction with Unity
Health Plans Insurance Corporation ("Unity") and Valley Health Plan, Inc.
("Valley"), wholly-owned health maintenance organization ("HMO") subsidiaries of
UWS, included in UWS' consolidated financial statements, which include
profit-sharing payments to certain providers and repurchase provisions.
Total UWS revenues subject to repurchase options pursuant to the various
acquisition agreements totaled $220,235,000, $207,014,000 and $186,318,000 for
1999, 1998 and 1997, respectively. Profit (loss) sharing expense related to
these provider arrangements is calculated based on the profitability of the HMO
subsidiary and totaled $(2,366,000), $3,171,000 and $3,960,000 in 1999, 1998 and
1997,
F-44
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AFFILIATES (CONTINUED)
respectively. Total net income (loss) subject to repurchase options, pursuant to
the various acquisition agreements, totaled $(1,071,000), $2,358,000 and
$2,395,000 for 1999, 1998 and 1997, respectively. Total assets and total net
assets subject to repurchase options were $39,409,000 and $16,970,000,
respectively, at December 31, 1999 and $44,798,000 and $21,362,000,
respectively, at December 31, 1998.
UWS has an agreement with United Wisconsin Life Insurance Company ("UWLIC"),
a wholly-owned subsidiary of AMSG, whereby United Wisconsin Insurance Company
("UWIC"), a wholly-owned subsidiary of UWS, 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. UWIC ceded to UWLIC
100% of the premium revenue of these products sold in Minnesota. The ceded
premium revenue approximated $15,562,000, $26,875,000 and $27,014,000 in 1999,
1998 and 1997, respectively.
UWS has an agreement with UWLIC whereby UWLIC underwrites certain life and
accidental death and dismemberment products on behalf of United Heartland Life
Insurance Company ("UHLIC"), a wholly-owned subsidiary of UWS. UWS also had
agreements with UWLIC, through September 30, 1998, whereby UWLIC underwrote
certain health care and dental products on behalf of Compcare, Heartland Dental
Plan, Inc., and Innovative Resource Group, Inc., all wholly-owned subsidiaries
of UWS. UWS assumes 100% of the premium revenues on these products from UWLIC.
The assumed premium revenue approximated $18,182,000, $23,295,000 and
$27,213,000 in 1999, 1998 and 1997, respectively.
Goodwill is being amortized over 15 years. All other accounting policies are
consistent with those of the Company. At December 31, 1999, the aggregate fair
value quoted on the New York Stock Exchange ("NYSE") of the Company's shares of
UWS stock was $33,300,000.
During 1999, the Company received a $0.05 per share dividend from UWS
totaling $387,300, which was reinvested in UWS's stock resulting in BCBSUW
obtaining 93,902 additional UWS shares. The Company's equity in UWS' net income
(loss) was $(12,711,000) in 1999, $6,825,000 in 1998 and $5,986,000 in 1997.
Summarized financial information for AMSG is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CONDENSED BALANCE SHEET
Total assets............................................ $503,094 $498,722
======== ========
Total liabilities....................................... $282,814 $232,271
Shareholders' equity.................................... 220,280 266,451
-------- --------
Total liabilities and shareholders' equity............ $503,094 $498,722
======== ========
</TABLE>
F-45
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AFFILIATES (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
---------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENT OF OPERATIONS
Health services revenues:
Premium revenue........................................... $1,056,107 $914,017 $ 957,204
Other revenue............................................. 22,361 22,632 24,249
Investment results.......................................... 18,912 24,220 24,071
---------- -------- ---------
Total revenues.............................................. 1,097,380 960,869 1,005,524
Expenses:
Medical and other benefits.................................. 860,473 691,767 733,491
Selling, general and administrative......................... 268,059 242,073 252,160
Interest.................................................... 3,564 7,691 9,311
Amortization of goodwill.................................... 4,273 8,781 7,975
Write-off of intangible assets and related charges.......... -- 15,453 --
---------- -------- ---------
Total expenses.............................................. 1,136,369 965,765 1,002,937
Gain (loss) from continuing operations before income tax.... (38,989) (4,896) 2,587
Income tax expense (benefit)................................ (13,043) (1,868) 1,032
---------- -------- ---------
Gain (loss) from continuing operations...................... (25,946) (3,028) 1,555
Income from discontinued operations, net of tax............. -- 10,003 16,595
---------- -------- ---------
Net income (loss)........................................... $ (25,946) $ 6,975 $ 18,150
========== ======== =========
</TABLE>
Income from discontinued operations reflects the operating results related
to AMSG's 1998 spin-off of UWS for the period January 1, 1998 through
September 25, 1998, the distribution date of the spin-off.
AMSG acquired a sales distribution system in 1996 in conjunction with the
purchase of its small group business. Subsequently AMSG has largely eliminated
its commission-based sales distribution system, replacing it with salaried sales
offices. This resulted in an after-tax charge to 1998 operations of $9,251,000,
including $7,683,000 of intangible distribution system assets and $1,568,000 of
related costs.
During 1999 the AMSG Board of Directors authorized the repurchase of AMSG
common stock. AMSG subsequently repurchased common stock aggregating $7,500,000.
The impact of this repurchase on BCBSUW's investment in the net assets of
affiliates is reported on the change in ownership of affiliates line of the
Consolidated Statement of Changes in Surplus and Comprehensive Income (Loss).
At December 31, 1999, the aggregate fair value quoted on the NYSE of the
Company's shares of AMSG stock was $37,900,000. The Company's equity in AMSG's
net income (loss) was $(9,979,000) in 1999, $(2,834,000) in 1998 and $871,000 in
1997.
F-46
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements.............................. $ 909 $ 909
Building and building improvements...................... 6,721 7,421
Computer equipment and software......................... 32,190 31,169
Furniture and other equipment........................... 17,488 18,368
-------- --------
57,308 57,867
Less accumulated depreciation........................... (33,711) (28,457)
-------- --------
$ 23,597 $ 29,410
======== ========
</TABLE>
Depreciation expense related to property and equipment totaled $6,791,000,
$4,820,000 and $3,846,000 in 1999, 1998 and 1997, respectively.
On an on-going basis, the Company reviews events or changes in circumstances
that may indicate that the carrying value of an asset may not be recoverable.
During 1999, the Company recorded a non-cash pre-tax charge of $2,398,000 to
reduce the carrying amount of certain computer software costs. This charge is
included in selling, general and administrative expense in the accompanying
income statement and is allocated between the insured and self-funded segments.
These costs were associated with data warehouse functions that had been written
off by the Company.
5. MEDICAL AND OTHER BENEFITS PAYABLE
A summary of the activity for medical and other benefits payable for the
years ended 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Medical and other benefits payable at beginning of
period................................................ $ 73,576 $ 54,731
Incurred related to:
Current year.......................................... 377,158 307,993
Prior years........................................... 1,064 (10,108)
-------- --------
Total incurred.......................................... 378,222 297,885
Paid related to:
Current year.......................................... 313,592 235,555
Prior years........................................... 72,422 43,485
-------- --------
Total paid.............................................. 386,014 279,040
-------- --------
Medical and other benefits payable at end of period..... $ 65,784 $ 73,576
======== ========
</TABLE>
The Company uses paid claims and completion factors based on historical
payment patterns to estimate incurred claims. Changes in payment patterns and
claims trends can result in changes to prior years' claims estimates.
F-47
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT
The Company has a bank line-of-credit which permits aggregate borrowings to
$30,000,000. The line-of-credit is with a commercial bank, and has an adjustable
rate with interest payments due quarterly. The Company's outstanding
line-of-credit balance was $11,175,000 and $13,615,000 at December 31, 1999 and
1998, respectively. The interest expense on the line-of-credit was $553,000,
$115,000 and $215,000 in 1999, 1998 and 1997, respectively. The 1999 weighted
average interest rate on the line-of-credit was 6.2%.
7. RELATED-PARTY TRANSACTIONS
As of September 11, 1998, UWS assumed a $70,000,000 note obligation to the
Company in connection with the spin-off in 1998 of AMSG's managed care companies
and specialty business. The spin-off involved the creation of a new corporation
that subsequently became UWS. UWS 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. On October 13, 1999, the maturity date of the principal
balance was extended from October 30, 1999 to April 30, 2001. The Company
intends to refinance this $70,000,000 note obligation with a maturity date
subsequent to December 31, 2001. This note receivable has been classified as
non-current in the accompanying September 30, 2000 balance sheet.
UWS provides marketing, underwriting, actuarial and certain administrative
services to the Company. In addition, the Company provides office space to UWS.
These activities are reimbursed at amounts approximating cost, which resulted in
allocations to UWS of $11,959,000, $14,757,000 and $14,564,000 in 1999, 1998 and
1997, respectively, and allocations to the Company of $11,659,000, $8,964,000
and $9,278,000 in 1999, 1998 and 1997, respectively. These amounts are included
in selling, general and administrative expenses.
Certain subsidiaries of UWS provide services to the Company, at market
rates, covering hospital bill audits, investigation recovery services,
electronic claims clearing and nurseline phone services. The cost of these
services to the Company was $2,257,000, $713,000 and $919,000 in 1999, 1998 and
1997, respectively. In addition, the Company provides health insurance to
certain of UWS's employees. Premium revenue received from UWS for these services
totaled $4,061,000, $2,005,000 and $1,814,000 in 1999, 1998 and 1997,
respectively.
Certain subsidiaries of UWS provide health, life and other insurance
benefits to the employees of the Company. Premium revenue paid by the Company
totaled $4,921,000, $4,547,000 and $4,537,000 in 1999, 1998 and 1997,
respectively.
The Company has an agreement with United Wisconsin Insurance Company
("UWIC"), a wholly-owned subsidiary of UWS, whereby UWIC underwrites the
Company's United Dairy Trust insured product. The Company assumes 100% of the
premium revenue of these products from UWIC. The assumed premium revenue was
$1,843,000, $6,122,000 and $8,430,000 in 1999, 1998 and 1997, respectively.
Amounts due from/to affiliates, except the $70,000,000 note obligation due
from UWS, are related primarily to operating expenses and reinsurance
arrangements. Such 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.
F-48
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED-PARTY TRANSACTIONS (CONTINUED)
Management believes the above stated related-party activities were entered
into on a reasonable basis and include all costs of doing business.
Certain members of the board of directors of the Company are also on the
boards of directors of UWS and AMSG.
8. INCOME TAXES
Prior to January 1, 1999, UGS was operated as a division of BCBSUW. As of
that date, United Government Services, LLC, a single member limited liability
company ("LLC"), was formed to continue the operations of UGS. UGS will continue
to be treated as a division of BCBSUW for income tax purposes. BCBSUW files
separate federal and state income tax returns, while UGS is treated as a
disregarded entity for tax purposes.
The Company had net federal income tax receivables of $11,776,000 and
$12,057,000 at December 31, 1999 and 1998, respectively. The Company has federal
net operating loss ("NOL") carryforwards totaling $72,325,000 which expire in
the years 2011 through 2019, and alternative minimum tax ("AMT") NOL
carryforwards totaling $55,050,000. The Company has state net business loss
carryforwards totaling $162,657,000 at December 31, 1999, which expire in the
years 2000 through 2014. The Company had federal and state income tax refunds,
net of payments in 1999 of $280,000 and federal and state tax payments, net of
refunds of $12,059,000 in 1998.
The Company had no income tax expense or benefit in 1999 due to the current
year operating losses and the change in the valuation allowance which offset the
change in the net deferred tax asset. Current tax benefit in 1998 and 1997 was
$78,000 and $2,785,000, respectively. There was no deferred tax expense in 1998
and 1997.
The components of deferred income tax expense include changes in pension and
other employee benefit accruals, deferred gain on sale of real estate, deferred
acquisition costs, and NOL and credit carryforwards. A valuation allowance of
$31,825,000 and $13,217,000 has been recorded at December 31, 1999 and 1998,
respectively. The valuation allowance relates primarily to the deferred federal
and state tax assets associated with NOL and tax credit carryforwards.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $78 $(2,788)
State............................................ -- -- 3
---- --- -------
-- 78 (2,785)
Deferred:
Federal.......................................... -- -- --
State............................................ -- -- --
---- --- -------
$ -- $78 $(2,785)
==== === =======
</TABLE>
F-49
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The differences between taxes computed at the federal statutory rate and
recorded income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating income (loss) before equity of
affiliates:
Tax at federal statutory rate.................... $(8,023) $ 513 $(3,616)
Valuation allowance.............................. 18,608 (1,752) 2,365
Prior period adjustment.......................... (8,600) -- --
Other, net....................................... (1,985) 1,161 (1,534)
------- ------ -------
$ -- $ (78) $(2,785)
======= ====== =======
</TABLE>
Significant components of the Company's federal and state deferred tax
liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- -------------------
FEDERAL STATE FEDERAL STATE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Depreciation........................................ $ (327) $ (74) $ (293) $ (68)
Claims-based receivables............................ (529) (119) -- --
Pension accrual..................................... (11,148) (2,516) (9,229) (2,144)
Deferred acquisition costs.......................... (3,091) (698) (2,746) (638)
Unrealized gains on investments..................... -- -- (2,091) (527)
Interest expense.................................... (1,555) (351) (1,674) (389)
Federal effect of state taxes....................... (2,993) -- (2,908) --
-------- -------- -------- -------
(19,643) (3,758) (18,941) (3,766)
Deferred tax assets:
Postretirement benefits other than pensions......... 3,215 726 3,806 884
Deferred gain on sale of building................... 1,187 268 1,331 309
Deferred compensation............................... 2,098 474 1,662 386
Medical and other benefits payable discounting...... 1,195 270 1,077 250
Unrealized losses on investments.................... 212 48 -- --
Net operating loss carryforwards.................... 25,314 12,850 5,923 8,622
Bad debt reserve allowance.......................... 1,859 420 1,707 397
AMT credit.......................................... 2,963 -- 2,963 --
Charitable contributions............................ -- -- 1,515 459
Other, net.......................................... 2,397 539 2,079 484
Valuation allowance................................. (20,036) (11,789) (4,665) (8,552)
-------- -------- -------- -------
20,404 3,806 17,398 3,239
-------- -------- -------- -------
Net deferred tax assets (liabilities)................. $ 761 $ 48 $ (1,543) $ (527)
======== ======== ======== =======
</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
non-current assets and liabilities, as applicable.
F-50
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
LONG-TERM CONTRACT
On October 1, 1998, the Company entered into an agreement with a service
bureau to obtain certain electronic data processing services for the Company and
an affiliate. The agreement has a term of five years, with options to extend for
two additional one-year renewal periods. Expenses to this service bureau were
$13,945,000 and $6,931,000 for the years ended December 31, 1999 and 1998,
respectively.
OPERATING LEASES
The Company has operating leases for office space, EDP equipment,
automobiles, software and terminal lines. Future minimum lease payments under
noncancelable operating leases with initial or remaining lease terms in excess
of one year at December 31, 1999 were $30,997,000 in total. Individually, the
lease payments are $4,931,000, $4,924,000, $4,798,000, $4,777,000, $4,449,000
and $7,118,000 for the years ended December 31, 2000, 2001, 2002, 2003, 2004 and
thereafter, respectively. Rental expense totaled $13,404,000, $10,855,000 and
$12,025,000 for 1999, 1998 and 1997, respectively.
EXTENSION OF CREDIT
The Company has an outstanding line-of-credit in the amount of $15,000,000
available to Health Professionals of Wisconsin, Inc. The outstanding balance as
of December 31, 1999, which originated in 1997, was $3,000,000.
LITIGATION
The Company and its affiliates are involved in various legal actions
occurring in the normal course of 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.
10. 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. Such accounting
practices differ from generally accepted accounting principles. The most
significant of these differences is the requirement that the Company's
investments in UWS and AMSG be valued at 87% of the fair value of the shares
owned for 1998 and the statutory book value starting in 1999, in accordance with
the National Association of Insurance Commissioners. The total surplus as
reported on a statutory basis at December 31, 1999, 1998 and 1997 were
$142,424,000, $198,515,000 and $228,075,000, respectively. The net results of
operations on a statutory basis were a net income (loss) of $(22,226,000) in
1999, $1,843,000 in 1998 and $(4,772,000) in 1997.
During 1998, the National Association of Insurance Commissioners ("NAIC")
adopted Codification of Statutory Accounting Principals ("Codification") which
provide interpretive guidance on statutory accounting principles and will
replace the current manual of Accounting Practices and Procedures adopted by the
NAIC commissioners. In addition, the NAIC is now considering
F-51
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STATUTORY FINANCIAL INFORMATION (CONTINUED)
amendments to Codification that would be effective on the recommended
implementation date of January 1, 2001. Such amendments could have a significant
impact on Codification guidelines. Codification provides new interpretive
guidance for some existing statutory accounting principles in some areas, and
requires the filing of new insurance reports for statutory purposes. Management
believes Codification will have a significant negative impact on the statutory
surplus of BCBSUW. Depending on the final resolution of pending amendments to
Codification and collection of provider receivables, BCBSUW may be required to
obtain additional capital or implement other measures, such as securing new
reinsurance treaties, to mitigate the impact of Codification on surplus and
risk-based capital.
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 NAIC. The RBC requirements establish minimum
levels of capital and surplus based upon the insurer's operations. At
December 31, 1999, the Company was in compliance with these capital surplus
requirements. As of September 30, 2000, statutory compulsory surplus and
regulatory minimum compulsory surplus, as calculated and permitted by the OCI,
were $38,744,000 and $51,232,000, respectively.
11. EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS
The Company and certain of its affiliates participate in a multiple employer
defined benefit pension plan (the "BCBSUW Plan"). Coincident with the
reorganization of UGS, a portion of the Plan's assets and liabilities were
spun-off to a new UGS Pension Plan (the "UGS Plan"). Beginning January 1, 1999,
the UGS Plan provided retirement benefits for current UGS employees and past
retirees, including benefits accrued prior to 1999, on the same basis as had
been provided under the BCBSUW Plan. The BCBSUW and UGS Plans provide retirement
benefits to covered employees based primarily on compensation and years of
service. No contributions were made in 1999, 1998 or 1997.
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.
The Company also has postretirement benefit plans to provide certain
medical, dental, and vision benefits and life insurance for certain groups of
retired employees. Such plans were amended in 1997 to limit the Company's
financial contribution in future periods. No benefits will be provided for
individuals hired after the effective dates of these amendments.
F-52
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the change in the pension and postretirement
benefit obligations as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Benefit obligation at beginning of
year.................................. $76,822 $68,884 $10,928 $ 9,979
Service cost.......................... 1,988 2,047 206 183
Interest cost......................... 5,175 5,334 737 764
Plan amendments....................... -- -- 1,003 --
Actuarial (gains) losses.............. (3,508) 6,908 1,338 749
Company transfers..................... 890 (270) -- --
Special Termination Benefits.......... -- 770 -- --
Benefits paid......................... (4,597) (6,851) (1,036) (747)
------- ------- ------- -------
Benefit obligation at end of year....... $76,770 $76,822 $13,176 $10,928
======= ======= ======= =======
</TABLE>
The pension and postretirement plans' assets are comprised primarily of
debt, equity and other marketable securities, including 700,000 shares of UWS
stock, held by the BCBSUW Plan, with a fair value of $2,975,000 at December 31,
1999. The plan received dividends in the amount of $35,000 during 1999. The plan
did not own any UWS stock at December 31, 1998. The following table summarizes
the change in the pension and postretirement plan assets as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning
of year............................... $108,256 $118,648 $3,611 $ --
Employer contributions................ -- -- 242 4,241
Actual return on plan assets.......... 17,792 (3,271) 235 117
Company transfers..................... 890 (270) -- --
Benefits paid......................... (4,597) (6,851) (1,036) (747)
-------- -------- ------ ------
Fair value of plan assets at end of
year.................................. $122,341 $108,256 $3,052 $3,611
======== ======== ====== ======
</TABLE>
The following table provides a reconciliation of the funded status of the
plans to the prepaid pension and (accrued) postretirement costs at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Funded status of plan at end of year... $45,571 $31,434 $(10,124) $ (7,317)
Unrecognized net transition asset.... (2,664) (3,800) -- --
Unrecognized prior service cost...... (6,123) (7,136) (1,040) (2,225)
Unrecognized net (gain).............. (5,174) 6,647 (662) (2,031)
------- ------- -------- --------
Prepaid (accrued) at end of year....... $31,610 $27,145 $(11,826) $(11,573)
======= ======= ======== ========
</TABLE>
F-53
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The 1999 combined ending prepaid pension balance consists of $31,851,000 for
the BCBSUW Plan and ending accrued pension liability of $241,000 for the UGS
Plan.
Weighted-average assumptions used as of September 30, 1999 and 1998, the
measurement date, in developing the projected benefit obligations are as
follows:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Discount rate................................ 7.00% 7.00% 7.00% 7.00%
Rate of compensation increase................ 4.75% 4.75% N/A N/A
Healthcare cost trend rate................... N/A N/A 5.00% 5.00%
Expected rate of return on plan assets....... 9.00% 9.00% N/A N/A
Union.................................... N/A N/A 7.50% 8.00%
Non-union................................ N/A N/A 4.50% 5.00%
</TABLE>
The unrecognized net asset is being amortized over the remaining estimated
service lives of participating employees at January 1, 1986: 15.4 years for
salaried employees and 16.9 years for hourly employees.
The effect of a 1% increase in the medical trend rate would be a $1,290,000
increase in the benefit obligation as of September 30, 1999.
The components of the pension credit and postretirement benefit cost, which
are included in selling, general and administrative expenses, for the years
ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost.......................................... $ 1,988 $ 2,047 $ 1,601 $206 $183 $233
Interest cost......................................... 5,175 5,334 5,246 737 764 804
Expected return on plan assets........................ (9,483) (9,012) (8,297) (224) (162) --
Net amortization of transition asset.................. (1,137) (1,283) (1,283) -- -- --
Amortization of prior service cost.................... (1,013) (1,013) (1,013) (182) (182) (147)
Amortization of unrecognized (gain) loss.............. 4 -- 11 (42) (107) (88)
Special termination benefits.......................... -- 770 -- -- -- --
------- ------- ------- ---- ---- ----
Pension (credit) and postretirement benefit cost
for the year........................................ $(4,466) $(3,157) $(3,735) $495 $496 $802
======= ======= ======= ==== ==== ====
</TABLE>
DEFINED CONTRIBUTION AND BONUS PLANS
The Company participates 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 also established various other
profit-sharing and bonus programs. Expenses related to all of these plans
totaled $2,128,000, $4,115,000 and $2,790,000 in 1999, 1998 and 1997,
respectively.
F-54
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK-BASED COMPENSATION PLANS
In 1993, the Company created a stock appreciation rights plan ("SAR") plan
for employees. As of December 31, 1999, the number of shares outstanding was
249,557. The Company's outstanding SAR balance was $34,000, $123,000 and
$172,154 at December 31, 1999, 1998 and 1997, respectively. The expense, which
did not have a significant impact on the statement of operations in 1999, 1998
and 1997, is included in selling, general and administrative expenses.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1999,
1998 and 1997, and for the nine months ended September 30, 2000 are as follows:
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2000
Total revenues............................ $146,267 $155,424 $167,492
Loss before income tax.................... (7,908) (8,427) (10,434)
Net loss.................................. (7,908) (8,427) (10,983)
1999
Total revenues............................ $118,810 $128,219 $131,293 $137,366 $515,688
Income (loss) before income tax........... 3,023 (4,299) (19,499) (21,972) (42,747)
Net income (loss)......................... 2,973 (4,249) (19,499) (21,972) (42,747)
1998
Total revenues............................ $104,049 $104,684 $110,950 $112,752 $432,435
Income (loss) before income tax........... 4,018 716 1,655 (1,116) 5,273
Net income (loss)......................... 4,018 716 1,805 (1,188) 5,351
1997
Total revenues............................ $103,634 $ 99,054 $102,491 $103,010 $408,189
Income (loss) before income tax........... 6,172 (6,867) 1,438 (2,927) (2,184)
Net income (loss)......................... 5,459 (5,051) 1,684 (1,491) 601
</TABLE>
13. SEGMENT REPORTING (UNAUDITED)
The Company has three reportable business segments: insured products,
self-funded products and government contracts. Insured products include: full
coverage, copayment, preferred provider organization, point of service, Medicare
supplement and interim coverage. The self-funded segment provides administrative
services and access to BCBSUW's extensive provider network for uninsured
contracts. Government contracts include processing services for Medicare
providers throughout the United States and for Medicaid in the State of
Wisconsin.
"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 unallocated overhead expenses) and
intercompany eliminations. The Company evaluates segment performance based on
profit or loss from operations before income taxes. The accounting policies of
F-55
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENT REPORTING (UNAUDITED) (CONTINUED)
the reportable segments are the same as those described in the summary of
significant accounting policies.
Financial data by segment is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Health services revenue:
Insured................................. $395,448 $306,579 $420,357 $361,965 $345,903
Self-funded............................. 18,168 19,581 25,970 25,302 20,606
Government contracts.................... 49,910 36,747 52,259 31,667 23,333
Other operations........................ (1,837) (903) (1,408) -- --
-------- -------- -------- -------- --------
Total consolidated.................... $461,689 $362,004 $497,178 $418,934 $389,842
======== ======== ======== ======== ========
Investment results:
Insured................................. $ 6,668 $ 15,115 $ 17,083 $ 12,392 $ 17,026
Self-funded............................. 306 965 1,052 862 1,010
Government contracts.................... 520 238 375 247 311
-------- -------- -------- -------- --------
Total consolidated.................... $ 7,494 $ 16,318 $ 18,510 $ 13,501 $ 18,347
======== ======== ======== ======== ========
Income (loss) before income tax expense
(benefit):
Insured............................... $(31,303) $ 5,034 $ (4,894) $ 14,756 $ 9,310
Self-funded........................... (7,766) (12,319) (16,365) (15,550) (19,672)
Government contracts.................. 875 683 1,202 2,076 1,321
Other operations...................... (2,358) (14,173) (22,690) 3,991 6,857
-------- -------- -------- -------- --------
Total consolidated.................. $(40,552) $(20,775) $(42,747) $ 5,273 $ (2,184)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets:
Insured.................................. $171,746 $158,772 $184,493
Self-funded.............................. 180,166 209,233 243,128
Government contracts..................... 17,301 13,395 15,565
-------- -------- --------
Total consolidated..................... $369,213 $381,400 $443,186
======== ======== ========
</TABLE>
F-56
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENT REPORTING (UNAUDITED) (CONTINUED)
Total assets, including investment in affiliates, are allocated between
insured and self-funded based on the percentage of premium revenue.
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
---------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Health services revenue from
transaction with other operating
segments:
Insured............................ $(1,837) $(903) $(1,408) -- --
</TABLE>
14. BCBSUW CONVERSION
BCBSUW's Board of Directors announced in June of 1999 its intention to
convert BCBSUW from a service insurance corporation to a stockholder owned
corporation. On March 28, 2000, the Wisconsin Commissioner of Insurance issued
an order which allows BCBSUW to convert to a stock form of ownership by
completing a merger with UWS. In conjunction with the planned change in
corporate structure of BCBSUW, a special committee of the Company's board of
directors has been elected to negotiate the terms of the merger with UWS.
F-57
<PAGE>
ANNEX A
EXCHANGE AGREEMENT
AMONG
UNITED WISCONSIN SERVICES, INC.,
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
AND
WISCONSIN BC HOLDINGS LLC
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
Article I The Combination.......................................................... A-2
Section 1.01 The Exchange of Shares...................................... A-2
Section 1.02 Closing..................................................... A-2
Section 1.03 Deliveries at Closing A-2
Article II Representations and Warranties of BCBSUW and Holdings................... A-2
Section 2.01 Organization and Authority.................................. A-2
Section 2.02 Authority Relative to this Agreement........................ A-2
Section 2.03 No Conflict; Required Filings and Consents.................. A-2
Section 2.04 [Intentionally Omitted]..................................... A-3
Section 2.05 Subsidiaries and Affiliates................................. A-3
Section 2.06 [Intentionally Omitted]..................................... A-3
Section 2.07 Financial Statements........................................ A-3
Section 2.08 Insurance Company Financial Statements...................... A-4
Section 2.09 Receivables................................................. A-4
Section 2.10 Absence of Certain Changes.................................. A-4
Section 2.11 Litigation.................................................. A-6
Section 2.12 Compliance with Laws........................................ A-6
Section 2.13 Tax Returns and Audits...................................... A-6
Section 2.14 Title to Properties......................................... A-7
Section 2.15 Contracts and Commitments................................... A-7
Section 2.16 Employee Relations.......................................... A-7
Section 2.17 [Intentionally Omitted]..................................... A-8
Section 2.18 Intellectual Property....................................... A-8
Section 2.19 Environmental Matters....................................... A-8
Section 2.20 Contingent or Undisclosed Liabilities....................... A-9
Section 2.21 Insurance................................................... A-10
Section 2.22 Related Party Transactions.................................. A-10
Section 2.23 Registration Statement, Etc................................. A-10
Section 2.24 Change of Control Provisions................................ A-10
Section 2.25 Brokers and Finders......................................... A-10
Section 2.26 Disclosure.................................................. A-10
Section 2.27 Organization and Authority.................................. A-11
Section 2.28 Authority Relative to this Agreement........................ A-11
Section 2.29 No Conflict; Required Filings and Consents.................. A-11
Section 2.30 Interim Operations of Holdings.............................. A-11
Section 2.31 Ownership of Holdings....................................... A-11
Section 2.32 Ownership of BCBSUW Shares.................................. A-11
Article III Representations and Warranties of UWS.................................. A-11
Section 3.01 Organization and Authority.................................. A-12
Section 3.02 Capitalization.............................................. A-12
Section 3.03 Authorization............................................... A-12
Section 3.04 No Conflict; Required Filings and Consents.................. A-12
Section 3.05 Subsidiaries................................................ A-12
Section 3.06 Insurance Company Financial Statements...................... A-13
Section 3.07 Absence of Certain Changes.................................. A-13
Section 3.08 Litigation.................................................. A-15
Section 3.09 Compliance with Laws........................................ A-15
Section 3.10 Environmental Matters....................................... A-15
</TABLE>
A-i
<PAGE>
<TABLE>
<S> <C> <C> <C>
Section 3.11 Contingent or Undisclosed Liabilities....................... A-16
Section 3.12 Change of Control Provisions................................ A-16
Section 3.13 Registration Statement, Etc................................. A-16
Section 3.14 Brokers and Finders......................................... A-17
Section 3.15 SEC Filings; Financial Statements........................... A-17
Section 3.16 Disclosure.................................................. A-17
Article IV Conduct of Business Prior to the Effective Time......................... A-17
Article V Additional Agreements.................................................... A-17
Section 5.01 Access and Information...................................... A-17
Section 5.02 Registration Statement and Proxy Statement.................. A-18
Section 5.03 UWS Shareholders Approval................................... A-18
Section 5.04 Miscellaneous Agreements and Consents....................... A-18
Section 5.05 Interim Financial Statements................................ A-19
Section 5.06 Hart-Scott-Rodino Compliance................................ A-19
Section 5.07 Certain Notifications....................................... A-19
Section 5.08 Voting Agreement............................................ A-19
Section 5.09 Sales and Issuances of UWS Stock............................ A-19
Section 5.10 Press Releases.............................................. A-19
Section 5.11 Expenses.................................................... A-19
Section 5.12 Insurance Regulatory Approvals.............................. A-19
Section 5.13 Dissenters' Rights.......................................... A-20
Section 5.14 Fiduciary Responsibilities.................................. A-20
Article VI Conditions.............................................................. A-21
Section 6.01 Conditions to Each Party's Obligations to Consummate the A-21
Combination...............................................
Section 6.02 Conditions to Obligations of BCBSUW and Holdings to A-22
Consummate the Combination................................
Section 6.03 Conditions to Obligations of UWS Consummate the A-23
Combination...............................................
Article VII Termination, Amendment................................................. A-25
Section 7.01 Termination................................................. A-25
Section 7.02 Amendment................................................... A-25
Article VIII Non-Survival of Representations, Warranties and Agreements............ A-25
Article IX General Provisions...................................................... A-25
Section 9.01 Notices..................................................... A-25
Section 9.02 Miscellaneous............................................... A-26
Section 9.03 Waiver; Remedies............................................ A-26
Section 9.04 Severability................................................ A-27
Section 9.05 Governing Law............................................... A-27
Section 9.06 Third-Party Beneficiaries................................... A-27
Section 9.07 Specific Performance........................................ A-27
Section 9.08 Headings.................................................... A-27
Section 9.09 Recitals.................................................... A-27
Section 9.10 "Knowledge"................................................. A-27
Section 9.11 "Material Adverse Effect"................................... A-27
</TABLE>
EXHIBITS
Exhibit A Amended and Restated Articles of Incorporation of Cobalt Corporation
Exhibit B Amended and Restated Bylaws of Cobalt Corporation
A-ii
<PAGE>
EXCHANGE AGREEMENT
THIS AGREEMENT (the "Agreement") dated as of December , 2000 between
UNITED WISCONSIN SERVICES, INC., a Wisconsin corporation ("UWS"), BLUE CROSS &
BLUE SHIELD UNITED OF WISCONSIN, a Wisconsin service insurance corporation
("BCBSUW"), and WISCONSIN BC HOLDINGS LLC, a Wisconsin limited liability company
("HOLDINGS").
R E C I T A L S
1. The Wisconsin Office of the Commissioner of Insurance ("OCI") has
approved a plan whereby BCBSUW will convert (the "Conversion") from its current
status as a service insurance corporation organized under Chapter 613 of the
Wisconsin Statutes to a stock insurance corporation organized under Chapter 611
of the Wisconsin Statutes, subject to the terms and conditions set forth in the
OCI's Conversion Order dated March 28, 1999 (the "Conversion Order").
2. The Board of Directors of BCBSUW has formed a special committee of its
Board of Directors consisting entirely of outside, independent members of
BCBSUW's Board of Directors (the "BCBSUW Special Committee"). The BCBSUW Special
Committee has engaged legal and financial advisors and, after consultation with
its advisors, the BCBSUW Special Committee has determined that, in connection
with the Conversion Order, the Combination (as hereinafter defined) is in the
best interest of BCBSUW and the Foundation (as defined below). The BCBSUW
Special Committee recommended that this Agreement and the Combination be
approved by the Board of Directors of BCBSUW, and the Board of Directors of
BCBSUW has adopted the recommendation of the BCBSUW Special Committee.
3. The Board of Directors of UWS has formed a special committee of the
Board of Directors consisting entirely of outside, independent members of UWS's
Board of Directors (the "UWS Special Committee"). The UWS Special Committee has
engaged legal and financial advisors and, after consultation with its advisors,
the UWS Special Committee has determined that the Combination is in the best
interest of UWS and the shareholders of UWS other than BCBSUW. The UWS Special
Committee recommended that this Agreement and the Combination be approved by the
Board of Directors of UWS, and the Board of Directors of UWS has adopted the
recommendation of the UWS Special Committee.
4. This Agreement provides for the combination (the "Combination") of the
businesses of UWS and BCBSUW through the exchange by Holdings (which,
immediately prior to the Combination, will be the sole shareholder of BCBSUW) of
all the issued and outstanding shares of BCBSUW to UWS in exchange for
31,313,390 shares of newly issued common stock, no par value, of UWS
constituting seventy-seven and one-half percent (77.5%) of the issued and
outstanding stock of UWS immediately following such issuance, plus cash in the
amount of Five Hundred Thousand Dollars ($500,000). Immediately following the
Combination, BCBSUW will be a wholly-owned subsidiary of UWS.
5. The Foundation (as defined below) has caused Holdings to be formed for
the purpose of effecting the Combination and, as the sole member and manager of
Holdings, has approved the Combination and this Agreement.
6. In connection with the Combination, a special meeting of the
shareholders of UWS will be held at which the shareholders will be requested to
approve: (a) the Combination and the issuance of shares to Holdings; (b) the
adoption of amended and restated Articles of Incorporation, including a new
Board of Directors; and (c) the adoption of amended and restated Bylaws.
A-1
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, the parties agree as follows:
ARTICLE I
THE COMBINATION
Section 1.01 THE EXCHANGE OF SHARES. Subject to the terms and conditions
of this Agreement at the Closing (as hereinafter defined), (i) Holdings shall
transfer, assign and deliver to UWS one hundred percent (100%) of the then
outstanding shares of capital stock of BCBSUW, exactly as received in the
Conversion, and (ii) UWS shall issue, transfer, assign and deliver to Holdings
(A) 31,313,390 shares (the "New Holdings Shares") of newly issued common stock,
no par value, of UWS and (B) cash in the sum of Five Hundred Thousand Dollars
($500,000).
Section 1.02 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Michael Best &
Friedrich LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin, immediately
following the meeting of UWS's shareholders referred to in Section 5.03, or at
such other time and place as Holdings, BCBSUW and UWS shall agree.
Section 1.03 DELIVERIES AT CLOSING. In addition to opinions, certificates
and other deliveries provided for by this Agreement, each of Holdings and UWS
shall deliver the securities it is obligated to transfer hereunder in such
certificated form as is reasonably satisfactory to the transferee, evidencing
transfer of good title, free and clear of all liens or encumbrances.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF BCBSUW AND HOLDINGS
BCBSUW hereby represents and warrants to UWS that:
Section 2.01 ORGANIZATION AND AUTHORITY. BCBSUW is duly organized and
validly existing under the laws of the State of Wisconsin and has the requisite
power and authority to carry on its business as now being conducted.
Section 2.02 AUTHORITY RELATIVE TO THIS AGREEMENT. BCBSUW has all
necessary power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
by BCBSUW and the performance by BCBSUW of its obligations hereunder have been
duly and validly authorized by all necessary corporate action on the part of
BCBSUW and, except as expressly described in this Agreement, no other
proceedings on the part of BCBSUW are necessary to authorize this Agreement or
to consummate the Combination. This Agreement has been duly and validly executed
and delivered by BCBSUW and constitutes the legal, valid and binding obligation
of BCBSUW, enforceable against BCBSUW in accordance with its terms, except
insofar as enforcement may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors rights generally and by principles of
equity.
Section 2.03 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Subject to compliance with applicable provisions of the Wisconsin
Business Corporation Law ("WBCL"), the execution and delivery of this Agreement
by BCBSUW does not, and the performance by BCBSUW of its obligations hereunder
will not, (i) conflict with or violate the charter documents, bylaws or other
organizational documents of BCBSUW, (ii) conflict with or violate any laws
applicable to BCBSUW or by which any of its properties or assets are bound or
affected, or (iii) result in a violation or any breach of or constitute a
default (or an event which with notice or lapse of time or both would become a
violation, breach or default) under any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which BCBSUW is a party or by which BCBSUW or any property or
asset of BCBSUW is bound or affected, except, in the
A-2
<PAGE>
case of clauses (ii) and (iii), for violations, breaches or defaults which would
not, individually or in the aggregate, be reasonably expected to prevent or
materially delay the consummation of the Combination or result in a Material
Adverse Effect as defined in Section 9.12.
To the Knowledge of BCBSUW, the execution and delivery of this Agreement by
each of BCBSUW and Holdings does not, and the consummation of this Agreement by
each of BCBSUW and Holdings will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any government or
subdivision thereof, or any administration, governmental or regulatory
authority, agency, commission, tribunal or body, domestic or foreign, except
(i) for applicable requirements, if any, of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), the Securities Act of 1933, as amended (the "1933
Act"), the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), the OCI, the Blue Cross and Blue Shield Association ("BCBSA"), state
regulatory notices and/or approvals in certain states where insurance company
subsidiaries transact business, rules of the New York Stock Exchange ("NYSE"),
applicable state takeover laws, and the WBCL, and (ii) where the failure to
obtain such other consents, approvals, authorizations, or permits, or to make
such filings or notifications, would not, individually or in the aggregate, be
reasonably expected to prevent or materially delay the consummation of the
Combination or result in a Material Adverse Effect.
Section 2.04 [INTENTIONALLY OMITTED]
Section 2.05 SUBSIDIARIES AND AFFILIATES. BCBSUW does not have any direct
or indirect equity interest in any corporation, partnership, limited liability
company or other entity except (a) 7,840,817 shares of common stock of UWS,
(b) 6,209,525 shares of common stock of American Medical Security Group, Inc., a
Wisconsin corporation ("AMS"), (c) 100% of the membership interest of United
Government Services, LLC ("UGS"), and (d) non-controlling equity interests in
various publicly traded issuers, held as part of BCBSUW's investment portfolio.
Notwithstanding any provision of this Agreement, and notwithstanding the
ownership by BCBSUW of a substantial portion of the outstanding shares of each
of UWS and AMS, neither BCBSUW nor Holdings makes any representation or warranty
with respect to the business, assets, condition (financial or otherwise), or
business prospects of UWS or AMS, or any of their respective subsidiaries, or
with respect to contracts, commitments or agreements to which UWS is a party. No
equity securities or interests of UGS are, or may become, required to be issued
by reason of any options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, interests or
rights convertible into, shares of capital stock or interests of UGS, and there
are no contracts, commitments, understandings or arrangements by which UGS is
bound to issue additional equity interests, options, warrants, interests or
other rights to purchase or acquire any additional such securities. BCBSUW has
pledged five million (5,000,000) shares of common stock of AMS to M&I
Marshall & Ilsley Bank as collateral for borrowings under its line of credit.
With that exception, all of the foregoing equity interests are owned by BCBSUW
free and clear of any claim, lien, encumbrance or agreement with respect
thereto.
All references in this Agreement to BCBSUW, its business, assets, condition
(financial or otherwise) or business prospects and all references to documents,
instruments or other agreements to be delivered at Closing shall mean and
include BCBSUW and UGS on a consolidated basis, unless the context clearly and
specifically limits the meaning solely to BCBSUW.
Section 2.06 [INTENTIONALLY OMITTED]
Section 2.07 FINANCIAL STATEMENTS. BCBSUW has provided to UWS (i) the
audited consolidated financial statements (including balance sheet and
statements of income and cash flow) of BCBSUW for its fiscal years ended
December 31, 1997 through December 31, 1999, including in each case all
footnotes thereto, certified by Ernst & Young, LLP, BCBSUW's independent
accountants (the audited balance sheet as of December 31, 1999 being herein
referred to as the "BCBSUW Balance Sheet"), and (ii) the unaudited consolidated
financial statements (including balance sheet and statements of
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income and cash flow) as of November 30, 2000 (collectively, the "Financial
Statements"). BCBSUW's books and records of accounts accurately reflect in all
material respects all of the assets, liabilities, transactions and results of
operations of BCBSUW, and the Financial Statements have been prepared based upon
and in conformity therewith. The Financial Statements have been prepared in
accordance with generally accepted accounting principles maintained and applied
on a consistent basis throughout the indicated periods ("GAAP"), and fairly
present in all material respects the consolidated financial condition and
results of operation of BCBSUW and its consolidated subsidiaries at the dates
and for the relevant periods indicated in accordance with GAAP (subject, in the
case of unaudited statements, to normal and recurring year-end adjustments and
the absence of footnotes).
Section 2.08 INSURANCE COMPANY FINANCIAL STATEMENTS. BCBSUW and each
subsidiary that is an insurance company (collectively, the "Insurers") has
provided UWS access to complete and correct copies of its annual and quarterly
statements for the years ended December 31, 1997 through 1999 and for the three
quarters ended September 30, 2000, respectively, together with all exhibits and
schedules thereto (collectively, the "Statements"). The Statements have been
prepared in accordance with Statutory Accounting Practices throughout the
periods involved and in accordance with the books and records of said Insurers,
except as expressly set forth or disclosed in the notes, exhibits or schedules
thereto. The Statements fairly and accurately present in all material respects
the assets, liabilities and capital and surplus of said Insurers as of the
respective dates thereof in accordance with Statutory Accounting Practices
consistently applied. As used in this Agreement, "Statutory Accounting
Practices" means the accounting procedures and methods prescribed or permitted
by the National Association of Insurance Commissioners as modified by the
Department of Insurance for the state of domicile of each Insurer.
(a) As of September 30, 2000, no Insurer had any material liability, whether
accrued, absolute, fixed contingent or otherwise, of a nature required to be
reflected on the balance sheet of said Insurer prepared in accordance with
Statutory Accounting Practices, which liability is not reflected or reserved
against in the balance sheet forming a part of the Statements in accordance with
Statutory Accounting Practices, or disclosed in the notes thereto. For the nine
months ended September 30, 2000, no Insurer has incurred any material
liabilities or obligations (absolute, accrued, fixed contingent, liquidated,
unliquidated or otherwise) except liabilities incurred in the ordinary course of
business consistent with past practice.
(b) Each Insurer's statutory capital met, as of December 31, 1999 and
September 30, 2000, and will meet as of the Effective Time, the requirements of
its state of domicile and was and will be at least as great as the minimum
aggregate amount required by each state in which each Insurer was and will be
licensed to do direct business.
Section 2.09 RECEIVABLES. Except as set forth on SCHEDULE 2.09, all
accounts, notes and other material receivables of BCBSUW as of September 30,
2000, whether reflected in the Financial Statements or otherwise, represent
sales or other transactions in the ordinary course of business, and to the
extent not previously collected, are fully collectible, subject to reserves as
set forth on the Financial Statements, and none of such receivables or other
debts is or will be at the date of the Closing subject to any counterclaim or
set-off.
Section 2.10 ABSENCE OF CERTAIN CHANGES. Except as set forth on
SCHEDULE 2.10, or as contemplated by this Agreement, since December 31, 1999,
BCBSUW has conducted its business only in the ordinary course thereof and has
not experienced any changes in its condition (financial or otherwise), assets,
liabilities, business or operations which individually or in the aggregate had
or could have a Material Adverse Effect. For purposes of this Section, an item
shall be deemed "material" if the dollar amount or value associated with such
item exceeds $1,000,000. Without limiting the generality of the foregoing
sentence, since December 31, 1999, BCBSUW has not:
(i) in a single transaction or a series of related transactions, sold
(including by sale-leaseback), leased, licensed, or otherwise disposed of
any assets which individually or in the aggregate, have a fair market value
in excess of $1,000,000;
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(ii) paid, discharged or satisfied any material liability or obligation
(whether accrued, absolute, contingent or otherwise) other than in the
ordinary and usual course of business, or liabilities or obligations shown
or reflected on the BCBSUW Balance Sheet or incurred any material liability
or obligation except in the ordinary course of business consistent with past
practice since the date of the BCBSUW Balance Sheet;
(iii) prepaid any material expenses, indebtedness or other obligations
except in the ordinary and usual course of business;
(iv) except in the ordinary and usual course of business, permitted or
allowed any assets (whether real, personal or mixed, tangible or intangible)
to be subjected to any mortgage, pledge, lien, security interest,
encumbrance, restriction or charge of any kind securing an obligation in
excess of $1,000,000;
(v) written off as uncollectible any material notes or accounts
receivable;
(vi) released, waived or terminated any material obligation of any third
party to BCBSUW;
(vii) disposed of or permitted to lapse any rights in, to or for the use
of any material patent, trademark, trade name or copyright;
(viii) settled any material claim, action or lawsuit involving BCBSUW, or
amended any tax return in any respect;
(ix) granted any increase in the base compensation or other payment to
any director, officer or employee, whether now or hereafter payable or
granted (other than increases in compensation in the ordinary course
consistent in timing and amount with past practice) or granted any severance
or termination pay (other than for severance pay to employees who are not
BCBSUW Related Parties (as defined in Section 2.22) in amounts consistent
with BCBSUW's established severance pay practices), or entered into, amended
or become obligated under any employment, severance, bonus, profit sharing
or other employee benefit arrangement;
(x) made any material capital expenditure or commitment for additions to
property, plant or equipment, or leased or agreed to lease any assets which,
if purchased, would be reflected in the property, plant or equipment
accounts;
(xi) made any change in any method of accounting or keeping its books of
account or accounting practices;
(xii) paid any amounts to, or sold or otherwise disposed of any assets
to, assets from, or entered into any agreement or arrangement with, any
BCBSUW Related Party;
(xiii) incurred any obligation or liability, including without limitation
any liability for nonperformance or termination of any contract, except
liabilities incurred in the ordinary and usual course of the business;
(xiv) incurred or become contingently liable with respect to any
indebtedness for borrowed money or guaranteed any such indebtedness, where
the aggregate amount of indebtedness so incurred or guaranteed exceeded
$1,000,000, or redeemed any long-term debt;
(xv) entered into or amended any contract, agreement or commitment, or
engaged in any transaction, in each case which is material to BCBSUW and
which is not in the usual and ordinary course of the business;
(xvi) amended or proposed to amend its Articles of Incorporation or
Bylaws;
(xvii) acquired or agreed to acquire by merging with, or by purchasing a
substantial equity interest in or a substantial portion of the assets of, or
by any other manner, any business or any
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corporation, partnership, association or other business entity, in a
transaction or series of related transactions;
(xviii) solicited or encouraged any inquiries or proposals regarding, or
offers for, or entered into or continued any discussions with, or provided
any information to, any third party concerning any sale or transfer of
BCBSUW or any of its assets or entered into or consummated any agreement or
understanding providing for a sale or transfer of BCBSUW or any of its
assets, other than as contemplated herein; or
(xix) agreed, whether or not in writing, to take any of the actions
described in clauses (i)-(xviii) above.
Section 2.11 LITIGATION. Except as set forth on SCHEDULE 2.11, BCBSUW is
not a party to any pending or threatened claim, action, suit, investigation or
proceeding, or subject to any order, judgment or decree relating to or affecting
BCBSUW which, if decided adversely to BCBSUW, would have a Material Adverse
Effect on BCBSUW, nor, to the Knowledge of BCBSUW, is any such claim, action,
suit, investigation or proceeding threatened. Except as set forth on
SCHEDULE 2.11, since January 1, 2000, BCBSUW has not been a party to any claim,
action, suit, investigation or proceeding outside the ordinary and usual course
of business. Except as described on SCHEDULE 2.11, there is no outstanding
order, decree or stipulation issued by any federal, state or local authority to
which BCBSUW is a party or subject and which adversely affects or may adversely
affect BCBSUW's properties, business or prospects.
Section 2.12 COMPLIANCE WITH LAWS. BCBSUW has conducted and is conducting
its business in compliance in all material respects with all applicable laws,
regulations and requirements in each jurisdiction in which it conducts (or in
the past has conducted) business, including any insurance or insurance-related
laws, regulations, rules or requirements, and UWS will not after the Closing
incur any material liability or obligation as a result of any noncompliance
existing at the Closing or arising or occurring thereafter but based upon
conditions extant at the Closing. SCHEDULE 2.12 lists all licenses,
registrations and permits, and applications with respect to the business and
operations of BCBSUW. BCBSUW currently possesses all governmental approvals,
consents, licenses, registrations, and permits necessary to carry on its
business as presently conducted and has not received any notice of violation of
any laws or notice of any proposed regulations or changes in the requirement of
such approvals, consents, licenses, registrations, or permits.
Section 2.13 TAX RETURNS AND AUDITS. BCBSUW has filed with the appropriate
governmental agencies all tax returns required to be filed by it and has paid,
or made provision for the payment of, all taxes of every type and description
which have or may become due, and such returns accurately reflect BCBSUW's
obligations to pay taxes for the periods covered therein. The accruals and
reserves for taxes reflected in the Financial Statements are, and on any interim
balance sheets to be delivered after the date hereof will be, adequate to pay in
full all taxes that have accrued for any period which are not yet due and
payable (to the extent that such taxes will not be eliminated by existing net
operating losses). Except as set forth on SCHEDULE 2.13, no examination or audit
relating to any tax returns is currently in progress of which BCBSUW has
received notice, and no waivers of statutes of limitation have been given or
requested. The federal income tax liabilities of BCBSUW have been finally
determined for all fiscal years to and including the fiscal year ended
December 31, 1986. No correspondence has been received by BCBSUW from any state
taxing authority requesting information concerning the extent of BCBSUW's nexus
with such state or asserting that BCBSUW has such nexus so as to impose such
state's taxing jurisdiction on BCBSUW and BCBSUW does not have a nexus with any
state in which it does not currently file tax returns which would allow such
state to impose its taxing jurisdiction on BCBSUW.
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Section 2.14 TITLE TO PROPERTIES.
(a) BCBSUW has good and marketable title to all of its properties and
assets, real, personal and mixed, including intangibles, free and clear of all
mortgages, liens, pledges, charges or encumbrances of any nature whatsoever, and
has taken all steps necessary or otherwise required to perfect and protect its
rights in and to its properties and assets, including intangibles. To the
knowledge of BCBSUW, all properties and assets owned and currently used by
BCBSUW in BCBSUW's business are in good condition and repair and are not in
violation of any applicable laws, including without limitation building and
zoning laws, and no notice of any violation of building or other laws, statutes,
ordinances or regulations relating to such business, property or assets has been
received by BCBSUW. The surveys of all real property owned by BCBSUW, which have
been made available to UWS, are listed on SCHEDULE 2.14, and, except as set
forth on SCHEDULE 2.14, disclose that none of the buildings, structures or
improvements on any of the real properties owned by BCBSUW encroaches on, and
none of the real properties owned by BCBSUW or any building, structure or
improvement is encroached upon by, any building, structure or improvement owned
by any other person.
(b) SCHEDULE 2.14 sets forth: (i) a true and complete list of all real
property leases of BCBSUW and all personal property leases to which BCBSUW is a
party as lessee as of the date hereof involving an annual lease payment of more
than $100,000, including an identification of the parties, the property, the
term of the lease and the rent or lease payments thereunder, and (ii) a true and
complete list of all real property owned by BCBSUW as of the date hereof
(collectively, the "Real Property"), including an identification of the
property, the record owner and the principal structures on it.
Section 2.15 CONTRACTS AND COMMITMENTS. Except as set forth on
SCHEDULE 2.15, or in the footnotes to the Financial Statements, BCBSUW has no
written or oral contracts, commitments, or other agreements or arrangements,
including any notes, loan agreements, guarantees or other evidences of
indebtedness of BCBSUW, involving an aggregate consideration with a value in
excess of $100,000, or any contracts, commitments, or other agreements or
arrangements with any BCBSUW Related Party. All of such contracts, commitments,
or other agreements or arrangements to which BCBSUW is a party or by which any
of its assets or properties are bound or affected are in full force and effect
and to the Knowledge of BCBSUW, no event or condition has occurred or exists, or
is alleged by any of the other parties thereto to have occurred or exist, which
constitutes, or with lapse of time or giving of notice might constitute, a
default or basis for acceleration under any such contract, commitment,
arrangement or other agreement. BCBSUW has not given any revocable or
irrevocable power of attorney to any person, firm or corporation for any purpose
whatsoever. BCBSUW has made available to UWS a complete and correct copy of all
such contracts, commitments, agreements or arrangements that are in written form
and written descriptions of all such contracts, commitments, agreements or
arrangements that are oral. BCBSUW is not bound by any covenant not to compete
or otherwise restricted by any agreement from carrying on or engaging in any
business.
Section 2.16 EMPLOYEE RELATIONS. Except as set forth on SCHEDULE 2.16
BCBSUW is not a party to any collective bargaining agreement covering or
relating to any of its employees and has not recognized, is not required to
recognize and during the past five years has not received a demand for
recognition by any collective bargaining representative or experienced any
strikes or work stoppages or slowdowns. To its knowledge, BCBSUW is in
compliance in all material respects with all applicable laws, rules and
regulations relating to employment or employment practices, including those
relating to wages, hours, collective bargaining and the withholding and payment
of taxes and contributions, and BCBSUW is in compliance with the Occupational
Safety and Health Act and applicable federal civil rights laws. Except as set
forth on SCHEDULE 2.16, to the knowledge of BCBSUW, there are no material
controversies pending or threatened between BCBSUW and any of its employees.
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Section 2.17 [INTENTIONALLY OMITTED]
Section 2.18 INTELLECTUAL PROPERTY. SCHEDULE 2.18 sets forth a correct and
complete list of all material patents, patent applications, inventions upon
which patent applications have not yet been filed, trade names, trademarks,
service marks, trademark registrations and applications, copyrights and
copyright registrations and applications, and all other rights with respect to
intellectual property, both domestic and foreign, presently owned, possessed,
used or held by BCBSUW (the "Intellectual Property"). To the knowledge of
BCBSUW, and except as noted on SCHEDULE 2.18, BCBSUW owns the entire right,
title and interest in and to all Intellectual Property. SCHEDULE 2.18 sets forth
a correct and complete list of all licenses granted to BCBSUW by others and to
others by BCBSUW. Except as set forth on SCHEDULE 2.18, to the knowledge of
BCBSUW, neither the conduct of BCBSUW's business nor any of the products it
sells or services it provides infringes upon the rights of any other person, nor
does the conduct of any other person's business or any of the products it sells
or services it provides infringe upon any of BCBSUW's rights. BCBSUW has no
liability for and has not given any indemnification for patent, trademark or
copyright infringement as to any products manufactured, used or sold by it or
with respect to services rendered by it. The Intellectual Property constitutes
all of the material intellectual property that is used in or necessary for the
conduct of BCBSUW's business, as presently conducted. Except as set forth on
SCHEDULE 2.18, BCBSUW has not licensed or permitted any third party to use any
of the Intellectual Property.
Section 2.19 ENVIRONMENTAL MATTERS.
(a) DEFINITIONS. As used in this Agreement:
"Environmental Laws" shall mean, collectively, the federal Clean Air Act,
the federal Clean Water Act, the federal Resource Conservation and Recovery Act,
the federal Comprehensive Environmental Response, Compensation and Liability
Act, the federal Toxic Substances Control Act, principles of common law and any
other federal, state or local laws, including rules and regulations thereunder,
regulating or otherwise affecting or relating to human health or the
environment.
"Environmental Materials" shall mean, collectively, any material, substance,
chemical, waste, contaminant or pollutant which is regulated, listed, defined as
or determined to be hazardous, extremely hazardous, toxic, dangerous, restricted
or a nuisance, or otherwise harmful to human health or the environment, under
any Environmental Laws.
"Hazardous Substances" means hazardous substances as defined under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section9601, et seq. and the Wisconsin Hazardous Substances Spills Law,
Section144.76 et seq., Wis. Stats., and all regulations promulgated thereunder.
(b) NO VIOLATIONS. Except as set forth on SCHEDULE 2.19, to the Knowledge
of BCBSUW, BCBSUW has never violated or been threatened with or received a
notice, directive, violation report or charge asserting any violation of any
Environmental Law.
(c) NO PROCEEDINGS. Except as set forth on SCHEDULE 2.19, to the Knowledge
of BCBSUW, no suit, proceeding or other administrative or legal action has been
instituted against BCBSUW by any federal, state or local governmental department
or agency or any other person or entity concerning any Environmental Laws.
(d) CLAIMS FOR REMEDIATION. Except as set forth on SCHEDULE 2.19, to the
Knowledge of BCBSUW, BCBSUW has not received from any federal, state or local
governmental department or agency or any other person or entity any claim,
demand, directive, order or request to investigate, restore, repair, clean up or
otherwise remediate, or to contribute to the costs of investigating, restoring,
repairing, cleaning up or otherwise remediating the Real Property.
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(e) COMPLIANCE. Except as set forth on SCHEDULE 2.19, to the Knowledge of
BCBSUW, (i) BCBSUW is in compliance in all material respects with all
Environmental Laws, (ii) BCBSUW has obtained all permits, authorizations,
licenses, or approvals which are necessary or required under Environmental Laws
in connection with the operation of BCBSUW's business, and BCBSUW is in
compliance in all material respects with such permits, authorizations, licenses,
and approvals, (iii) no asbestos, urea formaldehyde or polychlorinated biphenyls
are present on, at, in or under the Real Property, and (iv) none of the assets
or operations of BCBSUW is required to be upgraded, modified, or replaced in
order to be in compliance with Environmental Laws.
(f) NO RELEASES. Except as set forth on SCHEDULE 2.19, to the Knowledge of
BCBSUW, (i) BCBSUW has not disposed of, spilled, discharged, released or
otherwise placed any Environmental Materials, on, at, in or under the Real
Property, (ii) no third party has disposed of, spilled, discharged, released or
otherwise placed any Environmental Materials on, at, in or under the Real
Property or any real property adjacent to the Real Property, and (iii) other
than the information provided in (i) and (ii), there has been no release,
discharge, leakage, seepage or migration of any Environmental Materials from any
aboveground or underground storage tank or any other structure currently or
previously located on, at, in or under the Real Property.
(g) CERTAIN USES. Except as set forth on SCHEDULE 2.19, to the Knowledge
of BCBSUW, (i) no septic systems or wells exist on, at, in or under the Real
Property, (ii) neither the Real Property has ever been used as a landfill, dump
site or any other use which involves the disposal of Environmental Materials on
the Real Property in a manner which may subject the UWS to any claim for
investigation, remediation or damages, and (iii) except with respect to the
storage, use, generation, handling or removal from the Real Property of
Environmental Materials in the ordinary course of business consistent with past
practice and in compliance with all Environmental Laws, no Environmental
Materials are currently located at or ever have been used, generated, treated,
stored, disposed of, handled on or removed from the Real Property.
(h) STORAGE TANKS. Except as set forth on SCHEDULE 2.19, to the Knowledge
of BCBSUW, no aboveground or underground storage tanks have ever been located
on, at, in or under the Real Property.
(i) LIST OF REPORTS AND DISPOSAL SITES. SCHEDULE 2.19 includes a list of
(i) all environmental investigative reports, studies or assessments (including,
but not limited to, Phase I and Phase II assessments), compliance audits,
laboratory analytical data, technical reviews, or the like with respect to
BCBSUW, the Real Property, BCBSUW's business or any of BCBSUW's assets, copies
of which are attached hereto, and (ii) all past and present locations where
Environmental Materials which currently are or have been controlled by BCBSUW
have been sent, spilled, released, discharged or disposed, to the Knowledge of
BCBSUW.
(j) ASSUMPTION OF LIABILITY. Except as set forth on SCHEDULE 2.19, BCBSUW
has not assumed, either contractually or by operation of law, any liability of
any person or entity under any Environmental Laws.
Section 2.20 CONTINGENT OR UNDISCLOSED LIABILITIES. BCBSUW does not have
any material debts, liabilities or obligations due or to become due, and there
are no claims or causes of action that may be asserted against BCBSUW by any
governmental authority or third party which arise with respect to or relate to
any period or periods on or prior to the date hereof, regardless of whether such
obligations, liabilities or claims are known or unknown, absolute, accrued,
contingent or otherwise, except as and to the extent set forth on the BCBSUW
Balance Sheet or disclosed in the notes thereto and except for liabilities
incurred since January 1, 2000 in the ordinary course of business consistent
with past practice.
Section 2.21 INSURANCE. BCBSUW has in full force and effect the policies
of insurance listed in the amounts described on SCHEDULE 2.21 hereto, and all
premiums due thereon have been paid and no
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notice of cancellation, termination or increase of premiums has been received by
BCBSUW. BCBSUW does not have any interest in any other insurance policy. No
material claims were made against any insurance policy during the past three
years.
Section 2.22 RELATED PARTY TRANSACTIONS. Except as described on
SCHEDULE 2.22 attached hereto, or as disclosed in the Financial Statements
(including the footnotes thereto), BCBSUW (a) has not had any financial
transactions or arrangements (other than payment of regular salary to BCBSUW
Related Parties who are employees) with any BCBSUW Related Party since
January 1, 1999, and (b) has not and will not have any present or future
obligation to enter into any transaction or arrangement with any BCBSUW Related
Party. For purposes of this Agreement, the term "BCBSUW Related Party" shall
mean (i) UGS, (ii) any officer or director of BCBSUW or UGS, and (iii) any
spouse, in-law or lineal descendant of any BCBSUW Related Party. Except as
described on SCHEDULE 2.22, to the Knowledge of BCBSUW, no BCBSUW Related Party
owns, directly or indirectly, or is a director, member, officer or employee of,
or consultant to, any business organization which is a competitor, supplier, or
customer having business dealings with BCBSUW or UGS, nor does any BCBSUW
Related Party own any assets or properties which are used in BCBSUW's or UGS's
business.
Section 2.23 REGISTRATION STATEMENT, ETC. None of the information to be
supplied by BCBSUW insofar as such information relates to BCBSUW and such
information is furnished in writing by or on behalf of BCBSUW expressly for use
in (i) a Registration Statement to be filed with the Securities and Exchange
Commission (the "Commission") by UWS for the purpose of registering the New
Holding Shares (the "Registration Statement"), (ii) the proxy statement to be
mailed to the shareholders of UWS (the "Proxy Statement") in connection with the
meeting of shareholders to be called to consider and vote upon the Combination,
and (iii) any other documents to be filed with the Commission in connection with
the transactions contemplated hereby, at the respective times such documents are
filed with the Commission and, in the case of the Registration Statement, when
it becomes effective, and with respect to the Proxy Statement, when mailed,
shall be false or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein not
misleading. In the case of the Proxy Statement or any amendment thereof, none of
such information at the time of the meeting of shareholders referred to in
Section 5.03 hereof shall be false or misleading with respect to any material
fact, or omit to state any material fact necessary to correct any statement in
any earlier communication with respect to the solicitation of any proxy for such
meeting.
Section 2.24 CHANGE OF CONTROL PROVISIONS. Except as disclosed on
SCHEDULE 2.24, no director, officer or employee of BCBSUW will be entitled to
receive additional compensation, other payments or other rights (whether as a
result of any employee benefit plan, program or arrangement, any contract or
other agreement, or otherwise) as a result of the execution of this Agreement,
the consummation of the Combination, the consummation of any of the other
transactions contemplated hereby or otherwise in connection with a change of
control of BCBSUW.
Section 2.25 BROKERS AND FINDERS. Neither BCBSUW nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions or
finders' fees, and no broker or finder has acted directly or indirectly for
BCBSUW in connection with this Agreement or the transactions contemplated hereby
except for the fees of Bear, Stearns & Co., Inc. and except for financial
advisory fees incurred on behalf of the OCI in connection with the Combination
and the transactions contemplated by this Agreement.
Section 2.26 DISCLOSURE. No representation, warranty or other statement by
BCBSUW herein or in the schedules hereto, or in any other document entered into
in connection with this Agreement, contains or will contain an untrue statement
of material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein or therein not misleading.
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Holdings hereby represents and warrants to UWS that:
Section 2.27 ORGANIZATION AND AUTHORITY. Holdings is a single-member,
member-managed limited liability company duly organized and validly existing
under the laws of the State of Wisconsin and has the requisite power and
authority to carry on its business as now being conducted.
Section 2.28 AUTHORITY RELATIVE TO THIS AGREEMENT. Holdings has all
necessary power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
by Holdings and the consummation by Holdings of the Combination have been duly
and validly authorized by all necessary action on the part of Holdings and,
except as expressly described in this Agreement, no other proceedings on the
part of Holdings are necessary to authorize this Agreement or to consummate the
Combination. This Agreement has been duly and validly executed and delivered by
Holdings and constitutes the legal, valid and binding obligation of Holdings,
enforceable against Holdings in accordance with its terms, except insofar as
enforcement may be limited by bankruptcy, insolvency or similar laws affecting
the enforcement or creditors rights generally and by principles of equity.
Section 2.29 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Subject to compliance with applicable provisions of the WBCL, the
execution and delivery of this Agreement by Holdings does not, and the
consummation of the Combination by Holdings will not, (i) conflict with or
violate the articles of organization or other organizational documents of
Holdings, (ii) conflict with or violate any laws applicable to Holdings or by
which any of its properties or assets are bound or affected, or (iii) result in
a violation or any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a violation, breach or default)
under any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Holdings is a party
or by which Holdings or any property or assets of Holdings is bound or affected,
except, in the case of clauses (ii) and (iii), for violations, breaches or
defaults which would not, individually or in the aggregate, be reasonably
expected to present or materially delay the consummation of the Combination or
result in a Material Adverse Effect as defined in Section 9.12.
Section 2.30 INTERIM OPERATIONS OF HOLDINGS. Holdings was formed solely
for the purpose of engaging in the transactions contemplated hereby, has engaged
in no other business activities (other than those incident to its organization
and the execution of this Agreement) and has conducted its operations only as
contemplated hereby. On the date of this Agreement, Holdings owns no material
assets and has no liabilities, except for liabilities under this Agreement.
Section 2.31 OWNERSHIP OF HOLDINGS. Wisconsin United for Health
Foundation, Inc., a Wisconsin non-stock corporation ("Foundation"), is the sole
member and in such capacity, is the managing entity of Holdings.
Section 2.32 OWNERSHIP OF BCBSUW SHARES. Upon the effectiveness of the
Conversion, Holdings shall own, and Holdings shall, at the Closing, convey to
UWS, all the issued and outstanding capital stock of BCBSUW, free and clear of
any claim, lien, encumbrance or agreement with respect thereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF UWS
All references in this Agreement to UWS, its business, assets, condition
(financial or otherwise) or business prospects and all references to documents,
instruments or other agreements to be delivered at Closing shall mean and
include UWS and each corporation, partnership, limited liability company or
other entity in which UWS has a direct or indirect controlling equity interest
(each, a "UWS Controlled Subsidiary").
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UWS represents and warrants to BCBSUW and Holdings that:
Section 3.01 ORGANIZATION AND AUTHORITY. UWS is duly organized and validly
existing under the laws of the State of Wisconsin with power to own its property
and to carry on its business as now being conducted.
Section 3.02 CAPITALIZATION. The authorized capital stock of UWS consists
of (i) 50,000,000 shares of common stock, no par value per share, of which
16,939,682 shares were issued and outstanding on December 18, 2000, and
(ii) 500,000 shares of preferred stock, no par value per share, of which no
shares are issued and are outstanding. The New Holdings Shares will, when issued
in accordance with the terms of the Combination, be validly issued, fully paid
and nonassessable, subject to Section 180.0622(2)(b) of the WBCL and judicial
interpretations thereof.
Section 3.03 AUTHORIZATION. UWS has all necessary power and authority to
enter into this Agreement and to carry out its obligations hereunder and
thereunder. The transactions contemplated hereby and thereby have been duly
authorized by UWS's Board of Directors, and, except for shareholder approval in
accordance with applicable law, no other corporate proceedings on the part of
UWS are necessary to authorize this Agreement and the transactions contemplated
hereby and thereby. This Agreement is a valid and binding obligation of UWS
enforceable against UWS in accordance with its terms, except insofar as
enforcement may be limited by bankruptcy, insolvency or similar laws affecting
the enforcement of creditors rights generally and by principles of equity. Other
than in connection with or in compliance with the provisions of the WBCL,
applicable state takeover laws, the 1933 Act, the 1934 Act, the OCI, the BCBSA,
state regulatory notices and/or approvals in certain states where UWS insurance
company subsidiaries transact business, and the HSR Act, no notice to, filing
with, or authorization, consent or approval of, any public body or authority is
necessary for the consummation by UWS of the transactions contemplated by this
Agreement.
Section 3.04 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. Subject to
compliance with applicable provisions of the WBCL, the execution and delivery of
this Agreement by UWS does not, and the consummation of the Combination by UWS
will not, (i) conflict with or violate the charter documents, bylaws or other
organizational documents of UWS, (ii) conflict with or violate any laws
applicable to UWS or by which any of its properties or assets are bound or
affected, or (iii) result in a violation or any breach of or constitute a
default (or an event which with notice or lapse of time or both wold become a
violation, breach or default) under any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which UWS is a party or by which UWS or any property or asset of
UWS is bound or affected, except, in the case of clauses (ii) and (iii), for
violations, breaches or defaults which would not, individually or in the
aggregate, be reasonably expected to prevent or materially delay the
consummation of the Combination or result in a Material Adverse Effect as
defined in Section 9.12.
Section 3.05 SUBSIDIARIES. SCHEDULE 3.05 sets forth all UWS Controlled
Subsidiaries. UWS is, directly or indirectly, the record and beneficial owner of
the percentage of the outstanding shares of capital stock or other interests of
each of the UWS Controlled Subsidiaries shown on SCHEDULE 3.05. Except as set
forth on SCHEDULE 3.05, no equity securities or interests of any of the UWS
Controlled Subsidiaries are, or may become, required to be issued by reason of
any options, warrants, scrip, rights to subscribe to, calls or commitments of
any character whatsoever relating to, or securities, interests or rights
convertible into, shares of capital stock or interests of any UWS Controlled
Subsidiaries and there are no contracts, commitments, understandings or
arrangements by which any UWS Controlled Subsidiary is bound to issue additional
shares of its capital stock options, warrants, interests or other rights to
purchase or acquire any additional such securities. Except for the pledge of the
common stock of Compcare Health Services Insurance Corporation ("Compcare") to
BCBSUW as collateral for a $70 million note, and any disclosures set forth on
SCHEDULE 3.05, all of such equity interests are owned by UWS free and clear of
any claim, lien, encumbrance or agreement with respect thereto.
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Section 3.06 INSURANCE COMPANY FINANCIAL STATEMENTS. Each UWS Controlled
Subsidiary that is an insurance company (collectively, the "UWS Insurers") has
provided BCBSUW access to complete and correct copies of its annual and
quarterly statements for the years ended December 31, 1997 through 1999 and for
the three quarters ended September 30, 2000, respectively, together with all
exhibits and schedules thereto (collectively, the "UWS Statements"). The UWS
Statements have been prepared in accordance with Statutory Accounting Practices
throughout the periods involved and in accordance with the books and records of
said Insurers, except as expressly set forth or disclosed in the notes, exhibits
or schedules thereto. The UWS Statements fairly and accurately present in all
material respects the assets, liabilities and capital and surplus of said
Insurers as of the respective dates thereof in accordance with Statutory
Accounting Practices consistently applied.
(a) As of September 30, 2000, no UWS Insurer had any material liability,
whether accrued, absolute, fixed contingent or otherwise, of a nature required
to be reflected on the balance sheet of said Insurer prepared in accordance with
Statutory Accounting Practices, which liability is not reflected or reserved
against in the balance sheet forming a part of the Statements in accordance with
Statutory Accounting Practices, or disclosed in the notes thereto. For the nine
months ended September 30, 2000, no Insurer has incurred any material
liabilities or obligations (absolute, accrued, fixed contingent, liquidated,
unliquidated or otherwise) except liabilities incurred in the ordinary course of
business consistent with past practice.
(b) Compcare was below the Company Action Level Risk Based Capital and
reported a compulsory and security surplus deficit for purposes of the OCI
filing as of December 31, 1999. With this one exception, each Insurer's
statutory capital met, as of December 31, 1999 and September 30, 2000, and will
meet as of the Effective Time, the requirements of its state of domicile and was
and will be at least as great as the minimum aggregate amount required by each
state in which each Insurer was and will be licensed to do direct business.
Section 3.07 ABSENCE OF CERTAIN CHANGES. Except as set forth on
SCHEDULE 3.07, or as contemplated by this Agreement, since December 31, 1999,
UWS has conducted its business only in the ordinary course thereof and has not
experienced any changes in its condition (financial or otherwise), assets,
liabilities, business or operations which individually or in the aggregate had
or could have a Material Adverse Effect. For purposes of this Section, an item
shall be deemed "material" if the dollar amount or value associated with such
item exceeds $1,000,000. Without limiting the generality of the foregoing
sentence, since December 31, 1999, UWS has not:
(i) in a single transaction or a series of related transactions, sold
(including by sale-leaseback), leased, licensed, or otherwise disposed of
any assets which individually or in the aggregate, have a fair market value
in excess of $1,000,000;
(ii) paid, discharged or satisfied any material liability or obligation
(whether accrued, absolute, contingent or otherwise) other than in the
ordinary and usual course of business, or liabilities or obligations shown
or reflected on the audited balance sheet of UWS as of December 31, 1999
contained in the UWS SEC Reports as defined below (the "UWS Balance Sheet")
or incurred any material liability or obligation except in the ordinary
course of business consistent with past practice since the date of the UWS
Balance Sheet;
(iii) prepaid any material expenses, indebtedness or other obligations
except in the ordinary course of business;
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(iv) except in the ordinary and usual course of business, permitted or
allowed any assets (whether real, personal or mixed, tangible or intangible)
to be subjected to any mortgage, pledge, lien, security interest,
encumbrance, restriction or charge of any kind securing an obligation in
excess of $1,000,000;
(v) written off as uncollectible any material notes or accounts
receivable;
(vi) released, waived or terminated any material obligation of any third
party to UWS;
(vii) disposed of or permitted to lapse any rights in, to or for the use
of any material patent, trademark, trade name or copyright;
(viii) settled any material claim, action or lawsuit involving UWS, or
amended any tax return in any respect;
(ix) granted any increase in the base compensation or other payment to
any director, officer or employee, whether now or hereafter payable or
granted (other than increases in compensation in the ordinary course
consistent in timing and amount with past practice) or granted any severance
or termination pay (other than for severance pay to employees who are not
UWS Related Parties (as defined below) in amounts consistent with UWS'
established severance pay practices), or entered into, amended or become
obligated under any employment, severance, bonus, profit sharing or other
employee benefit arrangement;
(x) made any material capital expenditure or commitment for additions to
property, plant or equipment, or leased or agreed to lease any assets which,
if purchased, would be reflected in the property, plant or equipment
accounts;
(xi) made any change in any method of accounting or keeping its books of
account or accounting practices;
(xii) paid any amounts to, or sold or otherwise disposed of any assets
to, assets from, or entered into any agreement or arrangement with, any UWS
Related Party;
(xiii) incurred any obligation or liability, including without limitation
any liability for nonperformance or termination of any contract, except
liabilities incurred in the ordinary and usual course of the business;
(xiv) incurred or become contingently liable with respect to any
indebtedness for borrowed money or guaranteed any such indebtedness, where
the aggregate amount of indebtedness so incurred or guaranteed exceeded
$1,000,000, or redeemed any long-term debt;
(xv) entered into or amended any contract, agreement or commitment, or
engaged in any transaction, in each case which is material to UWS and which
is not in the usual and ordinary course of the business;
(xvi) amended or proposed to amend its Articles of Incorporation or
Bylaws;
(xvii) acquired or agreed to acquire by merging with, or by purchasing a
substantial equity interest in or a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership,
association or other business entity, in a transaction or series of related
transactions;
(xviii) solicited or encouraged any inquiries or proposals regarding, or
offers for, or entered into or continued any discussions with, or provided
any information to, any third party concerning any sale or transfer of UWS
or any of its assets or entered into or consummated any agreement or
understanding providing for a sale or transfer of UWS or any of its assets,
other than as contemplated herein;
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(xix) issued, or entered into any contracts, commitments, understandings
or arrangements by which UWS is or may be bound to issue, any capital stock,
or any securities convertible into capital stock, or any options, warrants,
scrip or other rights to subscribe to, calls or commitments of any character
relating to any such securities; or
(xx) agreed, whether or not in writing, to take any of the actions
described in clauses (i)-(xix) above.
For purposes of this Agreement, the term "UWS Related Party" shall mean (i) any
UWS Controlled Subsidiary, (ii) any officer or director of UWS or any UWS
Controlled Subsidiary, and (iii) any spouse, in-law or lineal descendant of any
UWS Related Party.
Section 3.08 LITIGATION. Except as set forth on SCHEDULE 3.08, UWS is not
a party to any pending or threatened claim, action, suit, investigation or
proceeding, or subject to any order, judgment or decree relating to or affecting
UWS which, if decided adversely to UWS, would have a Material Adverse Effect on
UWS, nor, to the Knowledge of UWS, is any such claim, action, suit,
investigation or proceeding threatened. Except as set forth on SCHEDULE 3.08,
since January 1, 2000, UWS has not been a party to any claim, action, suit,
investigation or proceeding outside the ordinary and usual course of business.
Except as described on SCHEDULE 3.08, there is no outstanding order, decree or
stipulation issued by any federal, state or local authority to which UWS is a
party or subject and which adversely affects or may adversely affect UWS'
properties, business or prospects.
Section 3.09 COMPLIANCE WITH LAWS. UWS has conducted and is conducting its
business in compliance in all material respects with all applicable laws,
regulations and requirements in each jurisdiction in which it conducts (or in
the past has conducted) business, including any insurance or insurance-related
laws, regulations, rules or requirements, and UWS will not after the Closing
incur any material liability or obligation as a result of any noncompliance
existing at the Closing or arising or occurring thereafter but based upon
conditions extant at the Closing. UWS currently possesses all governmental
approvals, consents, licenses, registrations, and permits necessary to carry on
its business as presently conducted and has not received any notice of violation
of any laws or notice of any proposed regulations or changes in the requirement
of such approvals, consents, licenses, registrations, or permits.
Section 3.10 ENVIRONMENTAL MATTERS.
(a) NO VIOLATIONS. Except as set forth on SCHEDULE 3.10, to the Knowledge
of UWS, UWS has never violated or been threatened with or received a notice,
directive, violation report or charge asserting any violation of any
Environmental Law.
(b) NO PROCEEDINGS. Except as set forth on SCHEDULE 3.10, to the Knowledge
of UWS, no suit, proceeding or other administrative or legal action has been
instituted against UWS by any federal, state or local governmental department or
agency or any other person or entity concerning any Environmental Laws.
(c) CLAIMS FOR REMEDIATION. Except as set forth on SCHEDULE 3.10, to the
Knowledge of UWS, UWS has not received from any federal, state or local
governmental department or agency or any other person or entity any claim,
demand, directive, order or request to investigate, restore, repair, clean up or
otherwise remediate, or to contribute to the costs of investigating, restoring,
repairing, cleaning up or otherwise remediating any real property now or at any
time owned, occupied or operated by UWS ("UWS Real Property").
(d) COMPLIANCE. Except as set forth on SCHEDULE 3.10, to the Knowledge of
UWS, (i) UWS is in compliance in all material respects with all Environmental
Laws, (ii) UWS has obtained all permits, authorizations, licenses, or approvals
which are necessary or required under Environmental Laws in connection with the
operation of UWS' business, and UWS is in compliance in all material respects
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with such permits, authorizations, licenses, and approvals, (iii) no asbestos,
urea formaldehyde or polychlorinated biphenyls are present on, at, in or under
the UWS Real Property, and (iv) none of the assets or operations of UWS is
required to be upgraded, modified, or replaced in order to be in compliance with
Environmental Laws.
(e) NO RELEASES. Except as set forth on SCHEDULE 3.10, to the Knowledge of
UWS, (i) UWS has not disposed of, spilled, discharged, released or otherwise
placed any Environmental Materials, on, at, in or under the UWS Real Property,
(ii) no third party has disposed of, spilled, discharged, released or otherwise
placed any Environmental Materials on, at, in or under the UWS Real Property or
any real property adjacent to the UWS Real Property, and (iii) other than the
information provided in (i) and (ii), there has been no release, discharge,
leakage, seepage or migration of any Environmental Materials from any
aboveground or underground storage tank or any other structure currently or
previously located on, at, in or under the UWS Real Property.
(f) LIST OF REPORTS AND DISPOSAL SITES. SCHEDULE 3.10 includes a list of
(i) all environmental investigative reports, studies or assessments (including,
but not limited to, Phase I and Phase II assessments), compliance audits,
laboratory analytical data, technical reviews, or the like with respect to UWS,
UWS' business or any of UWS' assets, copies of which are attached hereto, and
(ii) all past and present locations where Environmental Materials which
currently are or have been controlled by UWS have been sent, spilled, released,
discharged or disposed to the Knowledge of UWS.
(g) ASSUMPTION OF LIABILITY. Except as set forth on SCHEDULE 3.10, UWS has
not assumed, either contractually or by operation of law, any liability of any
person or entity under any Environmental Laws.
Section 3.11 CONTINGENT OR UNDISCLOSED LIABILITIES. UWS does not have any
material debts, liabilities or obligations due or to become due, and there are
no claims or causes of action that may be asserted against UWS by any
governmental authority or third party which arise with respect to or relate to
any period or periods on or prior to the date hereof, regardless of whether such
obligations, liabilities or claims are known or unknown, absolute, accrued,
contingent or otherwise, except as and to the extent set forth on the UWS
Balance Sheet or disclosed in the notes thereto and except for liabilities
incurred since January 1, 2000 in the ordinary course of business consistent
with past practice.
Section 3.12 CHANGE OF CONTROL PROVISIONS. Except as disclosed on
SCHEDULE 3.12, no director, officer or employee of UWS will be entitled to
receive additional compensation, other payments or other rights (whether as a
result of any employee benefit plan, program or arrangement, any contract or
other agreement, or otherwise) as a result of the execution of this Agreement,
the consummation of the Combination, the consummation of any of the other
transactions contemplated hereby or otherwise in connection with a change of
control of UWS.
Section 3.13 REGISTRATION STATEMENT, ETC. None of the information to be
supplied by UWS insofar as such information relates to UWS for inclusion in
(i) the Registration Statement, (ii) the Proxy Statement, or (iii) any other
document to be filed with the Commission in connection with the transactions
contemplated hereby, at the respective times such are filed with the Commission
and, in the case of the Registration Statement, when it becomes effective, and
in the case of the Proxy Statement, when mailed, shall be false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements therein not misleading. In the case of the Proxy
Statement or any amendment thereof or supplement thereto, none of such
information supplied by UWS at the time of the meeting of shareholders referred
to in Section 5.03 hereof shall be false or misleading with respect to any
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for such meeting. All documents filed by UWS with the Commission in
connection with the Combination will comply in all material respects with the
provisions of applicable federal and state securities laws.
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Section 3.14 BROKERS AND FINDERS. Neither UWS nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commission or
finders' fees and no broker or finder has acted directly or indirectly for UWS
in connection with the Agreement or the transactions contemplated hereby, other
than fees payable to Lehman Brothers Inc.
Section 3.15 SEC FILINGS; FINANCIAL STATEMENTS.
(a) UWS has timely filed all forms, reports and documents required to be
filed by it with the Commission since January 1, 1998 and has made available to
BCBSUW all registration statements filed by UWS with the Commission, including
all exhibits filed in connection therewith (on all forms applicable to the
registration of securities) after January 1, 1998 and prior to the date of this
Agreement (collectively, the "UWS SEC Reports"). As of their respective dates,
the UWS SEC Reports (i) complied in all material respects with the requirements
of the 1933 Act or the 1934 Act, as the case may be, and the rules and
regulations thereunder, and (ii) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. UWS will deliver to
BCBSUW as soon as they become available true and complete copies of any UWS SEC
Reports filed subsequent to the date hereof and prior to the Effective Time.
(b) Each of the financial statements (including, in each case, any notes and
schedules thereto) contained in UWS SEC Reports complied as to form in all
material respects with the applicable accounting requirements and rules and
regulations of the Commission and was prepared in accordance with GAAP, and each
fairly presented in all material respects the consolidated financial position,
results of operations and cash flows of UWS and its consolidated subsidiaries as
at the respective dates thereof and for the respective periods indicated therein
in accordance with GAAP (subject, in the case of unaudited statements, to normal
and recurring year-end adjustments and the absence of footnotes).
Section 3.16 DISCLOSURE. No representation, warranty or other statement by
UWS herein or any other document made in connection with this Agreement,
contains or will contain an untrue statement of material fact, or omits or will
omit to state a material fact necessary to make statements contained herein or
therein misleading.
ARTICLE IV
CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME
During the period from the date of this Agreement to the Effective Time,
BCBSUW and UWS shall conduct their respective operations in the ordinary and
usual course of business consistent with past and current practices and use
their best efforts to maintain and preserve their business organization,
prospects, employees and advantageous business relationships intact and shall
not, without the prior written consent of the other, take any action or permit
to occur any event that would be required to be disclosed by BCBSUW on
SCHEDULE 2.10 had such event occurred with respect to BCBSUW prior to the date
of this Agreement, or that would be required to be disclosed by UWS on
SCHEDULE 3.07 had such event occurred with respect to UWS prior to the date of
this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.01 ACCESS AND INFORMATION.
(a) Prior to the Effective Time, each of UWS and BCBSUW shall allow the
other, their respective accountants, counsel and other representatives and
advisers full and complete access during reasonable business hours to all
properties, books, contracts, commitments, records, documents and
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facilities of such party, and such party shall furnish promptly to the other all
other information concerning the business, properties and personnel of such
party as the other may reasonably request, and each of UWS and BCBSUW will make
its officers, employees, agents, independent accountants and actuaries of the
other available to discuss such aspects of the other as may be reasonably
requested by the other.
(b) Each of BCBSUW and UWS acknowledges that the access provided for in this
Section 5.01 is provided for the sole reason of allowing each of UWS and BCBSUW
to complete the due diligence necessary to allow their respective Boards of
Directors to make informed decisions regarding approval of this Agreement and
the preparation of the Registration Statement and Proxy Statement. Each of
BCBSUW and UWS acknowledges the securities laws applicable to the use of
material non-public information it may obtain pursuant to this Section 5.01, and
each of BCBSUW and UWS shall inform its respective directors, officers,
employees, and agents of such securities laws.
Section 5.02 REGISTRATION STATEMENT AND PROXY STATEMENT. As soon as
reasonably practicable after the date hereof, UWS shall prepare the Proxy
Statement and UWS shall prepare and file with the Commission and diligently
pursue to effectiveness the Registration Statement, of which the Proxy Statement
shall be a part. UWS shall furnish BCBSUW and its counsel copies of the
Registration Statement, as well as any pre-effective or post-effective
amendment, a reasonable time prior to such filing and prior to mailing of the
Proxy Statement, and will not file any Registration Statement or any amendment
thereto nor mail any Proxy Statement to which BCBSUW or its counsel reasonably
objects. In connection with the foregoing, (a) UWS, Holdings and BCBSUW will
comply fully with the requirements of applicable state securities laws, the 1933
Act, and the rules and regulations under such laws applicable to the offering,
sale or issuance of the New Holdings Shares in connection with the Combination
and the solicitation of proxies for the meeting of the shareholders of UWS
described in Section 5.03, and (b) Holdings and BCBSUW shall furnish to UWS such
information relating to BCBSUW, Holdings and the transactions contemplated by
this Agreement and the Plan of Combination and such further and supplemental
information as may be necessary or as may be reasonably requested by UWS to
ensure that the statements regarding the parties hereto and their affiliates and
such transactions contained in the Proxy Statement will not on the effective
date of the Registration Statement or the date of such meeting of the
shareholders of UWS or at the Effective Time include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The notice of
such meeting and the Proxy Statement shall not be mailed to shareholders of
BCBSUW or UWS until the auditors' letters called for in Sections 6.02(d) and
6.03(e) hereof (which shall speak as of a date five days prior to such date of
mailing wherever there is a reference to a date five days prior to the Effective
Time) likewise shall have been delivered.
Section 5.03 UWS SHAREHOLDERS APPROVAL. UWS shall call a special meeting
of its shareholders to be held no later than 35 days following effectiveness of
the Registration Statement for the purpose of considering and voting upon the
approval and adoption of a resolution (the "Combination Resolution") approving
all of the following acts:
(a) adopting amended and restated Articles of Incorporation of UWS in
substantially the form attached as Exhibit A hereto;
(b) adopting amended and restated Bylaws of UWS in substantially the form
attached as Exhibit B hereto; and
(c) approving the issuance of the New Holding Shares as provided herein.
Section 5.04 MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the terms
and conditions herein provided, each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws
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and regulations to consummate and make effective the transactions contemplated
by this Agreement, including, without limitation, using reasonable efforts to
satisfy the conditions contained in Article VI hereof. Holdings, BCBSUW and UWS
will use their best efforts to obtain consents of all third parties and
governmental bodies necessary or, in the opinion of UWS and BCBSUW, desirable
for the consummation of the transactions contemplated by this Agreement. In case
at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers
and/or directors of Holdings, BCBSUW, UWS as the case may be, shall take all
such necessary action.
Section 5.05 INTERIM FINANCIAL STATEMENTS. During the period prior to the
Effective Time, BCBSUW and UWS shall each make available to the other monthly an
unaudited consolidated balance sheet as of the end of such month and the
unaudited consolidated statements of income for the period then ended (the
"Interim Financial Statements"). The Interim Financial Statements shall be
correct and complete and shall fairly present the financial condition, and
results of operations of each respective party as of the respective dates, and
the Interim Financial Statements shall be prepared in accordance with GAAP
consistently applied throughout the periods involved, subject to normal and
recurring year-end adjustments and the absence of footnotes.
Section 5.06 HART-SCOTT-RODINO COMPLIANCE. If required, UWS, Holdings and
BCBSUW shall as soon as practicable file Notification and Report Forms under the
HSR Act with the Federal Trade Commission ("FTC") and the Antitrust Division of
the Department of Justice (the "Antitrust Division") and shall use reasonable
efforts to respond as promptly as practicable to all inquiries received from the
FTC or the Antitrust Division for additional information or documentation. UWS
and BCBSUW will take all such action as may be necessary under any laws
applicable to or necessary for, and will file and, if appropriate, use their
reasonable efforts to have declared effective or approved, all documents and
notifications with such governmental or regulatory bodies which they deem
necessary or appropriate for the consummation of the Combination and the
transactions contemplated hereby, and each party shall give the other
information reasonably requested by such other party pertaining to it and its
subsidiaries and affiliates reasonably necessary to enable such other party to
take such actions.
Section 5.07 CERTAIN NOTIFICATIONS. At all times until the Effective Time,
each party shall promptly notify the other in writing of the occurrence of any
event which will or may result in the failure to satisfy any of the conditions
specified in Article VI hereof.
Section 5.08 VOTING AGREEMENT. BCBSUW shall vote its shares of UWS in
favor of the Combination Resolution at the shareholder meeting referred to in
Section 5.03 of this Agreement.
Section 5.09 SALES AND ISSUANCES OF UWS STOCK. Until the Effective Time,
BCBSUW agrees that it will not, without the prior consent of UWS and Holdings
(which will not be unreasonably withheld), sell, or enter into any contracts,
commitments or understandings to sell, any shares of common stock of UWS owned
by BCBSUW. Until the Effective Time, UWS agrees that it will not, without the
prior consent of BCBSUW and Holdings, do any act described in subsection
(xix) of Section 3.07.
Section 5.10 PRESS RELEASES. The parties agree that, except as otherwise
provided by law, no press release or other public announcement with respect to
this Agreement or the transactions contemplated hereby shall be made without the
prior consultation of all parties hereto.
Section 5.11 EXPENSES. Each party shall pay or be responsible for the
expenses incurred by such party in connection with the transactions contemplated
by this Agreement. BCBSUW shall be responsible for the fees of any financial
advisors to OCI incurred by OCI in connection with its actions in connection
with this Agreement and the proposed Combination.
Section 5.12 INSURANCE REGULATORY APPROVALS. As soon as practicable in
conjunction with the execution and delivery of this Agreement UWS and BCBSUW
will in good faith take, or cause to be
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taken, all actions and do, or cause to be done, all things necessary, proper or
advisable to obtain the necessary consents, authorizations, orders, approvals
and clearances of governmental authorities in connection with the Combination
and the other transactions contemplated herein, including, without limitation,
approval of the OCI.
Section 5.13 DISSENTERS' RIGHTS. UWS, Holdings and BCBSUW agree that
shareholders of UWS Common Stock shall be entitled to Dissenters' Rights as set
forth in subchapter XIII of the WBCL.
Section 5.14 FIDUCIARY RESPONSIBILITIES.
(a) If, after the date of this Agreement, the UWS Special Committee or UWS
receives a bona-fide inquiry or proposal (any such inquiry, an "Acquisition
Inquiry" or any such proposal, an "Acquisition Proposal") regarding a possible
merger, consolidation, tender offer, exchange offer, recapitalization or other
business combination involving UWS or the acquisition (of any kind) of a
material portion of the assets or capital stock of UWS or its subsidiaries and
the UWS Special Committee concludes, after consultation with its legal counsel,
that the failure to provide information to, or to engage in discussions or
negotiations with, such person would be inconsistent with the fiduciary duties
of the Board of Directors of UWS to the shareholders of UWS under applicable law
(the "UWS Board's Fiduciary Duties"), then (i) the UWS Special Committee may,
directly or indirectly, provide access to and furnish information concerning the
business, properties, assets, financial position, operations and/or prospects of
UWS to such person, and (ii) the UWS Special Committee may participate in and
engage in discussions and negotiations with such person regarding the
Acquisition Inquiry or Acquisition Proposal, as the case may be. In addition, if
after the date of this Agreement the UWS Special Committee or UWS receives an
Acquisition Inquiry or Acquisition Proposal and the UWS Special Committee
determines, in good faith and after consultation with its legal counsel, that
the failure to do any or all of the following would be inconsistent with the UWS
Board's Fiduciary Duties, the Board of Directors of UWS (acting on the
recommendation of the UWS Special Committee) may do any or all of the following:
(xx) withdraw, modify or change the Board of Directors of UWS approval or
recommendation of this Agreement and the Combination; (yy) approve or recommend
to UWS's shareholders a competing Acquisition Proposal; and (zz) terminate this
Agreement. Notwithstanding anything contained in this Agreement to the contrary,
the exercise of the rights of the Board of Directors of UWS and the UWS Special
Committee pursuant to this Section 5.14 shall not constitute a breach of this
Agreement by UWS. Nothing in this Agreement shall require or be deemed to
require the UWS Special Committee or the Board of Directors of UWS to take or
refrain from taking any action which would violate any fiduciary duty under
applicable law.
(b) Nothing contained in this Agreement shall prohibit the Board of
Directors of UWS or the UWS Special Committee from taking and disclosing to the
shareholders of UWS a position with respect to a tender or exchange offer by a
third party pursuant to Rules 14d-9 and 14e-2(a) promulgated under the 1934 Act
or from making such disclosure to the shareholders of UWS which, in the judgment
of the Board of Directors of UWS or the UWS Special Committee, after
consultation with its legal counsel, is necessary under applicable law or the
rules of any stock exchange to meet the Board's Fiduciary Duties. UWS shall give
BCBSUW prompt written notice and a copy of any such disclosure.
(c) If, after the date of this Agreement, the BCBSUW Special Committee or
BCBSUW receives a bona-fide inquiry or proposal (any such inquiry, an
"Acquisition Inquiry" or any such proposal, an "Acquisition Proposal") regarding
a possible merger, consolidation, tender offer, exchange offer, recapitalization
or other business combination involving BCBSUW or the acquisition (of any kind)
of a material portion of the assets or capital stock of BCBSUW or its
subsidiaries and the BCBSUW Special Committee concludes, after consultation with
its legal counsel, that the failure to provide information to, or to engage in
discussions or negotiations with, such person would be inconsistent with the
fiduciary duties of the Board of Directors of BCBSUW to the persons having legal
or equitable
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interests in BCBSUW under applicable law (the "BCBSUW Board's Fiduciary
Duties"), then (i) the BCBSUW Special Committee may, directly or indirectly,
provide access to and furnish information concerning the business, properties,
assets, financial position, operations and/or prospects of BCBSUW to such
person, and (ii) the BCBSUW Special Committee may participate in and engage in
discussions and negotiations with such person regarding the Acquisition Inquiry
or Acquisition Proposal, as the case may be. In addition, if after the date of
this Agreement the BCBSUW Special Committee or BCBSUW receives an Acquisition
Inquiry or Acquisition Proposal and the BCBSUW Special Committee determines, in
good faith and after consultation with its legal counsel, that the failure to do
any or all of the following would be inconsistent with the BCBSUW Board's
Fiduciary Duties, the Board of Directors of BCBSUW (acting on the recommendation
of the BCBSUW Special Committee) may do any or all of the following:
(xx) withdraw, modify or change the Board of Directors of BCBSUW approval or
recommendation of this Agreement and the Combination; (yy) approve a competing
Acquisition Proposal; and (zz) terminate this Agreement. Notwithstanding
anything contained in this Agreement to the contrary, the exercise of the rights
of the Board of Directors of BCBSUW and the BCBSUW Special Committee pursuant to
this Section 5.14 shall not constitute a breach of this Agreement by BCBSUW.
Nothing in this Agreement shall require or be deemed to require the BCBSUW
Special Committee or the Board of Directors of BCBSUW to take or refrain from
taking any action which would violate any fiduciary duty under applicable law.
ARTICLE VI
CONDITIONS
Section 6.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO CONSUMMATE THE
COMBINATION. The respective obligations of each party to consummate the
Combination shall be subject to the fulfillment at or prior to the Effective
Time of the following conditions:
(a) HSR WAITING PERIOD. Any and all applicable waiting periods under
the HSR Act shall have expired.
(b) REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective and shall not be subject to a stop order or any
threatened stop order. The Registration Statement, in the form in which it
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective, shall comply in all material
respects with the provisions of the 1933 Act, and shall not at any such time
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(c) UWS SHAREHOLDER APPROVAL. The Combination Resolution shall have
been approved and adopted by the shareholders of UWS by the vote described
in Section 180.1131(1) and (2) of the WBCL.
(d) LISTING. The New Holdings Shares shall have been approved for
listing on the NYSE subject to notice of issuance.
(e) PROCEEDINGS. At the Effective Time there shall be no action or
proceeding initiated by any governmental agency or any third party pending
which seeks to restrain, prohibit or invalidate any material transaction
contemplated by this Agreement or to recover substantial damages or other
substantial relief with respect thereto and no injunction or restraining
order shall have been issued by any court restraining, prohibiting or
invalidating any such material transaction.
(f) OCI APPROVAL.
(i) This Agreement, and all aspects of the transactions contemplated
hereby, shall have received all appropriate and necessary insurance
consents and approvals from the OCI ("Approvals") which Approvals shall
be in full force and effect;
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(ii) Any conditions and directions of the OCI contained in the
Approvals shall have been fully complied with in all material respects;
(iii) The Approvals shall not have modified the terms and conditions
of this Agreement, and the transactions contemplated herein, in any
material respect; and
(iv) The Conversion shall have occurred, or shall simultaneously with
the Closing occur, in accordance with the Conversion Order.
(g) DISSENTERS' RIGHTS. The holders of not more than two and one-half
percent (2 1/2%) of the number of shares of UWS common stock that would be
issued and outstanding after completion of the Combination shall have
perfected their Dissenters' Rights under Section 5.13 hereof by delivering
to UWS timely written notice of their intent to demand payment of the fair
value of their shares.
(h) BCBSA APPROVAL. All necessary waivers, consents or approvals of
BCBSA have been obtained such that the Combination shall not jeopardize the
right of BCBSUW, UWS or any of their affiliates to continue operating under
licenses granted by BCBSA.
Section 6.02 CONDITIONS TO OBLIGATIONS OF BCBSUW AND HOLDINGS TO CONSUMMATE
THE COMBINATION. The obligations of BCBSUW and Holdings to consummate the
Combination shall be subject to the fulfillment (or waiver by BCBSUW and
Holdings) at or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of UWS set forth in Article III hereof shall be true and correct in all
material respects as of the date of this Agreement and as of the Effective
Time as though made on and as of the Effective Time, except as otherwise
contemplated by this Agreement, and BCBSUW and Holdings shall have received
a certificate signed by the President or a Senior Vice President of UWS to
that effect.
(b) PERFORMANCE OF OBLIGATIONS. UWS shall have in all material
respects performed all obligations required to be performed by it under this
Agreement prior to the Effective Time, and BCBSUW shall have received a
certificate signed by the President or a Senior Vice President of UWS to
that effect.
(c) PERMITS, AUTHORIZATIONS, ETC. UWS shall have obtained any and all
material permits, authorizations, consents or approvals of state securities
commissions and of any other public body or authority required for the
lawful consummation of the Combination.
(d) AUDITORS' LETTER. BCBSUW shall have received from Ernst & Young
LLP, certified public accountants, a letter substantially to the effect that
(i) with respect to UWS they are independent public accountants within the
meaning of the 1933 Act; (ii) it is their opinion that the financial
statements of UWS at December 31, 1999 and for the year then ended and all
other financial statements included in the Proxy Statement comply as to form
in all material respects with the applicable accounting requirements of the
1933 Act and the published rules and regulations issued by the Commission
thereunder with respect to registration statements on Form S-4; (iii) based
on a reading of any interim financial statements of UWS included in the
Proxy Statement, a reading of the latest available interim unaudited
consolidated financial statements of UWS, a reading of the minutes of the
Board of Directors and shareholders of UWS since December 31, 1999, as set
forth in the minute books, through a specified date not more than five days
prior to the Effective Time, and inquiries of certain officers of UWS
responsible for accounting and financial matters, nothing has come to their
attention which would indicate that (A) any unaudited financial statements
of UWS included in the Proxy Statement do not comply as to form with the
1933 Act or are not presented fairly in conformity with GAAP on a basis
substantially consistent with that of the audited financial statements
included in the Proxy Statement, or (B) during the period from
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December 31, 1999 to a specified date not more than five days prior to the
Effective Time, there was any change in the capital stock or the
consolidated long-term debt of UWS or any decrease in consolidated net
current assets or shareholders' equity as compared with amounts shown in the
December 31, 1999 balance sheet included in the Proxy Statement, or from
December 31, 1999 to a specified date not more than five days prior to the
Effective Time, there was any decrease, as compared with the corresponding
period in the preceding year, in consolidated net sales or in the total
amounts of net income, except in all instances for changes or decreases
which the Proxy Statement discloses have occurred or may occur; and
(iv) certain information set forth in the Proxy Statement with respect to
UWS, as itemized in a draft of a letter theretofore submitted to and
accepted by counsel for BCBSUW, which is expressed in numbers, dollars or
percentages derived from such dollar amounts obtained from accounting
records which are subject to internal controls of UWS' accounting system or
derived directly from such accounting records by analysis or computation, is
in agreement with such records or computations made therefrom or otherwise
properly compiled.
(e) FINANCIAL STATEMENTS. BCBSUW shall have been given access to the
UWS Interim Financial Statements.
(f) MATERIAL ADVERSE EFFECT. No Material Adverse Effect shall have
occurred with respect to UWS after the date hereof and prior to the
Effective Time, or prior to the date hereof, unless such Material Adverse
Effect is fully reflected in the Financial Statements.
(g) OPINION OF COUNSEL. Michael Best & Friedrich LLP, counsel for UWS,
shall have furnished its opinion to BCBSUW and Holdings in form and
substance reasonably satisfactory to counsel for BCBSUW.
Section 6.03 CONDITIONS TO OBLIGATIONS OF UWS CONSUMMATE THE
COMBINATION. The obligations of UWS to consummate the Combination shall be
subject to the fulfillment (or waiver by UWS) at or prior to the Effective Time
of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of BCBSUW and Holdings set forth in Article II hereof shall be true and
correct in all material respects as of the date of this Agreement and as of
the Effective Time as though made on and as of the Effective Time, except as
otherwise contemplated by this Agreement, and UWS shall have received a
certificate signed by the and by the President or a Senior Vice President of
each of BCBSUW and Holdings to that effect.
(b) PERFORMANCE OF OBLIGATIONS. BCBSUW and Holdings shall have
performed in all material respects all obligations required to be performed
by it or them under this Agreement prior to the Effective Time, and UWS
shall have received a certificate signed by the President or a Senior Vice
President of each of BCBSUW and Holdings to that effect.
(c) PERMITS, AUTHORIZATIONS, ETC. BCBSUW and Holdings shall have
obtained any and all consents or waivers from other parties to loan
agreements or other contracts material to their respective businesses for
the lawful consummation of the Combination.
(d) CONVERSION OF BCBSUW; ISSUANCE OF STOCK.
(i) BCBSUW shall have converted its form of organization from a
service insurance corporation under Chapter 613 of the Wisconsin Statutes
to a stock insurance corporation organized under Chapter 611 of the
Wisconsin Statutes and shall have issued all of its outstanding shares of
its capital stock to Holdings;
(ii) all of the issued and outstanding shares of capital stock of
Holdings shall be owned by the Foundation.
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(e) AUDITORS' LETTER. UWS shall have received from Ernst & Young LLP,
certified public accountants, a letter substantially to the effect that
(i) with respect to BCBSUW they are independent public accountants within
the meaning of the 1933 Act; (ii) it is their opinion that the financial
statements of BCBSUW at December 31, 1999 and for the year then ended and
all other financial statements included in the Proxy Statement comply as to
form in all material respects with the applicable accounting requirements of
the 1933 Act and the published rules and regulations issued by the
Commission thereunder with respect to registration statements on Form S-4;
(iii) based on a reading of any interim financial statements of BCBSUW
included in the Proxy Statement, a reading of the latest available interim
unaudited consolidated financial statements of BCBSUW, a reading of the
minutes of the Board of Directors of BCBSUW since December 31, 1999, as set
forth in the minute books, through a specified date not more than five days
prior to the Effective Time, and inquiries of certain officers of BCBSUW
responsible for accounting and financial matters, nothing has come to their
attention which would indicate that (A) any unaudited financial statements
of BCBSUW included in the Proxy Statement do not comply as to form with the
1933 Act or are not presented fairly in conformity with GAAP on a basis
substantially consistent with that of the audited financial statements
included in the Proxy Statement, or (B) during the period from December 31,
1999 to a specified date not more than five days prior to the Effective
Time, there was any change in the consolidated long-term debt of BCBSUW or
any decrease in consolidated net current assets as compared with amounts
shown in the December 31, 1999 balance sheet included in the Proxy
Statement, or from December 31, 1999 to a specified date not more than five
days prior to the Effective Time, there was any decrease, as compared with
the corresponding period in the preceding year, in consolidated net sales or
in the total amounts of net income, except in all instances for changes or
decreases which the Proxy Statement discloses have occurred or may occur;
and (iv) certain information set forth in the Proxy Statement with respect
to BCBSUW, as itemized in a draft of a letter theretofore submitted to and
accepted by counsel for UWS, which is expressed in numbers, dollars or
percentages derived from such dollar amounts obtained from accounting
records which are subject to internal controls of BCBSUW's accounting system
or derived directly from such accounting records by analysis or computation,
is in agreement with such records or computations made therefrom or
otherwise properly compiled.
(f) FINANCIAL STATEMENTS. UWS shall have been given access to the
BCBSUW Interim Financial Statements.
(g) MATERIAL ADVERSE EFFECT. No Material Adverse Effect shall have
occurred with respect to BCBSUW after the date hereof and prior to the
Effective Time, or prior to the date hereof, unless such Material Adverse
Effect is fully reflected in the Financial Statements.
(h) OPINION OF COUNSEL. Foley & Lardner, counsel for BCBSUW, shall
have furnished to UWS its opinion as of the Closing in form and substance
reasonably satisfactory to counsel for UWS.
(i) OPINION OF TAX COUNSEL. Michael Best & Friedrich LLP shall have
furnished its opinion to UWS regarding the tax consequences of the
Combination in form and substance satisfactory to UWS.
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ARTICLE VII
TERMINATION, AMENDMENT
Section 7.01 TERMINATION.
(a) This Agreement may be terminated upon written notice by the terminating
party to each other party at any time prior to the Effective Time, whether
before or after approval by the shareholders of UWS:
(i) by mutual consent of BCBSUW, Holdings and UWS;
(ii) by either BCBSUW and Holdings, acting jointly, or UWS if the
Combination has not taken place by March 28, 2001;
(iii) by UWS if any of the conditions contained in Sections 6.01 or 6.03
have not been satisfied prior to the Closing or in accordance with
Section 5.14(a) hereof; or
(iv) by BCBSUW and Holdings, acting jointly, if any of the conditions
contained in Sections 6.01 or 6.02 have not been satisfied prior to the
Closing or in accordance with Section 5.14(b) hereof.
(b) In the event this Agreement is terminated pursuant to Section 7.01, such
termination shall be without any liability or further obligation of any party to
another and the obligations and agreements in this Agreement shall terminate and
have no further effect except for liabilities and obligations based on any
intentional failure to perform or comply with any covenant or agreement herein
or for any intentional misrepresentation or material breach of any warranty
herein (and such termination shall not constitute a waiver of any claim with
respect thereto).
Section 7.02 AMENDMENT. Subject to applicable law, this Agreement may be
amended, modified or supplemented only by written agreement of the parties
hereto duly authorized by the respective Boards of Directors at any time prior
to the Effective Time; PROVIDED, HOWEVER, that, after the approval and adoption
of the Combination Resolution by the shareholders of UWS, no such amendment,
modification or supplement shall change the amount or the form of the
consideration to be delivered to Holdings as contemplated by this Agreement.
ARTICLE VIII
NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS
The representations, warranties and agreements in this Agreement shall
terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 7.01, as the case may be, except that those covenants and
agreements that by their terms apply or are to be performed in whole or in part
after the Effective Time and this Article VIII shall survive the Effective Time
for the respective periods set forth therein or, if no such period is specified,
for one year. Nothing in this Article VIII shall relieve any party for any
willful breach of any representation, warranty, covenant or other agreement in
this Agreement occurring prior to termination.
ARTICLE IX
GENERAL PROVISIONS
Section 9.01 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given (i) when delivered personally, (ii) the
second business day after being deposited in the United States mail registered
or certified (return receipt requested), or (iii) the first business day after
being deposited with Fed Ex or any other recognized national overnight courier
service, in each
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case to the parties at the following addresses (or at such other address for a
party as shall be specified by like notice):
(a) If to UWS:
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, WI 53203
Attention: Vice President, Treasurer
and Chief Financial Officer
With copies to:
Michael Best & Friedrich LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Geoffrey R. Morgan
(b) If to BCBSUW:
Blue Cross & Blue Shield United of Wisconsin
401 West Michigan Street
Milwaukee, WI 53203
Attention: Senior Vice President
and General Counsel
With a copy to:
Foley & Lardner
777 E. Wisconsin Avenue
Milwaukee, WI 53202
Attention: Joseph C. Branch
(c) If to Holdings:
Wisconsin BC Holdings LLC
c/o Lynette M. Zigman
Foley & Lardner
777 E. Wisconsin Avenue
Milwaukee, WI 53202
Section 9.02 MISCELLANEOUS. This Agreement (including the exhibits,
schedules, documents and instruments referred to herein or therein):
(i) constitutes the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof;
(ii) shall not be assigned by operation of law or otherwise; and
(iii) may be executed in two or more counterparts which together shall
constitute a single agreement.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors, heirs, next of kin, distributees,
executors, administrators and personal representatives.
Section 9.03 WAIVER; REMEDIES. No delay or failure on the part of any
party hereto to exercise any right, power, or privilege hereunder shall operate
as a waiver thereof, nor shall any waiver on the
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part of any party hereto of any right, power, or privilege hereunder operate as
a waiver of any other right, power, or privilege hereunder, nor shall any single
or partial exercise of any right, power, or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, power, or
privilege hereunder.
Section 9.04 SEVERABILITY. So long as there is no Material Adverse Effect
on the respective rights and obligations of the parties hereto, If any term or
other provision of this Agreement is invalid, illegal or incapable of being
enforced by any rule, law or regulation, or public policy, all other conditions
and provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the Combination is not
affected in any manner materially adverse to any party. Upon such determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in a mutually acceptable manner in order that the Combination be
consummated as originally contemplated to the fullest extent possible.
Section 9.05 GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the State of Wisconsin (without regard to principles
of conflicts of laws) applicable to contracts made and to be performed within
such State.
Section 9.06 THIRD-PARTY BENEFICIARIES. No third parties are intended to
benefit from this Agreement, and no third-party beneficiary rights shall be
implied from anything contained in this Agreement.
Section 9.07 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to specific performance of the terms hereof, in addition to any other remedy
at law or in equity.
Section 9.08 HEADINGS. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
Section 9.09 RECITALS. The Recitals to this Agreement are true and correct
and are a part of this Agreement hereby incorporated by reference.
Section 9.10 "KNOWLEDGE". As used in this Agreement, the phrase "Knowledge
of BCBSUW" or the like shall mean the knowledge of Thomas R. Hefty, Stephen E.
Bablitch or Gail L. Hanson after making a commercially reasonable inquiry. The
phrase "Knowledge of UWS" or the like shall mean the knowledge of Thomas R.
Hefty, Stephen E. Bablitch or Gail L. Hanson after making a commercially
reasonable inquiry.
Section 9.11 "MATERIAL ADVERSE EFFECT". As used in this Agreement, the
term "Material Adverse Effect" shall mean, when used in connection with any
party, any change, effect, event, occurrence, condition or development that is
or is reasonably likely to be materially adverse to (i) the business, assets,
liabilities, properties, results of operations, condition (financial or
otherwise) or prospects of such party and its subsidiaries, taken as a whole
(including any change or effect resulting from general economic conditions or
relating to those industries specific to the business of such party and its
subsidiaries), (ii) the right or ability of such party and its subsidiaries,
taken as a whole, to carry on their respective businesses as now or proposed to
be conducted, or (iii) the ability of such party to perform its respective
obligations under this Agreement. A Material Adverse Effect shall be deemed to
have occurred if the cumulative effect of an individual event and all other then
existing events would result in a Material Adverse Effect.
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IN WITNESS WHEREOF, UWS, Holdings and BCBSUW have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first written above.
UNITED WISCONSIN SERVICES, INC.
By: __________________________________
Its: _____________________________
BLUE CROSS & BLUE SHIELD UNITED OF
WISCONSIN
By: __________________________________
Its: _____________________________
WISCONSIN BC HOLDINGS LLC
By Wisconsin United for Health
Foundation, Inc.,
its sole member
By: __________________________________
Its: _____________________________
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ANNEX B
December 21, 2000
Special Committee of the
Board of Directors
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, WI 53207
Members of the Special Committee:
We understand that Blue Cross & Blue Shield United of Wisconsin ("BCBSUW")
proposes to convert (the "Conversion") from a service insurance corporation
organized under Chapter 613 of the Wisconsin Statutes to a stock insurance
corporation organized under Chapter 611 of the Wisconsin Statutes pursuant to
the conversion order of the Wisconsin Office of the Commission of Insurance (the
"OCI") dated March 28, 2000 (the "Conversion Order"). Under the Conversion
Order, BCBSUW will issue all of its common stock to BC Holdings LLC
("Holdings"), a limited liability company wholly owned by Wisconsin United for
Health Foundation, Inc. (the "Foundation"). In connection with the Conversion,
United Wisconsin Services, Inc. ("UWS" or the "Company"), BCBSUW and Holdings
have entered into an Exchange Agreement (the "Exchange Agreement"), dated as of
December 22, 2000, pursuant to which, among other things: (i) Holdings will
exchange all of the outstanding shares of the common stock of BCBSUW for
31,313,390 shares of the common stock of UWS and $500,000 in cash (the
"Exchange"); and (ii) UWS will amend and restate its Articles of Incorporation
to, among other things, change its name to "Cobalt Corporation" ("Cobalt"). Upon
consummation of the Exchange, the Foundation, through Holdings, will own 77.5%
of the outstanding common stock of Cobalt and the shareholders of UWS (excluding
BCBSUW) (the "Non-Foundation Shareholders") will own 22.5% of the outstanding
common stock of Cobalt (the "UWS Aggregate Interest"). The terms and conditions
of the Exchange are set forth in more detail in the Exchange Agreement.
We were originally requested by the Special Committee of the Board of
Directors of UWS (the "Special Committee") to render our opinion with respect to
the fairness, from a financial point of view, to the Non-Foundation Shareholders
of the UWS Aggregate Interest to be retained by the Non-Foundation Shareholders
upon consummation of the Exchange. We have advised the Special Committee that we
are not able to render such an opinion based upon the proposed terms of the
Exchange. The opinion we are rendering hereby should not be deemed to constitute
an opinion that the UWS Aggregate Interest to be retained by the Non-Foundation
Shareholders in the Exchange is fair to such shareholders.
We have subsequently been requested by the Special Committee to render our
opinion with respect to the adequacy, from a financial point of view, of the UWS
Aggregate Interest to be retained by the Non-Foundation Shareholders in the
Exchange. We have not been requested to opine as to, and our opinion does not in
any manner address, the Company's underlying business decision to proceed with
or effect the transactions contemplated by the Exchange Agreement.
In arriving at our opinion, we reviewed and analyzed: (1) the Exchange
Agreement and the specific terms of the Exchange; (2) the Conversion Order;
(3) the Report of the Appraisal Committee of BCBSUW dated February 14, 2000;
(4) the form of Voting Trust and Divestiture Agreement (dated as of December 22,
2000) between Cobalt, the Foundation and the Trustee; (5) the Amended and
Restated Bylaws and Articles of Incorporation of Cobalt; (6) a draft of the
proxy statement (dated December 21, 2000) proposed to be used in connection with
the solicitation of proxies from the shareholders of UWS for approval of the
Exchange (the "Proxy Statement"); (7) publicly available information concerning
UWS that we believed to be relevant to our analysis, including its Annual
Reports on Form 10-K for the fiscal years ended December 31, 1999 and 1998 and
its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000,
June 30, 2000 and September 30, 2000;
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(8) annual statutory financial statements for 1998 and 1999 and quarterly
statutory financial statements for the quarters ended March 31, 2000, June 30,
2000 and September 30, 2000 for BCBSUW and the insurance subsidiaries of UWS;
(9) financial and operating information with respect to the business, operations
and prospects of UWS and BCBSUW furnished to us by UWS and BCBSUW; (10) a
trading history of UWS's common stock from January 1, 1999 to the present and a
comparison of that trading history with those of other companies that we deemed
relevant; (11) a comparison of the historical financial results and present
financial condition of UWS and BCBSUW with those of other companies that we
deemed relevant; (12) a comparison of the financial terms of the Exchange with
the financial terms of certain other recent transactions that we deemed
relevant; (13) the highly leveraged position of UWS (including the $70 million
of debt owed to BCBSUW) and the limited strategic and financial alternatives
available to UWS as a stand alone business; and (14) the strategic benefits of a
combination of the businesses of UWS and BCBSUW and the greater access to
capital that will be afforded Cobalt following the consummation of the Exchange.
In addition, we have had discussions with the managements of UWS and BCBSUW
concerning their respective businesses, operations, assets, financial conditions
and prospects and have undertaken such other studies, analyses and
investigations as we deemed appropriate.
In arriving at our opinion as to the adequacy of the UWS Aggregate Interest,
we also considered BCBSUW's significant leverage over and control of UWS as a
result of: (i) BCBSUW's power to effectively vote a majority of the shares of
UWS's common stock; (ii) BCBSUW's control of certain marketing and distribution
systems and other operations that are essential to UWS's businesses;
(iii) BCBSUW's ability to withdraw from UWS the Blue Cross/Blue Shield
trademarks under which UWS markets certain of its products; and (iv) BCBSUW's
status as the holder of approximately $70 million of UWS's debt that matures in
April 2001.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without assuming
any responsibility for independent verification of such information and have
further relied upon the assurances of the managements of UWS and BCBSUW that
they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial projections
of UWS and BCBSUW, upon advice of UWS and BCBSUW, we have assumed that such
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of UWS and BCBSUW
as to the future financial performance of UWS and BCBSUW and that both companies
will perform substantially in accordance with such projections. In arriving at
our opinion, we have not conducted a physical inspection of the properties and
facilities of UWS and BCBSUW and have not made or obtained any evaluations or
appraisals of the assets or liabilities of either company. In addition, you have
not authorized us to solicit, and we have not solicited, any indications of
interest from any third party with respect to the purchase of all or a part of
the Company's business. Our opinion necessarily is based upon market, economic
and other conditions as they exist on, and can be evaluated as of, the date of
this letter.
As more fully described in the Proxy Statement, the Conversion Order
conditions the Conversion on either BCBSUW's completion of an initial public
offering or its merger with UWS, in either case by March 28, 2001. We have
assumed with your consent that BCBSUW would not be able to complete an initial
public offering given current market conditions and its recent financial results
and therefore that the only way to satisfy the condition of the Conversion Order
is to effect the combination contemplated by the Exchange Agreement.
In addition, we express no opinion as to the prices at which the shares of
common stock of Cobalt may trade at any time following the consummation of the
Exchange, and this opinion should not be viewed as providing any assurance that
the market value of such shares to be retained by the Non-Foundation
Shareholders after consummation of the Exchange will be in excess of the market
value of the shares of UWS common stock owned by such shareholders prior to such
consummation.
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Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the UWS Aggregate Interest to
be retained by the Non-Foundation Shareholders upon consummation of the Exchange
is adequate.
We have acted as financial advisor to the Special Committee of the Board of
Directors of UWS in connection with the Exchange and will receive a fee for our
services which is contingent upon the consummation of the Exchange. In addition,
UWS has agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. In the ordinary course of our business, we may trade
in the securities of UWS for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is for the use and benefit of the Special Committee of the
Board of Directors of the Company and is rendered to the Special Committee in
connection with its consideration of the Exchange. This opinion is not intended
to be and does not constitute a recommendation to any shareholder of UWS as to
how such shareholder should vote with respect to the Exchange.
Very truly yours,
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ANNEX C
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of
, 2001, is made and entered into by and between Cobalt Corporation,
a Wisconsin stock corporation (the "COMPANY"), and Wisconsin United for
Health, Inc., a Wisconsin nonstock corporation (the "FOUNDATION").
RECITALS
A. The Foundation has acquired, contemporaneous with the execution of this
Agreement, 31,313,390 shares of common stock, no par value, of the Company (the
"COMMON STOCK"), representing approximately 77.5% of the issued and outstanding
shares of Common Stock.
B. The Company has agreed to provide certain registration rights to the
Foundation with respect to the shares of Common Stock owned by the Foundation,
subject to the terms and conditions contained in this Agreement.
AGREEMENT
In consideration of the foregoing and the mutual covenants and agreements
contained in this Agreement, the Company and the Foundation agree as follows:
SECTION 1. DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following meanings:
(a) "AFFILIATE", as used with respect to the Foundation, has the meaning
ascribed to such term in Rule 12b-2 of the Exchange Act, and in effect on
November 17, 1993, but shall be deemed to not include the Company and its
subsidiaries.
(b) "AGREEMENT" has the meaning set forth in the Preamble hereof.
(c) "BENEFICIALLY OWN" has the meaning set forth in Section 1 of Article V
of the Articles of Incorporation.
(d) "BLACKOUT PERIOD" has the meaning specified in Section 6 hereof.
(e) "BUSINESS DAY" means a day other than a Saturday, Sunday or other day on
which commercial banks are authorized to close under the laws of the State of
Wisconsin and the United States of America.
(f) "BYLAWS" means the Bylaws of the Company as in effect at the time that
reference is made thereto.
(g) "ARTICLES OF INCORPORATION" means the Articles of Incorporation of the
Company as in effect at the time that reference is made thereto.
(h) "CLOSING DATE" means the date hereof.
(i) "COMMON STOCK" has the meaning set forth in Recital A hereof.
(j) "COMPANY" has the meaning set forth in the Preamble hereof.
(k) "CONTINUING OPTION" has the meaning specified in Section 4(a) hereof.
(l) "CONTINUING OPTION NOTICE" has the meaning specified in Section 4(a)
hereof.
(m) "CONTINUING OPTION PRICE" has the meaning specified in Section 4(a)
hereof.
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(n) "CONTINUING OPTION SECURITIES" has the meaning specified in
Section 4(a) hereof.
(o) "CURRENT MARKET VALUE" means the product of the number of Registrable
Securities at issue multiplied by the closing sale price of a share of Common
Stock on the NYSE on the date that the Current Market Value is to be determined.
(p) "DEMAND" has the meaning specified in Section 2(a) hereof.
(q) "DEMAND OPTION" has the meaning specified in Section 2(b) hereof.
(r) "DEMAND OPTION NOTICE" has the meaning specified in Section 2(b) hereof.
(s) "DEMAND OPTION SECURITIES" has the meaning specified in Section 2(b)
hereof.
(t) "DEMAND REGISTRATION" has the meaning specified in Section 2(a) hereof.
(u) "EFFECTIVE PERIOD" means the period commencing on the Closing Date and
ending on the first date on which there shall no longer exist any Registrable
Securities.
(v) "EXCESS SHARES" has the meaning set forth in Section 1 of Article V of
the Articles of Incorporation.
(w) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC thereunder, all as the same shall be in
effect at the time that reference is made thereto.
(x) "FOUNDATION" has the meaning set forth in the Preamble hereof.
(y) "INITIAL CONTINUING OPTION EXERCISE DATE" has the meaning specified in
Section 4(a) hereof.
(z) "INSPECTORS" has the meaning specified in Section 8(k) hereof.
(aa) "NASD" means the National Association of Securities Dealers, Inc.
(bb) "NYSE" means the New York Stock Exchange, Inc., or, if the Registrable
Securities are not listed on the New York Stock Exchange, then The Nasdaq Stock
Market, or any other national securities exchange or automated quotation system
on which the class of Registrable Securities is then listed or approved for
trading, as applicable.
(cc) "OWNERSHIP LIMIT" has the meaning set forth in Section 1 of Article V
of the Articles of Incorporation.
(dd) "PERSON" means any individual, firm, partnership, corporation
(including, without limitation, a business trust), limited liability company,
joint stock company, trust, unincorporated association, joint venture or other
entity, and shall include any successor (by merger or otherwise) of any such
entity.
(ee) "PIGGY-BACK REQUEST" has the meaning set forth in Section 3(b) hereof.
(ff) "PIGGY-BACK RIGHTS" has the meaning set forth in Section 3(a) hereof.
(gg) "PRIVATE PLACEMENT NOTICE" has the meaning specified in Section 11
hereof.
(hh) "PRIVATE PLACEMENT OPTION" has the meaning specified in Section 11
hereof.
(ii) "PRIVATE PLACEMENT OPTION NOTICE" has the meaning specified in
Section 11 hereof.
(jj) "PRIVATE PLACEMENT SECURITIES" has the meaning specified in Section 11
hereof.
(kk) "PROSPECTUS" means the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement, with respect
to the terms of the offering of any portion of the Registrable Securities
covered by any Registration Statement and by all other amendments and
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supplements to the prospectus, including post-effective amendments and all
material incorporated by reference in such prospectus.
(ll) "RECORDS" has the meaning specified in Section 8(k) hereof.
(mm) "REGISTRABLE SECURITIES" means any and all of (i) the shares of Common
Stock held by the Foundation as of the date of this Agreement, and (ii) any
securities issuable or issued or distributed in respect of any of the securities
identified in clause (i) by way of stock dividend or stock split or in
connection with a combination of shares, recapitalization, reorganization,
merger, consolidation or otherwise. Registrable Securities shall cease to be
Registrable Securities when and to the extent that (i) they shall have been
transferred, sold, distributed or otherwise disposed of (whether pursuant to an
underwritten public offering, a private placement transaction, Rule 144 or
otherwise) such that they are no longer Beneficially Owned by the Foundation,
(ii) they shall have ceased to be outstanding, or (iii) they shall have become
Delinquent Shares (as defined in the Voting Trust and Divestiture Agreement).
(nn) "REGISTRATION EXPENSES" means any and all reasonable expenses incident
to performance of or compliance with this Agreement, including, without
limitation, (i) all SEC, NASD and securities exchange registration and filing
fees, (ii) all fees and expenses of complying with state securities or "blue
sky" laws (including fees and disbursements of counsel for any underwriters in
connection with blue sky qualifications of the Registrable Securities),
(iii) all processing, printing, copying, messenger and delivery expenses,
(iv) all fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange pursuant to Section 8(h)
hereof, (v) all fees and disbursements of counsel for the Company and of its
independent public accountants, and (vi) the reasonable fees and expenses of any
special experts retained in connection with a registration under this Agreement,
but excluding (A) any underwriting discounts and commissions and transfer taxes
relating to the sale or disposition of Registrable Securities pursuant to a
Registration Statement, and (B) any fees, expenses or disbursements of counsel
and other advisers to the Foundation.
(oo) "REGISTRATION STATEMENT" means any registration statement (including a
Shelf Registration) of the Company referred to in Section 2 or Section 3 hereof
including any Prospectus, amendments and supplements to any such registration
statement, including post-effective amendments, and all exhibits and all
material incorporated by reference in any such registration statement.
(pp) "RULE 144" means Rule 144 under the Securities Act or any similar or
successor rules or regulations hereafter adopted by the SEC.
(qq) "SEC" means the United States Securities and Exchange Commission and
any successor federal agency having similar powers.
(rr) "SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC thereunder, all as the same shall be in effect
at the time that reference is made thereto.
(ss) "SHARE-RIGHTS" has the meaning set forth in Section 3(a) hereof.
(tt) "SHELF REGISTRATION" means a "shelf" registration statement on an
appropriate form pursuant to Rule 415 under the Securities Act (or any successor
rule that may be adopted by the SEC).
(uu) "UNDERWRITTEN OFFERING" means an offering in which securities of the
Company are sold to an underwriter for reoffering to the public pursuant to an
effective Registration Statement under the Securities Act.
(vv) "VOTING TRUST AND DIVESTITURE AGREEMENT" means that certain Voting
Trust and Divestiture Agreement, of even date herewith, by and among the
Company, the Foundation and the trustee named therein.
SECTION 2. DEMAND REGISTRATION RIGHTS.
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(a) Throughout the Effective Period, the Foundation may, at any time and
subject to the terms hereof, request the Company in writing (each, a "DEMAND")
to effect a registration with the SEC under and in accordance with the
provisions of the Securities Act of all or part of the Registrable Securities (a
"DEMAND REGISTRATION"). The Demand shall specify the aggregate number of shares
of Registrable Securities requested to be so registered. Any request received by
the Company from the Foundation as provided in this Section 2(a) shall be deemed
to be a "Demand" for purposes of this Agreement unless the Company shall have
notified the Foundation in writing, prior to its receipt of such request from
the Foundation, of its intention to register securities with the SEC, in which
case the request from the Foundation shall be governed by Section 3 hereof, not
this Section 2.
(b) Following its receipt of a Demand, the Company shall have the right, but
not the obligation (the "DEMAND OPTION"), exercisable by providing written
notice thereof (the "DEMAND OPTION NOTICE") to the Foundation within fifteen
(15) Business Days, to purchase all or (subject to the penultimate sentence of
this Section 2(b)) any portion of the Registrable Securities that are the
subject of such Demand (the "DEMAND OPTION SECURITIES") at a cash price per
share equal to the average closing sale price per share of the Common Stock on
the NYSE during the ten (10) consecutive trading days ending on the second (2nd)
trading day immediately preceding the date of the Demand. The Demand Option
Notice shall state the number of Demand Option Securities that the Company shall
purchase pursuant to the Demand Option, the aggregate purchase price therefor,
and the closing date of the Company's purchase of the Demand Option Securities,
which shall take place no later than thirty (30) days after the date of the
Demand Option Notice. The Company shall pay for the Demand Option Securities
that it shall purchase pursuant to the Demand Option at the closing thereof by
wire transfer of immediately available funds to a bank account designated by the
Foundation. At such closing, the Foundation shall deliver or cause to be
delivered to the Company the certificate or certificates representing the number
of Demand Option Securities purchased by the Company as specified in the Demand
Option Notice, free and clear of all liens, claims, security interests and other
encumbrances. The Company shall be entitled to receive customary representations
and warranties from the Foundation regarding such sale of Demand Option
Securities (including representations regarding good title to such shares, free
and clear of all liens, claims, security interests and other encumbrances).
Notwithstanding anything in this Section 2(b) to the contrary, unless the
Foundation shall consent thereto, the Company shall not have the right to
purchase less than all of the Demand Option Securities pursuant to a Demand
Option if the Current Market Value (determined as of the date of the original
Demand by the Foundation) of the Demand Option Securities that the Company shall
have elected not to purchase shall be less than Thirty Million Dollars
($30,000,000). In the event that the Company shall purchase all of the Demand
Option Shares in accordance with this Section 2(b), then the requested Demand
Registration related thereto shall not be deemed to count as a Demand
Registration described in Section 2(d)(i) or Section 2(d)(ii) hereof.
(c) If the Company does not elect to exercise the Demand Option, or elects
to purchase less than all of the Demand Option Securities, the Company shall use
its best efforts to file a Registration Statement for the Registrable
Securities, or remainder thereof, identified in such Demand as soon as
practicable.
(d) Notwithstanding anything in this Agreement to the contrary, the Company
shall not be required to file a Registration Statement for the Registrable
Securities identified in a Demand:
(i) if the Company shall have previously effected a Demand Registration
at any time during the immediately preceding one hundred twenty (120) day
period;
(ii) if the Company shall have previously effected a Demand Registration
at any time during the calendar year in which the Demand was received;
(iii) if the Company shall have previously effected a registration of
Common Stock to be issued and sold by the Company at any time during the
immediately preceding one hundred twenty
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(120) day period (other than a registration on Form S-4, Form S-8 or
Form S-3 (with respect to dividend reinvestment plans and similar plans) or
any successor forms thereto);
(iv) if the number of Registrable Securities identified in the Demand
shall have a Current Market Value (determined as of the date of such Demand)
of less than Thirty Million Dollars ($30,000,000), unless such Registrable
Securities identified in the Demand constitute all remaining Registrable
Securities; or
(v) during the pendency of any Blackout Period.
(e) The Company shall be permitted to satisfy its obligations under this
Section 2 by amending (to the extent permitted by applicable law) any Shelf
Registration previously filed by the Company under the Securities Act so that
such Shelf Registration (as amended) shall permit the disposition (in accordance
with the intended methods of disposition specified as aforesaid) of all of the
Registrable Securities for which a Demand shall have been made. If the Company
shall so amend a previously filed Shelf Registration, it shall be deemed to have
effected a Demand Registration.
(f) A requested Demand Registration shall not be deemed to count as a Demand
Registration described in Section 2(d)(i) or Section 2(d)(ii) hereof if:
(i) such registration has not been declared effective by the SEC or does not
become effective in accordance with the Securities Act, (ii) after becoming
effective, such registration is materially interfered with by any stop order,
injunction or similar order or requirement of the SEC or other governmental
agency or court for any reason not attributable to the Foundation and does not
thereafter become effective, (iii) the conditions to closing specified in the
underwriting agreement, if any, entered into in connection with such Demand
Registration are not satisfied or waived due to a failure on the part of the
Company, or (iv) the Foundation shall have withdrawn its Demand or otherwise
determined not to pursue such registration prior to the filing of the
Registration Statement with the SEC for such Demand, PROVIDED that the
Foundation shall have reimbursed the Company for all of its out-of-pocket
expenses incurred in connection with such Demand.
(g) Should a Registration Statement filed pursuant to a Demand not become
effective due to the failure of the Foundation to perform its obligations under
this Agreement or the inability of the Foundation to reach agreement with the
underwriter(s) on price or other customary terms for such transaction, or in the
event the Foundation determines to withdraw or does not pursue a request for
registration pursuant to a Demand (in each of the foregoing cases, provided that
at such time the Company shall be in compliance in all material respects with
its obligations under this Agreement), then (subject to the last sentence of
this Section 2(g)) such registration shall be deemed to count as a Demand
Registration described in Section 2(d)(i) or Section 2(d)(ii) hereof, and the
Foundation shall not be obligated to reimburse the Company for any of its
out-of-pocket expenses incurred in the preparation, filing and processing of the
Registration Statement. Notwithstanding anything to the contrary in this
Section 2(g), if (i) a Registration Statement filed pursuant to a Demand shall
not become effective due to the failure of the Foundation to reach agreement
with the underwriter(s) on the offering price for such transaction, and
(ii) the Current Market Value of the Registrable Securities included in such
Demand determined on the date that the Foundation and the underwriter(s) shall
have failed to reach agreement on the offering price for such transaction shall
be less than or equal to seventy-five percent (75%) of the Current Market Value
of the Registrable Securities included in such Demand determined on the date
that the Foundation shall have made such Demand to the Company, then such
requested Demand Registration shall not be deemed to count as a Demand
Registration described in Section 2(d)(i) or Section 2(d)(ii) hereof (PROVIDED
that the Foundation shall have reimbursed the Company for all of its
out-of-pocket expenses incurred in the preparation, filing and processing of the
Registration Statement).
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(h) The Company shall have the right, but not the obligation, to include any
securities to be issued and sold by the Company in any Registration Statement
(including a Shelf Registration referred to in Section 2(e) hereof) filed
pursuant to a Demand without the prior consent of the Foundation.
(i) If the lead managing underwriter (selected by the Company as provided in
Section 5 hereof) of an Underwritten Offering made pursuant to a Demand shall
advise the Company in writing (with a copy to the Foundation) that marketing or
other factors require a limitation on the number of shares of Common Stock which
can be sold in such offering within a price range acceptable to the Foundation,
then (i) if the Company shall have elected to include any securities to be
issued and sold by the Company in such Registration Statement pursuant to
Section 2(h) hereof, then the Company shall reduce the number of securities the
Company shall intend to issue and sell pursuant to such Registration Statement
such that the total number of securities being sold by the Foundation and the
Company shall be equal to the number which can be sold in such offering within a
price range acceptable to the Foundation, and (ii) if the Company shall not have
elected to include any securities in such Registration Statement pursuant to
Section 2(h) hereof or if the reduction referred to in the previous clause (i)
shall not be sufficient, then, notwithstanding Section 2(d)(iv) hereof, the
Foundation shall reduce the number of Registrable Securities requested to be
included in such offering to the number that the lead managing underwriter
advises can be sold in such offering within such price range and such Demand
shall count as a Demand Registration described in Section 2(d)(i) or
Section 2(d)(ii) hereof, PROVIDED THAT at least $10,000,000 in gross sale
proceeds shall have been received by the Foundation pursuant to such offering,
otherwise such requested Demand Registration shall not be deemed to count as a
Demand Registration described in Section 2(d)(i) and Section 2(d)(ii) hereof
(PROVIDED that the Foundation shall have reimbursed the Company for all of its
out-of-pocket expenses incurred in the preparation, filing and processing of the
Registration Statement).
SECTION 3. PIGGY-BACK REGISTRATION RIGHTS.
(a) Whenever the Company shall propose to file a Registration Statement
under the Securities Act relating to the public offering of Common Stock for
sale for cash for its own account, the Company shall give written notice to the
Foundation at least fifteen (15) Business Days prior to the anticipated filing
thereof, specifying the approximate date on which the Company proposes to file
such Registration Statement and the intended method of distribution in
connection therewith, and advising the Foundation of the Foundation's right to
have any or all of the Registrable Securities then held by the Foundation
included among the securities to be covered by such Registration Statement (the
"PIGGY-BACK RIGHTS") and the Foundation's right, until such time as the
Foundation holds less than fifty percent (50%) of the issued and outstanding
shares of Common Stock, to have any or all of the Registrable Securities then
held by the Foundation included among the securities to be covered by such
Registration Statement such that the Foundation shall be entitled to receive, at
its option, up to fifty percent (50%) of the proceeds from the sale of shares of
Common Stock to the public (the "SHARE-RIGHTS").
(b) Subject to Section 3(c) and Section 3(d) hereof in the event that the
Foundation has and shall elect to utilize its Piggy-Back Rights, the Company
shall include in the Registration Statement the Registrable Securities
identified by the Foundation in a written request (the "PIGGY-BACK REQUEST")
given to the Company not later than ten (10) Business Days prior to the proposed
filing date of the Registration Statement. The Registrable Securities identified
in the Piggy-Back Request shall be included in the Registration Statement on the
same terms and conditions as the other shares of Common Stock included in the
Registration Statement.
(c) Notwithstanding anything in this Agreement to the contrary, the
Foundation shall not have Piggy-Back Rights with respect to (i) a Registration
Statement on Form S-4 or Form S-8 or Form S-3 (with respect to dividend
reinvestment plans and similar plans) or any successor forms thereto, (ii) a
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Registration Statement filed in connection with an exchange offer or an offering
of securities solely to existing stockholders or employees of the Company,
(iii) a Registration Statement filed in connection with an offering by the
Company of securities convertible into or exchangeable for Common Stock, (iv) a
Registration Statement filed in connection with the redistribution of shares of
Common Stock held by the Foundation in excess of the Ownership Limit pursuant to
Article V of the Voting Trust and Divestiture Agreement, or (v) a Registration
Statement filed in connection with a private placement of securities of the
Company (whether for cash or in connection with an acquisition by the Company or
one of its subsidiaries).
(d) If the lead managing underwriter selected by the Company for an
Underwritten Offering for which Piggy-Back Rights are requested determines that
marketing or other factors require a limitation on the number of shares of
Common Stock to be offered and sold in such offering, then (i) such underwriter
shall provide written notice thereof to each of the Company and the Foundation,
and (ii) there shall be included in the offering, first, all shares of Common
Stock proposed by the Company to be sold for its account (or such lesser amount
as shall equal the maximum number determined by the lead managing underwriter as
aforesaid) and, second, only that number of Registrable Securities requested to
be included in such Registration Statement by the Foundation that such lead
managing underwriter reasonably and in good faith believes will not
substantially interfere with (including, without limitation, adversely affect
the pricing of) the offering of all the shares of Common Stock that the Company
desires to sell for its own account.
(e) Nothing contained in this Section 3 shall create any liability on the
part of the Company to the Foundation if the Company for any reason should
decide not to file a Registration Statement for which Piggy-Back Rights or
Share-Rights are available or to withdraw such Registration Statement subsequent
to its filing, regardless of any action whatsoever that the Foundation may have
taken, whether as a result of the issuance by the Company of any notice
hereunder or otherwise.
(f) A request made by the Foundation pursuant to its Piggy-Back Rights or
Share-Rights to include Registrable Securities in a Registration Statement shall
not be deemed a Demand Registration described in Section 2(d)(i) or
Section 2(d)(ii) hereof.
SECTION 4. CONTINUING OPTION.
(a) At any time and from time to time after the Initial Continuing Option
Exercise Date (as defined below in this Section 4(a)) and thereafter during the
Effective Period, the Company shall have the right, but not the obligation (the
"CONTINUING OPTION"), exercisable by providing written notice thereof (the
"CONTINUING OPTION NOTICE") to the Foundation, to purchase from the Foundation
all or any portion of the Registrable Securities (the "CONTINUING OPTION
SECURITIES") at a cash price per share equal to the Continuing Option Price (as
defined below in this Section 4(a)). The Continuing Option Notice shall state
the number of Continuing Option Securities that the Company shall purchase
pursuant to the Continuing Option, the aggregate purchase price therefor, and
the closing date of the Company's purchase of the Continuing Option Securities,
which shall take place within sixty (60) days of the date of the Continuing
Option Notice. The Company shall pay for the Continuing Option Securities that
it shall purchase pursuant to the Continuing Option at the closing thereof by
wire transfer of immediately available funds to a bank account designated by the
Foundation. At such closing, the Foundation shall deliver to the Company a
certificate or certificates representing the number of Continuing Option
Securities purchased by the Company as specified in the Continuing Option
Notice, free and clear of all liens, claims, security interests and other
encumbrances. The Company shall be entitled to receive customary representations
and warranties from the Foundation regarding such sale of Continuing Option
Securities (including representations regarding good title to such shares, free
and clear of all liens, claims, security interests and other encumbrances). The
term "INITIAL CONTINUING OPTION EXERCISE DATE", as used herein, shall mean the
earlier to occur of (i) the consummation of a Demand Registration or an offering
pursuant to a Piggy-Back Request resulting in
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gross sale proceeds to the Foundation of at least Ten Million Dollars
($10,000,000), (ii) the consummation of a private placement transaction by the
Foundation resulting in gross sale proceeds to the Foundation of at least Ten
Million Dollars ($10,000,000), or (iii) the purchase by the Company of Private
Placement Securities resulting in gross sale proceeds to the Foundation of at
least Ten Million Dollars ($10,000,000). The term "CONTINUING OPTION PRICE", as
used herein, shall mean (i) prior to the consummation of a Demand Registration
or an offering pursuant to a Piggy-Back Request, the greater of "A", "B" or "C",
and (ii) from and after the consummation of a Demand Registration or an offering
pursuant to a Piggy-Back Request, the greater of "A" or "B", where, for purposes
of the foregoing clauses (i) and (ii), "A" shall mean the average closing sale
price per share of Common Stock on the NYSE during the ten (10) consecutive
trading days ending on the date that the Continuing Option Notice with respect
to such Continuing Option shall have been provided, "B" shall mean the average
closing sale price per share of Common Stock on the NYSE during the ten
(10) consecutive trading days ending on the forty-fifth (45th) day prior to the
date that the Continuing Option Notice with respect to such Continuing Option
shall have been provided, and "C" shall equal the price per share received by
the Foundation in its most recent sale of Private Placement Securities pursuant
to Section 11 hereof (regardless of whether such Private Placement Securities
shall have been sold to qualified investors or to the Company).
(b) If the Company shall purchase Continuing Option Securities pursuant to
Section 4(a) hereof, it shall not, for a period of forty-five (45) days
thereafter, sell shares of Common Stock for cash in public or private
transactions (except that the Company shall be permitted, during such period, to
issue Common Stock pursuant to benefit, stock option and dividend reinvestment
plans for its directors, officers, employees and shareholders).
SECTION 5. SELECTION OF UNDERWRITERS.
(a) In connection with any Underwritten Offering made pursuant to a Demand,
the Company shall have the right to select the lead managing underwriter and any
other managing underwriter to administer the Underwritten Offering, so long as
each such underwriter shall be reasonably satisfactory to the Foundation. Each
underwriter selected by the Company shall be deemed reasonably satisfactory to
the Foundation unless the Foundation sends a written notice of objection to the
Company within five (5) Business Days following receipt of written notice from
the Company of the selection of the underwriter.
(b) The Foundation acknowledges and agrees that shall be
reasonably satisfactory to the Foundation to serve as a managing underwriter for
any Underwritten Offering made pursuant to a Demand.
SECTION 6. BLACKOUT PERIODS. If the Company determines in good faith that
the registration and distribution of Registrable Securities (or the use of the
Registration Statement or related Prospectus) resulting from a Demand received
from the Foundation would (i) materially and adversely interfere with any
previously announced business combination transaction involving the Company
pursuant to which the Company would issue, in connection with such transaction,
shares of Common Stock to some or all of the equity owners of the counter-party
to such business combination transaction, or (ii) result in the premature
disclosure of any pending financing, acquisition, corporate reorganization or
any other corporate development involving the Company or any of its
subsidiaries, and, in either such event, the Company shall promptly give the
Foundation written notice of such determination, then the Company shall be
entitled to (x) postpone the filing of the Registration Statement otherwise
required to be prepared and filed by the Company pursuant to Section 2 hereof,
or (y) elect that the effective Registration Statement not be used, in either
case for a reasonable period of time, but not to exceed 120 days after the date
that the Demand was made (a "BLACKOUT PERIOD"). Any such written notice shall
contain a general statement of the reasons for such postponement or restriction
on use and an estimate
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of the anticipated delay. The Company shall promptly notify the Foundation of
the expiration or earlier termination of such Blackout Period.
SECTION 7. HOLDBACK.
(a) If (i) during the Effective Period, the Company shall file a
Registration Statement (other than a registration on Form S-4, Form S-8 or
Form S-3 (with respect to dividend reinvestment plans and similar plans) or any
successor forms thereto) with respect to any shares of its capital stock, and
(ii) upon reasonable prior notice (A) the Company (in the case of a
non-underwritten offering pursuant to such Registration Statement) advises the
Foundation in writing that a sale or distribution of Registrable Securities
would adversely affect such offering, or (B) the managing underwriter or
underwriters (in the case of an Underwritten Offering) advise the Company in
writing (in which case the Company shall notify the Foundation) that a sale or
distribution of Registrable Securities would adversely impact such offering,
then the Foundation shall, to the extent not inconsistent with applicable law,
refrain from effecting any sale or distribution of Registrable Securities,
including sales pursuant to Rule 144, during the period commencing on the date
of such notice and continuing until the ninetieth (90th) day after the effective
date of such Registration Statement.
(b) During the thirty (30) day period commencing on the effective date of a
Registration Statement filed by the Company on behalf of the Foundation in
connection with an Underwritten Offering pursuant to a Demand, the Company shall
not effect (except pursuant to registrations on Form S-4 or Form S-8 or
Form S-3 (with respect to dividend reinvestment plans and similar plans) or any
successor forms thereto and except pursuant to Section 2(h) hereof) any public
sale or distribution of Common Stock or of preferred stock or securities
convertible into or exercisable for Common Stock.
SECTION 8. REGISTRATION PROCEDURES. If and whenever the Company shall be
required to use its best efforts to effect or cause the registration of any
Registrable Securities under the Securities Act as provided in this Agreement,
the Company shall and, with respect to Section 8(m) and Section 8(n), the
Foundation shall:
(a) prepare and file with the SEC a Registration Statement with respect to
such Registrable Securities on any form for which the Company then qualifies or
that counsel for the Company shall deem appropriate, and which form shall be
available for the sale of the Registrable Securities in accordance with the
intended methods of distribution thereof, and use its best efforts to cause such
Registration Statement to become and remain effective;
(b) prepare and file with the SEC amendments and post-effective amendments
to such Registration Statement and such amendments and supplements to the
Prospectus used in connection therewith as may be necessary to maintain the
effectiveness of such registration or as may be required by the rules,
regulations or instructions applicable to the registration form utilized by the
Company or by the Securities Act for a Shelf Registration or otherwise necessary
to keep such Registration Statement effective for at least sixty (60) days and
cause the Prospectus as so supplemented to be filed pursuant to Rule 424 under
the Securities Act, and to otherwise comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
Registration Statement until the earlier of (x) such 60th day or (y) such time
as all Registrable Securities covered by such Registration Statement shall have
ceased to be Registrable Securities (it being understood that the Company at its
option may determine to maintain such effectiveness for a longer period, whether
pursuant to a Shelf Registration or otherwise), PROVIDED, HOWEVER, that a
reasonable time before filing a Registration Statement or Prospectus, or any
amendments or supplements thereto (other than reports required to be filed by it
under the Exchange Act), the Company shall furnish to the Foundation, the
managing underwriter and their respective counsel for review and comment, copies
of all documents proposed to be filed;
(c) furnish to the Foundation and to any underwriter in connection with an
Underwritten Offering such number of conformed copies of such Registration
Statement and of each amendment and
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post-effective amendment thereto (in each case including all exhibits) and such
number of copies of any Prospectus or Prospectus supplement and such other
documents as the Foundation or underwriter may reasonably request in order to
facilitate the disposition of the Registrable Securities by the Foundation or
underwriter (the Company hereby consenting to the use (subject to the
limitations set forth in Section 8(n) hereof) of the Prospectus or any amendment
or supplement thereto in connection with such disposition);
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(d) use its best efforts to register or qualify such Registrable Securities
covered by such Registration Statement under such other securities or "blue sky"
laws of such jurisdictions as the Foundation shall reasonably request, except
that the Company shall not for any such purpose be required to qualify generally
to do business as a foreign corporation in any jurisdiction where, but for the
requirements of this Section 8(d), it would not be obligated to be so qualified,
to subject itself to taxation in any such jurisdiction, or to consent to general
service of process in any such jurisdiction;
(e) notify the Foundation, at any time when a Prospectus relating thereto is
required to be delivered under the Securities Act within the appropriate period
mentioned in Section 8(b) hereof, of the Company's becoming aware that the
Prospectus included in such Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, and, at the request of
the Foundation, prepare and furnish to the Foundation a reasonable number of
copies of an amendment or supplement to such Registration Statement or related
Prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such Prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing;
(f) notify the Foundation at any time:
(1) when the Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to the Registration Statement or
any post-effective amendment, when the same has become effective;
(2) of any request by the SEC for amendments or supplements to the
Registration Statement or the Prospectus or for additional information;
(3) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or any order preventing the use
of a related Prospectus, or the initiation (or any overt threats) of any
proceedings for such purposes;
(4) of the receipt by the Company of any written notification of the
suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction or the initiation (or overt threats) of any
proceeding for that purpose, and
(5) if at any time the representations and warranties of the Company
contemplated by Section 8(i) below cease to be true and correct in all
material respects;
(g) otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC, and make available to its security holders an earnings
statement that shall satisfy the provisions of Section 11(a) of the Securities
Act, provided that the Company shall be deemed to have complied with this
Section 8(g) if it shall have complied with Rule 158 under the Securities Act;
(h) use its best efforts to cause all such Registrable Securities to be
listed on the NYSE, The Nasdaq Stock Market or any other national securities
exchange or automated quotation system on which the class of Registrable
Securities being registered is then listed, if such Registrable Securities are
not already so listed and if such listing is then permitted under the rules of
such exchange, and to provide a transfer agent and registrar for such
Registrable Securities covered by such Registration Statement no later than the
effective date of such Registration Statement;
(i) enter into agreements (including an underwriting agreement in the form
customarily entered into by the Company in a comparable Underwritten Offering)
and take all other appropriate and all commercially reasonable actions in order
to expedite or facilitate the disposition of such Registrable
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Securities and in such connection, whether or not an underwriting agreement
shall be entered into and whether or not the registration shall be an
underwritten registration:
(i) make such representations and warranties to the Foundation and the
underwriters, if any, in form, substance and scope as are customarily made
by the Company to underwriters in comparable Underwritten Offerings;
(ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions shall be reasonably satisfactory (in form, scope
and substance) to the managing underwriters, if any, and the Foundation)
addressed to the Foundation and the underwriters covering the matters
customarily covered in opinions requested in comparable Underwritten
Offerings by the Company;
(iii) obtain "comfort letters" and updates thereof from the Company's
independent certified public accountants addressed to the Foundation and the
underwriters, if any, such letters to be in customary form and covering
matters of the type customarily covered in "comfort letters" by independent
accountants in connection with comparable underwritten offerings on such
date or dates as may be reasonably requested by the managing underwriter;
(iv) provide the indemnification in accordance with the provisions and
procedures of Section 11 hereof to all parties to be indemnified pursuant to
such Section 11; and
(v) deliver such documents and certificates as may be reasonably
requested by the Foundation and the managing underwriters, if any, to
evidence compliance with Section 8(f) above and with any customary
conditions contained in the underwriting agreement or other agreement
entered into by the Company;
(j) cooperate with the Foundation and the managing underwriter or
underwriters to facilitate, to the extent reasonable under the circumstances,
the timely preparation and delivery of certificates representing the securities
to be sold under such Registration Statement, and enable such securities to be
in such denominations and registered in such names as the managing underwriter
or underwriters, if any, or the Foundation may request and/or in a form eligible
for deposit with the Depository Trust Company;
(k) make available to the Foundation, any underwriter participating in any
disposition pursuant to such Registration Statement, and any attorney,
accountant or other agent retained by the Foundation or underwriter
(collectively, the "INSPECTORS"), reasonable access to appropriate officers of
the Company and the Company's subsidiaries to ask questions and to obtain
information reasonably requested by such inspector and all financial and other
records and other information, pertinent corporate documents and properties of
any of the Company and its subsidiaries and affiliates (collectively, the
"RECORDS"), as shall be reasonably necessary to enable them to exercise their
due diligence responsibility, PROVIDED, HOWEVER, that the Records that the
Company determines, in good faith, to be confidential and which it notifies the
Inspectors in writing are confidential shall not be disclosed to any Inspector
unless such Inspector signs a confidentiality agreement reasonably satisfactory
to the Company or either (i) the disclosure of such Records is necessary to
avoid or correct a misstatement or omission of a material fact in such
Registration Statement, or (ii) the release of such Records is ordered pursuant
to a subpoena or other order from a court of competent jurisdiction, PROVIDED,
FURTHER, that any decision regarding the disclosure of information pursuant to
subclause (i) shall be made only after consultation with counsel for the
applicable Inspectors; and PROVIDED, FURTHER, that the Foundation agrees that it
shall, promptly after learning that disclosure of such Records is sought in a
court having jurisdiction, give notice to the Company and allow the Company, at
the Company's expense, to undertake appropriate action to prevent disclosure of
such Records;
(l) in the event of the issuance of any stop order suspending the
effectiveness of the Registration Statement or of any order suspending or
preventing the use of any related Prospectus or suspending
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the qualification of any Registrable Securities included in the Registration
Statement for sale in any jurisdiction, the Company shall use all commercially
reasonable efforts promptly to obtain its withdrawal;
(m) the Foundation shall furnish the Company with such information regarding
the Foundation and pertinent to the disclosure requirements relating to the
registration and the distribution of such securities as the Company may from
time to time reasonably request in writing, and
(n) the Foundation shall, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 8(e) hereof forthwith
discontinue disposition of Registrable Securities pursuant to the Prospectus or
Registration Statement covering such Registrable Securities until the Foundation
shall have received copies of the supplemented or amended Prospectus
contemplated by Section 8(e) hereof and, if so directed by the Company, the
Foundation shall deliver to the Company (at the Company's expense) all copies,
other than permanent file copies then in the Foundation's possession, of the
Prospectus covering such Registrable Securities current at the time of receipt
of such notice.
SECTION 9. REGISTRATION EXPENSES. Except as otherwise provided herein, in
connection with all registrations of Registrable Securities made pursuant to a
Demand Registration, Piggy-Back Rights or Share-Rights, the Company shall pay
all Registration Expenses; provided, however, that the Foundation shall pay, and
shall hold the Company harmless from, (i) any underwriting discounts and
commissions and transfer taxes relating to the sale or disposition of
Registrable Securities, and (ii) any fees, expenses or disbursements of counsel
and other advisors to the Foundation.
SECTION 10. RULE 144. The Company shall take such measures and file such
information, documents and reports as shall be required by the SEC as a
condition to the availability of Rule 144. The Foundation shall not be permitted
to sell any Registrable Securities pursuant to Rule 144 until such time as the
Foundation shall have sold Registrable Securities to non-Affiliates of the
Foundation and shall have received in exchange therefor aggregate proceeds of at
least Fifty Million Dollars ($50,000,000). Thereafter, the Foundation shall not
be permitted to sell any Registrable Securities pursuant to Rule 144 if
(i) such sale shall be to any Person that Beneficially Owns any shares of Common
Stock in excess of the Ownership Limit applicable to such Person; (ii) such sale
shall cause any Person to Beneficially Own any shares of Common Stock in excess
of the Ownership Limit applicable to such Person; or (iii) such sale would
violate the terms of this Agreement, the Voting Trust and Divestiture Agreement,
the Articles of Incorporation or the Bylaws.
SECTION 11. PRIVATE PLACEMENTS. Subject to the terms of this Agreement,
the Voting Trust and Divestiture Agreement, the Articles of Incorporation, the
Bylaws and the right of first refusal in favor of the Company described below in
this Section 11, the Foundation shall have the right at all times to sell shares
of Registrable Securities in one or more private placements (the "Private
Placement Securities") to qualified investors PROVIDED that the Foundation
provides written notice to the Company at least forty-five (45) Business Days
prior to making any such proposed private placement advising the Company of the
terms and conditions of such proposed private placement (the "Private Placement
Notice"), and PROVIDED FURTHER that the consummation of such proposed private
placement would not cause any Person to Beneficially Own any shares of Common
Stock in excess of the Ownership Limit applicable to such Person. The Private
Placement Notice shall contain the identity of the proposed private placement
purchaser, the price at which the Private Placement Securities shall be sold to
the proposed private placement purchaser, the number of Private Placement
Securities to be sold to the proposed private placement purchaser, and all other
material terms and conditions of the proposed private placement. Following its
receipt of the Private Placement Notice, the Company shall have the right, but
not the obligation (the "Private Placement Option"), exercisable by providing
written notice thereof (the "Private Placement Option Notice") to the Foundation
within thirty (30) Business Days, to purchase all (but not less than all) of the
Private Placement Securities on the same terms and
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conditions contained in the Private Placement Notice. The Private Placement
Option Notice shall state the number of Private Placement Securities that the
Company shall purchase pursuant to the Private Placement Option, the aggregate
purchase price therefor, and the closing date of the Company's purchase of the
Private Placement Securities, which shall take place no later than sixty
(60) days after the date of the Private Placement Option Notice. The Company
shall pay for the Private Placement Securities that it shall purchase pursuant
to the Private Placement Option at the closing thereof by wire transfer of
immediately available funds to a bank account designated by the Foundation. At
such closing, the Foundation shall deliver to the Company a certificate or
certificates representing the number of Private Placement Securities, free and
clear of all liens, claims, security interests and other encumbrances. The
Company shall be entitled to receive customary representations and warranties
from the Foundation regarding such sale of Private Placement Securities
(including representations regarding good title to such shares free and clear of
all liens, claims, security interests and other encumbrances). If the Company
shall elect not to exercise the Private Placement Option, the Foundation may
sell the Private Placement Securities identified in the Private Placement Notice
at the time and subject to all of the terms and the conditions contained in the
Private Placement Notice.
SECTION 12. COVENANTS OF FOUNDATION. The Foundation hereby covenants and
agrees that it shall not sell any Registrable Securities in violation of the
Securities Act and this Agreement, the Voting Trust and Divestiture Agreement,
the Articles of Incorporation and the Bylaws.
SECTION 13. INDEMNIFICATION; CONTRIBUTION.
(a) The Company shall indemnify and hold harmless the Foundation, its
officers and directors, and any agent or investment adviser thereof against all
losses, claims, damages, liabilities and expenses (including reasonable
attorneys' fees and expenses) incurred by such party pursuant to any actual or
threatened action, suit, proceeding or investigation arising out of or based
upon (i) any untrue or alleged untrue statement of material fact contained in
any Registration Statement, any Prospectus or preliminary Prospectus, or any
amendment or supplement to any of the foregoing, or (ii) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein (in the case of a Prospectus or a
preliminary Prospectus, in light of the circumstances then existing) not
misleading, except in each case insofar as the same arise out of or are based
upon, any such untrue statement or omission made in reliance on and in
conformity with information with respect to the Foundation furnished to the
Company by the Foundation or its counsel expressly for use therein. In
connection with an Underwritten Offering, the Company shall indemnify the
underwriters thereof, their officers, directors and agents and each Person who
controls such underwriters (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) to the same extent as provided above with
respect to the indemnification of the Foundation. Notwithstanding the foregoing
provisions of this Section 13(a), the Company shall not be liable to the
Foundation, any Person who participates as an underwriter in the offering or
sale of Registrable Securities or any other Person, if any, who controls any
such underwriter (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act), under this Section 13 for any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense that
arises out of an untrue statement or alleged untrue statement or omission or
alleged omission in the preliminary Prospectus if the Foundation, or other
Person on behalf of the Foundation, failed to send or deliver a copy of a final
Prospectus to the Person asserting the claim prior to the written confirmation
of the sale of the Registrable Securities to such Person and such statement or
omission was corrected in such final Prospectus and the Company had previously
and namely furnished sufficient copies thereof to the Foundation in accordance
with this Agreement.
(b) In connection with any registration of Registrable Securities pursuant
to this Agreement, the Foundation shall furnish to the Company and any
underwriter in writing such information, including the name, address and the
amount of Registrable Securities held by the Foundation, as the Company or any
underwriter reasonably requests for use in the Registration Statement relating
to such
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registration or the related Prospectus and agrees to indemnify and hold harmless
the Company, any underwriter, each such party's officers and directors and each
Person who controls each such party (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act), and any agent or investment
adviser thereof against all losses, claims, damages, liabilities and expenses
(including reasonable attorneys' fees and expenses) incurred by each such party
pursuant to any actual or threatened action, suit, proceeding or investigation
arising out of or based upon (i) any untrue or alleged untrue statement of
material fact contained in any Registration Statement, any Prospectus or
preliminary Prospectus, or any amendment or supplement to any of the foregoing,
or (ii) any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein (in
the case of a Prospectus or a preliminary Prospectus, in light of the
circumstances then existing) not misleading, but only to the extent that any
such untrue statement or omission is made in reliance on and in conformity with
information with respect to the Foundation furnished to the Company or any
underwriter by the Foundation or its counsel specifically for inclusion therein.
Notwithstanding the foregoing provisions of this Section 13(b), the Foundation
shall not be liable to the Company, any underwriter, each such parties' officers
or directors, any other Person who controls any such party (within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act), or any
agent or investment advisor thereof, if the Foundation had provided information
curing any untrue statement or omission in time reasonably sufficient to prevent
the inclusion of such untrue statement or omission in the Registration
Statement.
(c) Any Person entitled to indemnification hereunder agrees to give prompt
written notice to the indemnifying party after the receipt by such indemnified
party of any written notice of the commencement of any action, suit, proceeding
or investigation or threat thereof made in writing for which such indemnified
party may claim indemnification or contribution pursuant to this Section 13
(PROVIDED that failure to give such notification shall not affect the
obligations of the indemnifying party pursuant to this Section 13 except to the
extent the indemnifying party shall have been actually prejudiced as a result of
such failure). In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party under this Section 13 for any legal expenses of other counsel
or any other expenses, in each case subsequently incurred by such indemnified
party, in connection with the defense thereof other than reasonable costs of
investigation. Notwithstanding the foregoing, if (i) the indemnifying party
shall not have employed counsel reasonably satisfactory to such indemnified
party to take charge of the defense of such action within a reasonable time
after notice of commencement of such action (so long as such failure to employ
counsel is not the result of an unreasonable determination by such indemnified
party that counsel selected pursuant to the immediately preceding sentence is
unsatisfactory) or if the indemnifying party shall not have demonstrated to the
reasonable satisfaction of the indemnified party its ability to finance such
defense, or (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnifying party and such indemnified party and such
indemnified party shall have reasonably concluded that there may be legal
defenses available to it which are different from or additional to those
available to the indemnifying party which, if the indemnifying party and such
indemnified party were to be represented by the same counsel, could result in a
conflict of interest for such counsel or materially prejudice the prosecution of
the defenses available to such indemnified party, then such indemnified party
shall have the right to employ separate counsel, in which case the fees and
expenses of one counsel or firm of counsel (plus one local or regulatory counsel
or firm of counsel) selected by a majority in interest of the indemnified
parties shall be borne by the indemnifying party and the fees and expenses of
all other counsel retained by the
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indemnified parties shall be paid by the indemnified parties. No indemnified
party shall consent to entry of any judgment or enter into any settlement
without the consent (which consent, in the case of an action, suit, claim or
proceeding exclusively seeking monetary relief, shall not be unreasonably
withheld) of each indemnifying party.
(d) If the indemnification from the indemnifying party provided for in this
Section 13 is unavailable to an indemnified party hereunder in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions which resulted in such losses,
claims, damages, liabilities and expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount paid
or payable by a party as a result of the losses, claims, damages, liabilities
and expenses referred to above shall be deemed to include, subject to the
limitations set forth in Section 13(c) hereof, any legal and other fees and
expenses reasonably incurred by such indemnified party in connection with any
investigation or proceeding. The parties hereto agree that it would not be just
and equitable if contribution pursuant to this Section 13(d) were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this
Section 13(d). Notwithstanding the provisions of this Section 13(d), no
underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Registrable Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission and
the Foundation shall not be required to contribute any amount in excess of the
amount by which the total price at which the Registrable Securities of the
Foundation were offered to the public exceeds the amount of any damages which
the Foundation has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. If indemnification is available
under this Section 13, the indemnifying parties shall indemnify each indemnified
party to the fullest extent provided in Section 13(a) or Section 13(b) hereof,
as the case may be, without regard to the relative fault of such indemnifying
parties or indemnified party or any other equitable consideration provided for
in this Section 13(d).
(e) The provisions of this Section 13 shall be in addition to any liability
which any party may have to any other party and shall survive any termination of
this Agreement. The indemnification provided by this Section 13 shall remain in
full force and effect irrespective of any investigation made by or on behalf of
an indemnified party, so long as such indemnified party is not guilty of acting
in a fraudulent, reckless or grossly negligent manner.
SECTION 14. PARTICIPATION IN UNDERWRITTEN OFFERINGS. The Foundation may
not participate in any Underwritten Offering hereunder unless the Foundation
(a) in the case of a registration pursuant to Section 3 hereof agrees to sell
the Foundation's securities on the basis provided in any underwriting
arrangements approved by the Company in its reasonable discretion, and
(b) completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
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SECTION 15. INJUNCTIONS. Each party acknowledges and agrees that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or were
otherwise breached. Therefore, each party shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically the terms and provisions hereof in any court having
jurisdiction, such remedy being in addition to any other remedy to which such
party may be entitled at law or in equity.
SECTION 16. AMENDMENTS AND WAIVERS. No amendment, modification,
supplement, termination, consent or waiver of any provision of this Agreement,
nor consent to any departure herefrom, shall in any event be effective unless
the same is in writing and is signed by the party against whom enforcement of
the same is sought. Any waiver of any provision of this Agreement and any
consent to any departure from the terms of any provision of this Agreement shall
be effective only in the specific instance and for the specific purpose for
which given.
SECTION 17. NOTICES. All notices, consents, requests, demands and other
communications hereunder must be in writing, and shall be deemed to have been
duly given or made (i) when delivered in person; (ii) three (3) days after
deposited in the United States mail, first class postage prepaid; (iii) in the
case of telegraph or overnight courier services, one (1) Business Day after
delivery to the telegraph company or overnight courier service with payment
provided; or (iv) in the case of telex or telecopy or fax, when sent,
verification received; in each case addressed as follows.
if to the Company
Thomas R. Hefty
Chairman and Chief Executive Officer
United Heartland Group, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
Fax: (414) 226-6229
with copy to:
Joseph C. Branch, Esq.
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Fax: (414) 297-4900
if to the Foundation [TO BE DETERMINED BY FOUNDATION PRIOR TO SIGNING]
----------------------------------------------------
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with copy to: [TO BE DETERMINED BY FOUNDATION PRIOR TO SIGNING]
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SECTION 18. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors of each of the parties. This
Agreement and the provisions of this Agreement that are for the benefit of the
Foundation shall not be assignable by the Foundation to any Person and any such
purported assignment shall be null and void.
C-17
<PAGE>
SECTION 19. COUNTERPARTS. This Agreement may be executed in one (1) or
more counterparts, all of which shall be considered one (1) and the same
agreement and shall become effective when one (1) or more counterparts have been
signed by each of the parties and delivered to the other parties.
SECTION 20. DESCRIPTIVE HEADINGS. The descriptive headings used herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 21. GOVERNING LAW. This Agreement and the rights and obligations
of the parties hereunder shall be governed by and construed in accordance with
the laws of the State of Wisconsin, without regard to choice or conflict of laws
rules.
SECTION 22. SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances,
shall be held invalid, illegal or unenforceable in any respect for any reason,
the validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
impaired thereby, it being intended that all remaining provisions contained
herein shall not be in any way impaired thereby.
SECTION 23. ENTIRE AGREEMENT. This Agreement, including any exhibits or
attachments referred to herein, is intended by the parties as a final expression
and a complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter hereof. There are no
restrictions, promises, warranties or undertakings with respect to the subject
matter hereof, other than those set forth or referred to herein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
SECTION 24. FURTHER ACTIONS; BEST EFFORTS. The Foundation shall use its
best efforts to take or cause to be taken all appropriate action and to do or
cause to be done all things reasonably necessary, proper or advisable under
applicable law and regulations to assist the Company in the performance of its
obligations hereunder, including, without limitation, the preparation and filing
of any Registration Statements pursuant to any Demand.
SECTION 25. FAIR CONSTRUCTION. This Agreement is the product of
negotiation and shall be deemed to have been drafted by all of the parties. It
shall be construed in accordance with the fair meaning of its terms and its
language shall not be strictly construed against, nor shall ambiguities be
resolved against, any particular party.
C-18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
<TABLE>
<S> <C> <C> <C>
COBALT CORPORATION
a Wisconsin corporation
By:
---------------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
WISCONSIN UNITED FOR HEALTH, INC.,
a Wisconsin nonstock corporation
By:
---------------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
</TABLE>
C-19
<PAGE>
ANNEX D
VOTING TRUST AND DIVESTITURE AGREEMENT
THIS VOTING TRUST AND DIVESTITURE AGREEMENT (this "AGREEMENT") is made and
entered into as of the day of 2001, by and among Cobalt
Corporation, a Wisconsin stock corporation (the "COMPANY"), Wisconsin United for
Health, Inc., a Wisconsin nonstock corporation, (the "BENEFICIARY"), and
[TRUSTEE], a corporation, as trustee (the "TRUSTEE").
RECITALS
A. The Beneficiary has acquired, contemporaneous with the execution of this
Agreement, 31,313,390 shares of common stock, no par value per share of the
Company (the "Common Stock"), representing approximately 77.5% of the issued and
outstanding shares of Common Stock of the Company.
B. The Company and its wholly owned subsidiary, Blue Cross & Blue Shield
United of Wisconsin, a Wisconsin stock insurance corporation ("New BCBSUW") are
licensees of the BlueCross BlueShield Association (the "BCBSA"), thereby
enabling the Company and New BCBSUW to use the "Blue Cross" and "Blue Shield"
names and related rights (the "Marks").
C. The Beneficiary wishes for its investment in the Company to be as
valuable as possible for so long as such investment is maintained and believes
that the Company's and New BCBSUW's licenses to use the Marks will contribute
substantially to the Company's value and its future prospects.
D. The BCBSA has conditioned the Company's and New BCBSUW's licenses to
continue to use the Marks upon the Company maintaining certain provisions set
forth in this Agreement and in its Articles of Incorporation (as defined below)
(the "BASIC PROTECTIONS") which are intended by the BCBSA to enable the Company
and New BCBSUW to remain independent of the Beneficiary and any other Person (as
defined below) who may in the future acquire shares of Capital Stock (as defined
below) in excess of the Ownership Limit (as defined below) applicable to such
Person.
E. The Beneficiary has agreed to be bound by the Basic Protections,
including (i) a requirement that the Beneficiary deposit into the voting trust
established by this Agreement (the "VOTING TRUST") all of the shares of Capital
Stock Beneficially Owned (as defined below) by the Beneficiary, and (ii) a
requirement that the Beneficiary reduce its Beneficial Ownership (as defined
below) of each class of Capital Stock to less than eighty percent (80%) of the
issued and outstanding shares of each class of Capital Stock by the first
anniversary of the Closing Date (as defined below), reduce its Beneficial
Ownership of each class of Capital Stock to less than fifty percent (50%) of the
issued and outstanding shares of each class of Capital Stock within three
(3) years following the Closing Date and reduce its Beneficial Ownership of each
class of Capital Stock to less than twenty percent (20%) of the issued and
outstanding shares of each class of Capital Stock within five (5) years
following the Closing Date, subject to possible extension as provided herein.
D-1
<PAGE>
AGREEMENT
In consideration of the foregoing and the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the following
meanings:
(A) "ACQUISITION PROPOSAL" means any tender or exchange offer, proposal for
a merger, consolidation or other business combination involving the Company or
any of its subsidiaries or affiliates or any proposal or offer to acquire in any
manner any equity interest in, or any portion of the assets of, the Company or
any of its subsidiaries or affiliates.
(B) AFFILIATE," as used with respect to the Beneficiary, has the meaning
ascribed to such term in Rule 12b-2 of the Securities and Exchange Act of 1934,
as amended, and in effect on November 17, 1993, but shall be deemed to not
include the Company and ITS subsidiaries.
(C) "AGREEMENT" has the meaning set forth in the Preamble hereof.
(D) "ARTICLES OF INCORPORATION" means the Articles of Incorporation of the
Company as in effect at the time that reference is made thereto.
(E) "BCBSA" has the meaning set forth in Recital B hereof.
(F) "BASIC PROTECTIONS" has the meaning set forth in Recital D hereof.
(G) "BENEFICIAL OWNERSHIP," "BENEFICIALLY OWN" or "BENEFICIAL OWNER" have
the meaning set forth in Section 1 of Article VI of the Articles of
Incorporation.
(H) "BENEFICIARY" has the meaning set forth in the Preamble hereof.
(I) "BLACKOUT PERIOD" has the meaning set forth in Section 1 of the
Registration Rights Agreement.
(J) "BOARD OF DIRECTORS" means the Board of Directors of the Company.
(K) "BYLAWS" means the Bylaws of the Company as in effect at the time that
reference is made thereto.
(L) "CAPITAL STOCK" has the meaning set forth in Section 1 of Article VI of
the Articles of Incorporation.
(M) "CHANGE OF CONTROL PROPOSAL" means any agreement, plan or proposal
involving any merger, consolidation or other business combination that, if
consummated in accordance with its terms, would result (i) in any holder of the
voting Capital Stock of the Company, or any other Person, who Beneficially Owned
less than 50.1% of the voting Capital Stock immediately prior to such merger,
consolidation or other business combination owning more than 50.1% of the
outstanding voting securities of the resulting entity arising out of such
merger, consolidation or other business combination, or (ii) in the holders of
the voting Capital Stock of the Company, in the aggregate, immediately prior to
such merger, consolidation or other business combination owning less than 50.1%
of the outstanding voting securities of the resulting entity arising out of such
merger, consolidation or other business combination.
(N) "CLOSING DATE" means the date hereof.
(O) "COMPANY" has the meaning set forth in the Preamble hereof.
D-2
<PAGE>
(P) "COMMON STOCK" has the meaning set forth in Recital A hereof.
(Q) "DELINQUENT SHARES" means any and all shares of Capital Stock
Beneficially Owned by the Beneficiary in excess of the number of shares of
Capital Stock that the Beneficiary may Beneficially Own at the One Year
Divestiture Deadline, the Three Year Divestiture Deadline or the Five Year
Divestiture Deadline, as the case may be, or at any date to which either the One
Year Divestiture Deadline, the Three Year Divestiture Deadline or the Five Year
Divestiture Deadline, as the case may be, may be extended pursuant to
Section 6.04 or Section 6.05 hereof.
(R) "FIVE YEAR DIVESTITURE DEADLINE" means the fifth anniversary of the
Closing Date, extended day for day, up to a maximum of seven hundred thirty
(730) days, for each day the Company is not required to file a registration
Statement (i) in response to an actual demand pursuant to Section 2(d)(iii) of
the Registration Rights Agreement as a result of the Company having previously
effected a registration of Common Stock, provided that there shall be no such
extension if the Company is not required to file a Registration Statement
pursuant to said Section 2(d)(iii) because the Company previously effected a
registration of Common Stock wherein the Beneficiary exercised its Share-Rights
and received the proceeds from the sale of its shares; or (ii) as a result of
the pendency of any Blackout Period.
(S) "INDEMNIFIED PARTY" has the meaning set forth in Section 8.06 hereof.
(T) "INDEPENDENT BOARD MAJORITY" has the meaning set forth in Section 4.B.3
of Article III of the Articles of Incorporation.
(U) "MARKS" has the meaning set forth in Recital B hereof.
(V) "ONE YEAR DIVESTITURE DEADLINE" has the meaning set forth in
Section 6.01 hereof.
(W) "OWNERSHIP LIMIT" has the meaning set forth in Section 1 of Article VI
of the Articles of Incorporation.
(X) "PERSON" means any individual, firm, partnership, corporation
(including, without limitation, a business trust), limited liability company,
trust, unincorporated association, joint stock company, joint venture or other
entity, and shall include any successor (by merger or otherwise) of any such
entity.
(Y) "REGISTRATION RIGHTS AGREEMENT" means that certain Registration Rights
Agreement, of even date herewith, by and between the Company and the
Beneficiary.
(Z) "SHARE-RIGHTS" has the meaning set forth in Section 1 of the
Registration Rights Agreement.
(AA) "SUCCESSOR TRUSTEE" has the meaning set forth in Section 8.04 hereof.
(BB) "THREE YEAR DIVESTITURE DEADLINE" means the third anniversary of the
Closing Date, extended day for day, up to a maximum of three hundred sixty-five
(365) days, for each day the Company is not required to file a registration
Statement (i) in response to an actual demand pursuant to Section 2(d)(iii) of
the Registration Rights Agreement as a result of the Company having previously
effected a registration of Common Stock, provided that there shall be no such
extension if the Company is not required to file a Registration Statement
pursuant to said Section 2(d)(iii) because the Company previously effected a
registration of Common Stock wherein the Beneficiary exercised its Share-Rights
and received the proceeds from the sale of its shares; or (ii) as a result of
the pendency of any Blackout Period.
(CC) "TRUSTEE" has the meaning set forth in Preamble hereof.
(DD) "VOTING TRUST" has the meaning set forth in Recital E hereof.
D-3
<PAGE>
ARTICLE II
DEPOSIT OF STOCK
SECTION 2.01 DELIVERY OF CAPITAL STOCK. Simultaneous with the execution of
this Agreement, all shares of Capital Stock Beneficially Owned by the
Beneficiary will be transferred to the Voting Trust. The Beneficiary shall
transfer any shares of Capital Stock that it shall Beneficially Own after the
Closing Date to the Voting Trust.
SECTION 2.02 CERTIFICATE BOOK AND INSPECTION OF AGREEMENT. The Trustee
shall keep at the address set forth in Section 10.04 hereof correct books of
account of all the Trustee's business and transactions relating to the Voting
Trust, and a book setting forth the number of shares of Capital Stock held by
the Voting Trust. A duplicate of this Agreement and any extension thereof shall
be filed with the Secretary of the Company and shall be open to inspection by a
shareholder upon the same terms as the record of shareholders of the Company is
open to inspection.
ARTICLE III
BENEFICIARY'S INTEREST IN CAPITAL STOCK
SECTION 3.01 RETAINED INTEREST. Subject to the powers, duties and rights
of the Company and the Trustee set forth herein and further subject to the terms
of this Agreement, the Registration Rights Agreement, the Articles of
Incorporation and the Bylaws, the Beneficiary shall retain the entire economic
and beneficial ownership rights in all of the shares of Capital Stock held in
the Voting Trust.
SECTION 3.02 WITHDRAWAL OF SHARES FROM TRUST. The Beneficiary shall not be
entitled to withdraw any shares of Capital Stock from the Voting Trust except to
sell its entire Beneficial Ownership interest in such shares of Capital Stock
PROVIDED that (i) such shares of Capital Stock shall be registered in the name
of the purchaser thereof (or The Depository Trust Company or its nominee) before
being withdrawn from the Voting Trust, (ii) such sale of shares of Capital Stock
shall not be to an Affiliate of the Beneficiary, (iii) such sale of shares of
Capital Stock shall not be made to any Person Beneficially Owning any shares of
Capital Stock in excess of the Ownership Limit applicable to such Person,
(iv) such sale of shares of Capital Stock shall not result in any Person
Beneficially Owning any shares of Capital Stock in excess of the Ownership Limit
applicable to such Person, and (v) such sale of shares of Capital Stock shall
otherwise be permitted pursuant to this Agreement, the Registration Rights
Agreement, the Articles of Incorporation and the Bylaws. The Beneficiary shall
not transfer any of its retained rights or interest in shares of Capital Stock
held in the Voting Trust. Any shares of Capital Stock withdrawn in accordance
with this Section 3.02 shall, upon withdrawal, cease to be subject to the terms
and conditions of this Agreement
ARTICLE IV
TRUSTEE'S POWERS AND DUTIES
SECTION 4.01 LIMITS ON TRUSTEE'S POWERS. The Trustee shall have only the
powers set forth in this Agreement. It is expressly understood and agreed by the
parties hereto that under no circumstances shall the Trustee be personally
liable for the payment of any indebtedness or expenses of this Agreement or be
liable for the breach or failure of any obligation, representation, warranty or
covenant made or undertaken by the Trustee under this Agreement, except as set
forth in this Agreement.
SECTION 4.02 RIGHT TO VOTE. With respect to all shares of Capital Stock
held in the Voting Trust, the Trustee shall have the exclusive and absolute
right in respect of such shares of Capital Stock to vote, assent or consent such
shares of Capital Stock at all times during the term of this Agreement, subject
to Section 4.03 hereof, including, without limitation, the right to vote at any
election of directors and in favor of or in opposition to any resolution,
dissolution, liquidation, merger or consolidation of the Company, any sale of
all or substantially all of the Company's assets, any issuance
D-4
<PAGE>
or authorization of securities, or any action of any character whatsoever which
may be presented at any meeting or require the consent of the shareholders of
the Company.
SECTION 4.03 VOTING ON PARTICULAR MATTERS. In exercising the Trustee's
powers and duties under this Agreement, the Trustee shall at all times vote,
assent or consent all shares of Capital Stock held in the Voting Trust as
follows:
(A) if the matter concerned is the election of directors of the Company, the
Trustee shall vote, assent or consent the whole number of shares of Capital
Stock held by the Voting Trust in favor of each nominee to the Board of
Directors whose nomination has been approved by an Independent Board Majority
and vote against any candidate for the Board of Directors for whom no competing
candidate has been nominated or selected by an Independent Board Majority;
(B) unless such action is initiated by or with the consent of an Independent
Board Majority, the Trustee shall (i) vote against removal of any director of
the Company, (ii) vote against any alteration, amendment, change or addition to
or repeal of the Bylaws or Articles of Incorporation, (iii) not nominate any
candidate to fill any vacancy on the Board of Directors, (iv) not call any
special meeting of the shareholders of the Company, (v) not make any Shareholder
Proposal pursuant to Section 2.14 of the Bylaws, and (vi) not take any action by
voting shares of Capital Stock held by the Voting Trust that would be
inconsistent with or would have the effect, directly or indirectly, of defeating
or subverting the voting requirements contained in Section 4.03(a) hereof or
this Section 4.03(b); and
(C) to the extent not covered by Section 4.03(a) or Section 4.03(b) hereof,
on any action, proposal or resolution requiring prior approval of the Board of
Directors as a prerequisite to become effective the Trustee shall vote in
accordance with the recommendation of the Board of Directors, PROVIDED, HOWEVER,
that on any Change of Control Proposal approved by the Board of Directors and
submitted by the Board of Directors to the shareholders of the Company for a
vote thereon, the Trustee shall vote on such Change of Control Proposal as
directed by the board of directors of the Beneficiary.
(D) notwithstanding anything to the contrary in Section 4.03(a), in the
event that, in any particular election of directors, Non-Independent Candidates
(as defined in Section 3.04(d) of the Bylaws) are eligible for election to the
Board of Directors pursuant to Section 4.A of Article III of the Articles of
Incorporation, then the Trustee shall vote shares of Capital Stock held by the
Beneficiary in the same proportion and for the same director candidates as the
votes cast by the non-Beneficiary shareholders ("Mirror Votes"); provided,
however, that the Trustee shall only cast Mirror Votes for the number of
eligible Non-Independent Candidates under Section 4.A of Article III of the
Articles of Incorporation. The provisions of this Section 4.03(d) shall sunset
at such time as the Beneficiary no longer Beneficially Owns twenty percent (20%)
or more of the issued and outstanding shares of Capital Stock.
SECTION 4.04 PRESENCE AT MEETINGS. The Trustee shall ensure, with respect
to the shares of Capital Stock held in the Voting Trust hereunder, that such
shares of Capital Stock are counted as being present for the purposes of any
quorum required for shareholder action of the Company and to vote, assent or
consent as set forth in this Article IV so long as the Trustee has reasonable
notice of the time to vote, assent or consent (and the Trustee shall be deemed
to have reasonable notice if it shall receive notice within the time periods
under the applicable provisions of the Wisconsin Business Corporation Law).
SECTION 4.05 SALES. The Trustee shall have no authority to sell any of the
shares of Capital Stock deposited pursuant to the provisions of this Agreement,
unless expressly permitted pursuant to the terms hereof. Upon the sale of shares
of Capital Stock in accordance with the terms hereof, the Trustee shall deliver
or cause to be delivered certificates representing such shares of Capital Stock
to the Person entitled thereto.
D-5
<PAGE>
SECTION 4.06 CONTRARY INSTRUCTIONS. The Trustee shall have no obligation
whatsoever to follow any instruction of the Beneficiary if such instruction is
contrary to the terms of this Agreement, unless such contrary instruction shall
be agreed to in writing by the Beneficiary and the Company.
SECTION 4.07 EXECUTION BY TRUSTEE. The Trustee shall execute all documents
as follows:
"By: , not in its individual capacity, but solely as Trustee
By: ." [TO BE PROVIDED BY TRUSTEE PRIOR TO SIGNING]
ARTICLE V
STANDSTILL
SECTION 5.01 ACQUISITION OF CAPITAL STOCK. Throughout the term of this
Agreement, the Beneficiary shall not, directly or indirectly, (i) individually,
or as part of a group, acquire, offer or propose to acquire, or agree to
acquire, by purchase or otherwise, Beneficial Ownership of any shares of Capital
Stock, or direct or indirect rights or options to acquire (through purchase,
exchange, conversion or otherwise) Beneficial Ownership of any shares of Capital
Stock (except by reason of stock dividends, stock splits, spinoffs, mergers,
recapitalizations, combinations, conversions, exchanges of shares, or the like),
or (ii) enter into any agreement, arrangement or understanding, other than for
the sale of shares of Capital Stock in accordance with Section 3.02 hereof and
the Registration Rights Agreement, with any Person, other than the Company, that
would have the effect of increasing such Person's or the Beneficiary's
Beneficial Ownership in any shares of Capital Stock.
SECTION 5.02 SALE OF CAPITAL STOCK. Notwithstanding anything in this
Agreement to the contrary, the Beneficiary shall not sell or otherwise dispose
of any shares of Capital Stock to any Person, whether in a private placement,
pursuant to a registered offering of securities or otherwise, if after giving
effect to the sale or other disposition, and any related transactions, (i) such
Person Beneficially Owns an amount of Capital Stock in excess of the Ownership
Limit applicable to such Person, or (ii) the effect of such sale or other
disposition would be to cause such Person to Beneficially Own an amount of
Capital Stock which would exceed the Ownership Limit applicable to such Person.
SECTION 5.03 NOMINATION OF DIRECTORS. The Beneficiary shall not itself,
nor shall it initiate, suggest or otherwise encourage the Board of Directors or
any other Person to, (i) nominate any individual as a candidate for election to
the Board of Directors, or (ii) appoint any individual to fill any vacancy on
the Board of Directors. The Beneficiary shall not support, endorse or otherwise
encourage the election of any candidate for election to the Board of Directors
other than a candidate or candidates nominated by an Independent Board Majority.
SECTION 5.04 ACQUISITION PROPOSALS. The Beneficiary shall not solicit or
encourage inquiries or proposals with respect to, or provide any confidential
information to, or have any discussions, meetings or other communications with,
any Person relating to an Acquisition Proposal or a Change of Control Proposal;
PROVIDED, HOWEVER, that the Beneficiary may have discussions with the
counter-party to any Change of Control Proposal after such Change of Control
Proposal shall have been approved by the Board of Directors and submitted to the
shareholders of the Company for a vote thereon, and PROVIDED FURTHER, HOWEVER,
that the Beneficiary may have discussions with any Person concerning the sale or
disposal of shares of Capital Stock Beneficially Owned by the Beneficiary in
accordance with Section 3.02 hereof and the Registration Rights Agreement. The
Beneficiary shall not itself, nor shall it initiate, suggest or otherwise
encourage any other Person to, request the Board of Directors to consider,
support or seek any Acquisition Proposal or Change of Control Proposal or take
any action designed, intended or likely to result in an Acquisition Proposal or
Change of Control Proposal being entered into or consummated.
SECTION 5.05 CONTACTS. Subject to Section 5.04 hereof, the Beneficiary
shall not meet or otherwise communicate with any Person that is seeking to
acquire shares of Capital Stock in excess of
D-6
<PAGE>
the Ownership Limit applicable to such Person to the extent that such meeting or
other communication relates to such acquisition of shares of Capital Stock or
Acquisition Proposal. The Beneficiary shall promptly advise the Company in
writing if the Beneficiary or any of its representatives shall have received a
communication, contact or inquiry relating to an Acquisition Proposal and shall
promptly advise the Company of all information available to the Beneficiary
concerning such communication, contact or inquiry relevant to such Acquisition
Proposal.
SECTION 5.06 LITIGATION. The Beneficiary shall not join as a party in any
litigation, suit or cause of action that alleges (i) that any of the Basic
Protections or any provisions of the Articles of Incorporation or Bylaws are not
enforceable in accordance with their terms, (ii) that the Board of Directors
should not enforce the Basic Protections or provisions of the Articles of
Incorporation or Bylaws in any particular case or circumstance, or (iii) that
the Board of Directors should approve, adopt, disapprove or abandon any
Acquisition Proposal or a Change of Control Proposal; provided, however, that
nothing in this Section 5.06 shall prevent the Beneficiary from joining as a
party to any litigation, suit or cause of action that alleges the Board of
Directors should solicit Acquisition Proposals or Change of Control Proposals,
or initiate a bidding process seeking proposals to acquire all of the
outstanding stock of the Company.
SECTION 5.07 CONSULTATION/OBSERVATION.
(A) CONSULTATION RIGHTS. For so long as the Beneficiary Beneficially Owns
twenty percent (20%) or more of the issued and outstanding shares of Capital
Stock, the Company shall consult with the Beneficiary prior to soliciting any
Change of Control Proposal and shall consult with the Beneficiary in the event
that the Company shall receive any Change of Control Proposal. The Beneficiary
shall comply with the same confidentiality and non-disclosure obligations that
apply to officers and directors of the Company with respect to all information
obtained by the Beneficiary in connection with any such consultation. Nothing in
this Agreement shall be construed to limit the rights of the Beneficiary as a
shareholder of the Company regarding Change of Control Proposals or, except as
otherwise provided in Section 5.03 hereof, any other matter pertaining to the
Company. The Company and the Beneficiary shall keep confidential the contents of
all such communications from the Beneficiary, provided that either party may
disclose the contents of such communications if required by law.
(B) OBSERVATION RIGHTS. For so long as the Beneficiary Beneficially Owns
twenty percent (20%) or more of the issued and outstanding shares of Capital
Stock, the Beneficiary, through an authorized representative, shall have the
limited right to attend and observe all meetings of the Board of Directors,
including all executive sessions. Every meeting notice which is provided to
members of the Board of Directors, including all meeting materials provided to
such members in advance of the noticed meeting, shall simultaneously be provided
to the authorized representative of the Beneficiary. The Beneficiary, which for
purposes of this Section 5.07(b) shall be deemed to include its authorized
representative, shall comply with the same confidentiality and non-disclosure
obligations that apply to officers and directors of the Company with respect to
all information obtained by the Beneficiary in connection with any such
observation. Notwithstanding anything to the contrary under this
Section 5.07(b), during any portion of a meeting during which the Board of
Directors addresses an item of business that would pose a conflict of interest
for the Beneficiary, the Beneficiary's authorized representative shall absent
himself or herself from such portion of the meeting.
ARTICLE VI
AGREEMENT TO DIVEST SHARES OF CAPITAL STOCK
SECTION 6.01 SALE OF BENEFICIARY'S CAPITAL STOCK BY ONE YEAR. The
Beneficiary hereby covenants and agrees that it shall sell, convey, or otherwise
dispose of shares of Capital Stock (so that the Beneficiary is no longer a
Beneficial Owner of such shares of Capital Stock) so that the Beneficiary
Beneficially Owns less than eighty percent (80%) of the issued and outstanding
shares of each class of
D-7
<PAGE>
Capital Stock on or prior to the first anniversary of the Closing Date (the "ONE
YEAR DIVESTITURE DEADLINE"). Any such disposition shall comply with the terms of
this Agreement, the Registration Rights Agreement, the Articles of Incorporation
and the Bylaws.
SECTION 6.02 SALE OF BENEFICIARY'S CAPITAL STOCK BY THIRD ANNIVERSARY. The
Beneficiary hereby covenants and agrees that it shall sell, convey, or otherwise
dispose of shares of Capital Stock (so that the Beneficiary is no longer a
Beneficial Owner of such shares of Capital Stock) so that the Beneficiary
Beneficially Owns less than fifty percent (50%) of the issued and outstanding
shares of each class of Capital Stock on or prior to the Three Year Divestiture
Deadline. Any such disposition shall comply with the terms of this Agreement,
the Registration Rights Agreement, the Articles of Incorporation and the Bylaws.
SECTION 6.03 SALE OF BENEFICIARY'S CAPITAL STOCK BY FIFTH ANNIVERSARY. The
Beneficiary hereby covenants and agrees that it shall sell, convey or otherwise
dispose of shares of Capital Stock (so that the Beneficiary is no longer a
Beneficial Owner of such shares of Capital Stock) so that the Beneficiary
Beneficially Owns less than twenty percent (20%) of the issued and outstanding
shares of each class of Capital Stock on or prior to the Five Year Divestiture
Deadline. Any such disposition shall comply with the terms of this Agreement,
the Registration Rights Agreement, the Articles of Incorporation and the Bylaws.
SECTION 6.04 EXTENSION OF DIVESTITURE DEADLINES SOUGHT BY
BENEFICIARY. Notwithstanding Section 6.01, Section 6.02 or Section 6.03 hereof,
the Company shall extend the One Year Divestiture Deadline, the Three Year
Divestiture Deadline or the Five Year Divestiture Deadline, as the case may be,
if (i) the Beneficiary makes a good faith and reasonable determination (and
provides the reasons therefor) that compliance with Section 6.01, Section 6.02
or Section 6.03 hereof, as the case may be, would have a material adverse affect
on the Beneficiary, (ii) the Beneficiary advises the Company of such
determination (and provides the reasons therefor) and makes a reasonable request
for an extension of the One Year Divestiture Deadline, the Three Year
Divestiture Deadline or the Five Year Divestiture Deadline, as the case may be,
and (iii) the Company receives written confirmation from the BCBSA that the
extension of the One Year Divestiture Deadline, the Three Year Divestiture
Deadline or the Five Year Divestiture Deadline, as the case may be, requested by
the Beneficiary, would not cause a violation of the license agreements governing
the Company's use of the Marks. The Company shall not oppose the Beneficiary's
request for an extension of the One Year Divestiture Deadline, the Three Year
Divestiture Deadline or the Five Year Divestiture Deadline, as the case may be,
and shall take reasonable steps, as reasonably requested by the Beneficiary, to
assist the Beneficiary in its efforts to obtain an extension of the One Year
Divestiture Deadline, the Three Year Divestiture Deadline or the Five Year
Divestiture Deadline, as the case may be, PROVIDED, HOWEVER, that the Company
shall have no obligation to, among other things, incur any fees or expenses for
its own account in connection with such assistance. The Beneficiary acknowledges
that, notwithstanding the scope or degree of assistance provided by the Company,
the BCBSA shall have the sole and absolute authority and discretion to determine
whether to consent to an extension of the One Year Divestiture Deadline, the
Three Year Divestiture or the Five Year Divestiture Deadline, as the case may
be, but shall have no obligation to grant such consent, and that in no event
shall the Company have any liability to the Beneficiary or any other Person in
the event that the BCBSA shall determine to deny any such extension request.
SECTION 6.05 EXTENSION OF DIVESTITURE DEADLINES SOUGHT BY
COMPANY. Notwithstanding Section 6.01, Section 6.02 or Section 6.03 hereof, the
Company shall extend the One Year Divestiture Deadline, the Three Year
Divestiture Deadline or the Five Year Divestiture Deadline, as the case may be,
if (i) the Company makes a good faith determination that compliance with
Section 6.01, Section 6.02 or Section 6.03 hereof, as the case may be, would
have an adverse affect on the Company, or any of its shareholders other than the
Beneficiary, and (ii) the Company receives written confirmation from BCBSA that
the extension of the One Year Divestiture Deadline, the Three Year Divestiture
Deadline or the Five Year Divestiture Deadline, as the case may be, requested by
the Company, would not cause
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a violation of the license agreement governing the Company's use of the Marks.
The Beneficiary and the Company acknowledge that the BCBSA shall have the sole
and absolute authority and discretion to determine whether to consent to an
extension of the One Year Divestiture Deadline, the Three Year Divestiture or
the Five Year Divestiture Deadline, as the case may be, but shall have no
obligation to grant such consent, and that in no event shall the Company have
any liability to the Beneficiary or any other Person in the event that the BCBSA
shall determine to deny any such extension request.
SECTION 6.06 FAILURE TO MEET DIVESTITURE DEADLINES. In the event that the
Beneficiary shall fail to meet any of the One Year Divestiture Deadline, the
Three Year Divestiture Deadline or the Five Year Divestiture Deadline, as the
case may be, and an extension thereof shall not have been granted pursuant to
Section 6.04 or Section 6.05 hereof, or shall fail to meet any extended One Year
Divestiture Deadline, Three Year Divestiture Deadline or Five Year Divestiture
Deadline, as the case may be, that may have been granted pursuant to
Section 6.04 or Section 6.05 hereof, then the Company shall arrange for the sale
of the Delinquent Shares in a manner and at such time or times as the Company
shall determine in its sole discretion and the Company shall have no liability
to the Beneficiary or any other Person on the grounds that the Company failed to
take actions which could have produced higher proceeds for the sale of the
Delinquent Shares. In either such case, the Beneficiary shall promptly take all
action reasonably requested by the Company in order to facilitate the sale of
the Delinquent Shares, and the Company shall be entitled to receive customary
representations and warranties from the Beneficiary regarding the Delinquent
Shares (including representations regarding good title to such shares, free and
clear of all liens, claims, security interests and other encumbrances). Until
sold, the Delinquent Shares shall be voted by the Trustee in the manner required
by Section 4.03 of this Agreement, PROVIDED, HOWEVER, that on any Change of
Control Proposal approved by the Board of Directors and submitted by the Board
of Directors to the shareholders of the Company for a vote thereon, the Trustee
shall vote the Delinquent Shares in the exact proportion as all shares of
Capital Stock not held in the Voting Trust shall have been voted upon such
Change of Control Proposal; PROVIDED, FURTHER, that if the Beneficiary is the
sole shareholder of all Capital Stock of the Company at such time, the
Delinquent Shares shall be voted in favor of the Change of Control Proposal.
Upon the sale of the Delinquent Shares, the Trustee shall deliver the shares to
the purchaser thereof as directed by the Company, and all proceeds from such
sale, less all expenses incurred by the Company, shall be distributed to the
Beneficiary as soon as practicable.
ARTICLE VII
DIVIDENDS AND DISTRIBUTIONS
SECTION 7.01 CASH. The Beneficiary shall be entitled to receive payments
equal to the amount of cash dividends, if any, collected or received by the
Trustee or its successor upon the number of shares of Capital Stock held in the
Voting Trust, subject to deduction in respect of expenses, charges or fees
pursuant to Section 8.02 or Section 8.03 hereof. The Trustee and the Company
shall arrange for the direct payment by the Company of all or a portion (as
provided in the preceding sentence) of such cash dividends to the Beneficiary.
SECTION 7.02 STOCK. In the event that the Trustee shall receive, as a
dividend or other distribution upon any shares of Capital Stock held by the
Trustee under this Agreement, any shares of stock or securities convertible into
stock of the Company, the Trustee shall hold the same and said shares shall be
subject to all of the terms and conditions of this Agreement to the same extent
as if originally deposited hereunder.
SECTION 7.03 OTHER DISTRIBUTIONS. In the event that, at any time during
the term of this Agreement, the Trustee shall receive or collect any monies
through a distribution by the Company to its shareholders, other than in payment
of cash dividends, or shall receive any property (other than shares of Capital
Stock or securities convertible into Capital Stock) through a distribution by
the Company to
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its shareholders, the Trustee shall distribute the same to the Beneficiary,
subject to deduction in respect of expenses, charges or fees pursuant to
Section 8.02 or Section 8.03 hereof.
ARTICLE VIII
THE TRUSTEE
SECTION 8.01 USE OF PROXIES. The Trustee may vote, assent or consent with
respect to all shares of Capital Stock held in the Voting Trust in person or by
such person or persons as it may from time to time select as its proxy, PROVIDED
that the Trustee shall at all times do so in conformity with the provisions of
Section 4.03 hereof.
SECTION 8.02 EXPENSES. The Trustee is expressly authorized to incur and
pay such reasonable expenses and charges, to employ and pay such agents,
attorneys and counsel, and to incur and pay such other charges and expenses as
the Trustee may deem reasonably necessary and proper for administering this
Agreement. The Beneficiary and the Company shall reimburse the Trustee equally
for any such expenses and charges, and any such expenses or charges may be
deducted from the cash dividends or other monies received by the Trustee on the
shares of Capital Stock deposited hereunder, to the extent unreimbursed by the
Beneficiary.
SECTION 8.03 COMPENSATION. The Beneficiary and the Company shall
compensate the Trustee equally for its services as Trustee hereunder as provided
in the Trustees' fee schedule, attached hereto as EXHIBIT A, and any such fees
may be deducted from the cash dividends or other monies received by Trustee on
the shares of Capital Stock deposited in the Voting Trust, to the extent
otherwise unpaid by the Beneficiary.
SECTION 8.04 SUCCESSOR TRUSTEE. The Trustee may resign after giving thirty
(30) days' advance written notice of its resignation to the Company and the
Beneficiary, PROVIDED that such resignation shall not become effective until a
reasonably competent alternate (the "SUCCESSOR TRUSTEE") shall have become bound
by this Agreement. The Company may, in addition, terminate the Trustee after
giving thirty (30) days' advance written notice thereof to the Trustee, PROVIDED
that such termination of the Trustee shall not become effective until a
Successor Trustee shall have become bound by this Agreement. If the Trustee
shall resign or be so terminated by the Company, the Trustee shall be replaced
by a Successor Trustee. The Successor Trustee shall be designated by the
Company. The Successor Trustee shall enjoy all the rights, powers, interests and
immunities of the Trustee originally designated and shall agree in writing to be
bound by this Agreement.
SECTION 8.05 QUALIFICATIONS OF TRUSTEE. Throughout the term of the Voting
Trust, the Trustee or Successor Trustee, as the case may be, must satisfy each
of the following qualifications: (i) the Trustee or Successor Trustee, as the
case may be, must be an institution duly authorized to act as such Trustee or
Successor Trustee under the laws of the State of Wisconsin; (ii) the Trustee or
Successor Trustee, as the case may be, must, either on an individual basis or on
a consolidated basis together with its subsidiaries and affiliates, have minimum
shareholders' equity of ; (iii) the Trustee or Successor Trustee, as
the case may be, must not own for its own account more than one percent (1%) of
the issued and outstanding securities of either the Company or the Beneficiary;
and (iv) no director or officer of the Trustee or any Successor Trustee, as the
case may be, may serve as a director or officer of the Company or the
Beneficiary (and no director or officer of the Company or the Beneficiary shall
serve as a director or officer of the Trustee or Successor Trustee, as the case
may be). In the event that the Trustee or Successor Trustee, as the case may be,
shall fail to meet any of the conditions set forth in this Section 8.05, the
Company shall replace the Trustee or the Successor Trustee, as the case may be,
as provided in Section 8.04 hereof.
SECTION 8.06 TRUSTEE'S LIABILITY. The Trustee shall not be liable for any
act or omission undertaken in connection with its powers and duties under this
Agreement, except for any willful misconduct or gross negligence by Trustee. No
Successor Trustee shall be liable for actions or omissions
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of the Trustee or any other Successor Trustee. The Trustee shall not be liable
in acting on any notice, request, consent, certificate, instruction, or other
paper or document or signature reasonably believed by it to be genuine and to
have been signed by the proper party. The Trustee may consult with legal counsel
(reasonably competent for the purpose) and any act or omission undertaken by it
in good faith in accordance with the opinion of such legal counsel shall not
result in any liabilities of the Trustee. The Beneficiary covenants and agrees
to indemnify and hold harmless the Trustee and its affiliates, directors,
officers, employees, agents and advisors (each an "INDEMNIFIED PARTY"), without
duplication, from and against any and all claims, damages, losses, liabilities,
obligations, actions, suits, costs, disbursements and expenses (including
without limitation reasonable fees and expenses of counsel) incurred by any
Indemnified Party, in any way relating to or arising out of or in connection
with or by reason of the preparation for a defense of any investigation,
litigation or proceeding arising out of this Agreement or the shares of Capital
Stock held pursuant to this Agreement, the administration of this Agreement or
the action or inaction of the Trustee hereunder; except to the extent such
claim, damage, loss, liability, obligation, action, suit, cost, disbursement or
expense results from such Indemnified Parties' gross negligence or willful
misconduct. The indemnity set forth in this Section 8.06 shall be in addition to
any other obligations or liabilities of the Beneficiary hereunder or at common
law or otherwise and shall survive the termination of this Agreement.
ARTICLE IX
TERMINATION
SECTION 9.01 TERMINATION. This Agreement shall terminate upon the joint
written notice by the Beneficiary and the Company to the Trustee that the
Beneficiary Beneficially Owns less than five percent (5%) of the issued and
outstanding shares of Common Stock and less than five percent (5%) of the issued
and outstanding shares of every other class of Capital Stock. Otherwise, the
Voting Trust is hereby expressly declared to be and shall be irrevocable.
SECTION 9.02 DELIVERY OF STOCK CERTIFICATE(S). As soon as practicable
after the termination of this Agreement, the Trustee shall deliver to the
Beneficiary stock certificate(s), with the appropriate legend as provided in the
Articles of Incorporation, representing the number of shares of Capital Stock
Beneficially Owned by the Beneficiary at the date of termination, if any, held
by the Voting Trust and upon payment by the Beneficiary of any and all taxes and
other expenses relating to the transfer or delivery of such certificates.
ARTICLE X
MISCELLANEOUS
SECTION 10.01 OWNERSHIP; AUTHORITY. The Beneficiary represents, warrants
and covenants to the Company that (i) as of the effective date of this
Agreement, the Beneficiary is the Beneficial Owner of shares of Common
Stock, (ii) the Beneficiary does not Beneficially Own any shares of Capital
Stock other than shares of Common Stock, and (iii) the Beneficiary has
full power and authority to make, enter into and carry out the terms of this
Agreement.
SECTION 10.02 MERGER, CONSOLIDATION, SALE OF ASSETS. If the Company shall
merge into or consolidate with another corporation or corporations, or if all or
substantially all of the assets of the Company are transferred to another
corporation, the shares of which are issued to shareholders of the Company in
connection with such merger, consolidation or transfer, then the terms "Cobalt
Corporation" or the "Company" shall be construed, so long as the Marks continue
to be licensed by such entity from BCBSA, to include such successor corporation,
and the Trustee shall receive and hold under this Agreement any shares of such
successor corporation received by it on account of its ownership as Trustee of
shares of Capital Stock held by it hereunder prior to such merger, consolidation
or transfer.
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SECTION 10.03 SUCCESSORS. This Agreement shall bind and inure to the
benefit of the Trustee and each and all of its respective heirs, executors,
administrators, successors and assigns. Notwithstanding any provision of this
Agreement, the provisions of this Agreement shall not be binding on any
transferee or purchaser from the Beneficiary (other than a Person who is an
Affiliate of the Beneficiary and except that any and all shares of Capital Stock
sold in violation of this Agreement, the Registration Rights Agreement, the
Articles of Incorporation or the Bylaws shall remain subject to this Agreement).
In case at any time the Trustee shall resign and no Successor Trustee shall have
been appointed within thirty (30) days after notice of such resignation has been
filed and mailed as required by Section 8.04 hereof, the resigning Trustee may
forthwith apply to a court of competent jurisdiction for the appointment of a
Successor Trustee. Such court may thereupon, after such notice, if any, as it
may deem proper and appropriate, appoint a Successor Trustee.
SECTION 10.04 NOTICES. All notices, consents, requests, demands and other
communications hereunder shall be in writing, and shall be deemed to have been
duly given or made: (i) when delivered in person; (ii) three (3) days after
deposited in the United States mail, first class postage prepaid; (iii) in the
case of telegraph or overnight courier services, one (1) business day after
delivery to the telegraph company or overnight courier service with payment
provided; or (iv) in the case of telex or telecopy or fax, when sent,
verification received; in each case addressed as follows:
if to the Company:
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with a copy to:
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if to the Beneficiary:
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with a copy to:
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if to the Trustee:
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with a copy to:
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SECTION 10.05 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Wisconsin, without
reference to conflicts of laws principles.
SECTION 10.06 ATTORNEYS' FEES. In the event of any suit or other
proceeding between the Company and the Beneficiary with respect to any of the
transactions contemplated hereby or the subject matter hereof, the prevailing
party shall, in addition to such other relief as the court may award, be
entitled to recover reasonable attorneys' fees, expenses and costs of
investigation, all as actually incurred, including, without limitation,
attorneys' fees, costs and expenses of investigation incurred in appellate
proceedings or in any action or participation in, or in connection with, any
case or proceeding under Chapters 7, 11 and 13 of the United States Bankruptcy
Code or any successor thereto.
SECTION 10.07 FAIR CONSTRUCTION. This Agreement is the product of
negotiation and shall be deemed to have been drafted by all of the parties. It
shall be construed in accordance with the fair meaning of its terms and its
language shall not be strictly construed against, nor shall ambiguities be
resolved against, any particular party.
SECTION 10.08 ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto regarding the subject matter hereof, and
may not be amended, altered or modified except by a writing signed by the
parties hereto. This Agreement supersedes all prior agreements, representations,
warranties, statements, promises, information, arrangements and understandings,
whether oral or written, express or implied, with respect to the subject matter
hereof, all of which are specifically integrated into this Agreement. No party
hereto shall be bound by or charged with any oral or written agreements,
representations, warranties, statements, promises, information, arrangements or
understandings, express or implied, not specifically set forth herein; and the
parties hereto further acknowledge and agree that in entering into this
Agreement they have not in any way relied and will not rely in any way on any of
the foregoing not specifically set forth herein.
SECTION 10.09 COUNTERPARTS. This Agreement may be executed in two (2) or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one (1) and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
<TABLE>
<S> <C> <C> <C>
COBALT CORPORATION
By:
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Name:
----------------------------------------
Title:
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WISCONSIN UNITED FOR HEALTH, INC.,
By:
---------------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
[TRUSTEE]
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By:
---------------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
</TABLE>
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EXHIBIT A
Trustee Fee Schedule
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ANNEX E
SECTIONS 180.1301 - 180.1331 OF THE WISCONSIN BUSINESS CORPORATION LAW
DISSENTERS' RIGHTS
180.1301. DEFINITIONS
In SectionSection 180.1301 to 180.1331:
(1) "Beneficial shareholder" means a person who is a beneficial owner of
shares held by a nominee as the shareholder.
(1m) "Business combination" has the meaning given in Section 180.1130(3).
(2) "Corporation" means the issuer corporation or, if the corporate action
giving rise to dissenters' rights under Section 180.1302 is a merger or share
exchange that has been effectuated, the surviving domestic corporation or
foreign corporation of the merger or the acquiring domestic corporation or
foreign corporation of the share exchange.
(3) "Dissenter" means a shareholder or beneficial shareholder who is
entitled to dissent from corporate action under Section 180.1302 and who
exercises that right when and in the manner required by SectionSection 180.1320
to 180.1328.
(4) "Fair value", with respect to a dissenter's shares other than in a
business combination, means the value of the shares immediately before the
effectuation of the corporate action to which the dissenter objects, excluding
any appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable. "Fair value", with respect to a dissenter's
shares in a business combination, means market value, as defined in Section
180.1130(9)(a) 1 to 4.
(5) "Interest" means interest from the effectuation date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all of the circumstances.
(6) "Issuer corporation" means a domestic corporation that is the issuer of
the shares held by a dissenter before the corporate action.
180.1302. RIGHT TO DISSENT
(1) Except as provided in sub. (4) and Section 180.1008(3), a shareholder or
beneficial shareholder may dissent from, and obtain payment of the fair value of
his or her shares in the event of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the issuer corporation is
a party if any of the following applies:
1. Shareholder approval is required for the merger by Section
180.1103 or by the articles of incorporation.
2. The issuer corporation is a subsidiary that is merged with its
parent under Section 180.1104.
(b) Consummation of a plan of share exchange if the issuer corporation's
shares will be acquired, and the shareholder or the shareholder holding
shares on behalf of the beneficial shareholder is entitled to vote on the
plan.
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(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the issuer corporation other than in the usual and regular
course of business, including a sale in dissolution, but not including any
of the following:
1. A sale pursuant to court order.
2. A sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale.
(d) Except as provided in sub. (2), any other corporate action taken
pursuant to a shareholder vote to the extent that the articles of
incorporation, bylaws or a resolution of the board of directors provides
that the voting or nonvoting shareholder or beneficial shareholder may
dissent and obtain payment for his or her shares.
(2) Except as provided in sub. (4) and Section 180.1008(3), the articles of
incorporation may allow a shareholder or beneficial shareholder to dissent from
an amendment of the articles of incorporation and obtain payment of the fair
value of his or her shares if the amendment materially and adversely affects
rights in respect of a dissenter's shares because it does any of the following:
(a) Alters or abolishes a preferential right of the shares.
(b) Creates, alters or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares.
(c) Alters or abolishes a preemptive right of the holder of shares to
acquire shares or other securities.
(d) Excludes or limits the right of the shares to vote on any matter or
to cumulate votes, other than a limitation by dilution through issuance of
shares or other securities with similar voting rights.
(e) Reduces the number of shares owned by the shareholder or beneficial
shareholder to a fraction of a share if the fractional share so created is
to be acquired for cash under Section 180.0604.
(3) Notwithstanding sub. (1)(a) to (c), if the issuer corporation is a
statutory close corporation under SectionSection 180.1801 to 180.1837, a
shareholder of the statutory close corporation may dissent from a corporate
action and obtain payment of the fair value of his or her shares, to the extent
permitted under sub. (1)(d) or (2) or Section 180.1803, 180.1813(1)(d) or
(2)(b), 180.1815(3) or 180.1829(1)(c).
(4) Except in a business combination or unless the articles of incorporation
provide otherwise, subs. (1) and (2) do not apply to the holders of shares of
any class or series if the shares of the class or series are registered on a
national securities exchange or quoted on the national association of securities
dealers, inc., automated quotations system on the record date fixed to determine
the shareholders entitled to notice of a shareholders meeting at which
shareholders are to vote on the proposed corporate action.
(5) Except as provided in Section 180.1833, a shareholder or beneficial
shareholder entitled to dissent and obtain payment for his or her shares under
SectionSection 180.1301 to 180.1331 may not challenge the corporate action
creating his or her entitlement unless the action is unlawful or fraudulent with
respect to the shareholder, beneficial shareholder or issuer corporation.
180.1303. DISSENT BY SHAREHOLDERS AND BENEFICIAL SHAREHOLDERS
(1) A shareholder may assert dissenters' rights as to fewer than all of the
shares registered in his or her name only if the shareholder dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
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he or she asserts dissenters' rights. The rights of a shareholder who under this
subsection asserts dissenters' rights as to fewer than all of the shares
registered in his or her name are determined as if the shares as to which he or
she dissents and his or her other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on his or her behalf only if the beneficial shareholder does all of the
following:
(a) Submits to the corporation the shareholder's written consent to the
dissent not later than the time that the beneficial shareholder asserts
dissenters' rights.
(b) Submits the consent under par. (a) with respect to all shares of
which he or she is the beneficial shareholder.
180.1320. NOTICE OF DISSENTERS' RIGHTS
(1) If proposed corporate action creating dissenters' rights under Section
180.1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders and beneficial shareholders are or may be entitled
to assert dissenters' rights under SectionSection 180.1301 to 180.1331 and shall
be accompanied by a copy of those sections.
(2) If corporate action creating dissenters' rights under Section 180.1302
is authorized without a vote of shareholders, the corporation shall notify, in
writing and in accordance with Section 180.0141, all shareholders entitled to
assert dissenters' rights that the action was authorized and send them the
dissenters' notice described in Section 180.1322.
180.1321. NOTICE OF INTENT TO DEMAND PAYMENT
(1) If proposed corporate action creating dissenters' rights under Section
180.1302 is submitted to a vote at a shareholders' meeting, a shareholder or
beneficial shareholder who wishes to assert dissenters' rights shall do all of
the following:
(a) Deliver to the issuer corporation before the vote is taken written
notice that complies with Section 180.0141 of the shareholder's or
beneficial shareholder's intent to demand payment for his or her shares if
the proposed action is effectuated.
(b) Not vote his or her shares in favor of the proposed action.
(2) A shareholder or beneficial shareholder who fails to satisfy sub.
(1) is not entitled to payment for his or her shares under SectionSection
180.1301 to 180.1331.
180.1322. DISSENTERS' NOTICE
(1) If proposed corporate action creating dissenters' rights under Section
180.1302 is authorized at a shareholders' meeting, the corporation shall deliver
a written dissenters' notice to all shareholders and beneficial shareholders who
satisfied Section 180.1321.
(2) The dissenters' notice shall be sent no later than 10 days after the
corporate action is authorized at a shareholders' meeting or without a vote of
shareholders, whichever is applicable. The dissenters' notice shall comply with
Section 180.0141 and shall include or have attached all of the following:
(a) A statement indicating where the shareholder or beneficial
shareholder must send the payment demand and where and when certificates for
certificated shares must be deposited.
(b) For holders of uncertificated shares, an explanation of the extent
to which transfer of the shares will be restricted after the payment demand
is received.
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(c) A form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and that requires the shareholder or beneficial shareholder
asserting dissenters' rights to certify whether he or she acquired
beneficial ownership of the shares before that date.
(d) A date by which the corporation must receive the payment demand,
which may not be fewer than 30 days nor more than 60 days after the date on
which the dissenters' notice is delivered.
(e) A copy of SectionSection 180.1301 to 180.1331.
180.1323. DUTY TO DEMAND PAYMENT
(1) A shareholder or beneficial shareholder who is sent a dissenters' notice
described in Section 180.1322, or a beneficial shareholder whose shares are held
by a nominee who is sent a dissenters' notice described in Section 180.1322,
must demand payment in writing and certify whether he or she acquired beneficial
ownership of the shares before the date specified in the dissenters' notice
under Section 180.1322(2)(c). A shareholder or beneficial shareholder with
certificated shares must also deposit his or her certificates in accordance with
the terms of the notice.
(2) A shareholder or beneficial shareholder with certificated shares who
demands payment and deposits his or her share certificates under sub.
(1) retains all other rights of a shareholder or beneficial shareholder until
these rights are canceled or modified by the effectuation of the corporate
action.
(3) A shareholder or beneficial shareholder with certificated or
uncertificated shares who does not demand payment by the date set in the
dissenters' notice, or a shareholder or beneficial shareholder with certificated
shares who does not deposit his or her share certificates where required and by
the date set in the dissenters' notice, is not entitled to payment for his or
her shares under SectionSection 180.1301 to 180.1331.
180.1324. RESTRICTIONS ON UNCERTIFICATED SHARES
(1) The issuer corporation may restrict the transfer of uncertificated
shares from the date that the demand for payment for those shares is received
until the corporate action is effectuated or the restrictions released under
Section 180.1326.
(2) The shareholder or beneficial shareholder who asserts dissenters' rights
as to uncertificated shares retains all of the rights of a shareholder or
beneficial shareholder, other than those restricted under sub. (1), until these
rights are canceled or modified by the effectuation of the corporate action.
180.1325. PAYMENT
(1) Except as provided in Section 180.1327, as soon as the corporate action
is effectuated or upon receipt of a payment demand, whichever is later, the
corporation shall pay each shareholder or beneficial shareholder who has
complied with Section 180.1323 the amount that the corporation estimates to be
the fair value of his or her shares, plus accrued interest.
(2) The payment shall be accompanied by all of the following:
(a) The corporation's latest available financial statements, audited and
including footnote disclosure if available, but including not less than a
balance sheet as of the end of a fiscal year ending not more than 16 months
before the date of payment, an income statement for that year, a statement
of changes in shareholders' equity for that year and the latest available
interim financial statements, if any.
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(b) A statement of the corporation's estimate of the fair value of the
shares.
(c) An explanation of how the interest was calculated.
(d) A statement of the dissenter's right to demand payment under Section
180.1328 if the dissenter is dissatisfied with the payment.
(e) A copy of SectionSection 180.1301 to 180.1331.
180.1326. FAILURE TO TAKE ACTION
(1) If an issuer corporation does not effectuate the corporate action within
60 days after the date set under Section 180.1322 for demanding payment, the
issuer corporation shall return the deposited certificates and release the
transfer restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the issuer corporation effectuates the corporate action, the
corporation shall deliver a new dissenters' notice under Section 180.1322 and
repeat the payment demand procedure.
180.1327. AFTER-ACQUIRED SHARES
(1) A corporation may elect to withhold payment required by Section 180.1325
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date specified in the dissenters' notice under Section 180.1322(2)(c)
as the date of the first announcement to news media or to shareholders of the
terms of the proposed corporate action.
(2) To the extent that the corporation elects to withhold payment under sub.
(1) after effectuating the corporate action, it shall estimate the fair value of
the shares, plus accrued interest, and shall pay this amount to each dissenter
who agrees to accept it in full satisfaction of his or her demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares, an explanation of how the interest was calculated, and a
statement of the dissenter's right to demand payment under Section 180.1328 if
the dissenter is dissatisfied with the offer.
180.1328. PROCEDURE IF DISSENTER DISSATISFIED WITH PAYMENT OR OFFER
(1) A dissenter may, in the manner provided in sub. (2), notify the
corporation of the dissenter's estimate of the fair value of his or her shares
and amount of interest due, and demand payment of his or her estimate, less any
payment received under Section 180.1325, or reject the offer under Section
180.1327 and demand payment of the fair value of his or her shares and interest
due, if any of the following applies:
(a) The dissenter believes that the amount paid under Section 180.1325
or offered under Section 180.1327 is less than the fair value of his or her
shares or that the interest due is incorrectly calculated.
(b) The corporation fails to make payment under Section 180.1325 within
60 days after the date set under Section 180.1322 for demanding payment.
(c) The issuer corporation, having failed to effectuate the corporate
action, does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within 60 days after the date
set under Section 180.1322 for demanding payment.
(2) A dissenter waives his or her right to demand payment under this section
unless the dissenter notifies the corporation of his or her demand under sub.
(1) in writing within 30 days after the corporation made or offered payment for
his or her shares. The notice shall comply with Section 180.0141.
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180.1330. COURT ACTION
(1) If a demand for payment under Section 180.1328 remains unsettled, the
corporation shall bring a special proceeding within 60 days after receiving the
payment demand under Section 180.1328 and petition the court to determine the
fair value of the shares and accrued interest. If the corporation does not bring
the special proceeding within the 60-day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
(2) The corporation shall bring the special proceeding in the circuit court
for the county where its principal office or, if none in this state, its
registered office is located. If the corporation is a foreign corporation
without a registered office in this state, it shall bring the special proceeding
in the county in this state in which was located the registered office of the
issuer corporation that merged with or whose shares were acquired by the foreign
corporation.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the special proceeding.
Each party to the special proceeding shall be served with a copy of the petition
as provided in Section 801.14.
(4) The jurisdiction of the court in which the special proceeding is brought
under sub. (2) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. An appraiser has the power described in the order appointing him
or her or in any amendment to the order. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the special proceeding is entitled to
judgment for any of the following:
(a) The amount, if any, by which the court finds the fair value of his
or her shares, plus interest, exceeds the amount paid by the corporation.
(b) The fair value, plus accrued interest, of his or her shares acquired
on or after the date specified in the dissenter's notice under Section
180.1322(2)(c), for which the corporation elected to withhold payment under
Section 180.1327.
180.1331. COURT COSTS AND COUNSEL FEES
(1) (a) Notwithstanding SectionSection 814.01 to 814.04, the court in a
special proceeding brought under Section 180.1330 shall determine all costs of
the proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court and shall assess the costs against the corporation,
except as provided in par. (b).
(b) Notwithstanding SectionSection 814.01 and 814.04, the court may assess
costs against all or some of the dissenters, in amounts that the court finds to
be equitable, to the extent that the court finds the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment under Section
180.1328.
(2) The parties shall bear their own expenses of the proceeding, except
that, notwithstanding SectionSection 814.01 to 814.04, the court may also assess
the fees and expenses of counsel and experts for the respective parties, in
amounts that the court finds to be equitable, as follows:
(a) Against the corporation and in favor of any dissenter if the court
finds that the corporation did not substantially comply with SectionSection
180.1320 to 180.1328.
(b) Against the corporation or against a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith
with respect to the rights provided by this chapter.
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(3) Notwithstanding SectionSection 814.01 to 814.04, if the court finds that
the services of counsel and experts for any dissenter were of substantial
benefit to other dissenters similarly situated, the court may award to these
counsel and experts reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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ANNEX F
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
COBALT CORPORATION
ARTICLE I
NAME
The name of the corporation is COBALT CORPORATION (the "CORPORATION").
ARTICLE II
AUTHORIZED CAPITAL STOCK
SECTION 1. The aggregate number of authorized shares of common stock of the
Corporation shall be Seventy-Five Million (75,000,000) shares, designated as
"Common Stock" and having no par value per share.
SECTION 2. The aggregate number of authorized shares of preferred stock of
the Corporation shall be One Million (1,000,000) shares, designated as
"Preferred Stock" and having no par value per share. Authority is hereby vested
in the Board of Directors from time to time to issue the Preferred Stock in one
or more series of any number of shares and, in connection with the creation of
each such series, to fix, by resolution providing for the issue of shares
thereof: (i) the voting rights, if any; (ii) the designations, preferences,
limitations and relative rights of such series in respect to the rate of
dividend, the price, the terms and conditions of redemption; (iii) the amounts
payable upon such series in the event of voluntary or involuntary liquidation;
(iv) sinking fund provisions for the redemption or purchase of such series of
shares; and, (v) if the shares of any series are issued with the privilege of
conversion, the terms and conditions on which such series of shares may be
converted. In addition to the foregoing, to the full extent now or hereafter
permitted by the WBCL, in connection with each issue thereof, the Board of
Directors may at its discretion assign to any series of the Preferred Stock such
other terms, conditions, restrictions, limitations, rights and privileges as it
may deem appropriate. The aggregate number of preferred shares issued and not
canceled of any and all preferred series shall not exceed the total number of
shares of Preferred Stock hereinabove authorized. Each series of Preferred Stock
shall be distinctively designated by letter or descriptive words or both.
ARTICLE III
BOARD OF DIRECTORS
AND SHAREHOLDER MEETINGS
SECTION 1. Except as may be otherwise specifically provided by the WBCL,
all corporate powers shall be exercised by or under the authority of, and the
business and affairs of the corporation managed under the direction of the Board
of Directors.
SECTION 2. A majority of the whole Board of Directors of the Corporation
shall constitute a quorum for the transaction of business and, except as
otherwise provided in these Articles of Incorporation or the Bylaws of the
Corporation, the vote of a majority of the directors present at a meeting at
which a quorum is then present shall be the act of the Board of Directors of the
Corporation. The term "whole Board of Directors of the Corporation," as used in
these Articles of Incorporation, means the total number of directors which the
Corporation would have as of the date of such determination if the Board of
Directors of the Corporation had no vacancies.
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SECTION 3. The Board of Directors of the Corporation shall consist of no
less than 3 nor more than 9 directors, the exact number of directors to be
determined in accordance with the Bylaws of the Corporation. The directors shall
be divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as may be possible, of one-third of the total
number of directors constituting the whole Board of Directors of the
Corporation. Thomas R. Hefty, Janet D. Steiger and Kenneth M. Viste, Jr. are
hereby named as the initial Class I directors to hold office for a term expiring
at the annual meeting of shareholders in 2001 and until their respective
successors are duly elected and qualified or until their earlier resignation or
removal; James L. Forbes, D. Keith Ness and William C. Rupp are hereby named as
the initial Class II directors to hold office for a term expiring at the annual
meeting of shareholders in 2002 and until their respective successors are duly
elected and qualified or until their earlier resignation or removal; and Richard
A. Abdoo, Barry K. Allen and Michael S. Joyce are hereby named as the initial
Class III directors to hold office for a term expiring at the annual meeting of
shareholders in 2003 and until their respective successors are duly elected and
qualified or until their earlier resignation or removal. At each annual meeting
of shareholders beginning in 2001, successors to the class of directors whose
term expires at that annual meeting shall be elected for a three-year term. If
the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as possible, but in no case shall a decrease in the number
of directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his or her term shall
expire and until his or her successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.
SECTION 4.
A. QUALIFICATIONS. No person shall be elected or appointed to, or permitted
to serve on, the Board of Directors of the Corporation unless either (i) such
person would qualify as an Independent Director (as defined in Paragraph B.1 of
this Section 4 of Article IV), or (ii) immediately after giving effect to such
election or appointment, at least eighty percent (80%) of the members of the
whole Board of Directors of the Corporation would qualify as Independent
Directors ("INDEPENDENT DIRECTOR MINIMUM"). The Independent Director Minimum
shall decrease by one-half percent (0.5%) in proportion to each one percent (1%)
reduction in the issued and outstanding Common Stock Beneficially Owned by the
Foundation below eighty percent (80%), PROVIDED, HOWEVER, that the Independent
Director Minimum shall always be greater than fifty percent (50%).
B. DEFINITIONS.
1. "INDEPENDENT DIRECTOR" means (i) any person who was a member of the
Board of Directors of Blue Cross & Blue Shield United of Wisconsin on [DATE
OF CONVERSION], or (ii) any person who, during the entirety of any term of
service on the Board of Directors of the Corporation, satisfies each of the
following conditions: (a) he or she shall have affirmed in writing that, at
the time of his or her election or appointment for such term, he or she was
Independent (as defined in Paragraph B. 2 of this Section 4 of
Article III), and (b) he or she shall have agreed to serve only in the
capacity of an Independent Director for such term.
2. "INDEPENDENT" means a person who, at any given time, (i) shall not
be a Major Participant (as defined in Paragraph B. 4 of this Section 4 of
Article III), (ii) shall not have been nominated to the Board of Directors
of the Corporation at the initiative of a Major Participant, (iii) shall not
have announced a commitment to any proposal made by a Major Participant that
has not been approved by an Independent Board Majority (as defined in
Paragraph B. 3 of this Section 4 of Article III), and (iv) shall not have
been determined by an Independent Board Majority to have been subject to any
relationship, arrangement or circumstance (including any relationship with a
Major Participant) which, in the judgment of such Independent Board
Majority, is reasonably
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possible or likely to interfere to an extent deemed unacceptable by such
Independent Board Majority with his or her exercise of independent judgment
as a director.
3. "INDEPENDENT BOARD MAJORITY" means a group of directors comprised of
(i) a majority of all directors who qualify as Independent Directors at the
time of such determination, and (ii) a majority of all directors at the time
of such determination.
4. "MAJOR PARTICIPANT" means (i) the Foundation (as defined in
Section 1 of Article V hereof) or a Person (as defined in Section 1 of
Article V hereof) who shall, in the judgment of an Independent Board
Majority, succeed to the position held by the Foundation, PROVIDED, that no
Person shall lose his, her or its status as an Independent Director solely
because such Person is a member of the Board of Directors of the Foundation
(as defined in Section 1 of Article V hereof), (ii) a Person who, except as
provided in the next sentence, is an Excess Owner (as defined in Section 1
of Article V hereof), (iii) a Person that has filed proxy materials with the
SEC (as defined in Section 1 of Article V hereof) supporting a candidate for
election to the Board of Directors of the Corporation in opposition to
candidates approved by an Independent Board Majority, (iv) a Person that has
made a proposal, made a filing with the SEC or taken other actions in which
such Person indicates that such Person may seek to become a Major
Participant or which in the judgment of an Independent Board Majority
indicates that it is reasonably possible or likely that such Person will
seek to become a Major Participant, or (v) a Person that is an affiliate or
associate (as defined in Section 1 of Article V hereof) of a Major
Participant. Notwithstanding the foregoing, in the event that an Independent
Board Majority shall have approved an acquisition of outstanding Capital
Stock (as defined in Section 1 of Article V hereof) of the Corporation,
prior to the time such acquisition shall occur, which would otherwise render
a Person a Major Participant and such Person (a) shall not have made any
subsequent acquisition of outstanding Capital Stock of the Corporation not
approved by an Independent Board Majority and (b) shall not have
subsequently taken any of the actions specified in the preceding sentence
without the prior approval of an Independent Board Majority, then such
Person shall not be deemed a Major Participant; PROVIDED that the Foundation
shall always be deemed a Major Participant notwithstanding any approval of
any acquisition of Capital Stock of the Corporation or any other development
or fact of any kind. In the event there shall be any question as to whether
a particular Person is a Major Participant, the determination of an
Independent Board Majority shall be binding upon all parties concerned.
SECTION 5. Each election of directors shall be by plurality vote except
that an individual shall not be elected to the Board of Directors of the
Corporation if such election is prohibited by Section 4 of this Article III or
the individual does not meet the qualifications which may be required by the
Bylaws of the Corporation as constituted at the time of such election.
SECTION 6. Any newly created directorships resulting from any increase in
the number of directors or from the removal, resignation or death of a director
may be filled only by the affirmative vote of an Independent Board Majority and
any directors so chosen shall hold office until the next election of the class
for which such directors shall have been chosen and until their successors shall
be elected and qualified or until their respective earlier resignation, removal
or death.
SECTION 7. Shareholders of the Corporation shall have no right to remove
any director or the whole Board of Directors of the Corporation unless such
removal is for Cause (as defined below in this Section 7 of Article III) and
unless the holders of at least seventy-five percent (75%) of the issued and
outstanding shares of Common Stock then entitled to vote at an election of
directors shall have voted in favor of such removal for Cause. "Cause," as used
in this Section 7, means gross negligence or willful misconduct in the
performance of the director's duty to the Corporation in a matter of substantial
importance to the Corporation.
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SECTION 8. Whenever the holders of any series of Preferred Stock issued by
the Corporation or of any other securities of the Corporation shall have the
right, voting separately by series, to elect directors at an annual or special
meeting of shareholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of these
Articles of Incorporation then applicable thereto.
SECTION 9. Meetings of the shareholders of the Corporation for any purpose
or purposes may be held within or without the State of Wisconsin, as the Bylaws
of the Corporation may provide.
SECTION 10. Subject to the rights, if any, of the holders of Preferred
Stock or any series thereof, special meetings of the shareholders of the
Corporation for any purpose or purposes may be called at any time only by the
Chairman of the Board of the Corporation, the Chief Executive Officer of the
Corporation, the President of the Corporation, an Independent Board Majority or
any other party specifically mandated by the WBCL. Special meetings of the
shareholders of the Corporation may not be called by any other person or persons
or in any other manner.
SECTION 11. The restrictions contained in Wisconsin Statutes
Section 180.1150 shall not apply to shares Beneficially Owned by the Foundation,
by any entity 100% of whose equity interests are owned beneficially by the
Foundation, or by any Trustee or Trustees under the Voting Trust and Divestiture
Agreement.
ARTICLE IV
LIABILITY FOR BREACH OF FIDUCIARY DUTY
A director of the Corporation shall not be personally liable to the
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 following: (i) a willful failure to deal fairly with the
corporation or its shareholders in connection with a matter in which the
director has a material conflict of interest; (ii) a violation of criminal law,
unless the director had reasonable cause to believe that his or her conduct was
lawful or no reasonable cause to believe that his or her conduct was unlawful;
(iii) a transaction from which the director derived an improper personal profit;
(iv) willful misconduct; or (v) liability arising under Section 180.0833 of the
WBCL. In no event shall any director be deemed to breach any fiduciary duty or
other obligation owed to any shareholders of the Corporation or any other person
by reason of (i) his or her failure to vote for (or by reason of such director's
vote against) any proposal or course of action that in such director's judgment
would breach any requirement imposed by the Blue Cross and Blue Shield
Association (or its then successor) (the "BCBSA") or could lead to termination
of any license granted by the BCBSA to the Corporation or any subsidiary or
affiliate of the Corporation, or (ii) his or her decision to vote in favor of
any proposal or course of action that in such director's judgment is necessary
to prevent a breach of any requirement imposed by the BCBSA or could prevent
termination of any license granted by the BCBSA to the Corporation or any
subsidiary or affiliate of the Corporation. If the WBCL is hereafter amended to
authorize, with the approval of a corporation's shareholders, further reductions
in the liability of a corporation's directors for breach of fiduciary duty, then
a director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the WBCL as so amended. Any repeal or modification
of the foregoing provisions of this Article IV by the shareholders of the
Corporation shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification.
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ARTICLE V
RESTRICTION ON TRANSFER
SECTION 1. The following definitions shall apply with respect to this
Article V:
(A) "AFFILIATE" and "ASSOCIATE" have the respective meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act.
(B) a Person shall be deemed to "BENEFICIALLY OWN," be the "BENEFICIAL
OWNER" of or have "BENEFICIAL OWNERSHIP" of any Capital Stock:
(1) in which such Person shall then have a direct or indirect beneficial
ownership interest;
(2) in which such Person shall have the right to acquire any direct or
indirect beneficial ownership interest pursuant to any option or other
agreement (either immediately or after the passage of time or the occurrence
of any contingency);
(3) which such Person shall have the right to vote;
(4) in which such Person shall hold any other interest which would count
in determining whether such Person would be required to file a Schedule 13D
or Schedule 13G under Regulation 13D-G under the Exchange Act; or
(5) which shall be Beneficially Owned (under the concepts provided in
the preceding clauses) by any affiliate or associate of the particular
Person or by any other Person with whom the particular Person or any such
affiliate or associate has any agreement, arrangement or understanding
(other than customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of securities and
other than pursuant to the Registration Rights Agreement);
PROVIDED, HOWEVER, that:
(6) a Person shall not be deemed to Beneficially Own, be the Beneficial
Owner of, or have Beneficial Ownership of Capital Stock by reason of
possessing the right to vote if (i) such right arises solely from a
revocable proxy or consent given to such Person in response to a public
proxy or consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations promulgated under the Exchange Act, and
(ii) such Person is not the Excess Owner of any Excess Shares, is not named
as holding a beneficial ownership interest in any Capital Stock in any
filing on Schedule 13D or Schedule 13G, and is not an affiliate or associate
of any such Excess Owner or named Person;
(7) a member of a national securities exchange or a registered
depositary shall not be deemed to Beneficially Own, be the Beneficial Owner
of or have Beneficial Ownership of Capital Stock held directly or indirectly
by it on behalf of another Person (and not for its own account) solely
because such member or depositary is the record holder of such Capital
Stock, and (in the case of such member), pursuant to the rules of such
exchange, such member may direct the vote of such Capital Stock without
instruction on matters which are uncontested and do not affect substantially
the rights or privileges of the holders of the Capital Stock to be voted,
but is otherwise precluded by the rules of such exchange from voting such
Capital Stock without instruction on either contested matters or matters
that may affect substantially the rights or the privileges of the holders of
such Capital Stock to be voted;
(8) a Person who in the ordinary course of business is a pledgee of
Capital Stock under a written pledge agreement shall not be deemed to
Beneficially Own, be the Beneficial Owner of or have Beneficial Ownership of
such pledged Capital Stock solely by reason of such pledge until the
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pledgee has taken all formal steps which are necessary to declare a default
or has otherwise acquired the power to vote or to direct the vote of such
pledged Capital Stock, PROVIDED THAT:
(A) the pledge agreement is bona fide and was not entered into with
the purpose nor with the effect of changing or influencing the control of
the Corporation, nor in connection with any transaction having such
purpose or effect, including any transaction subject to Rule 13d-3(b)
promulgated under the Exchange Act; and
(B) the pledge agreement does not grant to the pledgee the right to
vote or to direct the vote of the pledged securities prior to the time
the pledgee has taken all formal steps which are necessary to declare a
default;
(9) a Person engaged in business as an underwriter or a placement agent
for securities who enters into an agreement to acquire or acquires Capital
Stock solely by reason of its participation in good faith and in the
ordinary course of its business in the capacity of underwriter or placement
agent in any underwriting or agent representation registered under the
Securities Act, as a bona fide private placement, a resale under Rule 144A
promulgated under the Securities Act, or in any foreign or other offering
exempt from the registration requirements under the Securities Act shall not
be deemed to Beneficially Own, be the Beneficial Owner of or have Beneficial
Ownership of such securities until the expiration of forty (40) days after
the date of such acquisition so long as (i) such Person does not vote such
Capital Stock during such period, and (ii) such participation is not with
the purpose or with the effect of changing or influencing control of the
Corporation, nor in connection with or facilitating any transaction having
such purpose or effect, including any transaction subject to Rule 13d-3(b)
promulgated under the Exchange Act;
(10) if the Corporation shall sell shares in a transaction not involving
any public offering, then each purchaser in such offering shall be deemed to
obtain Beneficial Ownership in such offering of the shares purchased by such
purchaser, but no particular purchaser shall be deemed to Beneficially Own
or have acquired Beneficial Ownership or be the Beneficial Owner in such
offering of shares purchased by any other purchaser solely by reason of the
fact that all such purchasers are parties to customary agreements relating
to the purchase of equity securities directly from the Corporation in a
transaction not involving a public offering, PROVIDED THAT:
(A) all the purchasers are persons specified in
Rule 13d-l(b)(l)(ii) promulgated under the Exchange Act;
(B) the purchase is in the ordinary course of each purchaser's
business and not with the purpose nor with the effect of changing or
influencing control of the Corporation, nor in connection with or as a
participant in any transaction having such purpose or effect, including
any transaction subject to Rule 13d-3(b) promulgated under the Exchange
Act;
(C) there is no agreement among or between any purchasers to act
together with respect to the Corporation or its securities except for the
purpose of facilitating the specific purchase involved; and
(D) the only actions among or between any purchasers with respect to
the Corporation or its securities subsequent to the closing date of the
nonpublic offering are those which are necessary to conclude ministerial
matters directly related to the completion of the offer or sale of the
securities sold in such offering;
(11) the Share Escrow Agent shall not be deemed to be the Beneficial
Owner of any Excess Shares held by such Share Escrow Agent pursuant to an
Excess Share Escrow Agreement, nor shall any such Excess Shares be
aggregated with any other shares of Capital Stock held by affiliates or
associates of such Share Escrow Agent; and
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(12) a Person shall not be deemed to Beneficially Own, be the Beneficial
Owner of, or have Beneficial Ownership of Capital Stock by reason of the
fact that such Person shall have entered into an agreement with the
Corporation pursuant to which such Person, or its associates or affiliates,
shall, upon consummation of the transaction described in such agreement,
acquire, directly or indirectly, all of the Capital Stock of the Corporation
(by means of a merger, consolidation, stock purchase or otherwise), PROVIDED
THAT:
(A) such agreement shall have been approved by an Independent Board
Majority prior to the execution thereof by the Corporation;
(B) neither such Person nor its associates or affiliates shall have
been the Excess Owner of any Excess Shares immediately prior to the
execution of such agreement;
(C) the consummation of the transaction described in such agreement
shall be subject to the approval of the holders of Capital Stock of the
Corporation entitled to vote thereon under the WBCL or pursuant to other
applicable law or the rules of the New York Stock Exchange, Inc. or any
other national securities exchange or automated quotation system on which
any of the Capital Stock shall then be listed or quoted; and
(D) neither such Person nor its associates or affiliates shall have
made any acquisition of Capital Stock after the execution of such
agreement other than pursuant to the terms of such agreement.
Anything herein to the contrary notwithstanding, a Person shall continue to be
deemed to Beneficially Own, be the Beneficial Owner of, and have Beneficial
Ownership of, such Person's Excess Shares which shall have been conveyed, or
shall be deemed to have been conveyed, to the Share Escrow Agent in accordance
with this Article V until such time as such Excess Shares shall have been sold
by the Share Escrow Agent as provided in this Article V.
(C) "BCBSA" has the meaning set forth in Article IV hereof.
(D) "CAPITAL STOCK" means shares (or any basic unit) of any class or series
of any equity security, voting or non-voting, common or preferred, which the
Corporation may at any time issue or be authorized to issue.
(E) "COMMON STOCK" has the meaning set forth in Section 1 of Article II
hereof.
(F) "EXCESS OWNER" means a Person who Beneficially Owns Excess Shares.
(G) "EXCESS SHARES" means (i) with respect to any Institutional Investor,
all the shares of Capital Stock Beneficially Owned by such Institutional
Investor in excess of the Institutional Investor Ownership Limit, (ii) with
respect to any Noninstitutional Investor, all the shares of Capital Stock
Beneficially Owned by such Noninstitutional Investor in excess of the
Noninstitutional Investor Ownership Limit, and (iii) with respect to any Person,
all the shares of Capital Stock Beneficially Owned by such Person in excess of
the General Ownership Limit; PROVIDED, HOWEVER, that in the event the Excess
Shares with respect to such Person results from the Beneficial Ownership of
Capital Stock of such Person being aggregated with the Beneficial Ownership of
Capital Stock of any other Person, then the number of Excess Shares with respect
to such Person shall be allocated PRO RATA in proportion to each Person's total
Beneficial Ownership (as calculated without giving effect to this Article V).
All Excess Shares shall be deemed to be issued and outstanding shares of Capital
Stock even when subject to or held pursuant to this Article V.
(H) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended or
supplemented and any other federal law which the BCBSA shall reasonably judge to
have replaced or supplemented the coverage of the Exchange Act.
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<PAGE>
(I) "FOUNDATION" means Wisconsin United for Health, Inc., a nonstock
corporation organized under Chapter 181 of the Wisconsin Statutes.
(J) "GENERAL OWNERSHIP LIMIT" means any combination of shares of Capital
Stock in any series or class (including Common Stock) that represents 20% of the
ownership interest in the Corporation at the time of determination. Unless an
Independent Board Majority otherwise determines pursuant to the authority
granted in Section 15 of this Article V, the manner in which shares in different
classes or series of Capital Stock shall be counted to determine the ownership
interest represented by any particular combination of those shares of Capital
Stock pursuant to clause (ii) above shall be the same manner prescribed by the
BCBSA under the License Agreements. So long as Common Stock (carrying identical
voting rights per share) shall be the only class of Capital Stock issued by the
Corporation, the General Ownership Limit shall be irrelevant for purposes of
this Article V because the Institutional Investor Ownership Limit shall
exclusively determine whether any shares of Common Stock owned by any
Institutional Investor constitute Excess Shares and the Noninstitutional
Investor Ownership Limit shall exclusively determine whether any shares of
Common Stock owned by any Noninstitutional Investor constitute Excess Shares.
If, however, the Corporation were to issue a series of Preferred Stock or other
class of Capital Stock other than Common Stock, then (i) shares Beneficially
Owned by an Institutional Investor in excess of either the Institutional
Investor Ownership Limit or the General Ownership Limit would constitute Excess
Shares, and (ii) shares Beneficially Owned by a Noninstitutional Investor in
excess of either the Noninstitutional Investor Ownership Limit or the General
Ownership Limit would constitute Excess Shares.
(K) "INSTITUTIONAL INVESTOR" means any Person that is an entity or group
identified in Rule 13d-l(b)(1)(ii) under the Exchange Act as constituted on
June 1, 1997, PROVIDED THAT every filing made by such Person with the SEC under
Regulation 13D-G (or any successor Regulation) under the Exchange Act with
respect to such Person's Beneficial Ownership of Capital Stock by such Person
shall have contained a certification identical to the one required by Item 10 of
Schedule 13G constituted on June 1, 1997, or such other affirmation as shall be
approved by the BCBSA and the Board of Directors.
(L) "INSTITUTIONAL INVESTOR OWNERSHIP LIMIT" means that number of shares of
Capital Stock one share lower than the number of shares of Capital Stock which
would represent 10% of the Voting Power of all shares of Capital Stock issued
and outstanding at the time of determination.
(M) "LICENSE AGREEMENTS" means the license agreements as constituted from
time to time between the Corporation or any of its subsidiaries or affiliates
and the BCBSA, including any and all addenda thereto, with respect to, among
other things, the "Blue Cross" and "Blue Shield" names and marks.
(N) "NONINSTITUTIONAL INVESTOR" means any Person that is not an
Institutional Investor.
(O) "NONINSTITUTIONAL INVESTOR OWNERSHIP LIMIT" means that number of shares
of Capital Stock one share lower than the number of shares of Capital Stock
which would represent 5% of the Voting Power of all shares of Capital Stock
issued and outstanding at the time of determination.
(P) "ORIGINAL FOUNDATION SHARES" has the meaning set forth in Section 14 of
this Article V.
(Q) "OWNERSHIP LIMIT" means each of the General Ownership Limit, the
Institutional Investor Ownership Limit and the Noninstitutional Investor
Ownership Limit.
(R) "PERMITTED TRANSFEREE" means a Person whose acquisition of Capital Stock
will not violate any Ownership Limit applicable to such Person.
(S) "PERSON" means any individual, firm, partnership, corporation, limited
liability company, trust, association, joint venture or other entity, and shall
include any successor (by merger or otherwise) or of any such entity.
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<PAGE>
(T) "REGISTRATION RIGHTS AGREEMENT" means that certain Registration Rights
Agreement, between the Corporation and the Foundation, dated .
(U) "SCHEDULE 13D" means a report on Schedule 13D under Regulation 13D-G
under the Exchange Act and any report which may be required in the future under
any requirements which the BCBSA shall reasonably judge to have any of the
purposes served by Schedule 13D.
(V) "SCHEDULE 13G" means a report on Schedule 13G under Regulation 13D-G
under the Exchange Act and any report which may be required in the future under
any requirements which the BCBSA shall reasonably judge to have any of the
purposes served by Schedule 13G.
(W) "SEC" means the United States Securities and Exchange Commission and any
successor federal agency having similar powers.
(X) "SECURITIES ACT" means the Securities Act of 1933, as amended or
supplemented, and any other federal law which the BCBSA shall reasonably judge
to have replaced or supplemented the coverage of the Securities Act.
(Y) "SHARE ESCROW AGENT" means the Person appointed by the Corporation to
act as escrow agent with respect to the Excess Shares.
(Z) "TRANSFER" means any of the following which would affect the Beneficial
Ownership of Capital Stock: (a) any direct or indirect sale, transfer, gift,
hypothecation, pledge, assignment, devise or other disposition of Capital Stock
(including (i) the granting of any option or entering into any agreement for the
sale, transfer or other disposition of Capital Stock, or (ii) the sale,
transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for Capital Stock), whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise, and (b) any other transaction or event, including
without limitation a merger, consolidation, or acquisition of any Person, the
expiration of a voting trust which is not renewed, or the aggregation of the
Capital Stock Beneficially Owned by one Person with the Capital Stock
Beneficially Owned by any other Person.
(AA) "VOTING POWER" means the voting power attributable to the shares of
Capital Stock issued and outstanding at the time of determination and shall be
equal to the number of all votes which could be cast in any election of any
director which could be accounted for by all shares of Capital Stock issued and
outstanding at the time of determination. If, in connection with an election for
any particular position on the Board of Directors of the Corporation, shares in
different classes or series are entitled to be voted together for purposes of
such election, then in determining the number of "all votes which could be cast"
in the election for that particular position for purposes of the preceding
sentence, the number shall be equal to the number of votes which could be cast
in the election for that particular position if all shares entitled to be voted
in such election (regardless of series or class) were in fact voted in such
election. For any particular Person, the Voting Power of such Person shall be
equal to the quotient, expressed as a percentage, the numerator of which shall
be the number of votes that could be cast with respect to shares of Capital
Stock Beneficially Owned by such Person (including, for these purposes, (i) any
Excess Shares Beneficially Owned by such Person and held and/or voted by the
Escrow Share Agent, and (ii) any shares of Capital Stock Beneficially Owned by
such Person, but not yet issued) and the denominator of which shall be (a) the
total number of votes that could be cast by all shareholders of the Corporation
(including such particular Person) based upon the issued and outstanding shares
of Capital Stock at the time of determination plus (b) any shares of Capital
Stock that have not been issued but which were counted in the determination of
the numerator. If the Corporation shall issue any series or class of shares for
which positions on the Board of Directors of the Corporation are reserved or
shall otherwise issue shares which have voting rights which can arise or vary
based upon terms governing that class or series, then the percentage of the
voting power represented by the shares of Capital Stock Beneficially Owned by
any particular Person shall be the
F-9
<PAGE>
highest percentage of the total votes which could be accounted for by those
shares in any election of any director.
(BB) "VOTING TRUST AND DIVESTITURE AGREEMENT" means that certain Voting
Trust and Divestiture Agreement among the Corporation, the Foundation, BC
Holding LLC, a Wisconsin limited liability company, and the trustee named
therein, dated .
SECTION 2.
(A) No Institutional Investor shall Beneficially Own shares of Capital Stock
in excess of the Institutional Investor Ownership Limit. No Noninstitutional
Investor shall Beneficially Own shares of Capital Stock in excess of the
Noninstitutional Investor Ownership Limit. No Person shall Beneficially Own
shares of Capital Stock in excess of the General Ownership Limit.
(B) The occurrence of any Transfer which would cause any Person to
Beneficially Own Capital Stock in excess of any Ownership Limit applicable to
such Person shall have the following legal consequences: (i) such Person shall
receive no rights to the Excess Shares resulting from such Transfer (other than
as specified in this Article V), and (ii) the Excess Shares resulting from such
Transfer immediately shall be deemed to be conveyed to the Share Escrow Agent.
(C) Notwithstanding the foregoing, a Person's Beneficial Ownership of
Capital Stock shall not be deemed to exceed any Ownership Limit applicable to
such Person if (A) the Excess Shares with respect to such Person do not exceed
the lesser of 1% of the Voting Power of the Capital Stock or 1% of the ownership
interest in the Corporation, and (B) within fifteen (15) days of the time when
such Person becomes aware of the existence of such Excess Shares, such Person
transfers or otherwise disposes of sufficient shares of Capital Stock so that
such Person's Beneficial Ownership of Capital Stock shall not exceed any
Ownership Limit.
SECTION 3. Any Excess Owner who acquires or attempts to acquire shares of
Capital Stock in violation of Section 2 of this Article V, or any Excess Owner
who is a transferee such that any shares of Capital Stock are deemed Excess
Shares, shall immediately give written notice to the Corporation of such event
and shall provide to the Corporation such other information as the Corporation
may request.
SECTION 4. The Corporation shall have the right to take such actions as it
deems necessary to give effect to the transfer of Excess Shares to the Share
Escrow Agent, including refusing to give effect to the Transfer or any
subsequent Transfer of Excess Shares by the Excess Owner on the books of the
Corporation. Excess Shares so held or deemed held by the Share Escrow Agent
shall be issued and outstanding shares of Capital Stock. An Excess Owner shall
have no rights in such Excess Shares except as expressly provided in this
Article V and the administration of the Excess Shares escrow shall be governed
by the terms of an Excess Share Escrow Agreement to be entered into between the
Corporation and the Share Escrow Agent and having such terms as the Corporation
shall deem appropriate.
SECTION 5. The Share Escrow Agent, as record holder of Excess Shares, shall
be entitled to receive all dividends and distributions as may be declared by the
Board of Directors of the Corporation with respect to Excess Shares (the "EXCESS
SHARE DIVIDENDS") and shall hold the Excess Share Dividends until disbursed in
accordance with the provisions of Section 9 of this Article V. In the event an
Excess Owner receives any Excess Share Dividends (including without limitation
Excess Share Dividends received prior to the time the Corporation determines
that Excess Shares exist with respect to such Excess Owner), such Excess Owner
shall repay such Excess Share Dividends to the Share Escrow Agent or the
Corporation. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any Excess Share Dividends paid to
an Excess Owner, including, if necessary, withholding any portion of future
dividends or distributions payable on shares of Capital
F-10
<PAGE>
Stock Beneficially Owned by any Excess Owner (including future dividends on
distributions on shares of Capital Stock which fall below the Ownership Limit as
well as on Excess Shares), and, as soon as practicable following the
Corporation's receipt or withholding thereof, shall pay over to the Share Escrow
Agent the dividends so received or withheld, as the case may be.
SECTION 6. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of, or any distribution of the assets of, the
Corporation, the Share Escrow Agent shall be entitled to receive, ratably with
each other holder of Capital Stock of the same class or series, that portion of
the assets of the Corporation that shall be available for distribution to the
holders of such class or series of Capital Stock. The Share Escrow Agent shall
distribute to the Excess Owner the amounts received upon such liquidation,
dissolution, winding up or distribution in accordance with the provisions of
Section 9 of this Article V.
SECTION 7. The Share Escrow Agent shall be entitled to vote all Excess
Shares. The Share Escrow Agent shall vote, consent, or assent Excess Shares as
follows:
(A) to vote in favor of each nominee to the Board of Directors of the
Corporation whose nomination has been approved by an Independent Board Majority
and to vote against any candidate for the Board of Directors of the Corporation
for whom no competing candidate has been nominated or selected by an Independent
Board Majority;
(B) unless such action is initiated by or with the consent of the Board of
Directors of the Corporation, (i) to vote against removal of any director of the
Corporation, (ii) to vote against any alteration, amendment, change or addition
to or repeal (collectively, "CHANGE") of the Bylaws or these Articles of
Incorporation, (iii) not to nominate any candidate to fill any vacancy of the
Board of Directors of the Corporation, (iv) not to call any special meeting of
the shareholders of the Corporation, and (v) not take any action by voting such
Excess Shares that would be inconsistent with or would have the effect, directly
or indirectly, of defeating or subverting the voting requirements contained in
Section 7(a) of this Article V or this Section 7(b) of Article V;
(C) to the extent not covered by clauses (a) and (b) above, on any action,
proposal or resolution requiring the approval of the Board of Directors of the
Corporation as a prerequisite to entitle the shareholders of the Corporation to
vote thereon and as a prerequisite to become effective, to vote in the same
proportion as all other votes represented by shares of Capital Stock are cast
with respect to such action, proposal or resolution; and
(D) to the extent not covered by clauses (a), (b) and (c) above, to vote as
recommended by the Board of Directors of the Corporation.
SECTION 8.
(A) The Share Escrow Agent shall hold all Excess Shares until such time as
they are sold in accordance with this Section 8 of Article V.
(B) The Share Escrow Agent shall sell or cause the sale of Excess Shares at
such time or times and on such terms as shall be determined by the Corporation.
The Share Escrow Agent shall have the right to take such actions as the
Corporation shall deem appropriate to ensure that sales of Excess Shares shall
be made only to Permitted Transferees.
(C) The Share Escrow Agent shall have the power to convey to the purchaser
of any Excess Shares sold by the Share Escrow Agent ownership of such Excess
Shares free of any interest of the Excess Owner of those Excess Shares and free
of any other adverse interest arising through the Excess Owner. The Share Escrow
Agent shall be authorized to execute any and all documents sufficient to
transfer title to any Permitted Transferee.
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<PAGE>
(D) Upon acquisition by any Permitted Transferee of any Excess Shares sold
by the Share Escrow Agent or the Excess Owner, such shares shall upon such sale
cease to be Excess Shares and shall become regular shares of Capital Stock in
the class or series to which such Excess Shares otherwise belong, and the
purchaser of such shares shall acquire such shares free of any claims of the
Share Escrow Agent or the Excess Owner.
(E) To the extent permitted by the WBCL or other applicable law, neither the
Corporation, the Share Escrow Agent nor anyone else shall have any liability to
the Excess Owner or anyone else by reason of any action or inaction the
Corporation or the Share Escrow Agent or any director, officer or agent of the
Corporation shall take which any of them shall in good faith believe to be
within the scope of their authority under this Article V or by reason of any
decision as to when or how to sell any Excess Shares or by reason of any other
action or inaction in connection with the activities permitted under this
Article V which does not constitute gross negligence or willful misconduct.
Without limiting by implication the scope of the preceding sentence, to the
extent permitted by law, neither the Share Escrow Agent nor the Corporation nor
any director, officer or agent of the Corporation (a) shall have any liability
on grounds that any of them failed to take actions which would or could have
produced higher proceeds for any of the Excess Shares or by reason of the manner
or timing for any disposition of any Excess Shares, and (b) shall be deemed to
be a fiduciary or agent of any Excess Owner.
SECTION 9. The proceeds from the sale of the Excess Shares and any Excess
Share Dividends shall be distributed as follows: (i) FIRST, to the Share Escrow
Agent for any costs and expenses incurred in respect of its administration of
the Excess Shares that have not theretofore been reimbursed by the Corporation;
(ii) SECOND, to the Corporation for all costs and expenses incurred by the
Corporation in connection with the appointment of the Share Escrow Agent, the
payment of fees to the Share Escrow Agent with respect to the services provided
by the Share Escrow Agent in respect of the escrow and for any other direct or
indirect and out of pocket expenses incurred by the Corporation in connection
with the Excess Shares, including any litigation costs and expenses, and all
funds expended by the Corporation to reimburse the Share Escrow Agent for costs
and expenses incurred by the Share Escrow Agent in respect of its administration
of the Excess Shares and for all fees, disbursements and expenses incurred by
the Share Escrow Agent in connection with the sale of the Excess Shares; and
(iii) THIRD, the remainder thereof (as the case may be) to the Excess Owner;
PROVIDED, HOWEVER, if the Corporation shall have any questions as to whether any
security interest or other interest adverse to the Excess Owner shall have
existed with respect to any Excess Shares, neither the Share Escrow Agent, the
Corporation nor anyone else shall have the obligation to disburse proceeds for
those shares until the Share Escrow Agent shall be provided with such evidence
as the Corporation shall deem necessary to determine the parties who shall be
entitled to such proceeds.
SECTION 10. Each certificate for Capital Stock shall bear the following
legend:
"The shares of stock represented by this certificate are subject to
restrictions on ownership and transfer. All capitalized terms in this
legend have the meanings ascribed to them in the Corporation's Articles
of Incorporation, as the same may be amended from time to time, a copy
of which, including the restrictions on ownership and transfer, shall be
sent without charge to each shareholder who so requests. No Person shall
Beneficially Own shares of Capital Stock in excess of any Ownership
Limit applicable to such Person. Subject to certain limited specific
exemptions, (i) Beneficial Ownership of that number of shares of Capital
Stock by an Institutional Investor which would represent 10% or more of
the Voting Power would exceed the Institutional Investor Ownership
Limit, (ii) Beneficial Ownership of that number of shares of Capital
Stock by a Noninstitutional Investor which would represent 5% or more of
the Voting Power would exceed the Noninstitutional Investor Ownership
Limit, and (iii) Beneficial Ownership of any combination of shares in
any series or class of Capital Stock (including Common Stock) that
represents 20% or more of the ownership interest in the Corporation
(determined as provided in the Corporation's Articles of Incorporation)
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<PAGE>
would exceed the General Ownership Limit. Any Person who attempts to
Beneficially Own shares of Capital Stock in violation of this limitation
must immediately notify the Corporation. Upon the occurrence of any
event that would cause any Person to exceed any Ownership Limit
applicable to such Person (including without limitation the expiration
of a voting trust that entitled such Person to an exemption from any
Ownership Limit applicable to such Person), all shares of Capital Stock
Beneficially Owned by such Person in excess of any Ownership Limit
applicable to such Person shall automatically be deemed Excess Shares
and shall be transferred immediately to the Share Escrow Agent and shall
be subject to the provisions of the Corporation's Articles of
Incorporation. The foregoing summary of the restrictions on ownership
and transfer is qualified in its entirety by reference to the
Corporation's Articles of Incorporation."
The legend may be amended from time to time to reflect amendments to these
Articles of Incorporation, or revisions to the Ownership Limits in accordance
with Section 15 of this Article V.
SECTION 11. Subject to Section 12 of this Article V, nothing contained in
this Article V or in any other provision of these Articles of Incorporation
shall limit the authority of the Corporation to take such other action (not
specifically prohibited by these Articles of Incorporation) as it deems
necessary or advisable to protect the Corporation and the interests of its
shareholders.
SECTION 12. Nothing contained in these Articles of Incorporation shall
preclude the settlement of any transactions entered into through the facilities
of the New York Stock Exchange, Inc. or any other exchange or through the means
of any automated quotation system now or hereafter in effect.
SECTION 13. Except in the case of manifest error, any interpretation of
this Article V by the Board of Directors of the Corporation shall be conclusive
and binding; PROVIDED, HOWEVER, that in making any such interpretation, the
Board of Directors of the Corporation shall consider, wherever relevant, the
Corporation's obligations to the BCBSA.
SECTION 14. This Article V shall not be applicable with respect to any
shares of Capital Stock (i) owned by the Foundation which were issued by the
Corporation ("Original Foundation Shares"), or (ii) acquired by the Foundation
with respect to Original Foundation Shares as a result of a stock dividend,
stock split, conversion, recapitalization, exchange of shares or the like, so
long as such shares of Capital Stock shall be Beneficially Owned by the
Foundation or by a trustee for the account of the Foundation and subject to the
terms of the Voting Trust and Divestiture Agreement, PROVIDED, HOWEVER, that the
legend set forth in Section 10 of this Article V shall be placed on all shares
of Capital Stock issued to the Foundation at any time. Upon the Transfer of any
Beneficial Ownership interest in any Original Foundation Shares (and such other
shares of Capital Stock received by the Foundation or by a trustee for the
account of the Foundation as a result of a stock dividend, stock split,
conversion, recapitalization, exchange of shares or the like relating to such
Original Foundation Shares) from the Foundation or trustee thereof or the voting
trust established by the Voting Trust and Divestiture Agreement to any
transferee, those shares of Capital Stock shall become fully subject to this
Article V from and at all times after such Transfer.
SECTION 15. In the event the Corporation issues any series or class of
Capital Stock other than Common Stock, then an Independent Board Majority shall
have the power to determine the manner in which each class or series of Capital
Stock shall be counted for purposes of determining each Ownership Limit.
ARTICLE VI
BYLAWS
SECTION 1. The Bylaws shall govern the business and affairs of the
Corporation, the rights and powers of the directors, officers, employees and
shareholders of the Corporation in accordance with its
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<PAGE>
terms and shall govern the rights of all persons concerned relating in any way
to the Corporation except that if any provision in the Bylaws shall be
irreconcilably inconsistent with any provision in these Articles of
Incorporation, the provision in these Articles of Incorporation shall control.
SECTION 2. The Board of Directors of the Corporation shall have the power
to amend or replace the Bylaws of the Corporation by the vote of a majority of
the whole Board of Directors of the Corporation, except that the approval of an
Independent Board Majority shall be required to amend or replace any provision
of the Bylaws of the Corporation which, pursuant to the terms thereof, may now
or hereafter require the approval of an Independent Board Majority. The
shareholders of the Corporation shall not have the power to Change (as defined
in Section 7 of Article V hereof) the Bylaws of the Corporation unless such
Change shall be approved by the holders of at least seventy-five percent (75%)
of the then issued and outstanding shares of Common Stock entitled to vote
thereon. Notwithstanding anything contained in this Article VI to the contrary,
for so long as the Foundation Beneficially Owns twenty percent (20%) or more of
the issued and outstanding shares of Capital Stock, any amendment to the Bylaws
of the Corporation shall be subject to the prior review and approval of the
Office of the Commissioner of Insurance before such amendment shall be given
full force and effect.
ARTICLE VII
NO PREFERENTIAL RIGHTS
No shareholder of the Corporation shall, by reason of his, her or its
holding shares of any class or series, have any preemptive or preferential
rights to purchase or subscribe to any shares of Capital Stock of the
Corporation now or hereafter to be authorized, or any notes, debentures, bonds
or other securities convertible into or carrying options or warrants to purchase
shares of any class now or hereafter to be authorized (whether or not the
issuance of any such shares or such notes, debentures, bonds or other securities
would adversely affect the dividend or voting rights of such shareholder) other
than such rights, if any, as the Board of Directors of the Corporation in its
discretion from time to time may grant and at such price as the Board of
Directors of the Corporation may fix; and the Board of Directors of the
Corporation may issue shares of Capital Stock of the Corporation or any notes,
debentures, bonds or other securities, convertible into or carrying options or
warrants to purchase shares of Capital Stock without offering any such shares of
Capital Stock, either in whole or in part, to the existing shareholders.
ARTICLE VIII
NO CUMULATIVE VOTING
There shall be no cumulative voting by shareholders of any class or series
of Capital Stock in the election of directors of the Corporation.
ARTICLE IX
BOOKS AND RECORDS
The books and records of the Corporation may be kept (subject to any
provision contained in the WBCL or other applicable law) at such place or places
as may be designated from time to time by the Board of Directors of the
Corporation or in the Bylaws of the Corporation.
ARTICLE X
RIGHT TO AMEND ARTICLES OF INCORPORATION
The Corporation reserves the right to Change (as defined in Section 7 of
Article V hereof) any provision contained in these Articles of Incorporation, in
the manner now or hereafter prescribed by the WBCL or other applicable law and
these Articles of Incorporation, and all rights conferred upon
F-14
<PAGE>
shareholders herein are granted subject to this reservation; PROVIDED, HOWEVER,
that notwithstanding anything contained in these Articles of Incorporation to
the contrary, (a) the approval of an Independent Board Majority shall be
required for the Board of Directors to approve and authorize any Change to
Sections 1, 3, 4, 5, 6, 7, 10 and 11 of Article III, Article IV, Article V,
Article VI, Article VIII, or this Article X, and (b) the affirmative vote of the
holders of at least seventy-five percent (75%) of the then issued and
outstanding shares of Common Stock entitled to vote thereon shall be required to
Change Sections 1, 3, 4, 5, 6, 7, 10, and 11 of Article III, Article IV,
Article V, Article VI, Article VIII, and this Article X (the "SUPERMAJORITY
SHAREHOLDER VOTE") and PROVIDED FURTHER, HOWEVER, that (i) the Supermajority
Shareholder Vote shall become unnecessary and shall be of no further force and
effect with respect to a Change to Article V hereof in the event that each and
every License Agreement to which the Corporation shall be subject shall have
been terminated; and (ii) the Supermajority Shareholder Vote shall not apply to
(1) any Change to Article V to conform Article V hereof to a change to the terms
of any License Agreement, (2) any Change to Article V hereof required or
permitted by the BCBSA (whether or not constituting a change to the terms of any
License Agreement), or (3) any Change to Article V hereof approved by an
Independent Board Majority in connection with a proposal to acquire (by means of
a merger, consolidation or otherwise) all of the outstanding Capital Stock of
the Corporation. The affirmative vote of the holders of at least the percentage
of the issued and outstanding Capital Stock entitled to vote thereon required by
the WBCL or other applicable law shall be required to Change any provisions of
these Articles of Incorporation that shall not require the Supermajority
Shareholder Vote under this Article X. Notwithstanding anything contained in
this Article X to the contrary, for so long as the Foundation Beneficially Owns
twenty percent (20%) or more of the issued and outstanding shares of Capital
Stock, any amendment to these Articles of Incorporation shall be subject to the
prior review and approval of the Office of the Commissioner of Insurance before
such amendment shall be given full force and effect.
ARTICLE XI
REGISTERED AGENT
The address of the registered office of the corporation in the state of
Wisconsin is 401 West Michigan Street, Milwaukee, WI 53202. The name of its
registered agent at such address is Thomas R. Hefty.
IN WITNESS WHEREOF, the undersigned duly executed these Amended and Restated
Articles of Incorporation on this day of , 2000.
<TABLE>
<S> <C> <C> <C>
COBALT CORPORATION
By:
-----------------------------------------
Title:
------------------------------------
</TABLE>
This instrument was drafted by and should be returned to: Joseph C. Branch,
Attorney, FOLEY & LARDNER, 777 East Wisconsin Avenue, Milwaukee, Wisconsin
53202.
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<PAGE>
ANNEX G
AMENDED AND RESTATED
BYLAWS
OF
COBALT CORPORATION
(a Wisconsin corporation)
[DATE]
G-1
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
COBALT CORPORATION
(a Wisconsin corporation)
ARTICLE I. OFFICES
1.01. PRINCIPAL AND BUSINESS OFFICES. The corporation may have such
principal and other business offices, either within or without the State of
Wisconsin, as the Board of Directors may designate or as the business of the
corporation may require from time to time.
1.02. REGISTERED OFFICE. The registered office of the corporation required
by the Wisconsin Business Corporation Law to be maintained in the State of
Wisconsin may be, but need not be, identical with the principal office in the
State of Wisconsin, and the address of the registered office may be changed from
time to time by the Board of Directors or by the registered agent. The business
office of the registered agent of the corporation shall be identical to such
registered office.
ARTICLE II. SHAREHOLDERS
2.01. ANNUAL MEETING. The Annual Meeting of the shareholders shall be held
at the principal office of the Corporation in the City of Milwaukee, Milwaukee
County, Wisconsin, unless the Board of Directors shall designate another
location either within or without the State of Wisconsin. The Annual Meeting
shall take place on the last Wednesday of May each year or at such other time
and date as may be fixed by or under the authority of the Board of Directors. If
the day fixed for the Annual Meeting shall be a legal holiday in the State of
Wisconsin, such meeting shall be held on the next succeeding business day. At
such meeting the Shareholders shall elect Directors and transact such other
business as shall lawfully come before them.
2.02. SPECIAL MEETINGS. Special meetings of shareholders may be called
only by the Chairman of the Board, the President, an Independent Board Majority
(as defined in Section 4.B.3 of Article III of the Articles of Incorporation),
or any other party specifically mandated by the Wisconsin Business Corporation
Law. The Chairman of the Board, the President, or an Independent Board Majority,
as the case may be, shall have the right to determine the business to be
transacted at any special meeting and no issue or matter may be acted upon by
any shareholders at any special meeting unless such issue or matter has been
approved by the Board of Directors for vote by shareholders at such meeting,
unless Wisconsin law specifically authorizes such action by the shareholders
without the assent of the Board of Directors.
2.03. PLACE OF MEETING. The Board of Directors may designate any place,
either within or without the State of Wisconsin, as the place of meeting for any
annual or special meeting of shareholders. If no designation is made, the place
of meeting shall be the principal office of the Corporation. Any meeting may be
adjourned to reconvene at any place designated by vote of a majority of the
shares represented thereat.
2.04. NOTICE OF MEETING. Written notice stating the date, time and place
of any meeting of shareholders and, in case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
days nor more than sixty days before the date of the meeting (unless a different
time is provided by the Wisconsin Business Corporation Law or the Articles of
Incorporation), either personally or by mail, by or at the direction of the
President or the Secretary, to each shareholder of record entitled to vote at
such meeting and to such other persons as required by the Wisconsin Business
Corporation Law. If mailed, such notice shall be deemed to be effective when
deposited in the United States mail, addressed to the shareholder at his or her
address as it appears on
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the stock record books of the Corporation, with postage thereon prepaid. If an
annual or special meeting of shareholders is adjourned to a different date, time
or place, the Corporation shall not be required to give notice of the new date,
time or place if the new date, time or place is announced at the meeting before
adjournment; provided, however, that if a new record date for an adjourned
meeting is or must be fixed, the Corporation shall give notice of the adjourned
meeting to persons who are shareholders as of the new record date.
2.05. WAIVER OF NOTICE. A shareholder may waive any notice required by the
Wisconsin Business Corporation Law, the Articles of Incorporation or these
Bylaws before or after the date and time stated in the notice. The waiver shall
be in writing and signed by the shareholder entitled to the notice, contain the
same information that would have been required in the notice under applicable
provisions of the Wisconsin Business Corporation Law (except that the time and
place of meeting need not be stated) and be delivered to the Corporation for
inclusion in the corporate records. A shareholder's attendance at a meeting, in
person or by proxy, waives objection to all of the following: (a) lack of notice
or defective notice of the meeting, unless the shareholder at the beginning of
the meeting or promptly upon arrival objects to holding the meeting or
transacting business at the meeting; and (b) consideration of a particular
matter at the meeting that is not within the purpose described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented.
2.06. FIXING OF RECORD DATE. The Board of Directors may fix in advance a
date as the record date for the purpose of determining shareholders entitled to
notice of and to vote at any meeting of shareholders, shareholders entitled to
take any other action, or shareholders for any other purpose. Such record date
shall not be more than seventy days prior to the date on which the particular
action, requiring such determination of shareholders, is to be taken. If no
record date is fixed by the Board of Directors or by the Wisconsin Business
Corporation Law for the determination of shareholders entitled to notice of and
to vote at a meeting of shareholders, the record date shall be the close of
business on the day before the first notice is given to shareholders. Except as
provided by the Wisconsin Business Corporation Law for a court-ordered
adjournment, a determination of shareholders entitled to notice of and to vote
at a meeting of shareholders is effective for any adjournment of such meeting
unless the Board of Directors fixes a new record date, which it shall do if the
meeting is adjourned to a date more than 120 days after the date fixed for the
original meeting. The record date for determining shareholders entitled to a
distribution (other than a distribution involving a purchase, redemption or
other acquisition of the Corporation's shares) or a share dividend is the date
on which the Board of Directors authorized the distribution or share dividend,
as the case may be, unless the Board of Directors fixes a different record date.
2.07. SHAREHOLDERS LIST FOR MEETINGS. After a record date for a special or
annual meeting of shareholders has been fixed, the Corporation shall prepare a
list of the names of all of the shareholders entitled to notice of the meeting.
The list shall be arranged by class or series of shares, if any, and show the
address of and number of shares held by each shareholder. Such list shall be
available for inspection by any shareholder, beginning two business days after
notice of the meeting is given for which the list was prepared and continuing to
the date of the meeting, at the Corporation's principal office or at a place
identified in the meeting notice in the city where the meeting will be held. A
shareholder or his or her agent may, on written demand, inspect and, subject to
the limitations imposed by the Wisconsin Business Corporation Law, copy the
list, during regular business hours and at his or her expense, during the period
that it is available for inspection pursuant to this Section 2.07. The
Corporation shall make the shareholders list available at the meeting and any
shareholder or his or her agent or attorney may inspect the list at any time
during the meeting or any adjournment thereof. Refusal or failure to prepare or
make available the shareholders list shall not affect the validity of any action
taken at a meeting of shareholders.
2.08. QUORUM AND VOTING REQUIREMENTS.
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(a) Shares entitled to vote as a separate voting group as defined in the
Wisconsin Business Corporation Law may take action on a matter at a meeting only
if a quorum of those shares exists with respect to that matter. Unless the
Articles of Incorporation or the Wisconsin Business Corporation Law provide
otherwise, a majority of the votes entitled to be cast on the matter by a voting
group constitutes a quorum of that voting group for action on that matter. Once
a share is represented for any purposes at a meeting, other than for the purpose
of objecting to holding the meeting or transacting business at the meeting, it
is considered present for purposes of determining whether a quorum exists, for
the remainder of the meeting and for any adjournment of that meeting unless a
new record date is or must be set for that adjourned or postponed meeting. If a
quorum exists, action on a matter by a voting group is approved if the votes
cast within the voting group favoring the action exceed the votes cast opposing
the action, unless the Articles of Incorporation or the Wisconsin Business
Corporation Law require a greater number of affirmative votes. "Voting group"
means: (a) All shares of one or more classes or series that under the Articles
of Incorporation or the Wisconsin Business Corporation Law are entitled to vote
and be counted together collectively on a matter at a meeting of shareholders;
or (b) All shares that under the Articles of Incorporation or the Wisconsin
Business Corporation Law are entitled to vote generally on a matter. Though less
than a quorum of the outstanding shares are represented at a meeting, a majority
of the shares so represented may adjourn the meeting from time to time without
further notice. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified.
(b) Each director shall be elected by a plurality of the votes cast by the
shares entitled to vote in the election of directors at a meeting at which a
quorum is present. Cumulative voting is not permitted with respect to the
election of directors, and thus no shareholder entitled to vote in the election
of directors shall have the right to cast as many votes in the aggregate as
shall equal the number of votes held by the shareholder in the Corporation,
multiplied by the number of directors to be elected at the election, for one
candidate, or distribute them among two or more candidates.
2.09. CONDUCT OF MEETING. The Chairman of the Board, or in the Chairman's
absence, the President, and in his or her absence, a Vice President as is
designated by the Board of Directors, shall call the meeting of the shareholders
to order and shall act as chairman of the meeting, and the Secretary of the
Corporation shall act as secretary of all meetings of the shareholders, but, in
the absence of the Secretary, the presiding officer may appoint any other person
to act as secretary of the meeting.
2.10. PROXIES. At all meetings of shareholders, a shareholder entitled to
vote may vote in person or by proxy. A shareholder may appoint a proxy to vote
or otherwise act for the shareholder by signing an appointment form, either
personally or by his or her attorney-in-fact. Such proxy appointment is
effective when received by the Secretary before or at the time of the meeting.
Unless otherwise provided in the appointment form of proxy, a proxy appointment
may be revoked by the shareholder at any time before it is voted, either by
written notice filed with the Secretary or the acting Secretary of the meeting
or by oral notice given by the shareholder to the presiding officer during the
meeting. The presence of a shareholder who has filed his or her proxy
appointment shall not of itself constitute a revocation. No proxy appointment
shall be valid after eleven months from the date of its execution, unless
otherwise provided in the appointment form of proxy. The Board of Directors
shall have the power and authority to make rules establishing presumptions as to
the validity and sufficiency of proxy appointments.
2.11. VOTING OF SHARES. Except as provided in the Articles of
Incorporation or in the Wisconsin Business Corporation Law, each outstanding
share, regardless of class, is entitled to one vote on each matter voted on at a
meeting of shareholders.
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2.12. NO ACTION WITHOUT MEETING. No action required or permitted to be
taken at any annual or special meeting of shareholders of the Corporation may be
taken by written consent without a meeting of such shareholders.
2.13. VOTING OF SHARES BY CERTAIN HOLDERS.
(a) OTHER CORPORATIONS. Shares standing in the name of another corporation
may be voted either in person or by proxy, by the president of such corporation
or any other officer appointed by such president. An appointment form of proxy
executed by any principal officer of such other corporation or assistant thereto
shall be conclusive evidence of the signer's authority to act, in the absence of
express notice to the Corporation given in writing to the Secretary, or the
designation of some other person by the board of directors or by the bylaws of
such other corporation.
(b) LEGAL REPRESENTATIVES AND FIDUCIARIES. Shares held by an
administrator, executor, guardian, conservator, trustee in bankruptcy, receiver
or assignee for creditors may be voted by him, her or it either in person or by
proxy, without a transfer of such shares into his, her or its name, provided
that there is filed with the Secretary before or at the time of meeting proper
evidence of his, her or its incumbency and the number of shares held by him, her
or it either in person or by proxy. An appointment form of proxy executed by a
fiduciary shall be conclusive evidence of the signer's authority to act, in the
absence of express notice to the Corporation, given in writing to the Secretary,
that such manner of voting is expressly prohibited or otherwise directed by the
document creating the fiduciary relationship.
(c) PLEDGEES. A shareholder whose shares are pledged shall be entitled to
vote such shares until the shares have been transferred into the name of the
pledgee, and thereafter the pledgee shall be entitled to vote the shares so
transferred; provided, however, a pledgee shall be entitled to vote shares held
of record by the pledgor if the Corporation receives acceptable evidence of the
pledgee's authority to sign.
(d) TREASURY STOCK AND SUBSIDIARIES. Neither treasury shares, nor shares
held by another corporation if a majority of the shares entitled to vote for the
election of directors of such other corporation is held by the Corporation,
shall be voted at any meeting or counted in determining the total number of
outstanding shares entitled to vote, but shares of its own issue held by the
Corporation in a fiduciary capacity, or held by such other corporation in a
fiduciary capacity, may be voted and shall be counted in determining the total
number of outstanding shares entitled to vote.
(e) MINORS. Shares held by a minor may be voted by such minor in person or
by proxy and no such vote shall be subject to disaffirmance or avoidance, unless
prior to such vote the Secretary has received written notice or has actual
knowledge that such shareholder is a minor. Shares held by a minor may be voted
by a personal representative, administrator, executor, guardian or conservator
representing the minor if evidence of such fiduciary status, acceptable to the
Corporation, is presented.
(f) INCOMPETENTS AND SPENDTHRIFTS. Shares held by an incompetent or
spendthrift may be voted by such incompetent or spendthrift in person or by
proxy and no such vote shall be subject to disaffirmance or avoidance, unless
prior to such vote the Secretary has actual knowledge that such shareholder has
been adjudicated an incompetent or spendthrift or actual knowledge of judicial
proceedings for appointment of a guardian. Shares held by an incompetent or
spendthrift may be voted by a personal representative, administrator, executor,
guardian or conservator representing the minor if evidence of such fiduciary
status, acceptable to the Corporation, is presented.
(g) JOINT TENANTS. Share registered in the names of two or more
individuals who are named in the registration as joint tenants may be voted in
person or by proxy signed by any one or more of such individuals if either
(i) no other such individual or his or her legal representative is present and
claims the right to participate in the voting of such shares or prior to the
vote files with the Secretary a contrary written voting authorization or
direction or written denial of authority of the individual
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present or signing the appointment form of proxy proposed to be voted, or
(ii) all such other individuals are deceased and the Secretary has no actual
knowledge that the survivor has been adjudicated not to be the successor to the
interests of those deceased.
2.14. SHAREHOLDER PROPOSALS.
(a) Shareholders shall be entitled to submit proposals to be voted upon by
shareholders at an annual meeting of the Corporation provided that they comply
with the procedures set forth in this Section 2.14. Only those proposals which
satisfy all requirements specified in this Section 2.14 shall be deemed
"QUALIFIED SHAREHOLDER PROPOSALS."
(b) In order for a proposal to constitute a "Qualified Shareholder
Proposal," all of the following requirements must be satisfied:
(1) The proposal must be made for submission at an annual meeting of
shareholders;
(2) The proposal must be a proper subject for shareholder action. The
Board of Directors shall be entitled to determine that any proposal which
the shareholder is not entitled to have included in the Corporation's proxy
statement for the annual meeting under the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), and the regulations issued by the
Securities and Exchange Commission (which are collectively referred to
herein as the "SEC PROXY RULES") is not a proper subject for shareholder
action;
(3) The proposal must be made by a shareholder who shall be the record
holder on the record date for such annual meeting and at that meeting of
shares entitled to be voted for the proposal (a "PROPOSING SHAREHOLDER");
(4) The Proposing Shareholder must deliver a written notice identifying
such proposal to the office of the Corporation's Corporate Secretary at the
Corporation's principal place of business which provides the information
required by these Bylaws which is timely under the standards given in
Section 3.04(e)(4) of these Bylaws;
(5) Such Proposing Shareholder's proposal notice shall: (i) contain a
description of the proposal, the reasons for the proposal and any material
interest in such proposal by the Proposing Shareholder or the beneficial
owner of the shareholder's record shares; (ii) contain an affirmation by the
Proposing Shareholder that the shareholder satisfies the requirements
specified in this Section 2.14 for presentation of such proposal; and
(iii) as to the Proposing Shareholder and the beneficial owner, if any, on
whose behalf the proposal is made (x) the name and address of such Proposing
Shareholder, as they appear on the Corporation's books, and of such
beneficial owner and the telephone number at which each may be contacted
during normal business hours through the time for which the meeting is
scheduled, and (y) the class and number of shares of the Corporation which
are owned beneficially and of record by such Proposing Shareholder and such
beneficial owner; and
(6) The Proposing Shareholder and the beneficial owner shall provide
such other information as any officer of the Corporation shall reasonably
deem relevant within such time limits as any officer of the Corporation
shall reasonably impose for such information.
(c) Nothing in these Bylaws shall be deemed to prohibit a shareholder from
including any proposals in the Corporation's proxy statement to the extent such
inclusion shall be required by the SEC Proxy Rules or to lessen any obligation
by any shareholder to comply with the SEC Proxy Rules; PROVIDED, HOWEVER, that
neither the fact that a shareholder's nominee qualifies as a Qualified Candidate
(as defined in Section 3.04 of these Bylaws) nor the fact that a Proposing
Shareholder's proposal qualifies as a Qualified Shareholder Proposal under this
Section 2.14 shall obligate the Corporation to endorse that candidate or
proposal or (except to the extent required by the SEC Proxy Rules) to provide a
means to vote on that proposal on proxy cards solicited by the Corporation or to
include
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information about that proposal in the Corporation's proxy statement. To the
extent this Section 2.14 shall be deemed by the Board of Directors or the
Securities and Exchange Commission, or adjudged by a court of competent
jurisdiction, to be inconsistent with the rights of shareholders to request
inclusion of a proposal in the Corporation's proxy statement pursuant to the SEC
Proxy Rules, the SEC Proxy Rules shall prevail.
2.15 INVALIDITY. The Chairman of the Board, upon recommendation of the
Secretary, may reject a vote, consent, waiver or proxy appointment, if the
Secretary or other Officer or agent of the Corporation who is authorized to
tabulate votes, acting in good faith, has reasonable doubt about the validity of
the signature on it or about the signatory's authority to sign for the
shareholder. The Corporation and its Officer or agent who accepts or rejects a
vote, consent, waiver or proxy appointment in good faith and in accordance with
the Wisconsin Business Corporation Law shall not be liable for damages to the
shareholders for consequences of the acceptance or rejection.
ARTICLE III. BOARD OF DIRECTORS
3.01. GENERAL POWERS AND NUMBER. All corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Corporation
managed under the direction of, the Board of Directors. The number of directors
of the Corporation shall initially be nine (9) and thereafter such number as may
be determined from time to time by an Independent Board Majority, provided that
such number shall be no fewer than three (3) and no more than nine (9).
3.02. DIVISION OF THE BOARD OF DIRECTORS INTO CLASSES. The Board of
Directors shall be divided into three classes in accordance with the Articles of
Incorporation. The positions within each class shall be the same in number as
reasonably practicable. Directors within a given class shall be designated as
the "Class of [Year]" with the entry for "Year" being the year in which the next
triennial election for directors in that class is scheduled to occur.
3.03 BOARD OF DIRECTORS' POWER TO ALTER THE NUMBER OF DIRECTORS AND THE
SIZE OF CLASSES. The Board of Directors shall have the power (within the
limitations prescribed by the Articles of Incorporation) by a resolution adopted
by an Independent Board Majority at the time of such adoption to alter at any
time and from time to time (i) the total number of directorship positions on the
Board of Directors, and (ii) the number of directorship positions in any of the
three classes of directors established by the Articles of Incorporation. Except
as otherwise expressly provided in the Articles of Incorporation, from the
adoption of any particular resolution in the manner provided in the preceding
sentence until the adoption in the manner prescribed by the preceding sentence
of any subsequent resolution altering the results of the particular resolution,
(i) the total number of directorship positions on the Board of Directors shall
be equal to the number specified in the particular resolution, and (ii) the
number of directorship positions in each of the three classes of directors
established by the Articles of Incorporation shall be the number established in
the particular resolution.
3.04 ELECTION OF DIRECTORS BY SHAREHOLDERS.
(a) Qualified Candidates (as defined below in this Section 3.04) for
election as directors at any meeting of the shareholders of the Corporation
shall be elected by plurality vote. (Under plurality voting, if five positions
on the Board of Directors were up for election at any particular shareholders'
meeting, then the five Qualified Candidates who receive more votes than any
other Qualified Candidates shall be deemed elected at that meeting. It shall
not, therefore, be necessary for election to the Board of Directors that a
candidate receive a majority of the votes comprising the quorum for the meeting
so long as the individual receives a number of votes sufficient for election
under the terms hereof.)
(b) Only Qualified Candidates may be elected to the Board of Directors at
any particular shareholders' meeting. Votes cast in favor of an individual who
is not a Qualified Candidate shall not be effective to elect that individual to
the Board of Directors regardless of whether (i) that individual receives a
greater number of votes than Qualified Candidates who are elected to the Board
of Directors under the preceding provisions of this Section 3.04 or (ii) no
other individual receives any votes at that meeting.
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(c) An individual shall be deemed a "QUALIFIED CANDIDATE" for election to
the Board of Directors at any particular shareholders' meeting if that
individual (i) shall have been nominated for election by the affirmative vote of
an Independent Board Majority or shall have been nominated for election in a
manner which satisfies all of the requirements specified in Section 3.04(e)
hereof, and (ii) is not disqualified under the provisions of Section 3.04(d)
hereof.
(d) The term "NON-INDEPENDENT CANDIDATE," as used with respect to any
particular election of directors, means an individual who satisfies the
conditions of clause (i) of Section 3.04(c) hereof but who does not qualify as
an "Independent Director" as defined in Section 4.B.1 of Article III of the
Articles of Incorporation. In the event that, in any particular election of
directors, some but not all of the Non-Independent Candidates for director at
such election may be eligible for election to the Board of Directors pursuant to
Section 4.A of Article III of the Articles of Incorporation, then the
Non-Independent Candidates shall be treated as Qualified Candidates until all
positions available for Non-Independent Candidates at such election pursuant to
Section 4.A of Article III of the Articles of Incorporation shall have been
elected in the manner set forth in this Section 3.04. The remaining
Non-Independent Candidates shall, in accordance with Section 3.04(b), be deemed
to not be Qualified Candidates.
(e) An individual who is not nominated for election by the affirmative vote
of an Independent Board Majority, and who would otherwise qualify as a Qualified
Candidate as provided in Sections 3.04(c) and 3.04(d) hereof, shall be a
Qualified Candidate if all of the following requirements are satisfied:
(1) The nomination must be made for an election to be held at an annual
meeting of shareholders or a special meeting of shareholders in which the
Board of Directors has determined that candidates will be elected by the
issued and outstanding shares of the Corporation's common stock to one or
more positions on the Board of Directors;
(2) The individual must be nominated by a shareholder who shall be the
record owner on the record date for such meeting and at that meeting of
shares entitled to be voted at that meeting for the election of directors (a
"NOMINATING SHAREHOLDER");
(3) The Nominating Shareholder must deliver a timely written nomination
notice to the office the Corporation's Corporate Secretary at the
Corporation's principal place of business which provides the information
required by this Section 3.04(e);
(4) To be timely for an annual meeting, a Nominating Shareholder's
notice must be actually delivered to the Corporate Secretary at the
Corporation's principal place of business not later than the close of
business on the 90th day nor earlier than the close of business on the 120th
day prior to the first anniversary of the preceding year's annual meeting;
PROVIDED, HOWEVER, that: (i) if the date of the annual meeting is more than
30 days before or more than 30 days after such anniversary date, notice by
the shareholder to be timely must be so delivered not earlier than the close
of business on the 120th day prior to such annual meeting and not later than
the close of business on the later of the 90th day prior to such annual
meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made by the Corporation, and (ii) if the
number of directors to be elected to the Board of Directors is increased and
there is no public announcement by the Corporation naming all of the
nominees for director or specifying the size of the increased Board of
Directors at least 70 days prior to the first anniversary of the preceding
year's annual meeting, a Nominating Shareholder's nominating notice required
by this Section 3.04(e) shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if
(x) the Nominating Shareholder shall have nominated candidates in accordance
with the requirements in this Section 3.04(e) for all Board of Directors
positions not covered by such increase, and (y) the nomination notice for
candidates to fill the expanded positions shall be actually delivered to the
Corporate Secretary at the Corporation's
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principal place of business not later than the close of business on the 10th
day following the day on which such public announcement is first made by the
Corporation;
(5) If the election is to be held at a special shareholders' meeting, a
Nominating Shareholder's nominating notice required by this Section 3.04(e)
shall be considered timely for such meeting if it shall be actually
delivered to the Corporate Secretary at the Corporation's principal place of
business not later than the close of business on the 10th day following the
day on which the Corporation shall first publicly announce the date of the
special meeting and that a vote by shareholders shall be taken at such
meeting to elect one or more directors;
(6) In no event shall the public announcement of an adjournment of an
annual meeting commence a new time period for the giving of a Nominating
Shareholder's notice as described above. "PUBLIC ANNOUNCEMENT" means, for
these purposes, disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act;
(7) Such Nominating Shareholder's nomination notice shall: (i) set forth
as to each person whom the Nominating Shareholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Exchange Act; (ii) be accompanied by
each nominee's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected; (iii) set forth the name
and address of the shareholder giving the notice and the beneficial owner of
the shares owned of record by the beneficial owner, and the telephone number
at which the Corporation will be able to contact the shareholder, the
beneficial owner and each nominee during usual business hours during the
period through the meeting at which the nomination is to take place; and
(iv) set forth the class and number of shares of the Corporation which are
owned beneficially and of record by such Nominating Shareholder and such
beneficial owner;
(8) The Nominating Shareholder, the beneficial owner and each nominee
shall provide such other information as any officer of the Corporation shall
reasonably deem relevant within such time limits as any officer of the
Corporation shall reasonably impose for such information.
3.05. REGULAR MEETINGS. A regular meeting of the Board of Directors shall
be held without other notice than this bylaw immediately after the annual
meeting of shareholders and each adjourned session thereof. The place of such
regular meeting shall be the same as the place of the meeting of shareholders
which precedes it, or such other suitable place as may be announced at such
meeting of shareholders. The Board of Directors shall provide, by resolution,
the date, time and place, either within or without the State of Wisconsin, for
the holding of additional regular meetings of the Board of Directors without
other notice than such resolution.
3.06. SPECIAL MEETINGS. Special Meetings of the Board of Directors shall
be held whenever called by the Chairman of the Board or the Secretary upon
written request of any three Directors. The Secretary shall give sufficient
notice of such meeting, to be not less than 48 hours, in person or by mail,
telephone, telegraph, teletype, facsimile or other form of wire or wireless
communication as to enable the Directors so notified to attend such meeting. The
Chairman of the Board or Secretary who calls the meeting may fix any place,
within or without the State of Wisconsin, as the place for holding any Special
Meeting of the Board of Directors.
3.07. NOTICE; WAIVER. Notice of each special meeting of the Board of
Directors shall be given by written notice delivered or communicated in person,
by telegraph, teletype, facsimile or other form of wire or wireless
communication, or by mail or private carrier, to each director at his business
address or at such other address as such director shall have designated in
writing filed with the Secretary, in
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each case not less than forty-eight hours prior to the meeting. The notice need
not prescribe the purpose of the special meeting of the Board of Directors or
the business to be transacted at such meeting. If mailed, such notice shall be
deemed to be effective when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice is given by telegram, such notice shall
be deemed to be effective when the telegram is delivered to the telegraph
company. If notice is given by private carrier, such notice shall be deemed to
be effective when delivered to the private carrier. If notice is given by
facsimile, such notice shall be deemed to be effective when so given. Whenever
any notice whatever is required to be given to any director of the Corporation
under the Articles of Incorporation or these Bylaws or any provision of the
Wisconsin Business Corporation Law, a waiver thereof in writing, signed at any
time, whether before or after the date and time of meeting, by the director
entitled to such notice shall be deemed equivalent to the giving of such notice.
The Corporation shall retain any such waiver as part of the permanent corporate
records. A director's attendance at or participation in a meeting waives any
required notice to him or her of the meeting unless the director at the
beginning of the meeting or promptly upon his or her arrival objects to holding
the meeting or transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
3.08. QUORUM. Except as otherwise provided by the Wisconsin Business
Corporation Law or by the Articles of Incorporation or these Bylaws, a majority
of the number of directors specified in Section 3.01 of these Bylaws shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors. Except as otherwise provided by the Wisconsin Business Corporation
Law or by the Articles of Incorporation or by these Bylaws, a quorum of any
committee of the Board of Directors created pursuant to Section 3.14 hereof
shall consist of a majority of the number of directors appointed to serve on the
committee. A majority of the directors present (though less than such quorum)
may adjourn any meeting of the Board of Directors or any committee thereof, as
the case may be, from time to time without further notice.
3.09. MANNER OF ACTING. The affirmative vote of a majority of the
directors present at a meeting of the Board of Directors or a committee thereof
at which a quorum is present shall be the act of the Board of Directors or such
committee, as the case may be, unless the Wisconsin Business Corporation Law,
the Articles of Incorporation or these Bylaws require the vote of a greater
number of directors.
3.10. CONDUCT OF MEETINGS. The Chairman of the Board, or in the Chairman's
absence, the President, and in his or her absence, a Vice President as is
designated by the Board of Directors, shall call meetings of the Board of
Directors to order and shall act as chairman of the meeting. The Secretary of
the Corporation shall act as secretary of all meetings of the Board of Directors
but in the absence of the Secretary, the presiding officer may appoint any other
person present to act as secretary of the meeting. Minutes of any regular or
special meeting of the Board of Directors shall be prepared and distributed to
each director.
3.11. VACANCIES. Neither the provisions of Section 3.04 nor any other
provision set forth herein shall diminish the right granted to the Board of
Directors to elect individuals to fill any vacancy which shall occur for any
reason as provided in the Articles of Incorporation.
3.12. COMPENSATION. The Board of Directors, irrespective of any personal
interest of any of its members, may establish reasonable compensation of all
directors for services to the Corporation as directors, officers or otherwise,
or may delegate such authority to an appropriate committee. The Board of
Directors also shall have authority to provide for or delegate authority to an
appropriate committee to provide for reasonable pensions, disability or death
benefits, and other benefits or payments, to directors, officers and employees
and to their estates, families, dependents or beneficiaries on account of prior
services rendered by such directors, officers and employees to the Corporation.
3.13. PRESUMPTION OF ASSENT. A director who is present and is announced as
present at a meeting of the Board of Directors or any committee thereof created
in accordance with Section 3.14 hereof,
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when corporate action is taken, assents to the action taken unless any of the
following occurs: (a) the director objects at the beginning of the meeting or
promptly upon his or her arrival to holding the meeting or transacting business
at the meeting; (b) the director's dissent or abstention from the action taken
is entered in the minutes of the meeting; or (c) the director delivers written
notice that complies with the Wisconsin Business Corporation Law of his or her
dissent or abstention to the presiding officer of the meeting before its
adjournment or to the Corporation immediately after adjournment of the meeting.
Such right of dissent or abstention shall not apply to a director who votes in
favor of the action taken.
3.14. COMMITTEES.
(a) REGULAR COMMITTEES
1. GENERAL DESCRIPTION. In order to facilitate the work of the Board
of Directors, the following regular committees shall be elected from the
membership of the Board of Directors at the regular meeting of the Board of
Directors held each year (or at such other time as the Board of Directors
may determine):
Executive Committee
Finance Committee
Management Review Committee
Audit Committee
Nominating Committee
Each regular committee shall have three to six members. No member of the
Management Review Committee, the Audit Committee or the Nominating
Committee may be an employee of the Corporation. The Chairman of the
Board, and in the Chairman's absence the President, and in their absence,
such Vice President as is designated by the Board of Directors, shall
submit nominations for such regular committee memberships. Regular
committee members shall hold office until the next Board of Directors
meeting at which the regular committee elections are conducted in
accordance with these Bylaws, and until their successors are elected and
qualified. Each regular committee of the Board of Directors may exercise
the authority of the full Board of Directors when the Board of Directors
is not in session and solely with regard to and within the scope of the
duties and powers delegated to it in these Bylaws, except that no
committee of the Board shall do any of the following:
(i) Authorize distributions;
(ii) Approve or propose to shareholders action that the Wisconsin
Business Corporation Law requires be approved by shareholders;
(iii) Fill vacancies on the Board of Directors or, except as
provided herein, on any of its committees;
(iv) Amend the Articles of Incorporation;
(v) Adopt, amend or repeal these Bylaws;
(vi) Approve a plan of merger not requiring shareholder approval;
(vii) Authorize or approve reacquisition of shares, except
according to a formula or method prescribed by the Board of
Directors; or
(viii) Authorize or approve the issuance or sale or contract for
sale of shares or determine the designation and relative rights,
preferences and limitations of a class or series of shares, except
that the Board of Directors may authorize a committee or a senior
executive officer to do so within limits prescribed by the Board of
Directors.
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2. THE EXECUTIVE COMMITTEE. The Executive Committee shall:
(i) Approve long range corporate and strategic plans, including
plans for any major borrowing or capital raising programs;
(ii) Advise and consult with management on corporate policies
regarding reserving, reinsurance and other liabilities;
(iii) Approve the annual operating plan;
(iv) Approve major changes in policy affecting new services and
programs; and
(v) Carry out such special assignments as the Board of Directors
may, from time to time, give to the Executive Committee.
3. THE FINANCE COMMITTEE. The Finance Committee shall:
(i) Approve investment policies and plans;
(ii) Authorize and approve the investment of funds of the
Corporation;
(iii) Consult with management regarding real estate, accounts
receivable and other assets;
(iv) Determine the amount and types of all insurance that should
be carried by the Corporation and authorize the purchase thereof;
(v) Advise and consult with the management in the selection of
the carriers of such insurance;
(vi) Advise and consult with management on corporate tax policy;
and
(vii) Carry out such special assignments as the Board of Directors
may, from time to time, give to the Finance Committee.
4. THE MANAGEMENT REVIEW COMMITTEE. The Management Review Committee
shall:
(i) Evaluate senior management (corporate officers) performance
against objectives;
(ii) Approve senior management development programs;
(iii) Approve the Corporation's compensation policy, including
making recommendations and decisions on any bonuses or incentive
plans, and establish the annual compensation for the Chairman of the
Board;
(iv) Make recommendation to the Board for types, methods and
levels of Directors' compensation;
(v) Administer the compensation plans for the Officers, Directors
and key employees; and
(vi) Carry out such special assignments as the Board of Directors
may, from time to time, give to the Management Review Committee.
5. THE AUDIT COMMITTEE. The Audit Committee shall:
(i) Select and engage independent certified public accountants to
audit the books, records and financial transactions of the
Corporation;
(ii) Review with the independent accountants the scope of their
examination, with particular emphasis on the areas to which either
the Audit Committee or the independent accountants believe special
attention should be directed. The Audit Committee may have
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the independent accountants perform such additional procedures as the
Audit Committee or the auditors deem necessary;
(iii) Review and approve an annual plan for the financial audit
(internal audit) department;
(iv) Review with the independent accountants the financial
statements and auditors' reports thereon;
(v) Review the management letter of the independent accountants
and audit reports by the Corporation's internal auditors to assure
that appropriate action has been taken by senior management as to
each item recommended;
(vi) Encourage the independent accountants and the internal
auditors to communicate directly with the Chairman of the Board and
the President or, if necessary, the Chairman of the Audit Committee
whenever any significant recommendation has not been satisfactorily
resolved at the senior management level;
(vii) Review conflict of interest statements to assure the Board
of Directors that any conflict of interest has been duly reported to
and reviewed by the Audit Committee;
(viii) Review and approve all related party transactions; and
(ix) Carry out such special assignments as the Board of Directors
may, from time to time, give to the Audit Committee.
6. THE NOMINATING COMMITTEE. The Nominating Committee shall:
(i) Recommend to the Board prior to the annual shareholders'
meeting each year nominees for election to the Board;
(ii) Recommend to the Board prior to the annual Board meeting
nominees for election as corporate officers and Chairman of the Board
(Chief Executive Officer); and
(iii) Carry out such special assignments as the Board of Directors
may, from time to time, give to the Nominating Committee.
(b) SPECIAL COMMITTEES. In addition to the regular committees, the Board
of Directors may, from time to time, establish special committees and specify
the composition, functions and authority of any special committee.
(c) VACANCIES; TEMPORARY ASSIGNMENTS. When, for any cause, a vacancy
occurs in a regular committee, the remaining committee members, by majority
vote, may fill such vacancy by a temporary appointment of a Director not on the
subject committee to fill the vacancy until the next meeting of the Board of
Directors, at which time the Board of Directors may fill the vacancy.
(d) COMMITTEE MINUTES AND REPORTS. All of the foregoing committees shall
keep minutes and records of all of their meetings and activities and shall
report the same to the Board of Directors at its next regular meeting. Such
minutes and records shall be available for inspection by the Board of Directors
at all times.
3.15. TELEPHONIC MEETINGS. To the extent provided herein and
notwithstanding any place set forth in the notice of the meeting or these
Bylaws, members of the Board of Directors (and any committees thereof created
pursuant to Section 3.14 hereof) may participate in regular or special meetings
by, or through the use of, any means of communication by which all participants
may simultaneously hear each other, such as by conference telephone. If a
meeting is conducted by such means, then at the commencement of such meeting the
presiding officer shall inform the participating directors that a
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meeting is taking place at which official business may be transacted. Any
participant in a meeting by such means shall be deemed present in person at such
meeting.
3.16. ACTION WITHOUT MEETING. Any action required or permitted by the
Wisconsin Business Corporation Law to be taken at a meeting of the Board of
Directors or a committee thereof created pursuant to Section 3.14 hereof may be
taken without a meeting if the action is taken by all members of the Board or of
the committee. The action shall be evidenced by one or more written consents
describing the action taken, signed by each director or committee member and
retained by the Corporation. Such action shall be effective when the last
director or committee member signs the consent, unless the consent specifies a
different effective date.
ARTICLE IV. OFFICERS
4.01. NUMBER. The principal officers of the Corporation shall be a
Chairman of the Board (Chief Executive Officer), a President, one or more Vice
Presidents, a Secretary, and a Treasurer. The Board of Directors shall elect the
principal officers annually at the regular meeting. All officers shall hold
office for a period of one year and until their successors are duly elected and
qualified, or until their prior death, resignation or removal. Each officer has
the authority and shall perform the duties set forth in these Bylaws or, to the
extent not inconsistent with these Bylaws, the duties prescribed by the Board of
Directors or by the direction of an officer authorized by the Bylaws or by the
Board of Directors to prescribe the duties of other officers.
4.02. REMOVAL. Any officer or agent may be removed by the Board of
Directors with or without cause whenever, in its judgment, the best interests of
the Corporation would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Election or
appointment shall not of itself create contract rights.
4.03. VACANCIES. A vacancy in any principal office because of death,
resignation, removal, or otherwise, shall be filled by the Board of Directors
for the unexpired portion of the term. The Board of Directors may, from time to
time, omit to elect one or more officers, or may omit to fill a vacancy, and in
such case, the designated duties of such officer, unless otherwise provided in
these Bylaws, shall be discharged by the Chairman of the Board or such other
officer as he or she may designate.
4.04 CHAIRMAN OF THE BOARD. The Chairman of the Board, who shall also be
the Chief Executive Officer, shall preside at all meetings of the shareholders
and of the Board of Directors.
4.05. PRESIDENT. The President shall have general supervision of the
business and affairs of the Corporation. The President may sign and execute all
authorized bonds, notes, checks, contracts, deeds, mortgages, instruments of
assignment or pledge or other obligations of the Corporation in the name of the
Corporation.
4.06. THE VICE PRESIDENTS. Should the Chairman of the Board or the
President be absent or unable to act, the Board of Directors shall designate one
or more Vice Presidents or other officer(s) to discharge the duties of the
vacant office with the same power and authority as is vested in that office. The
Vice Presidents shall perform such other duties as from time to time may be
assigned to them by the President or the Board of Directors.
4.07. THE SECRETARY. The Secretary shall keep a record of the minutes of
the meetings of the shareholders and of the Board of Directors. He or she shall
countersign all instruments and documents executed by the Corporation, affix to
instruments and documents the seal of the Corporation when necessary or
required, keep in books therefor the transactions of the Corporation, see that
all notices are duly given in accordance with the provisions of these Bylaws or
as required by law and perform such other duties as usually are incident to such
office or may be assigned by the Chairman of the Board, the President or the
Board of Directors.
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4.08. THE TREASURER. The Treasurer, subject to the control of the Board of
Directors, shall collect, receive, and safely keep all monies, funds and
securities of the Corporation and attend to all pecuniary affairs. He or she
shall keep full and complete accounts and records of all its transactions, of
sums owing to or by the Corporation and all rents and profits in its behalf.
4.09. ASSISTANTS AND ACTING OFFICERS. The Chairman of the Board, the
President and the Board of Directors shall have the power to appoint any person
to act as assistant to any officer, or as agent for the Corporation in the
officer's stead, or to perform the duties of such officer whenever for any
reason it is impracticable for the officer to act personally, and the assistant
or acting officer or other agent so appointed by the Chairman of the Board, the
President and the Board of Directors shall have the power to perform all the
duties of the office to which he or she is so appointed to be an assistant, or
as to which he or she is so appointed to act, except as such power otherwise may
be defined or restricted by the Chairman of the Board, the President or the
Board of Directors.
4.10. SALARIES. The salaries of the principal officers shall be fixed from
time to time by the Board of Directors or by a duly authorized committee thereof
and no officer shall be prevented from receiving such salary by reason of the
fact that he or she is also a Director of the Corporation.
ARTICLE V. FUNDS OF THE CORPORATION
5.01. FUNDS. All funds of the Corporation shall be deposited or invested
as may be authorized from time to time by the Board of Directors or appropriate
committee under authorization of the Board of Directors.
5.02. NAME. All investments and deposits of funds of the Corporation shall
be made and held in its corporate name, except that securities kept under a
custodial agreement or trust arrangement with a bank or banking and trust
company may be issued in the name of a nominee of such bank or banking and trust
company and except that securities may be acquired and held in bearer form.
5.03. LOANS. All loans contracted on behalf of the Corporation and all
evidences of indebtedness that are issued in the name of the Corporation shall
be under the authority of a resolution of the Board of Directors. Such
authorization may be general or specific.
5.04. DISBURSEMENTS. All monies of the Corporation shall be disbursed by
check, draft or written order only, and all checks and orders for the payment of
money shall be signed by such Officer or Officers as may be designated by the
Board of Directors. The Officers and employees of the Corporation handling funds
and securities of the Corporation shall give surety bonds in such sums as the
Board of Directors or appropriate committee may require.
5.05. PROHIBITED TRANSACTIONS. No Director or Officer of the Corporation
shall borrow money from the Corporation or receive any compensation for selling,
aiding in the sale, negotiating for the sale of any property belonging to the
Corporation or for negotiating any loan for or by the Corporation.
5.06. VOTING OF SECURITIES OWNED BY THE CORPORATION. Subject always to the
directions of the Board of Directors:
(a) Any shares or other securities issued by any other corporation and owned
or controlled by the Corporation may be voted at any meeting of security holders
of such other corporation by the Chairman of the Board, the President or, in
their absence, any Vice President of the Corporation who may be present and
designated by the Board of Directors; and
(b) Whenever, in the judgment of the Chairman of the Board, the President
or, in their absence, a designated Vice President, it is desirable for the
Corporation to execute a proxy or written consent in respect to any shares or
other securities issued by any other corporation and owned by the Corporation,
such proxy or consent shall be executed in the name of the Corporation by the
Chairman
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of the Board, the President or a designated Vice President of the Corporation in
the order as provided in Section 4.06 hereof, without necessity of any
authorization by the Board of Directors, affixation of corporate seal or
countersignature or attestation by another Officer. Any person or persons
designated in the manner above stated as the proxy or proxies of the Corporation
shall have full right, power and authority to vote the shares or other
securities issued by such other corporation and owned by the Corporation the
same as such shares or other securities might be voted by the Corporation.
ARTICLE VI. CERTIFICATES FOR SHARES; TRANSFER OF SHARES
6.01. CERTIFICATES FOR SHARES. Certificates representing shares of the
Corporation shall be in such form, consistent with law, as shall be determined
by the Board of Directors. Such Certificates shall be signed by the Chairman of
the Board, the President or a Vice President and the Secretary or by another
Officer designated by the Chairman of the Board, the President or the Board of
Directors. All Certificates shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered on the stock transfer books of the Corporation. All Certificates
surrendered to the Corporation for transfer shall be canceled and no new
Certificate shall be issued until the former Certificate for a like number of
shares shall have been surrendered and canceled, except as provided in
Section 6.06 hereof.
6.02. FACSIMILE SIGNATURES AND SEAL. The seal of the Corporation, if any,
on any Certificates may be a facsimile. The signature of the Chairman of the
Board, the President or other authorized Officer upon a Certificate may be a
facsimile if the Certificate is manually signed on behalf of a transfer agent or
a registrar, other than the Corporation itself or an employee of the
Corporation.
6.03. SIGNATURE BY FORMER OFFICERS. If any Officer who has signed or whose
facsimile signature has been placed upon any Certificate shall have ceased to be
an Officer before such Certificate is issued, it may be issued by the
Corporation with the same effect as if he or she were an Officer at the date of
its issue.
6.04. TRANSFER OF SHARES. Prior to due presentment of a certificate for
shares for registration of transfer the Corporation may treat the registered
owner of such shares as the person exclusively entitled to vote, to receive
notifications and otherwise to have and exercise all the rights and power of an
owner. Where a certificate for shares is presented to the Corporation with a
request to register for transfer, the Corporation shall not be liable to the
owner or any other person suffering loss as a result of such registration of
transfer if (a) there were on or with the certificate the necessary
endorsements, and (b) the Corporation had no duty to inquire into adverse claims
or has discharged any such duty. The Corporation may require reasonable
assurance that such endorsements are genuine and effective and compliance with
such other regulations as may be prescribed by or under the authority of the
Board of Directors.
6.05. RESTRICTIONS ON TRANSFER. The face or reverse side of each
certificate representing shares shall bear a conspicuous notation of any
restriction imposed by the Corporation upon the transfer of such shares.
6.06. LOST, DESTROYED OR STOLEN CERTIFICATES. Where the owner claims that
certificates for shares have been lost, destroyed or wrongfully taken, a new
certificate shall be issued in place thereof if the owner (a) so requests before
the Corporation has notice that such shares have been acquired by a bona fide
purchaser, (b) files with the Corporation a sufficient indemnity bond if
required by the Board of Directors or any principal officer, and (c) satisfies
such other reasonable requirements as may be prescribed by or under the
authority of the Board of Directors.
6.07. CONSIDERATION FOR SHARES. The shares of the Corporation may be
issued for such consideration as shall be fixed from time to time by the Board
of Directors, provided that any shares
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having a par value shall not be issued for a consideration less than the par
value thereof. The consideration to be received for shares may consist of any
tangible or intangible property or benefit to the Corporation, including cash,
promissory notes, services performed, contracts for services to be performed, or
other securities of the Corporation. When the Corporation receives the
consideration for which the Board of Directors authorized the issuance of
shares, the shares issued for that consideration are fully paid and
nonassessable, except as provided by Section 180.0622(2)(b) of the Wisconsin
Business Corporation Law, or any successor statute, which may require further
assessment for unpaid wages to employees under certain circumstances. The
Corporation may place in escrow shares issued for a contact for future services
or benefits or a promissory note, or make other arrangements to restrict the
transfer of the shares, and may credit distributions in respect of the shares
against their purchase price, until the services are performed, the benefits are
received or the note is paid. If the services are not performed, the benefits
are not received or the note is not paid, the Corporation may cancel, in whole
or in part, the shares escrowed or restricted and the distributions credited.
6.08. UNCERTIFICATED SHARES. In accordance with Section 180.0626 of the
Wisconsin Business Corporation Law, or any successor statute, the Board of
Directors may issue any shares of any of its classes or series without
Certificates. The authorization does not affect shares already represented by
Certificates unless the Certificates are surrendered to the Corporation. Within
a reasonable time after the issuance or transfer of shares without Certificates,
the Corporation shall send the Shareholder a written statement of the
information required on share certificates by Sections 180.0625 and 180.0627, or
any successor statutes, if applicable, of the Wisconsin Business Corporation
Law, and by these Bylaws. The Corporation shall maintain at its offices or at
the office of its transfer agent, an original or duplicate stock transfer book
containing the names and addresses of all shareholders and the number of shares
held by each shareholder. If the shares are uncertificated, the Corporation
shall be entitled to recognize the exclusive right of a person registered on its
books as the owner of shares for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such shares on the part
of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of the State of Wisconsin.
6.09. STOCK REGULATIONS. The Board of Directors shall have the power and
authority to make all such further rules and regulations not inconsistent with
law as it may deem expedient concerning the issue, transfer and registration of
shares of the Corporation.
ARTICLE VII. FISCAL YEAR
7.01. FISCAL YEAR. The fiscal year of the Corporation shall be set by the
Board of Directors.
ARTICLE VIII. SEAL
8.01. The Board of Directors may provide a corporate seal which may be
circular in form and may have inscribed thereon the name of the Corporation and
the state of incorporation and the words "Corporate Seal."
ARTICLE IX. INDEMNIFICATION AND LIABILITY
OF OFFICERS AND DIRECTORS
9.01. INDEMNIFICATION.
(a) Any person, or such person's estate or personal representative, made or
threatened with being made a party to any action, suit, arbitration, or
proceeding (civil, criminal, administrative, or investigative, whether formal or
informal), which involves foreign, federal, state or local law, by reason of the
fact that such person is or was a Director or Officer of the Corporation or of
any corporation or other enterprise for which he or she served at the
Corporation's request as a director, officer, partner, trustee, member of any
decision-making committee, employee, or agent, shall be indemnified by the
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Corporation for all reasonable expenses incurred in the proceeding to the extent
he or she has been successful on the merits or otherwise.
(b) In cases where a person described in Paragraph (a) of this Section is
not successful on the merits or otherwise, the Corporation shall indemnify such
person against liability and reasonable expenses incurred by him or her in any
such proceeding, unless liability was incurred because the person breached or
failed to perform a duty he or she owed to the Corporation and the breach or
failure to perform constituted any of the following:
(1) A willful failure to deal fairly with the Corporation or its
shareholders in connection with a matter in which the Director or Officer
had a material conflict of interest;
(2) A violation of criminal law, unless the Director or Officer had
reasonable cause to believe his or her conduct was lawful or no reasonable
cause to believe his or her conduct was unlawful;
(3) A transaction from which the Director or Officer derived an improper
personal profit; or
(4) Willful misconduct.
(c) The determination whether indemnification shall be required under
Paragraph (b) of this Section shall be made according to one of the following
methods selected by the Director or Officer:
(1) By a majority vote of a quorum of the Board of Directors consisting
of Directors who are not at the time parties to the same or related
proceedings. If a quorum of such disinterested Directors cannot be obtained,
by majority vote of a committee duly appointed by the Board of Directors and
consisting solely of two or more Directors who are not at the time parties
to the same or related proceedings. Directors who are parties to the same or
related proceedings may participate in the designation of members of the
committee;
(2) By independent legal counsel selected by a quorum of the Board of
Directors or its committee in the manner prescribed in paragraph (1) of this
Section or, if unable to obtain such a quorum or committee, by a majority
vote of the Board of Directors, including Directors who are parties to the
same or related proceedings; or
(3) By the court conducting the proceedings or another court of
competent jurisdiction, either on application by the Director or Officer for
an initial determination or on application for review of an adverse
determination under Clause (1) or (2) of this paragraph (c).
(d) The termination of a proceeding by judgment, order, settlement or
conviction, or upon a plea of no contest or an equivalent plea, does not, by
itself, create a presumption that indemnification of the Director or Officer is
not required.
(e) A Director or Officer who seeks indemnification under this Section shall
make a written request to the Corporation.
(f) Upon written request by a Director or Officer who is a party to a
proceeding described in Paragraph (a) of this Section, the Corporation may pay
or reimburse his or her reasonable expenses as incurred if the Director or
Officer provides the Corporation with all of the following:
(1) A written affirmation of his or her good faith belief that he or she
has not breached or failed to perform his or her duties to the Corporation;
and
(2) A written undertaking, executed personally or on his or her behalf,
to repay the allowance and reasonable interest thereon, to the extent that
it is ultimately determined under Clause (1) or (2) of Paragraph (c) of this
Section, that indemnification is not required or to the extent that
indemnification is not ordered by a court under Clause (3) of Paragraph (c)
of this Section. The undertaking under this Clause (2) shall be an unlimited
general obligation of the
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Director or Officer, may be accepted without reference to his or her ability
to repay the allowance and may be secured or unsecured.
(g) Paragraphs (a) through (f) of this Section shall also apply where a
person or such person's estate or personal representative is made or threatened
with being made a party to any proceeding described in Paragraph (a) of this
Section by reason of the fact that such person is or was an employee of the
Corporation, except that in addition to the categories of conduct set forth in
Paragraph (b) of this Section in relation to which the Corporation has no duty
to indemnify, the Corporation also shall have no duty to indemnify the employee
against liability and reasonable expenses incurred by him or her in any such
proceeding if liability was incurred because the person breached or failed to
perform a duty he or she owed to the Corporation and the breach or failure to
perform constituted material negligence or material misconduct in performance of
the employee's duties to the Corporation.
(h) Unless a Director or Officer of the Corporation has knowledge that makes
reliance unwarranted, a Director or Officer, in discharging his or her duties to
the Corporation, may rely on information, opinions, reports or statements, any
of which may be written or oral, formal or informal, including financial
statements and other financial data, if prepared or presented by any of the
following:
(1) An Officer or employee of the Corporation whom the Director or
Officer believes in good faith to be reliable and competent in the matters
presented;
(2) Legal counsel, public accountants or other persons as to matters the
Director or Officer believes in good faith are within the person's
professional or expert competence; or
(3) In the case of reliance by a Director, a committee of the Board of
Directors of which the Director is not a member if the Director believes in
good faith that the committee merits confidence.
This Paragraph (h) does not apply to the liability of a Director for
improper declaration of dividends, distribution of assets, corporate purchase of
its own shares, distribution of assets to Shareholders during liquidation,
corporate loans made to an Officer or Director under Wisconsin Business
Corporation Law Section 180.0832(1) or the reliance of a Director on financial
information represented as correct by Officers or independent or certified
public accountants under Wisconsin Business Corporation Law Section 180.0826.
(i) In discharging his or her duties to the Corporation and in determining
what he or she believes to be in the best interest of the Corporation, a
Director or Officer may, in addition to considering the effects of any action on
Shareholders, consider the following:
(1) The effects of the action on employees, suppliers and customers of
the Corporation;
(2) The effects of the action on communities in which the Corporation
operates; or
(3) Any other factor the Director or Officer considers pertinent.
9.02. LIMITED LIABILITY OF DIRECTORS AND OFFICERS TO THE CORPORATION AND
SHAREHOLDERS.
(a) Except as provided in Paragraph (b) of this Section, a Director or
Officer is not liable to the Corporation, its shareholders or any person
asserting rights on behalf of the Corporation or shareholders, for damages,
settlements, fees, fines, penalties or other monetary liabilities arising from a
breach of, or failure to perform, any duty resulting solely from his or her
status as a Director, unless the person asserting liability proves that the
breach or failure to perform constitutes any of the following:
(1) A willful failure to deal fairly with the Corporation or
Shareholders in connection with a matter in which the Director or Officer
had a material conflict of interest;
G-19
<PAGE>
(2) A violation of criminal law, unless the Director or Officer had
reasonable cause to believe his or her conduct was lawful or no reasonable
cause to believe his or her conduct was unlawful;
(3) A transaction from which the Director or Officer derived an improper
personal profit; or
(4) Willful misconduct.
(b) This Section does not apply to the liability of a Director or Officer
for improper declaration of dividends, distribution of assets, corporate
purchase of its own shares, or distribution of assets to shareholders during
liquidation, or for corporate loans made to an Officer or Director under
Wisconsin Business Corporation Law Section 180.0832(1).
ARTICLE X. AMENDMENTS
10.01. AMENDMENTS OF BYLAWS.
(a) The Board of Directors shall have the power to amend these Bylaws by the
vote of a majority of the directors present at a meeting at which a quorum is
then present except that any amendment to Sections 2.02, 2.08(b), 2.12, 2.14,
3.02, 3.04, 10.01, 10.02 or Article IX of these Bylaws shall require the
approval of an Independent Board Majority.
(b) The holders of the Corporation's capital stock shall not have the power
to amend or replace these Bylaws in whole or in part unless such amendment or
replacement shall be approved by the holders of at least seventy-five percent
(75%) of the issued and outstanding shares of Common Stock of the Corporation.
(c) Notwithstanding anything contained in this Article X to the contrary,
for so long as the Foundation Beneficially Owns twenty percent (20%) or more of
the issued and outstanding shares of Capital Stock as contemplated under the
provisions of the Articles of Incorporation, any amendment to these Bylaws shall
be subject to the prior review and approval of the Office of the Commissioner of
Insurance before such amendment shall be given full force and effect.
10.02. INCONSISTENT PROVISIONS. The Board of Directors shall have the
authority to interpret these Bylaws and to resolve any question or issue which
may arise under these Bylaws. Whenever possible, each provision of these Bylaws
shall be interpreted in such manner as to be valid and enforceable under
applicable law and the provision of the Articles of Incorporation, but if any
provision of these Bylaws shall be held to be prohibited by or unenforceable
under or to be in irreconcilable conflict with applicable law or the Articles of
Incorporation, (i) such provision shall be applied to accomplish the objectives
of the provision as originally written to the fullest extent permitted by law,
and (ii) all other provisions of these Bylaws shall remain in full force and
effect.
ARTICLE XI. DEFINITIONS
11.01. DEFINITIONS. Those capitalized terms which remain undefined herein
shall be accorded the definition for such terms in the Articles of
Incorporation.
G-20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Bylaws of UWS and Wisconsin law, directors and officers of UWS are
entitled to mandatory indemnification from UWS 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 UWS and such
breach or failure constituted: (i) a willful failure to deal fairly with UWS 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. Wisconsin law 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 Wisconsin law, unless the Articles of Incorporation provide otherwise,
directors of UWS are not subject to personal liability to UWS, 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 Wisconsin law. 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 equity 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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
2.1 Exchange Agreement, dated December 22, 2000, by and among
United Wisconsin Services, Inc. ("UWS"), Wisconsin BC
Holdings LLC and Blue Cross & Blue Shield United of
Wisconsin ("BCBSUW") (including the proposed Amended and
Restated Articles of Incorporation and Bylaws of Cobalt
Corporation, attached as Exhibits A and B thereto).(1)
3.1 Articles of Incorporation of Registrant.(2)
3.2 Bylaws of Registrant.(2)
4.1 Specimen UWS common stock Certificate.(10)
5.1 Opinion of Michael Best & Friedrich LLP.(10)
8.1 Opinion of Michael Best & Friedrich LLP as to Tax
Matters.(10)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
8.2 Opinion of Foley & Lardner as to Tax Matters.(10)
10.1 Consolidated Federal Income Tax Allocation Agreement among
BCBSUW, United Wisconsin Insurance Company ("UWIC"), UWS,
United Wisconsin Proservices, Inc. ("UWPS"), Leasing
Unlimited, Inc., United Wisconsin Life Insurance Company
("UWLIC"), Compcare Health Services Insurance Corporation
("COMPCARE"), ProHealth, Inc. and Take Control, Inc., as
amended by Amendments dated August 6, 1993 and May 9, 1994,
respectively.(2)
10.2 Comprehensive Tax Allocation Agreement dated July 1, 1994
among BCBSUW, UWS and various subsidiaries thereof.(2)
10.3 Federal Income Tax Allocation Agreement among BCBSUW, UWS,
UWIC, UWLIC, UWPS, Compcare, Take Control, Inc., Meridian
Resource Corporation ("MRC"), Valley Health Plan, Inc.
("VALLEY") and United Wisconsin Capital Corporation ("UWCC")
for the period commencing January 1, 1993, as amended.(2)
10.4 Consolidated Federal Income Tax Allocation Agreement among
UWS, UWIC, Compcare, Meridian Managed Care, Inc. ("MMC"),
MRC, Valley, UWCC, Your Health Plan, Inc. ("YHP"), HMO of
Wisconsin Insurance Corporation ("HMOW"), HMO-W, Inc. and
Hometown Insurance Services, Inc. ("HTWN") commencing
October 1, 1994.(2)
10.5 Consolidated Federal Income Tax Allocation Agreement among
UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley, UWCC, YHP,
HMOW, HMO-W, Inc., HTWN, United Heartland, Inc. ("UHI") and
Meridian Marketing Services, Inc. ("MMS") commencing January
1, 1995.(2)
10.6 Consolidated Federal Income Tax Allocation Agreement among
UWS, UWIC, UWPS, Compcare, MMC, MRC, Valley, AMS HMO
Holdings, Inc. (f/k/a UWCC), Unity Health Plans Insurance
Corporation ("UNITY") (f/k/a HMOW), HMO-W, Inc., HTWN, UHI
and MMS for the period commencing January 1, 1996, and
American Medical Security Holdings, Inc., American Medical
Security, Inc., American Medical Insurance Company,
Continental Plan Services, Inc., Nurse Healthline, Inc.,
Accountable Health Plans, Inc., AMS Provider Partnerships,
Inc., Unity HMO of Illinois, Inc., American Medical Security
Insurance Company of Ohio and American Medical Security
Insurance Company of Georgia for the period commencing
December 3, 1996.(2)
10.7 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.
("INI"), Heartland Dental Plan, Inc. ("HDP") and Heartland
Dental Plan of Michigan, Inc. ("HDPM") dated September 25,
1998. (5)
10.8 Second Amended and Restated Joint Venture Agreement by and
among BCBSUW, UWS, Valley and Midelfort Clinic, Ltd., Mayo
Health Systems dated January 1, 2000.(8)
10.9 Intercompany Service Agreement between BCBSUW, UWS (assigned
to the Registrant) and UWIC, effective January 1, 1998.(2)
10.10 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UWIC, effective January 1, 1998.(2)
10.11 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UHI, effective January 1, 1998.(2)
10.12 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MMC, effective January 1, 1998.(2)
10.13 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare on behalf of its
Pharmacy Services department, effective January 1, 1998.(2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
10.14 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare on behalf of its RxCel
department, effective January 1, 1998.(2)
10.15 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant), MMC and Compcare, effective January 1,
1998.(2)
10.16 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.(2)
10.17 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Consulting
Services department, effective January 1, 1998.(2)
10.18 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and MRC on behalf of its Audit Services
department, effective January 1, 1998.(2)
10.19 Intercompany Service Agreement among BCBSUW, UWS (assigned
to the Registrant) and UWPS, effective January 1, 1998.(2)
10.20 Service Agreement between BCBSUW and VALLEY, effective
January 1, 1993.(2)
10.21 Service Agreement between UWS (assigned to the Registrant)
and Community Health Systems, LLC, dated November 1,
1994.(2)
10.22 Form of Service Agreement between United Wisconsin Services,
Inc. (f/k/a Newco/UWS, Inc.) and American Medical Security
Group, Inc. (f/k/a United Wisconsin Services, Inc.).(2)
10.23 Second Amended and Restated Joint Venture Agreement by and
among UNITY, BCBSUW, UWS, University Health Care, Inc.,
University Community Clinics, Inc. (f/k/a Health
Professionals, Inc.) and Health Professionals of Wisconsin,
Inc., dated September 30, 1999 (As amended October 29,
1999).(6)
10.24 Amended and Restated Joint Venture Agreement by and among
Unity, BCBSUW, UWS and Community Health Systems, LLC, dated
October 25, 1999.(7)
10.25 Service Agreement between UWS (assigned to the Registrant)
and HPI dated November 1, 1994.(2)
10.26 License Agreement between UWS (assigned to the Registrant)
and U-Care dated November 1, 1994.(2)
10.27 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.(2)
10.28 Information System Service Agreement among Blue Cross Blue
Shield of South Carolina and Blue Cross & Blue Shield United
of Wisconsin dated August 23, 1996, as amended January 1,
1997.(2)
10.29 Form of Trademark Assignment Agreement by and among UWS, the
Registrant and UWLIC.(2)
10.30 Registrant's Equity Incentive Plan as revised.(3)
10.31 1998 Management Incentive Plan.(2)
10.32 Registrant's Deferred Compensation Plan for Directors.(2)
10.33 Registrant/BCBSUW 401(k) Plan.(2)
10.34 Registrant/BCBSUW Union Employees 401(k) Plan.(2)
10.35 Unity Health Plans Insurance Corp. 1998 Profit Sharing
Plan.(2)
10.36 Registrant's and BCBSUW's 1998 Profit Sharing Plan.(2)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
10.37 Registrant Voluntary Deferred Compensation Plan.(2)
10.38 Registrant Deferred Compensation Trust.(2)
10.39 Registrant/BCBSUW Hourly Pension Plan.(2)
10.40 Registrant/BCBSUW Salaried Pension Plan.(2)
10.41 Registrant/BCBSUW Supplemental Executive Retirement Plan.(2)
10.42 Registrant Stock Appreciation Rights Plan.(2)
10.43 Note and Pledge Agreement dated October 30, 1996, between
BCBSUW and United Wisconsin Services, Inc. (assumed by and
assigned to the Registrant).(2)
10.44 Administrative Services Agreement between UWSI and HMO of
Wisconsin Insurance Corporation, effective November 1,
1994.(2)
10.45 Assumption and Administration Agreement by and among
Wellmark, Inc., Wellmark Community Insurance, Inc., BCBSUW
and UWIC, effective June 1, 2000.(9)
10.46 Amendment to Employee Benefits Agreement between UWS and
American Medical Security Group, Inc. effective September
21, 1998.(3)
10.47 Executive Severance Agreement by and between UWS and Michael
E. Bernstein effective June 8, 2000.(9)
10.48 Executive Severance Agreement by and between UWS and
Mary I. Traver effective October 16, 2000.
11 Statement regarding computation of per share earnings. (See
Note 2 of Notes to Combined Financial Statements).(2)
21 Subsidiaries of the Registrant.(7)
23.1 Consent of Ernst & Young LLP (UWS).
23.2 Consent of Ernst & Young LLP (BCBSUW).
23.2 Consent of Michael Best & Friedrich LLP (included in Exhibit
5.1).(10)
24 Power of Attorney (included on Signature Page of this
Registration Statement).
27 Financial Data Schedule.(10)
99 Form of Proxy for Special Meeting of Shareholders of UWS.
</TABLE>
------------------------
(1) Incorporated by reference to Annexes A, F and G to Registrant's Proxy
Statement/Prospectus, which is part of this Registration Statement.
(2) Incorporated by reference to Registrant's Registration Statement on
Form 10 declared effective September 11, 1998.
(3) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
(4) Incorporated by reference to Registrant's Registration Statement on
Form S-1 declared effective November 25, 1998.
(5) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998.
(6) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1999.
(7) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999.
II-4
<PAGE>
(8) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended March 31, 2000.
(9) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 2000.
(10) To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES. Financial Statement Schedules are
attached as Schedule F to the Proxy Statement/Prospectus which is a part of this
Registration Statement.
(C) OPINIONS. The "adequacy opinion" of Lehman Brothers Inc., attached as
ANNEX B to the Proxy Statement/ Prospectus, which is part of this Registration
Statement.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(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, as
amended; (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.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and (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.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, 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.
(d) Prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this Registration Statement, by
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form;
(e) Every prospectus: (i) that is filed pursuant to paragraph (a)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
II-5
<PAGE>
(f) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the 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 director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
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 the Act and will be governed by the final adjudication of such
issue;
(g) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form S-4 under
the Securities Act of 1933, within one business day of receipt of any such
request, and to send the incorporated documents by first class mail or other
equally prompt means, including information contained in documents filed after
the effective date of the registration statement through the date of responding
to such request; and
(h) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-6
<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, State of
Wisconsin, on December 22, 2000.
<TABLE>
<S> <C> <C>
UNITED WISCONSIN SERVICES, INC.
By: /s/ THOMAS R. HEFTY
--------------------------------------------
Its: Chairman, President & Chief Executive Officer
--------------------------------------------
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Thomas R. Hefty
and Gail L. Hanson and each of them his or her true and lawful attorney and
agent to execute in the name of each such person and to file any amendments to
this Registration Statement necessary or advisable to enable the registrant to
comply with the Securities Act of 1933, as amended, and any rules, regulations
and requirements of the Securities and Exchange Commission in respect thereof in
connection with this Registration Statement, which amendments may make any such
changes in this Registration Statement as the registrant deems appropriate and
to execute any and all instruments and documents filed as a part or in
connection with this Registration Statement or any amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the following
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THOMAS R. HEFTY Chairman of the Board (Principal
---------------------------- Executive Officer), President, Chief December 22, 2000
Thomas R. Hefty Executive Officer and Director
/s/ GAIL L. HANSON Vice President and Chief Financial
---------------------------- Officer (Principal Financial Officer and December 22, 2000
Gail L. Hanson Chief Accounting Officer)
/s/ RICHARD A. ABDOO
---------------------------- Director December 22, 2000
Richard A. Abdoo
/s/ BARRY K. ALLEN
---------------------------- Director December 22, 2000
Barry K. Allen
/s/ MICHAEL D. DUNHAM
---------------------------- Director December 22, 2000
Michael D. Dunham
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES C. HICKMAN
---------------------------- Director December 22, 2000
James C. Hickman
/s/ JAMES L. FORBES
---------------------------- Director December 22, 2000
James L. Forbes
/s/ EUGENE A. MENDEN
---------------------------- Director December 22, 2000
Eugene A. Menden
/s/ WILLIAM C. RUPP, M.D.
---------------------------- Director December 22, 2000
William C. Rupp, M.D.
/s/ CAROL N. SKORNICKA
---------------------------- Director December 22, 2000
Carol N. Skornicka
</TABLE>
II-8
