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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996
Commission File Number 0-19506
UNITED WISCONSIN SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1431799
(State of Incorporation) (I.R.S. Employer
Indentification No.)
401 West Michigan Street, Milwaukee, Wisconsin 53203-2896
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 226-6900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Number of shares of Common Stock outstanding as of July 31, 1996 was 12,599,715.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1996 1995
------ ---------------------------
(In thousands)
Investments:
Bonds available for sale, at market $ 414,924 $ 461,915
Bonds held to maturity, at amortized cost 10,635 9,850
--------- ---------
Total bonds 425,559 471,765
Stocks, at market 64,787 71,582
--------- ---------
Total investments 490,346 543,347
Cash and cash equivalents 16,658 38,290
Receivables:
Due from affiliates 1,169 14,789
Other receivables 76,591 73,265
--------- ---------
Total receivables 77,760 88,054
Other assets 56,810 51,598
--------- ---------
Total assets $ 641,574 $ 721,289
--------- ---------
--------- ---------
See Notes to Interim Consolidated Financial Statements
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UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------------------------------ -------------------------
(In thousands)
Liabilities:
Medical and other benefits payable $ 236,330 $ 245,118
Advance premiums 46,599 41,456
Due to affiliates 31,734 71,508
Funds held on behalf of affiliated reinsurers 28,344 60,041
Other liabilities 48,530 45,857
Subordinated notes 44,888 44,898
--------- ---------
Total liabilities 436,425 508,878
Shareholders' equity:
Common stock (no par value, $1 stated value,
50,000,000 shares authorized, 12,599,715 shares
issued and outstanding at June 30, 1996 and
December 31, 1995) 12,600 12,600
Paid-in capital 86,902 86,902
Retained earnings 103,824 103,361
Unrealized gains on investments 1,823 9,548
--------- ---------
Total shareholders' equity 205,149 212,411
--------- ---------
Total liabilities and shareholders' equity $ 641,574 $ 721,289
--------- ---------
--------- ---------
See Notes to Interim Consolidated Financial Statements
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UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Revenues:
Premium revenue $ 264,120 $ 237,678 $ 525,769 $ 467,912
Other revenue 6,842 6,329 14,108 12,730
Investment income 7,381 6,383 14,755 12,678
Realized investment gains 2,369 2,805 7,484 2,969
--------- --------- --------- ---------
Total revenues 280,712 253,195 562,116 496,289
Expenses:
Medical and other benefits 216,267 209,795 437,706 396,239
Commission expenses 17,491 15,843 34,931 30,890
Administrative expenses 33,496 29,155 66,406 58,012
Premium taxes and other assessments 3,555 3,043 7,041 5,846
Interest and profit sharing on joint ventures 3,973 3,133 8,393 5,444
Interest expense on subordinated notes 869 871 1,739 1,742
Dividends on preferred stock of subsidiary 0 0 0 204
--------- --------- --------- ---------
Total expenses 275,651 261,840 556,216 498,377
--------- --------- --------- ---------
Income (loss) before income tax expense (benefit) 5,061 (8,645) 5,900 (2,088)
Income tax expense (benefit) 1,866 (2,967) 2,413 (575)
--------- --------- --------- ---------
Net income (loss) $ 3,195 $ (5,678) $ 3,487 $ (1,513)
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (loss) per common share $ 0.26 $ (0.45) $ 0.28 $ (0.13)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See Notes to Interim Consolidated Financial Statements
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UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------
1996 1995
---------- ----------
(In thousands)
<S> <C> <C>
Operating activities:
Net income (loss) $ 3,487 $ (1,513)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Bond and other amortization 898 1,709
Realized investment gains (7,484) (2,969)
Deferred income tax expense (benefit) 2,134 (9)
Changes in other operating accounts:
Medical and other benefits payable (8,788) 25,115
Advance premiums 5,143 1,076
Due to/from affiliates 23,846 10,837
Other receivables (3,326) (23,435)
Funds held on behalf of affiliated reinsurers (25,720) (8,639)
Other - net (7,777) (8,439)
---------- ----------
Net cash used in operating activities (17,587) (6,267)
Investing activities:
Purchases of available for sale investments (366,838) (382,991)
Proceeds from sale of available for sale investments 359,742 364,672
Proceeds from maturity of available for sale investments 50,450 11,400
Purchases of held to maturity investments (970) (2,299)
Proceeds from maturity of held to maturity investments 280 1,010
Change in investment in unconsolidated affiliates (116) 505
Purchases of other investments (249) (423)
---------- ----------
Net cash provided by (used in) investing activities 42,299 (8,126)
Financing activities:
Capital contribution - 716
Cash dividends paid (3,024) (3,138)
Redemption of preferred stock of subsidiary - (30,000)
Redemption of redeemable preferred stock - (2,007)
Common stock issuance - 16,628
Repayment of subordinated notes (10) (10)
Net borrowings under line of credit agreement 6,690 -
Payment on surplus note with affiliate (50,000) -
---------- ----------
Net cash used in financing activities (46,344) (17,811)
---------- ----------
Cash and cash equivalents:
Decrease during period (21,632) (32,204)
Balance at beginning of year 38,290 84,717
---------- ----------
Balance at end of period $ 16,658 $ 52,513
---------- ----------
---------- ----------
</TABLE>
Notes to Interim Consolidated Financial Statements
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UNITED WISCONSIN SERVICES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial
statements for United Wisconsin Services, Inc. (the Company) have been
prepared in accordance with generally accepted accounting principles.
The financial information included herein has been prepared by
management without audit by independent certified public accountants.
The unaudited financial statements include all adjustments and
accruals consisting only of normal recurring accrual adjustments which
are, in the opinion of management, necessary for a fair presentation
of the consolidated financial position and results of operations for
the interim periods. The results of operations for any interim period
are not necessarily indicative of results for the full year. The
unaudited interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto for the year ended December 31, 1995, incorporated by
reference or included in the Company's Form 10-K, as filed with the
Securities and Exchange Commission.
EARNINGS (LOSS) PER COMMON SHARE - Earnings (loss) per common share
are computed by dividing net income, after reduction for dividends and
discounts on redeemable preferred stock, by the weighted average
number of common shares outstanding. Weighted average common shares
outstanding were 12,599,715 for the three months ended June 30, 1996
and 1995, and 12,599,715 and 12,500,674 for the six months ended June
30, 1996 and 1995, respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to the
consolidated financial statements for 1995 to conform with the 1996
presentation.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
United Wisconsin Services, Inc. (the Company) is a leading provider of
managed health care services and employee benefit products. The Company's
three primary product lines are (i) Health Maintenance Organization (HMO)
products, including Compcare Health Services Insurance Corporation
(Compcare), Valley Health Plan, Inc. (Valley), Unity Health Plans Insurance
Corporation (Unity), and certain point-of-service (POS) and other related
products managed by Compcare and Valley; (ii) small group preferred provider
organization (PPO) products and other non-PPO products sold through American
Medical Security Group, Inc. (AMS), the Company's joint venture partner in
the marketing and administration of low-cost health insurance primarily to
employer groups of 100 or fewer employees on behalf of the Company; and (iii)
specialty managed care products and services, including dental, life,
disability and workers' compensation products, managed care consulting,
electronic claim submission, pharmaceutical management and managed mental
health services. These three product groups represented the following
percentages of the Company's premium and other revenue and the following
amounts of income (loss) before income tax expense for the periods noted.
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -----------------
1996 1995 1996 1995
-------- -------- -------- -------
PREMIUM AND OTHER REVENUE (As a percentage of the total)
- -------------------------
HMO products 38.6% 40.7% 38.8% 41.4%
Small group PPO products 49.4 47.1 49.1 46.4
Specialty managed care
products and services 13.1 12.9 13.1 13.0
Intercompany elimination (1.1) (0.7) (1.0) (0.8)
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (In millions of dollars)
- ----------------------------
HMO products $ 1.2 $ (1.3) $ 2.3 $ 1.0
Small group PPO products (3.1) (12.3) (9.1) (11.5)
Specialty managed care
products and services 7.9 5.9 14.6 10.5
Holding company expenses (0.9) (0.9) (1.9) (2.1)
----- ----- ----- -----
Total $ 5.1 $ (8.6) $ 5.9 $(2.1)
----- ----- ----- -----
----- ----- ----- -----
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The Company's revenues are derived primarily from premiums, while
medical benefits constitute the majority of expenses. Profitability is
directly affected by many factors including 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
TOTAL REVENUES
Total revenues for the three months ended June 30, 1996 increased 10.9%
to $280.7 million from $253.2 million for the three months ended June 30,
1995, due to an increase in premium revenue of $26.4 million, an increase in
investment income and realized investment gains of $0.6 million and an
increase in other revenue of $0.5 million. On a year-to-date basis, total
revenues increased 13.3% to $562.1 million from $496.3 million for the same
period in the prior year, due to an increase in premium revenue of $57.8
million, an increase in investment income and realized investment gains of
$6.6 million and an increase in other revenue of $1.4 million.
PREMIUM AND OTHER REVENUE -- HMO premiums for the three months ended
June 30, 1996 increased 5.4% to $104.7 million from $99.3 million for the
same period in the prior year. Average HMO medical premium per member
increased by 2.7% from the second quarter of 1995 to the second quarter of
1996. The average number of HMO medical members for the three months ended
June 30, 1996 increased 2.1% to 259,614 from 254,238 for the same period in
the prior year.
HMO premiums for the six months ended June 30, 1996 increased 5.3% to
$209.3 million from $196.7 million for the same period in the prior year.
Average HMO medical premium per member increased by 3.1% for the six months
ended June 30, 1996, compared with the same period in the prior year. The
average number of HMO medical members for the six months ended June 30, 1996
increased 2.4% to 259,911 from 253,889 for the same period in the prior year.
Small group PPO premiums for the three months ended June 30, 1996
increased 16.4% to $133.9 million from $115.0 million for the same period in
the prior year, due primarily to growth in the average number of insured
medical contracts outstanding, which increased 12.3% to 323,089 for the
second quarter of 1996 from 287,700 for the second quarter of 1995. Average
small group PPO insured medical premium per insured medical contract
increased by 4.4% from the second quarter of 1995 to the second quarter of
1996.
Small group PPO premiums for the six months ended June 30, 1996
increased 18.8% to $265.2 million from $223.2 million for the same period in
the prior year, due primarily to growth in the
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average number of medical contracts outstanding, which increased 15.6% to
322,350 for the six months ended June 30, 1996, compared with 278,783 for the
same period in the prior year. Average small group PPO insured medical
premium per insured medical contract increased by 3.5% for the six months
ended June 30, 1996, compared with the same period in the prior year. See
"Expense Ratio - Medical Loss Ratio" for a further discussion of pricing
actions on small group PPO products.
Premium and other revenue from specialty managed care products and
services for the three months ended June 30, 1996 increased 12.7% to $35.6
million from $31.5 million for the second quarter of 1995. This increase is
due primarily to an increase in life premiums of $1.5 million resulting from
an increase in contracts, and a $1.1 million increase in other revenue for
CNR Health, Inc. (CNR), resulting from increased sales of services.
Premium and other revenue from specialty managed care products and
services for the six months ended June 30, 1996 increased 13.2% to $70.7
million from $62.4 million for the same period in the prior year. This
increase is due primarily to an increase in life premiums of $3.8 million
resulting from an increase in contracts, and a $2.2 million increase in other
revenue for CNR, resulting from increased sales of services.
INVESTMENT INCOME AND REALIZED GAINS -- Investment income for the three
months ended June 30, 1996 increased 15.6% to $7.4 million from $6.4 million
for the three months ended June 30, 1995. On a year-to-date basis, investment
income increased 16.4% to $14.8 million from $12.7 million for the same
period in the prior year. These increases are due primarily to an increased
level of invested assets due to growth in premiums and recent capital raising
activities, including $16.6 million from a public offering of the Company's
common stock in February 1995 and $65.0 million from Blue Cross & Blue Shield
United of Wisconsin (BSBSUW) in December of 1995 to United Wisconsin
Insurance Company (UWIC) under a Surplus Note Agreement, which is guaranteed
by the Company. During the first six months of 1996, $50.0 million was repaid
on this Surplus Note. See "Liquidity and Capital Resources". Investment
income on the proceeds of the Surplus Note is offset by the related interest
expense on the Surplus Note, which is netted against investment income on the
Company's statement of income for the first six months of 1996.
Average invested assets, excluding the proceeds of the Surplus Note, for
the three months ended June 30, 1996 increased 12.0% to $520.2 million from
$464.6 million for the three months ended June 30, 1995. On a year-to-date
basis, average invested assets increased 13.6% to $525.6 million from $462.5
million for the first six months of the prior year. The average annual
investment yield, excluding net realized gains (losses), was 5.8% and 5.7%
for the three and six month periods ended June 30, 1996, compared with 5.4%
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for both comparable periods in the prior year.
Net realized investment gains for the second quarter of 1996 decreased
to $2.4 million, compared with a gain of $2.8 million for the second quarter
of 1995. For the six months ended June 30, 1996, realized investment gains
increased to $7.5 million from $3.0 million for the same period in the prior
year. Investment gains are realized in the normal investment process in
response to market opportunities. In addition, during the first and second
quarters of 1996 securities were sold (i) as funds were transferred from UWIC
to United Wisconsin Life Insurance Company (UWLIC) associated with the
transfer of claim reserves on the small group PPO business, (ii) to repay
$50.0 million on the Surplus Note with BCBSUW and (iii) to effect a $50.0
million capital contribution from the Company to UWLIC to provide UWLIC with
sufficient capital to support the small group PPO business sold by AMS as the
business transitions from UWIC to UWLIC. The transfer of the small group PPO
business and supporting capital from UWIC to UWLIC is related to the
Company's planned acquisition of the remaining interest in AMS. See
"Liquidity and Capital Resources." The Company will make an additional
capital contribution to UWLIC of $20.0 million in the third quarter of 1996,
resulting in total capital contributions to UWLIC in 1996 of $70.0 million.
The source of funds for these capital contributions was an extraordinary
dividend from subsidiaries in December of 1995, which was substantially
collected from UWIC.
In connection with the AMS joint venture, the Company holds funds on
behalf of affiliated reinsurers. Investment income and realized gains
attributable to those funds are included in their respective captions on the
statements of income and are offset by amounts reported as interest and
profit sharing on joint ventures on the Company's statements of income.
EXPENSE RATIOS
MEDICAL LOSS RATIO -- The combined medical loss ratio for HMO and small
group PPO products for the three months ended June 30, 1996 decreased to
84.1% from 90.1% for the same period in the prior year, due to decreases in
both the HMO and small group PPO component loss ratios. On a year-to-date
basis, the combined medical loss ratio decreased to 85.4% from 86.2% for the
first six months of 1995.
The medical loss ratio for HMO products for the three months ended June
30, 1996 was 90.5%, compared with 92.5% for the same period in the prior
year. On a year-to-date basis, the medical loss ratio for HMO products
decreased to 90.4% from 90.7% for the first six months of 1995. The Company
has taken and continues to take steps to lower the medical loss ratio for HMO
products, including, among other actions, negotiation of more favorable
provider contracts, selectively increasing premium rates, review of
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underwriting practices, review of managed care procedures, and selective
product design changes.
The medical loss ratio for small group PPO products for the three months
ended June 30, 1996 decreased to 79.2% from 88.0% for the same period in the
prior year. On a year-to-date basis, the medical loss ratio for small group
PPO products decreased to 81.4% from 82.1% for the first six months of 1995.
During 1995, management determined that the liability for unpaid insured
medical claims at December 31, 1994 was deficient by approximately $5.6
million, net of amounts allocated to an insurance subsidiary of AMS. This
deficiency was charged to operations during the first six months of 1995,
which increased the reported medical loss ratio for the six-month period by
approximately 2.5 percentage points.Products sold by AMS, which are more
sensitive to changes in health care costs than the Company's other products,
have been adversely affected since the first quarter of 1995 by an unexpected
increase in the rate of health care inflation. The rate of change for health
care costs for the small group PPO products on a per contract basis
experienced a significant increase in late 1994 and early 1995. Since the
second quarter of 1995, the rate of change in health care costs for insured
medical products sold by AMS has remained fairly flat at approximately 10%.
This stability in the rate of inflation has allowed the Company to better
estimate health care costs in the pricing of its products.
The increase in medical costs in 1995 and 1996 has affected other
companies operating in the small group PPO marketplace. The small group PPO
products utilize a variety of provider reimbursement arrangements, many of
which are based on, but do not necessarily control, provider prices. A
number of steps have been and are continuing to be taken in an effort to
improve the profitability of the small group PPO business, including (i)
selective price increases, (ii) modification of the design of certain PPO
products to adjust to the changed market conditions, inflation patterns and
utilization trends, (iii) a revision of underwriting practices to improve
risk identification, and (iv) review and modification of provider contracting
arrangements, including direct contracting with providers to better control
health care costs.
AMS began implementing more significant rate increases on renewals of
its small group PPO insured medical products in the third quarter of 1995.
For policies sold with effective dates of September 1995 through August 1996,
increases have averaged approximately 21%. These rate increases take effect
as groups renew, and a portion of the business renews each month. As such, it
takes nearly a full year from the effective date of the renewals
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to fully reflect the impact of the rate increases in premium revenues.
Therefore, premium revenue per contract is expected to increase during 1996
as these rate increases continue to cycle through existing small group PPO
customers on their respective renewal dates and as new groups are sold at
higher rates. The impact of these rate increases will be moderated to the
extent the insured selects a different level of benefits, deductibles, or
co-payments. Such selections, however, should also have a corresponding
impact on the medical costs incurred by the Company.
COMMISSION EXPENSE RATIO -- The combined commission expense ratio for
HMO products and small group PPO products for the three months ended June 30,
1996 decreased to 6.7% from 6.8% for the same period in the prior year. On a
year-to-date basis, the combined commission expense ratio remained constant
at 6.7% for the first six months of 1996 and 1995. The commission ratio for
small group PPO products for the three months ended June 30, 1996 was 11.6%,
compared with 12.2% for the three months ended June 30, 1995. On a
year-to-date basis, the commission ratio for small group PPO products for the
six months ended June 30, 1996 was 11.7%, compared with 12.2% for the six
months ended June 30, 1995. Over time, renewal business has gradually
represented a larger proportion of the total small group PPO business. Since
renewal commissions are typically lower than commissions on new sales, this
has contributed to the decrease in the small group PPO commission ratio. The
commission ratio for HMO products has remained steady at 0.5% for the three
and six month periods ended June 30, 1996 and 1995. Small group PPO products
are sold exclusively through independent agents who are compensated through
commissions, while the Company's HMO products are primarily sold directly by
the Company's sales force. The costs of the Company's sales are included in
administrative expenses and are, therefore, not reflected in the commission
expense ratio.
ADMINISTRATIVE EXPENSE RATIO -- The combined administrative expense
ratio for HMO products and small group PPO products for the second quarter of
1996 increased to 9.4% from 9.2% for the second quarter of 1995. On a
year-to-date basis, the combined administrative expense ratio increased to
9.3% from 9.2% for the same period in the prior year. When the component
ratios are viewed separately the administrative expense ratio for small group
PPO products for the three months and six months ended June 30, 1996
increased to 10.1% from 10.0% for the same periods in the prior year. The
second quarter ratio for HMO products increased to 8.4% from 8.2% for the
second quarter of 1995 and the year-to-date ratio increased to 8.4% from 8.3%
for the same period in the prior year.
OTHER EXPENSES
Premium taxes and other assessments for the second quarter of 1996
increased to $3.6 million from $3.0 million for the second
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quarter of 1995, while the year-to-date totals similarly increased to $7.0
million from $5.8 million for the same period in the prior year. These
increases are due primarily to premium taxes on the increased volume of
business sold by AMS outside Wisconsin.
Interest and profit sharing on joint ventures for the second quarter of
1996 increased to $4.0 million from $3.1 million for the second quarter of
1995, while the year-to-date totals similarly increased to $8.4 million from
$5.4 million for the same period in the prior year. Of these balances, $3.3
million and $2.6 million for the three months ended June 30, 1996 and 1995,
respectively, and $6.8 million and $4.4 million for the six months ended June
30, 1996 and 1995, respectively, were due to investment income and realized
investment gains on funds held by the Company on behalf of American Medical
Security Insurance Company (AMSIC), an insurance subsidiary of AMS. See
"Investment Income and Realized Gains" for a discussion of the increase in
realized gains in 1996.
The Company also recorded interest expense related to the issuance of
$45.0 million of Subordinated Notes in 1993 totaling $0.9 million for the
three months ended June 30, 1996 and 1995, and $1.7 million for the six
months ended June 30, 1996 and 1995.
NET INCOME
Consolidated net income for the three months ended June 30, 1996
increased to $3.2 million, or $0.26 per share, from a loss of $5.7 million,
or $0.45 per share, for the same period in the prior year. Consolidated net
income for the six months ended June 30, 1996 increased to $3.5 million, or
$0.28 per share, from a loss of $1.5 million, or $0.13 per share, for the
same period in the prior year.
Pre-tax income (loss) for small group PPO products for the three months
ended June 30, 1996 increased to a loss of $3.1 million, compared with a loss
of $12.3 million for the same period in the prior year. Pre-tax income (loss)
for small group PPO products for the six months ended June 30, 1996 increased
to a loss of $9.1 million, compared with a loss of $11.5 million for the same
period in the prior year. The increases are due primarily to an improved
medical loss ratio in 1996, compared with the prior year. See "Expense Ratios
- -- Medical Loss Ratio."
Pre-tax income (loss) for HMO products for the three months ended June
30, 1996 increased to a gain of $1.2 million, compared with a loss of $1.3
million for the same period in the prior year. Pre-tax income for HMO
products for the six months ended June 30, 1996 increased to a gain of $2.3
million, compared with a gain of $1.0 million for the same period in the
prior year. The increase in pre-tax income is due primarily to an improved
medical loss ratio in 1996, compared with the prior year. See "Expense Ratios
- -- Medical Loss Ratio."
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Pre-tax income for specialty managed care products and services for the
three months ended June 30, 1996 increased 33.5% to $7.9 million, compared
with $5.9 million for the same period in the prior year. On a year-to-date
basis, pre-tax income for specialty managed care products and services
increased 39.7% to $14.6 million for the six months ended June 30, 1996
compared with $10.5 million for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of premium revenue
received and investment income. The primary uses of cash include medical and
other benefits, commissions and administrative expense payments. Positive
cash flows are invested pending future payments of medical and other benefits
and other operating expenses. The Company's investment policies are designed
to maximize yield, preserve principal and provide liquidity to meet
anticipated payment obligations.
Historically, the Company has generated positive cash flow from
operations. For the six months ended June 30, 1996, however, net cash
provided by (used in) operating activities amounted to a use of $17.6
million, compared with a used of $6.3 million for the same period in the
prior year. The use of cash in 1996 was due primarily to a reduction in funds
held on behalf of AMSIC due to the reduced profitability on the business sold
by AMS and cash payments to AMSIC during the first six months of 1996, as
discussed further in the paragraph below. Due to periodic cash flow
requirements of certain subsidiaries the Company made borrowings under its
bank line of credit ranging up to $14.4 million during the first six months
of 1996 to meet short-term cash needs, and $7.2 million was outstanding at
June 30, 1996.
In conjunction with the AMS joint venture, the Company holds funds to
support policy reserves, holds AMSIC's undistributed net profits on this
business, and credits investment income and realized investment gains or
losses to AMSIC on the funds held balance at the Company's average portfolio
rate. The Company held $143.7 million and $118.5 million of funds on behalf
of AMSIC at December 31, 1995 and June 30, 1996, respectively, of which $83.4
million and $88.2 million, respectively, were utilized to offset reinsurance
recoverable balances from AMSIC on the Company's balance sheet in accordance
with SFAS No. 113. These funds are included in cash and investments, and
$60.3 million and $30.3 million were accessible as of December 31, 1995 and
June 30, 1996, respectively, upon request by AMSIC without prior approval of
the Company. The decrease in funds accessible by AMSIC during the first six
months of 1996 is due primarily to cash payments to AMSIC totalling $17.0
million during 1996, net losses allocable to AMSIC on the small group PPO and
life business sold by AMS of approximately $4.0 million during the six-month
period, and a $6.0 million decrease in unrealized gains on investment
securities which
14
<PAGE>
is included in the funds held balance.
The Company currently owns 12% of the common stock of AMS, and through
reinsurance agreements with AMSIC, the Company retains 50% of the small group
PPO and life business sold by AMS on the books of UWIC and UWLIC. In June
1996, the Company announced that it had signed a letter of intent for an
early exercise of the Company's buy-out option granted under the 1988 Joint
Venture Agreement to acquire the remaining 88% of AMS' common stock. A
definitive agreement was executed by both parties on July 31, 1996, which
provides for a purchase price of $67.0 million in cash and 4,000,000 newly
issued shares of the Company's common stock. The transaction is expected to
be completed in the fourth quarter of 1996 and will be accounted for under
the purchase method of accounting. Upon completion of the transaction, the
Company will record 100% of the small group PPO and life business sold by AMS
on behalf of UWLIC.
In May 1996, the Board of Directors of the Company approved plans to
form a managed care joint venture with Howard Young Health Care, Inc. to
serve the rural communities of northern and north central Wisconsin. The
Howard Young Medical Center in Woodruff, Wisconsin, is a leading provider of
health care services in the state's north central region. Upon finalization
of the Agreement, the Joint Venture will be known as Northwoods Health Plan,
LLC.
The Company's investment portfolio consists primarily of investment
grade bonds and has a limited exposure to equity securities. At December 31,
1995, $471.8 million or 86.8% of the Company's total investment portfolio was
invested in bonds. At June 30, 1996, $425.6 million or 86.8% of the Company's
total investment portfolio was invested in bonds. At December 31, 1995 and
June 30, 1996, the bond portfolio had an average quality rating of "Aa3" by
Moody's Investor Service, and the majority of the bond portfolio was
classified as available for sale. In accordance with SFAS No. 115, bonds
classified as available for sale are recorded on the Company's balance sheet
at market value. The market value of the total bond portfolio exceeded
amortized cost by $10.6 million and $4.9 million at December 31, 1995 and
June 30, 1996, respectively. Unrealized holding gains and losses on bonds
classified as available for sale are included as a component of shareholders'
equity, net of applicable deferred taxes and amounts attributable to funds
held on behalf of an affiliated reinsurer. The Company has no investments in
mortgage loans, non-publicly traded securities (except for common and
preferred stock of AMS), real estate held for investment or financial
derivatives (except for principal only strips of U.S. Government securities).
In December 1995, UWIC borrowed $65.0 million from BCBSUW under a
Surplus Note Agreement, which is guaranteed by the Company. The Surplus Note
provides UWIC with regulatory capital needed to replace capital paid to the
Company in the form of a dividend in
15
<PAGE>
December 1995. The dividend and Surplus Note are part of a capital
restructuring plan designed to transfer capital from UWIC to UWLIC to support
UWLIC's retention of the small group PPO business beginning in 1996. At June
30, 1996, $15.0 million was outstanding on this Surplus Note.
The Company's anticipated expansion of its business requires capital
levels sufficient to support premium growth. The Company's compound annual
growth rate in premium revenue for the five years ended December 31, 1995 was
28.7%, due principally to the growth of small group PPO products. While the
future rate of growth is uncertain, growth in premium revenue is expected to
continue. In addition, upon acquisition of the remaining interest in AMS, the
Company will record 100% of the premium revenues on the business sold by AMS,
compared with the 50% recorded currently.
From time to time, the Company makes capital contributions to its
subsidiaries to assist them in maintaining appropriate levels of capital and
surplus for regulatory and rating purposes. Compcare, Valley, Unity, UWIC and
UWLIC are required to maintain certain levels of statutory capital and
surplus. In Wisconsin, where a large percentage of the Company's premium is
written, these levels are based upon the amount and type of premiums written
and are calculated separately for each subsidiary. As of June 30, 1996,
statutory capital and surplus for each of these insurance subsidiaries
exceeded required levels.
In compliance with applicable state insurance regulations, UWIC and
UWLIC have deposited securities with various states aggregating $5.5 million
at June 30, 1996. In addition, HMOs are required to maintain a deposit with
the State of Wisconsin for future assessments for HMO insolvencies. As of
June 30, 1996, the combined deposit for Compcare, Valley and Unity was $4.2
million. States in which UWIC and UWLIC are licensed to do business
independently establish deposit requirements. Increases in deposit levels,
resulting in the segregation of certain investments, may adversely affect the
Company's liquidity.
The National Association of Insurance Commissioners (NAIC) has adopted
risk-based capital guidelines for both life and health insurers and for
property and casualty insurers. These guidelines currently apply only to
certain of the Company's subsidiaries. Those subsidiaries exceed the Company
action level for NAIC risk-based capital guidelines. The NAIC is also
developing risk-based capital guidelines for health organizations, which
would apply to the Company's HMO subsidiaries. In addition, the OCI and other
state regulators have the authority to establish capital and surplus
requirements for individual companies and may propose stricter capital and
surplus requirements for Compcare, Valley, Unity, UWIC and UWLIC.
The Company believes that internal funds and periodic
16
<PAGE>
borrowings on its bank line of credit will be sufficient to finance planned
growth for the foreseeable future, other than financing required in
connection with the acquisition of the remaining interest of AMS, which will
be financed with newly issued common stock of the Company and long-term debt
and/or borrowings from BCBSUW. In the event the Company seeks additional
financing to facilitate long-term growth, the Company believes that such
financing could be obtained through equity offerings, debt offerings,
financings from BCBSUW or other bank borrowings, as market conditions may
permit or dictate.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1994, Compcare and BCBSUW filed a lawsuit in U.S. District
Court, Western District of Wisconsin against The Marshfield Clinic
(the "Clinic") and Security Health Plan of Wisconsin, Inc., a
Wisconsin HMO sponsored by the Clinic ("Security"), asserting that the
defendants committed violations of antitrust law through
monopolization of physician services and HMO services in northern and
north central Wisconsin. BCBSUW and Compcare sought: (i) treble
damages to compensate for excessive payments to the Clinic and lost
revenues due to the defendants' anti-competitive actions, as well as
(ii) certain injunctive relief intended to remedy and prevent the
defendants from maintaining their anti-competitive behavior. On
January 4, 1995 a jury found in favor of BCBSUW and Compcare and
awarded damages to BCBSUW and Compcare in the amount of approximately
$48.5 million (after trebling), of which approximately $17.0 million
was allocable to Compcare. On March 22, 1995 the U.S. District Court,
Western District of Wisconsin affirmed the jury's verdict but reduced
the damage award to approximately $16.8 million (after trebling) of
which approximately $15.2 million was allocable to Compcare. The
Court also awarded injunctive relief enjoining the Clinic from various
anti-competitive acts and requiring that the Clinic contract with
Compcare for HMO services on a non-discriminatory basis. The Clinic
and Security filed for appeal with the Seventh Circuit Court of
Appeals which, on September 18, 1995, affirmed the District Court's
finding of a violation of market division and remanded for a
determination of the damages related thereto. All other counts were
reversed. On November 7, 1995 the Court of Appeals granted the motion
of BCBSUW and Compcare to stay the remand pending their petition to
the U.S. Supreme Court to hear their appeal of the reversed portions
of the case. The petition to the U.S. Supreme Court filed by BCBSUW
and Compcare was denied in March 1996. The case has now been remanded
to the District Court for retrial on the issue of damages for those
violations affirmed by the Seventh Circuit and for the entry of
injunctive relief and awarding of attorneys' fees. The trial date has
been set for December 9, 1996.
On April 20, April 27, and May 10, 1995, suits were filed in the
United States District Court for the Eastern District of Wisconsin
against the Company and certain of its officers, alleging violations
of federal securities laws through the purported issuance of false and
misleading statements regarding the Company, its financial condition
and operations. The suits seek certification of a class of
individuals who purchased the Company's common stock between February
7, 1995 and April 18, 1995. A consolidated and amended complaint
combining the three cases was filed on August 14, 1995. The suit
seeks damages yet to be determined. The Company and its officers have
denied any wrongdoing, and will vigorously defend the actions. A
motion to dismiss the complaint was filed on September 5, 1995. In
October, 1995, before the court ruled on the motion to dismiss, the
plaintiffs sought leave from the court to file a second amended
complaint. In November, 1995, the court granted plaintiffs' request,
and the Company and its officers filed a motion to dismiss this second
amended complaint on December 4, 1995.
18
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 29,
1996 for the purpose of electing three directors. Proxies for the
meeting were solicited pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended, and there was no solicitation in
opposition to the Board of Directors' solicitation.
All three of the Company's nominees were elected, each receiving the
vote indicated below:
Thomas A. Bausch: James L. Forbes:
For 11,319,457 For 11,326,182
Withheld 571,606 Withheld 564,881
Abstain 0 Abstain 0
Broker Non-Votes 0 Broker Non-Votes 0
James C. Hickman:
For 11,318,487
Withheld 572,576
Abstain 0
Broker Non-Votes 0
ITEM 5. OTHER INFORMATION
None
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Joint Venture Agreement among United Wisconsin
Services, Inc., Blue Cross & Blue Shield United of
Wisconsin, Compcare Health Services Insurance
Corporation and Northwoods Health Care, LLC
10.2 Agreement and Plan of Merger between United Wisconsin
Services, Inc., Blue Cross & Blue Shield United of
Wisconsin, American Medical Security Group, Inc.,
Wallace J. Hilliard and Ronald A. Weyers
11 Statement regarding computation of per share earnings.
(b) No reports of the Registrant on Form 8-K have been filed with the
SEC during the three months ended June 30, 1996.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: 8/12/96
----------------------------
UNITED WISCONSIN SERVICES, INC.
/s/ C. EDWARD MORDY
------------------------------------------
Vice President and Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
21
<PAGE>
UNITED WISCONSIN SERVICES, INC.
INDEX TO EXHIBITS
Sequential
Exhibit Page
Number Document Description Number
- ------- -------------------- ----------
10.1 Joint Venture Agreement Among United Wisconsin 23
Services, Inc., Blue Cross & Blue Shield United
of Wisconsin, Compcare Health Services Insurance
Corporation and Northwoods Health Care, LLC
10.2 Agreement and Plan of Merger Between United 37
Wisconsin Services, Inc., Blue Cross & Blue
Shield United of Wisconsin, American Medical
Security Group, Inc., Wallace J. Hilliard and
Ronald A. Weyers
11 Statement regarding computation of per share
earnings. (See Note 1 of Notes to Interim
Consolidated Financial Statements).
22
<PAGE>
JOINT VENTURE AGREEMENT
AMONG
UNITED WISCONSIN SERVICES, INC.,
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN,
COMPCARE HEALTH SERVICES INSURANCE CORPORATION
AND
NORTHWOODS HEALTH CARE, LLC
1ST DAY OF JULY, 1996
----- ------
<PAGE>
JOINT VENTURE AGREEMENT
This Joint Venture Agreement ("Agreement") is entered into on this 1st day
of July, 1996, by and among United Wisconsin Services, Inc., a corporation
organized under Chapter 180 of the Wisconsin Statutes ("UWS"), Blue Cross & Blue
Shield United of Wisconsin, a service insurance corporation organized under
Chapter 613 of the Wisconsin Statutes ("Blue Cross"), Compcare Health Services
Insurance Corporation, a health maintenance organization organized under Chapter
611 of the Wisconsin Statutes ("Compcare") and Northwoods Health Care, LLC, a
limited liability company organized under Chapter 183 of the Wisconsin Statutes
("NHC").
RECITALS
WHEREAS, UWS, Blue Cross and Compcare (collectively, the "UWS Parties")
desire to develop and market a broad array of quality, competitive managed
health care products, including health maintenance organization ("HMO") and
point-of-service ("POS") products and a Medicare managed care product, in the
northern region of Wisconsin, utilizing the relationships with health care
providers that NHC has and continues to build in that region; and
WHEREAS, NHC desires to obtain the resources and insurance expertise of the
UWS Parties as necessary to further its goal of offering a broad array of
quality, competitive managed health care products including HMO and POS products
in the northern region of Wisconsin; and
WHEREAS, the UWS Parties and NHC (collectively, the "Parties") wish to
coordinate their efforts through a joint venture arrangement (the "Joint
Venture") upon the terms and conditions set forth in this Agreement to achieve
the objectives set forth in the recitals above.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants hereinafter set forth, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Parties agree
as follows:
<PAGE>
ARTICLE 1
JOINT VENTURE FORMATION
A. JOINT VENTURE PRODUCTS. Through a series of implementing contracts with
one another and with third parties, the Parties shall jointly offer a broad
spectrum of managed health care products, including HMO and POS products
(collectively, the "Products") on both a fully-insured and self-insured
basis, to groups and individuals.
B. SERVICE AREA. The initial service area of the Joint Venture shall be
comprised of the following Wisconsin counties: Clark, Florence, Forest,
Iron, Langlade, Lincoln, Marathon, Marinette, Menominee, Oconto, Oneida,
Portage, Price, Shawano, Taylor, Waupaca, Wood and Vilas counties
(collectively, the "Service Area"). Upon mutual agreement of the Parties
and the receipt of necessary regulatory approval, the service area of the
Joint Venture may be expanded.
C. AGENCY RELATIONSHIP. This Agreement shall not create any agency
relationship between the Parties other than as specifically enumerated
herein and in the agreements and documents to be executed and performed
pursuant hereto (collectively, the "Joint Venture Documents"). The
relationship between the Parties is that of independent contractors in a
cooperative arrangement. It is not the intent of the Parties to create,
nor should this Agreement be construed to create, a partnership or an
employment relationship between the Parties. This Agreement creates no
fiduciary relationship between the Parties.
ARTICLE 2
GOVERNING COMMITTEE
A. GOVERNING COMMITTEE REPRESENTATION. The Joint Venture shall be managed by
a governing committee ("Governing Committee") which shall consist of six
(6) members, three (3) appointed by the UWS Parties and three (3) appointed
by NHC.
B. DUTIES OF THE GOVERNING COMMITTEE. The Governing Committee shall serve as
a forum for affording the Parties the opportunity to collaborate and
coordinate the development and marketing of the Products. The Governing
Committee shall not be a separate legal entity and shall have no authority
to bind the Parties in any manner. The Governing Committee shall establish
such books, records and accounts for the Joint Venture as it deems
reasonably necessary and shall allow each of the Parties, upon request, to
review such books, records and accounts. The Governing Committee shall
maintain records of all of its meetings and recommendations made. The
Governing Committee may establish such subcommittees as it deems
appropriate; provided, however, that any subcommittee so created must be
comprised of an equal number of representatives from each entity entitled
to appoint members to the Governing Committee.
-2-
<PAGE>
C. MEETINGS AND VOTING REQUIREMENTS. The Governing Committee shall meet at
least once every fiscal quarter. A chairperson, who shall be a voting
member of the Governing Committee, shall preside over each meeting.
Members of the Governing Committee may participate in meetings either
telephonically or in person. Any action that the Governing Committee may
take at a meeting may be taken instead by a written consent signed by all
of the members of the Governing Committee. The UWS Parties and NHC,
respectively, shall each have the power to appoint a chairperson every
alternate year for a one (1) calendar year term. NHC may appoint a
chairperson for the first calendar year upon the Effective Date of this
Joint Venture (as hereinafter defined). The Governing Committee may not
take any action without the approval of at least a quorum of its members.
Four members of the Governing Committee shall constitute a quorum. The
Joint Venture shall not pay members of the Governing Committee.
ARTICLE 3
INSURANCE OPERATIONS
A. UWS. UWS shall provide administrative services to the Joint Venture
including, but not limited to, accounting, actuarial, financial reporting,
management information, legal and investment services according to the
terms of an administrative services agreement ("Administrative Services
Agreement") attached as EXHIBIT A. UWS shall be compensated for providing
administrative services on a reasonable cost basis such that all
administrative "profit" will remain with the Products to be shared equally
by the Parties as underwriting profit.
B. BLUE CROSS. Blue Cross shall be the sole underwriter of the indemnity
segment of POS Products. Blue Cross shall have sole authority, without
approval of the Governing Committee being required, to perform all duties
of an insurer for insurance business underwritten or administered by Blue
Cross.
C. COMPCARE. Compcare shall be the sole underwriter for insured and self-
insured HMO products and the HMO segment of POS products. Compcare shall also
serve as the administrator for HMO plans and the HMO and indemnity segments of
POS plans. Compcare shall have sole authority, without approval of the
Governing Committee being required, to perform all duties of an insurer for the
Products underwritten or administered by Compcare.
ARTICLE 4
MEDICAL SERVICES AGREEMENT
NHC shall arrange for the delivery of all health care services for the Joint
Venture according to the terms of the medical services agreement (the "Medical
Services Agreement") between NHC
-3-
<PAGE>
and the UWS Parties attached hereto as EXHIBIT B. The capitation rates NHC will
be paid by the UWS Parties for the initial three year term of the Joint Venture
shall be as established in the attached EXHIBIT C. Capitation shall be paid to
NHC on a monthly basis for each enrolled plan member; such capitation shall be
adjusted for age, sex and benefit plan design. The capitation rate for each
additional one (1) year term(s), if any, after the initial term of the Joint
Venture shall be established in a written agreement between the Parties by June
30 of each year, to become effective in the next succeeding calendar year. It
is the expectation of the Parties that NHC shall capitate or otherwise
compensate providers under the agreements NHC will have with providers for the
delivery of health care services under the Joint Venture. Such provider
agreements, executed by NHC and individual providers, shall include provision
for (i) a withhold of at least fifteen percent (15%), unless such withhold is
waived by unanimous consent of the Governing Committee; and (ii) periodic price
adjustments. The overall responsibility for medical management shall remain
with the underwriters; however, the Medical Services Agreement shall define
those responsibilities relating to medical management and utilization review
which shall be delegated to NHC.
ARTICLE 5
RISK-SHARING
A. CAPITATION RISK. The Parties shall share in capitation risk as follows:
1. In the event that claims for covered health care services exceed the
capitation paid to NHC by Blue Cross and Compcare under the terms of
the Medical Services Agreement ("Aggregate Service Loss"), the
provider withhold shall first be applied to reduce the deficit. After
the withhold has been applied, the UWS Parties shall pay NHC fifty
percent (50%) of any remaining Aggregate Service Loss.
2. In the event that claims for covered health care services are less
than the capitation paid to NHC by Blue Cross and Compcare under the
terms of the Medical Services Agreement ("Aggregate Service Profit"),
the withhold shall be returned to the providers; then NHC shall pay to
the UWS Parties fifty percent (50%) of any remaining Aggregate Service
Profit.
3. Subject to section 5.D., below, relating to reconciliation following
the initial term of this Agreement, calculation of Aggregate Service
Losses and Aggregate Service Profits shall be made at the end of each
calendar year and shall be paid within 120 days after the end of the
calendar year.
B. UNDERWRITING RISK. The Parties shall share in underwriting risk as
follows:
1. In the event that before tax, the Products' aggregate sum of net
earned premium is less than the Products' aggregate sum of capitation
and administrative expenses
-4-
<PAGE>
("Aggregate Net Underwriting Loss"), NHC shall pay the UWS Parties
fifty percent (50%) of the Aggregate Net Underwriting Loss.
2. In the event that before tax, the Products' aggregate sum of net
earned premium is greater than the Products' aggregate sum of
capitation, incurred claims and administrative expenses ("Aggregate
Net Underwriting Profit"), the UWS Parties shall pay NHC fifty percent
(50%) of the Aggregate Net Underwriting Profit.
3. Subject to section 5.D. below, relating to reconciliation following
the initial term of this Agreement, calculation of Aggregate Net
Underwriting Losses and Aggregate Net Underwriting Profits shall be
made at the end of each calendar year and shall be paid within 120
days after the end of the calendar year.
C. LIMITATION ON RISK-SHARING. As a condition precedent to the UWS Parties'
obligations under this Agreement, Howard Young Health Care, Inc.. shall
provide capitalization to NHC of $1.5 million for the initial term of the
Agreement. Such capitalization shall be in the form of either cash or a
non-revocable letter of credit from Howard Young Health Care, Inc. or
another party acceptable to UWS. UWS shall not unreasonably withhold
permission to substitute another party for all or part of the irrevocable
letter of credit. NHC's obligation for sharing in Aggregate Service Losses
and Aggregate Net Underwriting Losses during the initial three (3) year
term of the Agreement shall be limited to a total of $1.5 million. If the
Joint Venture is extended for an additional term or terms, NHC shall
provide additional capitalization as mutually agreed by the Parties.
D. RECONCILIATION FOLLOWING INITIAL TERM. The Parties shall reconcile amounts
owed with respect to the Aggregate Service Profit (Loss) and the Aggregate
Net Underwriting Profit (Loss) within 180 days after the end of the initial
three (3) year term of this Agreement. Either Party may offset any
balance, whether on account of Aggregate Service Profit (Loss) or Aggregate
Net Underwriting Profit (Loss), due from one party to the other under this
Agreement.
-5-
<PAGE>
ARTICLE 6
TERM AND TERMINATION
A. TERM. The initial term of this Agreement shall commence on the 1st day of
July, 1996, ("Effective Date") and terminate three (3) calendar years from
the Effective Date, on the 31st day of December, 1999. The Joint Venture
shall automatically renew for additional one year terms unless written
notice of termination is given in accordance with section 6.B., below.
B. TERMINATION. This Agreement may be terminated as follows:
1. Either party may terminate this Agreement at the end of the initial
three (3) year term or any subsequent term upon 180 days advance
written notice to all other Parties. Termination shall be effective
on December 31.
2. All providers with whom NHC has contracted to provide health care
services under this Joint Venture Agreement shall continue to provide
services according to the terms of the applicable Product benefit plan
until the end of the then current term of such benefit plan.
3. The capitation amounts paid to NHC for the provision of health care
services, as referenced in Article 4 herein, shall continue to be paid
until the end of applicable Product benefit plan years thereunder and
at the rates in effect at the time of termination.
C. EFFECT OF TERMINATION.
1. Upon termination, the Parties may mutually agree to form an HMO and
transfer the business of the Joint Venture to said HMO.
2. In the event the Joint Venture is terminated and the Parties do not
agree to form the HMO referenced in section 6.C.1. above, then the UWS
Parties shall have the right to retain all business of the Joint
Venture. However, upon such termination or upon transfer or sale of
the membership by the underwriter(s) to a third party, the Governing
Committee shall approve the amount of consideration, if any, to be
paid by the underwriter(s) to NHC. Consideration shall be calculated
to reflect any adverse impact to the UWS Parties and NHC with respect
to the risk-sharing described in Article 5 herein. If the Governing
Committee disapproves any consideration offered by the underwriter(s),
then the amount of the consideration to be paid by the underwriter(s)
to NHC shall be subject to binding arbitration as provided in Article
7.
-6-
<PAGE>
3. Notwithstanding the termination of the Joint Venture, all provider
agreements entered into by the Parties shall continue until their
scheduled termination date.
ARTICLE 7
ARBITRATION
A. If any dispute arises between the Parties to this Agreement with reference
to the interpretation of this Agreement or their rights with respect to any
transaction involved, whether such dispute arises before or after
termination of this Agreement, such dispute, upon the written request of
either party, shall be submitted to three arbitrators, one to be chosen by
each party, and the third to be chosen by the other two arbitrators.
B. If either party refuses or neglects to appoint an arbitrator within thirty
(30) days after the receipt of written notice from the other party
requesting it to do so, the requesting party may appoint two arbitrators.
If the two arbitrators fail to agree on the selection of a third arbitrator
within thirty (30) days of their appointment, each of them shall name two,
of whom the other shall strike one, and the selection of the third
arbitrator shall be made by drawing lots. All arbitrators shall be present
or former executive officers of insurance or reinsurance companies other
than the Parties to this Agreement or Underwriters at Lloyd's of London.
C. The arbitrators shall interpret this Agreement as an honorable engagement
and not merely as a legal obligation. They are relieved of all judicial
formalities and may abstain from following the strict rules of law, and
they shall make their award with a view of effecting the general purpose of
this Agreement in a reasonable manner rather than in accordance with a
literal interpretation of the language. Each party shall submit its case
to the arbitrators within thirty (30) days of the appointment of the third
arbitrator.
D. The decision in writing of any two arbitrators, when provided to the
Parties pursuant to section 9.I of this Agreement, shall be final and
binding on both parties. Each party shall bear the expense of its own
arbitrator and shall jointly and equally bear with the other party the
expense of the third arbitrator and the arbitration. Said arbitration
shall take place in Milwaukee, Wisconsin, unless some other place is
mutually agreed upon by the parties.
-7-
<PAGE>
ARTICLE 8
REPRESENTATIONS AND WARRANTIES
A. REPRESENTATIONS AND WARRANTIES OF NHC. NHC hereby represents and warrants
to the UWS Parties as follows: (1) NHC is a corporation duly organized,
validly existing and in current standing under the laws of the State of
Wisconsin. (2) The execution, delivery and performance of this Agreement
and all documents to be executed and delivered by the entities hereunder:
(a) are within their respective corporate power; (b) have been duly
authorized by all necessary or proper corporate and other action, including
the consent of shareholders, members or boards of directors, where
required; (c) are not in contravention of any provision of their respective
articles of incorporation or bylaws; (d) do not violate any law, statute,
ordinance, rule or regulation or any order or decree of any court or
governmental instrumentality applicable to them; and (e) do not conflict
with or result in the breach of, or constitute a default under, any
agreement or other instrument to which NHC is a party.
B. REPRESENTATIONS AND WARRANTIES OF UWS PARTIES. Blue Cross, Compcare and
UWS, each hereby represent and warrant to NHC as follows: (1) Blue Cross,
Compcare and UWS, respectively, are corporations duly organized, validly
existing and in current standing under the laws of the State of Wisconsin.
(2) The execution, delivery and performance of this Agreement and all
documents to be executed and delivered by the entities hereunder: (a) are
within their respective corporate power; (b) have been duly authorized by
all necessary or proper corporate and other action, including the consent
of shareholders, members or boards of directors, where required; (c) are
not in contravention of any provision of their respective articles of
incorporation or bylaws; (d) do not violate any law, statute, ordinance,
rule or regulation or any order or decree of any court or governmental
instrumentality applicable to them; and (e) do not conflict with or result
in the breach of, or constitute a default under, any agreement or other
instrument to which any of the UWS Parties is a party.
C. ENFORCEABILITY. The UWS Parties and NHC each have the right to bring an
action for up to three years from the Effective Date of this Agreement for
any and all legal and equitable remedies available in the event any of the
representations or warranties of either Party as stated in sections 8.A.
and 8.B. of this Agreement prove to be untrue.
D. HOLD HARMLESS. UWS Parties shall indemnify and hold harmless NHC from any
and all claims, liabilities, damages or other costs to the extent they
result from or arise out of acts or omissions of the UWS Parties or any of
the UWS Parties' employees or agents that constitute criminal conduct,
negligence or willful misconduct with respect to the UWS Parties'
responsibilities under the Joint Venture. NHC shall indemnify and hold
harmless the UWS Parties from any and all claims, liabilities, damages or
other costs to the extent they result from or arise out of acts or
omissions of NHC or any of NHC's employees or
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<PAGE>
agents that constitute criminal conduct, negligence or willful misconduct
with respect to NHC's responsibilities under the Joint Venture.
ARTICLE 9
GENERAL PROVISIONS
A. NON-EXCLUSIVITY. This Agreement shall be non-exclusive. The Parties are
free to compete in the Service Area with any products and with any other
entities.
B. AMENDMENTS. This Agreement may be amended only by the consent of the
Parties expressed in a written addendum; and such addendum, when executed
by all Parties, shall be deemed to be an integral part of this Agreement
and binding on the Parties.
C. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and
bind each of the Parties and their successors and assigns. Neither this
Agreement nor any right hereunder nor any part hereof may be assigned by
any party without the prior written consent of the other Parties and all
necessary regulatory authorities.
D. GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Wisconsin applicable to a contract
executed and to be performed in such state.
E. HEADINGS. The headings used in this Agreement have been inserted for
convenience and do not constitute matter to be construed or interpreted in
connection with this Agreement.
F. WAIVER. The failure of any party at any time or enforce any provision of
this Agreement shall not be construed as a waiver of that provision and
shall not affect the right of any party thereafter to enforce each and
every provision of this Agreement in accordance with its terms.
G. COUNTERPARTS. This Agreement may be executed simultaneously in any number
of counterparts, each of which will be deemed an original, but all of which
will constitute one and the same instrument.
H. CONFIDENTIALITY. The Parties acknowledge that all materials and
information of either Party which has or will come into the possession of
another party in connection with this Agreement consists of confidential
and proprietary data. Each Party agrees to hold such material and
information in strictest confidence, not to make use thereof other than for
the performance of this Agreement, and not to release or disclose it to any
third party other than for the performance of this Agreement.
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<PAGE>
I. NOTICES. Any notice or communication given pursuant to this Agreement must
be in writing and will be deemed to have been duly given if mailed (by
registered or certified mail, postage prepaid, return receipt requested),
or if transmitted by facsimile, or if delivered by courier, as follows:
TO BLUE CROSS:
Blue Cross & Blue Shield United of Wisconsin
401 West Michigan Street
Milwaukee, Wisconsin 53203
Facsimile: (414) 226-6229
Attention: Penny J. Siewert
TO UWS:
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, Wisconsin 53203
Facsimile: (414) 226-6229
Attention: Thomas R. Hefty
TO COMPCARE:
Compcare Health Services Insurance Corporation
401 West Michigan Street
Milwaukee, Wisconsin 53203
Facsimile: (414) 226-6229
Attention: Roger A. Formisano
TO NHC:
Howard Young Health Care, Inc.
P. O. Box 470
Woodruff, Wisconsin 54568
Facsimile: 715-356-6097
Attention: Douglas O. Rosenberg
All notices and other communications required or permitted under this
Agreement that are addressed as provided in this paragraph will, whether
sent by mail, facsimile, or courier, be deemed given upon the first
business day after actual delivery to the party to whom such notice or
other communication is sent (as evidenced by the return receipt or shipping
invoice signed by a representative of such party or by the facsimile
confirmation). Any
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<PAGE>
party from time to time may change its address for the purpose of notices
to that party by giving a similar notice specifying a new address, but no
such notice will be deemed to have been given until it is actually received
by the party sought to be charged with the contents thereof.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized representative as of the date first set forth
above.
BLUE CROSS & BLUE SHIELD
UNITED OF WISCONSIN
By: /s/ THOMAS R. HEFTY
------------------------------
Title: Chairman, CEO
-----------------------------
Date: July 1, 1996
-----------------------------
UNITED WISCONSIN SERVICES, INC.
By: /s/ THOMAS R. HEFTY
------------------------------
Title: Chairman, President, CEO
-----------------------------
Date: July 1, 1996
-----------------------------
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<PAGE>
COMPCARE HEALTH SERVICES
INSURANCE CORPORATION
By: /s/ ROGER A. FORMISANO
------------------------------
Title:_____________________________
Date: July 1, 1996
-----------------------------
NORTHWOODS HEALTH CARE, LLC
By: /s/ DOUGLAS O. ROSENBERG
------------------------------
Title:_____________________________
Date: July 1, 1996
-----------------------------
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<PAGE>
AGREEMENT AND PLAN OF
MERGER
BETWEEN
UNITED WISCONSIN SERVICES, INC.,
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN
AMERICAN MEDICAL SECURITY GROUP, INC.,
WALLACE J. HILLIARD
AND
RONALD A. WEYERS
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I................................................................... 2
The Merger............................................................. 2
1.01 THE MERGER................................................... 2
1.02 CLOSING...................................................... 2
ARTICLE II.................................................................. 3
Representations and Warranties of the Company
and the Principal Shareholders............................... 3
2.01 ORGANIZATION AND AUTHORITY................................... 3
2.02 SUBSIDIARIES AND AFFILIATES.................................. 3
2.03 CAPITALIZATION OF THE COMPANY................................ 4
2.04 AUTHORIZATION................................................ 4
2.05 FINANCIAL STATEMENTS......................................... 6
2.06 INSURANCE COMPANY FINANCIAL STATEMENTS....................... 6
2.07 RECEIVABLES.................................................. 7
2.08 ABSENCE OF CERTAIN CHANGES................................... 7
2.09 LITIGATION AND OTHER PROCEEDINGS............................. 9
2.10 COMPLIANCE WITH LAWS......................................... 9
2.11 TAXES........................................................ 10
2.12 TITLE TO PROPERTIES.......................................... 10
2.13 CONTRACTS AND COMMITMENTS.................................... 11
2.14 EMPLOYEE RELATIONS........................................... 11
2.15 EMPLOYEE BENEFIT PLANS....................................... 11
2.16 INTELLECTUAL PROPERTY........................................ 13
2.17 ENVIRONMENTAL MATTERS........................................ 13
2.18 CONTINGENT OR UNDISCLOSED LIABILITIES........................ 14
2.19 INSURANCE.................................................... 14
2.20 RELATED PARTY TRANSACTIONS................................... 14
2.21 REGISTRATION STATEMENT, ETC.................................. 15
2.22 BROKERS AND FINDERS.......................................... 15
2.23 DISCLOSURE................................................... 15
ARTICLE III................................................................. 16
Representations and Warranties of UWSI................................. 16
3.01 ORGANIZATION AND AUTHORITY................................... 16
3.02 CAPITALIZATION............................................... 16
3.03 AUTHORIZATION................................................ 16
3.04 REGISTRATION STATEMENT, ETC.................................. 17
3.05 BROKERS AND FINDERS.......................................... 17
3.06 DISCLOSURE................................................... 17
ARTICLE IV.................................................................. 18
Conduct of Business Prior to the Effective Time........................ 18
4.01 CONDUCT OF THE COMPANY'S BUSINESS PRIOR TO THE EFFECTIVE
TIME.............................................................. 18
ARTICLE V................................................................... 18
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Additional Agreements.................................................. 18
5.01 ACCESS AND INFORMATION....................................... 18
5.02 REGISTRATION STATEMENT AND PROXY STATEMENT................... 19
5.03 COMPANY SHAREHOLDERS' APPROVAL............................... 19
5.04 UWSI SHAREHOLDERS APPROVAL................................... 20
5.05 MISCELLANEOUS AGREEMENTS AND CONSENTS........................ 20
5.06 INTERIM FINANCIAL STATEMENTS................................. 21
5.07 INSURANCE REGULATORY APPROVALS............................... 21
5.08 HART-SCOTT-RODINO COMPLIANCE................................. 21
5.09 CERTAIN NOTIFICATIONS........................................ 21
5.10 VOTING AGREEMENT......................................... ....22
5.11 BEST EFFORTS................................................. 22
5.12 PRESS RELEASES............................................... 22
5.13 EXPENSES..................................................... 22
5.14 CERTAIN AGREEMENTS........................................... 22
5.15 UWSI CAPITALIZATION.......................................... 23
ARTICLE VI.................................................................. 23
Conditions............................................................. 23
6.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO CONSUMMATE THE
MERGER....................................................... 23
6.02 CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE PRINCIPAL
SHAREHOLDERS TO CONSUMMATE THE MERGER........................ 24
6.03 CONDITIONS TO OBLIGATIONS OF UWSI TO CONSUMMATE THE
MERGER....................................................... 25
ARTICLE VII................................................................ 27
Termination, Amendment................................................. 27
7.01 TERMINATION.................................................. 27
7.02 AMENDMENT.................................................... 28
ARTICLE VIII............................................................... 28
Indemnification........................................................ 28
8.01 INDEMNIFICATION BY SHAREHOLDERS............................. 28
8.02 LIMITATIONS................................................. 29
8.03 PROCEDURE................................................... 30
8.04 INDEMNIFICATION BY UWSI..................................... 31
8.05 PROCEDURE................................................... 31
ARTICLE IX.................................................................. 32
General Provisions..................................................... 32
9.01 NOTICES...................................................... 32
9.02 MISCELLANEOUS................................................ 34
9.03 WAIVER: REMEDIES............................................. 34
9.04 SEVERABILITY................................................. 34
9.05 GOVERNING LAW................................................ 34
9.06 "KNOWLEDGE".................................................. 34
9.07 ARBITRATION.................................................. 35
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<PAGE>
EXHIBITS
Exhibit A Plan of Merger
Exhibit B Registration Rights and Stock Restriction Agreement
Exhibit C Agreements of Affiliates
Exhibit D Escrow Agreement
-iii-
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into this 31st day of July, 1996 by and among UNITED WISCONSIN SERVICES, INC.,
a Wisconsin corporation ("UWSI"), AMERICAN MEDICAL SECURITY GROUP, INC., a
Delaware corporation (the "Company"), BLUE CROSS & BLUE SHIELD UNITED OF
WISCONSIN ("BCBSUW"), and WALLACE J. HILLIARD ("Hilliard"), individually and as
trustee under the Voting Trust Agreement hereinafter defined, and RONALD A.
WEYERS ("Weyers"), individually and as successor trustee under the Voting Trust
Agreement (Hilliard, individually, and Weyers, individually, are referred to
collectively as the "Principal Shareholders").
RECITALS:
WHEREAS, all of the shareholders of the Company are parties to that certain
Voting Trust Agreement, dated as of February 3, 1989 (the "Voting Trust
Agreement"), pursuant to which Voting Trust Agreement Hilliard has been
appointed Trustee and to which Weyers has been appointed successor Trustee;
WHEREAS, the Principal Shareholders own, in the aggregate, approximately
43 percent of the outstanding shares of capital stock of the Company;
WHEREAS, the parties hereto are party to that certain Joint Venture
Agreement, effective October 1, 1988, as amended (the "Joint Venture Agreement")
and to that certain Stock Restriction Agreement, dated February 3, 1989 (the
"Stock Restriction Agreement");
WHEREAS, on April 29, 1996, UWSI gave notice of intent to exercise the
option under Paragraphs 5.4 and 5.5 of Article V of the Joint Venture Agreement
and Paragraph 3 of Article III of the Stock Restriction Agreement;
WHEREAS, the parties hereto desire to amend and restructure the exercise of
such option in accordance with the terms hereof.
WHEREAS, the respective Boards of Directors of UWSI and the Company have
approved the transactions provided for by this Agreement, pursuant to which the
Company is to be merged into UWSI in accordance with the applicable provisions
of the Delaware General Corporation Law (the "DGCL") and the Wisconsin Business
Corporation Law (the "WBCL"), which merger is intended to qualify as a
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code");
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<PAGE>
WHEREAS, in exchange for all of the issued and outstanding shares of
common stock, $1.00 par value per share, of the Company (the "Company Common
Stock") and in settlement of all of the outstanding options to acquire shares
of Company Common Stock (the "Options"), UWSI has agreed to pay to the holders
of the Company Common Stock (other than UWSI) and the Options, in the aggregate
and in such proportions as may be determined by the holders thereof (other than
UWSI), (i) 4,000,000 shares of common stock, no par value per share, of UWSI
("UWSI Common Stock"), as adjusted as set forth in the Plan of Merger attached
hereto as Exhibit A (the "Plan of Merger"), and (ii) $67,010,000, less expenses
attributable to the Shareholders as provided herein, each subject to the
provisions of this Agreement and the Plan of Merger, all upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in order to consummate the transactions set forth above
and in consideration of the mutual covenants, agreements, representations and
warranties herein contained, the parties agree as follows:
ARTICLE I
THE MERGER
1.01 THE MERGER. Subject to the terms and conditions of this Agreement
and the Plan of Merger: the Company shall be merged with and into UWSI (the
"Merger") in accordance with Section 252 of the DGCL and Section 180.1101 of the
WBCL; the separate corporate existence of the Company shall cease; and UWSI
shall be the surviving corporation . The Plan of Merger sets forth (i) the
terms of the Merger and the mode of carrying the same into effect, (ii) the
manner of converting the outstanding shares of Company Common Stock (other than
Company Common Stock held by UWSI) into a combination of shares of UWSI Common
Stock and cash, and (iii) the manner of converting the outstanding Options into
options to acquire shares of UWSI Common Stock. The Merger shall be consummated
following the Closing provided for in Section 1.02 hereof when properly executed
Articles of Merger are executed and filed with the Secretary of State of
Delaware in accordance with the DGCL and the Department of Financial
Institutions of the State of Wisconsin in accordance with the WBCL and when the
Plan of Merger is received and accepted as filed by the Delaware Secretary of
State and the Department of Financial Institutions of the State of Wisconsin
(the "Effective Time").
1.02 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") and the Plan of Merger shall take place at the offices
of Michael Best & Friedrich, 100 East Wisconsin Avenue, Milwaukee, Wisconsin,
immediately following the meeting of UWSI's shareholders referred to in Section
5.04 or at such other time and place as UWSI and the Company shall agree.
2
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
The Company and the Principal Shareholders (on behalf of all the
Shareholders of the Company, other than UWSI) hereby make the following
representations and warranties to UWSI. The "Disclosure Schedule" shall mean
the disclosure schedule relating to each section of this Article II which has
previously been delivered to UWSI. Disclosure of any information in any one
section or schedule of the Disclosure Schedule shall be deemed to be disclosure
in any other section or schedule thereof.
2.01 ORGANIZATION AND AUTHORITY. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with all requisite corporate power and corporate authority to own,
lease and operate its properties and to carry on its business as now being
conducted, is qualified in the jurisdictions set forth on the Disclosure
Schedule , and is not otherwise required to be qualified in any other
jurisdiction, except where the failure to do so would not have a Material
Adverse Effect. For purposes of this Agreement unless otherwise specified,
"Material Adverse Effect" shall mean a material adverse effect on the Company
and its subsidiaries, taken as a whole. Copies of the articles or certificate
of incorporation and by-laws of each of the Company and each Controlled
Subsidiary and Noncontrolled Subsidiary (as such terms are hereinafter defined)
that have been heretofore delivered and/or made available to UWSI are complete
and correct as of the date hereof.
2.02 SUBSIDIARIES AND AFFILIATES. Except as set forth on the Disclosure
Schedule, the corporations, partnerships or other entities in which the Company
has a greater than 50 percent equity interest (the "Controlled Subsidiaries")
and the corporations, partnerships or other entities in which the Company's
equity interest is not a controlling interest (the "Noncontrolled Subsidiaries")
are set forth on the Disclosure Schedule. The Company is, directly or
indirectly, the record and beneficial owner of the percentage of the outstanding
shares of capital stock of each of the Controlled and Noncontrolled Subsidiaries
shown on the Disclosure Schedule and the capitalization of each such subsidiary
is set forth on the Disclosure Schedule. Except as set forth on the Disclosure
Schedule , no equity securities of any of the 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 or rights convertible into, shares of capital stock
of any Controlled Subsidiaries, and there are no contracts, commitments,
understandings or arrangements by which any Controlled Subsidiary is bound to
issue additional shares of its capital stock, or options, warrants, or rights to
purchase or acquire any additional shares of its capital stock. Except as set
forth on
3
<PAGE>
the Disclosure Schedule, all of such equity interests are owned by the Company
free and clear of any claim, lien, encumbrance or agreement with respect
thereto.
2.03 CAPITALIZATION OF THE COMPANY. The authorized capital stock of the
Company consists of (a) 600,000 shares of common stock, $1.00 par value per
share, of which 174,733 2/3 shares of Company Common Stock are issued and
outstanding as of the date of this Agreement, and (b) 15,000 shares of Series A
Preferred Stock, $1.00 par value, with a stated value of $1,000 per share, of
which 15,000 shares are issued and outstanding as of the date of this Agreement.
The Disclosure Schedule sets forth a list of all of the holders of Company
Common Stock and the number of shares owned by each such holder. All of the
outstanding shares of Company Common Stock have been issued pursuant to and in
accordance with valid exemptions from registration under the Securities Act of
1933, as amended and the rules and regulations promulgated thereunder
(collectively the "1933 Act"), and any applicable state securities laws and
rules and regulations under such laws. All of the outstanding shares of Company
Common Stock are duly authorized, validly issued, fully paid and nonassessable,
with no liability attaching to the ownership thereof except as provided in
Section 180.0622 of the WBCL and judicial interpretations thereof, and all such
shares are free of pre-emptive rights. The Disclosure Schedule sets forth a
list of all Options, the number of shares acquirable upon exercise of the
Options, the exercise price, the expiration date and the beneficial owner of
each such Option. Except as set forth on the Disclosure Schedule , there are
no other shares of capital stock or other equity securities (or debt securities
with any voting rights or convertible into securities with any voting rights)
of the Company or any Controlled Subsidiary outstanding and no other outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into,
shares of capital stock of the Company or any Controlled Subsidiary.
2.04 AUTHORIZATION. The Company has full corporate power and corporate
authority to enter into this Agreement and the Plan of Merger and to carry out
its obligations hereunder and thereunder. The execution and delivery of this
Agreement and the Plan of Merger and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the Company's
Board of Directors and, except for the approval of the Plan of Merger by its
shareholders, no other corporate proceedings on the part of the Company or any
Controlled Subsidiary are necessary to authorize this Agreement, the Plan of
Merger and the transactions contemplated hereby and thereby. This Agreement and
the Plan of Merger have each been duly executed and delivered by the Company.
This Agreement and the Plan of Merger are, and subject to approval by the
shareholders of the Company will be, the
4
<PAGE>
legal, valid and binding obligations of the Company enforceable against the
Company in accordance with their respective terms except to the extent limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by general equitable principles. This Agreement
has been duly executed and delivered by the Principal Shareholders and is the
legal, valid and binding obligation of the Principal Shareholders enforceable
against each of the Principal Shareholders in accordance with its terms except
to the extent limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally or by general equitable
principles. Except as set forth on the Disclosure Schedule, neither the
execution and delivery of this Agreement nor the Plan of Merger by the Company,
nor the execution and delivery of this Agreement by the Principal Shareholders,
nor the consummation of the transactions contemplated hereby and thereby, nor
compliance by the Company or the Principal Shareholders with any of the
provisions hereof or thereof will (i) violate, conflict with, or result in a
breach of any provisions of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or result in a
right of termination or acceleration, or result in the creation of any lien,
security interest, charge or encumbrance upon, except for Permitted
Encumbrances (as hereinafter defined), any of the properties or assets of the
Company or any Controlled Subsidiary, under any of the terms, conditions or
provisions of (x) their respective certificates of incorporation or by-laws, or
(y) any note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which the Company, any Controlled
Subsidiary or any of the Principal Shareholders is a party, or by which any
property or assets of the foregoing may be subject, or (ii) violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or any Controlled Subsidiary or any of the Principal
Shareholders or any of their respective properties or assets, except where such
a violation, breach, default, termination or lien of any of the foregoing would
not have a Material Adverse Effect. Other than in connection with or in
compliance with the provisions of the DGCL, the 1933 Act, the securities laws
of the various states, Section 7A of the Clayton Act and the rules and
regulations thereunder (the "Hart-Scott-Rodino Act"), no notice or report to,
filing with, or authorization, consent or approval of, any public body or
authority (other than the insurance regulatory authorities listed on the
Disclosure Schedule) is necessary for the execution, delivery and performance by
the Company or any Controlled Subsidiary and the Principal Shareholders of this
Agreement or the Plan of Merger.
5
<PAGE>
2.05 FINANCIAL STATEMENTS. Attached on the Disclosure Schedule are (i)
the audited consolidated financial statements (including balance sheet and
statements of stockholders' equity, income and cash flow) of the Company for its
fiscal years ended December 31, 1993 through December 31, 1995, including in
each case the related footnotes thereto, together with the applicable reports of
the Company's independent auditors Ernst & Young LLP, and (ii) the unaudited
consolidated financial statements (including balance sheet and statement of
income) as of June 30, 1996 (collectively, the "Financial Statements") (the
balance sheet as of June 30, 1996 being herein referred to as the "Company
Balance Sheet"). The Company's books and records of accounts accurately reflect
all of the assets, liabilities, transactions and results of operations of the
Company, except where any inaccuracy would not have a Material Adverse Effect,
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 ("GAAP") maintained and applied on a
consistent basis throughout the indicated periods, and fairly present the
financial condition and results of operation of the Company at the dates and for
the relevant periods indicated in accordance with GAAP. True and correct copies
of all written reports submitted to the Company or the Principal Shareholders by
the Company's auditors since January 1, 1994 relating to the findings of audits
or examination of the books and records of the Company or any Controlled
Subsidiary have been delivered to UWSI.
2.06 INSURANCE COMPANY FINANCIAL STATEMENTS. Except as set forth on the
Disclosure Schedule, each Controlled Subsidiary that is an insurance company or
a health maintenance organization has delivered to UWSI complete and correct
copies of the Annual Statements for the years ended December 31, 1995, 1994 and
1993, and the Quarterly Statement for the quarter ended March 31, 1996, together
with all Exhibits and Schedules thereto (the "Statements"); provided, however,
that any such Controlled Subsidiary was licensed to operate as an insurance
company or health maintenance organization during said fiscal years
("Insurers"). 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 the assets, liabilities and capital and surplus of said
Insurers as of the respective dates thereof in accordance with Statutory
Accounting Practices consistently applied, and do not omit to state or reflect
any material fact concerning said Insurers required to be stated or reflected
therein or necessary to make the statements made therein not misleading in light
of the circumstances under which made. As used in this Agreement, "Statutory
Accounting Practices" means the accounting procedures and methods prescribed or
permitted by the National Association of
6
<PAGE>
Insurance Commissioners as modified by the Department of Insurance for the state
of domicile of each Insurer.
(a) Except as disclosed on the Disclosure Schedule, as of March 31,
1996, 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 fully and correctly reflected or reserved
against in the balance sheet forming a part of the Insurers Statements for the
quarter ended March 31, 1996. Except as set forth on the Disclosure Schedule ,
since March 31, 1996, no Insurer has incurred any 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 reserves met, as of December 31, 1995 and April 1,
1996, and will meet as of the Closing Date, the requirements of the state of
domicile and were 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.
2.07 RECEIVABLES. Except as set forth on the Disclosure Schedule, all
accounts, notes and other receivables of the Company, whether reflected in the
Financial Statements or otherwise, represent sales in the ordinary course of
business.
2.08 ABSENCE OF CERTAIN CHANGES.
(a) Since June 25, 1996 through the date of this Agreement, the Company
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, prospects or operations which individually or in the
aggregate had or could have a material adverse effect. For purposes of this
Section 2.08 only, an item shall be deemed "material" if the dollar amount or
value associated with such item exceeds $25,000. Without limiting the
generality of the foregoing sentence, since June 25, 1996, neither the Company
nor any Controlled Subsidiary has, except as set forth on the Disclosure
Schedule:
(i) in a single transaction or a series of related transactions, sold
(including by sale-leaseback), leased, licensed, pledged, disposed of or
encumbered any assets which individually or in the aggregate, have a fair
market value in excess of $50,000;
(ii) incurred or became 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
$10,000 or redeemed,
7
<PAGE>
purchased, acquired or offered to purchase or acquire any long-term debt;
(iii) 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;
(iv) changed any of its accounting practices or procedures;
(v) amended or proposed to amend its charter or bylaws; or split, combined
or reclassified its outstanding capital stock, or declared, set aside or
paid any dividend or distribution in respect of any capital stock;
(vi) entered into, amended or became obligated under any employment,
severance, bonus, profit sharing or other employee benefit arrangement;
(vii) issued, purchased or redeemed any shares of capital stock of the
Company or any Controlled Subsidiary (including any security convertible or
exchangeable into capital stock) other than: the issuance of shares of
Company Common Stock upon exercise of options outstanding on, and in
accordance with their terms as of, June 25, 1996, or issued, granted or
otherwise created any portion or right to acquire any such capital stock;
(viii) prepaid any material expenses, indebtedness or other obligations;
(ix) entered into or amended any contract, agreement or commitment, or
engaged in any transaction, in each case which was material to the Company
and which was not in the usual and ordinary course of business;
(x) entered into any contract, agreement or commitment or engaged in any
transaction (other than transactions pursuant to agreements in existence on
June 25, 1996 which on such date had been previously disclosed in writing
to UWSI) with any affiliate of Hilliard, Weyers or any officer of the
Company or any Controlled Subsidiary;
(xi) settled any material claim (including without limitations, any tax
claim), action or lawsuit involving the Company or any of its Controlled
Subsidiaries pending as of or arising on or after June 25, 1996, or amended
any tax return in any respect;
8
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(xii) released, waived or terminated any material obligation of any
third party to the Company or any Controlled Subsidiary;
(xiii) 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 the
Company or any of its assets or entered into or consummated any agreement
or understanding providing for a sale or transfer of the Company or any of
its assets, other than as contemplated herein; or
(xiv) agreed, whether or not in writing, to take any of the actions
described in clauses (i)-(xiii) above.
2.09 LITIGATION AND OTHER PROCEEDINGS. Except as set forth on the
Disclosure Schedule , none of the Company, any Controlled Subsidiary or either
Principal Shareholder is currently a party to any pending or, to the Company's
and each Principal Shareholder's knowledge, threatened, claim (other than
benefit claims in the ordinary course of business), action, suit, investigation
or proceeding or is a party to any order, judgment or decree relating to or
affecting the Company, any Controlled Subsidiary or, with respect to the
Principal Shareholders, relating to or affecting their shares of Company Common
Stock or their positions with the Company. Except as set forth on the
Disclosure Schedule, since January 1, 1993, neither the Company nor any
Controlled Subsidiary has been a party to any such claim, action, suit,
investigation or proceeding. Except as described on the Disclosure Schedule,
there is no outstanding order, decree or stipulation issued by any federal,
state or local authority to which the Company or any Controlled Subsidiary is a
party or subject and which has or is reasonably likely to have a Material
Adverse Effect.
2.10 COMPLIANCE WITH LAWS. Except as set forth on the Disclosure Schedule,
to the knowledge of the Company and each Principal Shareholder, the Company and
each Controlled Subsidiary is conducting its business in compliance with all
applicable laws and regulations in each jurisdiction in which it conducts
business, including any insurance or insurance-related laws, regulations or
rules, except where a failure to comply would not have a Material Adverse
Effect. The Disclosure Schedule lists all licenses, registrations and permits,
and applications with respect to the business and operations of each of the
Company and the Controlled Subsidiaries. Except as set forth on the Disclosure
Schedule, to the knowledge of the Company and each Principal Shareholder, the
Company and each of the Controlled Subsidiaries currently has all governmental
approvals, consents, licenses, registrations, and permits necessary to carry on
its business as presently conducted (collectively, "Licenses"), except where
the failure to have any such License would not have a Material Adverse Effect,
and neither the Company nor any Principal Shareholder has received notice of
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violation of any laws or notice of any proposed regulations or changes in the
requirement of such approvals, consents, licenses, registrations, or permits
which notice has not previously been disclosed to UWSI in writing.
2.11 TAXES. To the knowledge of the Company and each Principal
Shareholder, and except as set forth in the Disclosure Schedule: (i) the
Company has duly filed all material reports and returns and extensions ("Tax
Returns") required to be filed by it relating to all taxes imposed by any
jurisdiction ("Taxes"); (ii) all material liabilities for Taxes which are due
from the Company with respect to periods ending on or before the Closing Date
for which a statute of limitations has not barred the assessment of
deficiencies have been paid or provision therefor has been made on the
Company Balance Sheet; and (iii) the Tax Returns reflect all Taxes due and
payable with respect to the periods covered thereby and there are no other
tax liabilities, deficiencies, interest or penalties payable or asserted with
respect to such periods. Except as set forth on the Disclosure Schedule,
there are no actions, suits, proceedings, investigations or claims pending
with respect to tax matters. Except as set forth on the Disclosure Schedule,
there are no pending audits by any federal, state, local or foreign taxing
authority of any payment, return or report made or filed by the Company.
2.12 TITLE TO PROPERTIES.
(a) Except as set forth on the Disclosure Schedule , the Company has good
and marketable title to all of the properties and assets recorded on the
Company Balance Sheet free and clear of all mortgages, liens, pledges, charges
or encumbrances of any nature whatsoever, except for (i) such properties and
assets as may have been sold in the ordinary course of business since the date
of the Company Balance Sheet, or (ii) Permitted Encumbrances. As used herein
"Permitted Encumbrances" means municipal and zoning ordinances, recorded
easements, covenants and restrictions provided the same do not prohibit or
materially interfere with the present use, or materially affect the present
value, of the real property owned by the Company or any Controlled Subsidiary.
All properties and assets owned and currently used by the Company in the
Company's business are in good condition and repair , normal wear and tear
excepted. Surveys of all real property owned by the Company, true and correct
copies of which have been furnished to UWSI, are listed on the Disclosure
Schedule.
(b) The Disclosure Schedule sets forth: (i) a true and complete list of
all real property leases of the Company and all personal property leases to
which the Company is a party as lessee as of the date hereof involving an annual
lease payment of more than $20,000, 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
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owned by the Company as of the date hereof, including an identification of the
property, the record owner and the principal structures on it.
2.13 CONTRACTS AND COMMITMENTS. Except as set forth on the Disclosure
Schedule, neither the Company nor any Controlled Subsidiary has any written or
oral contract, commitment, or other agreement or arrangement, including any
note, loan agreement, guarantee or other evidence of indebtedness of the
Company, which involves an annual aggregate consideration with a value in excess
of $100,000 (excluding any agreements with insureds or plan sponsors), or any
contracts, commitments, or other agreements or arrangements with any Related
Party individually in excess of $60,000. All of such contracts, commitments, or
other agreements or arrangements to which the Company or any Controlled
Subsidiary is a party or by which any of its assets or properties are bound or
affected are in full force and effect and no event or condition has occurred or
exists or has been threatened in writing by any of the other parties thereto to
have occurred or exist, which constitutes or with lapse of time or giving of
notice would constitute a default or basis for acceleration under any such
contract, commitment, arrangement or other agreement. Except as set forth on
the Disclosure Schedule, neither the Company nor any Controlled Subsidiary has
given any revocable or irrevocable power of attorney to any person, firm or
corporation for any purpose whatsoever. Set forth on the Disclosure Schedule
are written descriptions of all such contracts, commitments, agreements or
arrangements that are oral. The Company is not bound by any covenant not to
compete or otherwise restricted by any agreement to which it is a party from
carrying on or engaging in any business anywhere in the world.
2.14 EMPLOYEE RELATIONS. Neither the Company nor any Controlled Subsidiary
is 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. Each of the Company and its Controlled Subsidiaries is in compliance
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 the
Company is in compliance with the Occupational Safety and Health Act and
applicable Federal Civil Rights laws except where the failure to so comply would
not have a Material Adverse Effect.
2.15 EMPLOYEE BENEFIT PLANS.
(a) Listed in the Disclosure Schedule are all written
employment agreements presently in effect between the Company and its
employees, all collective bargaining agreements between Company and its
employees, and all benefit
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plans in effect for employees of the Company, including without limitation
all bonus, pension and retirement, deferred compensation, vacation, and
severance pay plans.
(b) The Company is in compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, except where the failure to so comply
would not have a Material Adverse Effect on the Company. There is no labor
strike, dispute, slowdown, representation campaign or work stoppage
actually pending with respect to the Company's employees.
(c) Since June 25, 1996, there has not been (i) any increase in
the rate or terms of compensation payable by the Company to, or any
increase in the rate or terms of any bonus, insurance, pension, or other
employee benefit plan on behalf of, its officers, except increases
occurring in the ordinary course of business in accordance with its
customary practices (which shall include normal period performance reviews
and related compensation and benefit increases), or (ii) any general or
uniform increase in the compensation or benefits of employees of the
Company.
(d) There are no "employee pension benefit plans" (as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")), subject to Title IV of ERISA, in which the Company's
employees are participants. Each employee pension benefit plan listed on
the Disclosure Schedule is in compliance in all material respects with the
applicable provisions of the Code and ERISA, including the fiduciary and
prohibited transaction rules and funding requirements. Except as required
by law, the Company has made no commitment to provide retiree health
coverage to any employee. The consummation of the transactions
contemplated by this Agreement will not trigger any severance payments.
(e) Except as set forth on the Disclosure Schedule, there are no
pending claims, lawsuits or arbitrations which have been asserted or
instituted against the Company with respect to any laws respecting
employment and employment practices of the Company.
(f) The Company is not a party to any collective bargaining
agreement and no such contract is being negotiated with the Company. No
representation question exists or has been raised respecting the employees
of the Company, nor are there any campaigns being conducted to solicit
cards from the employees of the Company to authorize representation by any
labor organization.
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(g) The Company has (i) timely filed with the United States
Department of Labor and the Internal Revenue Service, all reports required
to be filed by it (including, without limitation, all Forms 5500), and
(ii) attached to the Disclosure Schedule all determination letters from the
Internal Revenue Service which are currently applicable to any benefit plan
of the Company.
2.16 INTELLECTUAL PROPERTY. The Disclosure Schedule sets forth a correct
and complete list of all letters patent, patent applications, trade names,
trademarks, service marks, trademark registrations and applications, copyrights
and copyright registrations and applications, both domestic and foreign,
presently owned, possessed, used or held by the Company or any Controlled
Subsidiary (the "Intellectual Property") which are material to the conduct of
the business of the Company and the Controlled Subsidiaries taken as a whole.
To the Company's and each Principal Shareholder's knowledge, the Company and
each Controlled Subsidiary owns the entire right, title and interest in and to
all Intellectual Property. The Disclosure Schedule sets forth a correct and
complete list of all licenses granted to the Company and each Controlled
Subsidiary by others which are material to the conduct of the business of the
Company and each Controlled Subsidiary as now conducted , taken as a whole and
to others by the Company or any Controlled Subsidiary. Except as set forth on
the Disclosure Schedule , neither the conduct of the Company's or any Controlled
Subsidiary's business nor any of the products it sells or services it provides
infringes upon the rights of any other person and, the conduct of any other
person's business or any of the products it sells or services it provides does
not infringe upon any of the Company's or any Controlled Subsidiary's rights.
Neither the Company nor any Controlled Subsidiary has any liability for or has
given any indemnification for patent, trademark or copyright infringement as to
any products used or sold by it or with respect to services rendered by it.
The Intellectual Property constitutes all of the intellectual property that is
used in or necessary for the conduct of the Company's or any Controlled
Subsidiary's business, as presently conducted. Except as set forth on the
Disclosure Schedule, neither the Company nor any Controlled Subsidiary has
licensed any third party to use any of the Intellectual Property.
2.17 ENVIRONMENTAL MATTERS. There are no actions pending or, to the
Company's and Principal Shareholders' knowledge, threatened, and no conditions
which could give rise to such an action against the Company which assert or
allege (a) the Company, any Controlled Subsidiary or U&C Real Estate Partnership
or their respective businesses has violated or any of their respective owned
real property is in violation of any environmental laws or is in default with
respect to any order, writ, judgment, variance, award or decree applicable to
the Company, any Controlled Subsidiary or U&C
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Real Estate Partnership of any governmental authority relating to environmental
laws (an "Environmental Law"); (b) the Company, any Controlled Subsidiary or U&C
Real Estate Partnership is required to clean up or take any investigation,
remedial or other response action under any Environmental Law; or (c) the
Company, any Controlled Subsidiary or U&C Real Estate Partnership is required to
contribute to the cost of any past, present or future cleanup or remedial or
other response action which arises under any Environmental Law.
2.18 CONTINGENT OR UNDISCLOSED LIABILITIES. Except as set forth on the
Disclosure Schedule, neither the Company nor any Controlled Subsidiary has any
debts, liabilities or obligations due or to become due (which debts,
liabilities or obligations are not the subject of any other representation or
warranty made in this Article II), and there are no claims or causes of action
that may be asserted against the Company or any Controlled Subsidiary by any
governmental authority or third party (which claims or causes of action are not
the subject of any other representation or warranty made in this Article II)
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 Company Balance Sheet, except for liabilities
incurred since June 25, 1996 in the ordinary course of business consistent with
past practice or except to the extent that any such liability would not have a
Material Adverse Effect.
2.19 INSURANCE. The Company has in full force and effect the policies of
insurance listed in the amounts described on the Disclosure Schedule , and all
premiums due thereon have been paid. The Company does not have any interest in
any other insurance policy.
2.20 RELATED PARTY TRANSACTIONS. Except as described on the Disclosure
Schedule attached hereto, the Company and each Controlled Subsidiary: (a) has
not had any financial transactions or arrangements (other than payment of
regular salary to Related Parties who are employees) with an annual aggregate
amount in excess of $10,000 with any Related Party since June 25, 1996, and (b)
except as contemplated hereby has not and will not have any present or future
binding obligation to enter into any transaction or arrangement with any Related
Party. For purposes hereof, the term "Related Party", shall mean: (i) any five
percent or greater shareholder of the Company (other than UWSI) (ii) any officer
or director of the Company or any Controlled Subsidiary, (iii) any spouse,
in-law or descendant of any Related Party, and (iv) any person who, directly or
indirectly, controls the Company. For purposes of this definition, "person"
shall mean an individual, partnership, corporation, trust, unincorporated
organization or other entity; and "control," as used with respect to any person,
shall mean the possession, directly or indirectly, of the power to
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direct or cause the direction of the management and policies of such person,
whether through the ownership of voting securities, by contract or otherwise.
Except as described on the Disclosure Schedule, to the knowledge of the Company
and Principal Shareholders, no 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, or supplier, having business dealings with
the Company or any Controlled Subsidiary, nor does any Related Party own any
material assets or properties which are used in the Company's or any Controlled
Subsidiary's business.
2.21 REGISTRATION STATEMENT, ETC. None of the information to be supplied
by the Company or the Principal Shareholders insofar as such information relates
to the Company or the Principal Shareholders and such information is furnished
in writing by or on behalf of the Company or the Principal Shareholders
expressly for use in (i) a Registration Statement to be filed with the
Securities and Exchange Commission (the "Commission") by UWSI for the purpose of
registering the shares of UWSI Common Stock to be exchanged for shares of the
Company Common Stock pursuant to the provisions of the Plan of Merger (the
"Registration Statement"), (ii) the proxy statement to be mailed to the
shareholders of the Company and UWSI (the "Proxy Statement") in connection with
the meeting of shareholders to be called to consider and vote upon the Merger,
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.
2.22 BROKERS AND FINDERS. Except as set forth in the Disclosure Schedule,
neither the Company or any of its officers, directors or employees nor the
Principal Shareholders 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 the
Company or the Principal Shareholders in connection with this Agreement, the
Plan of Merger or the transactions contemplated hereby and thereby.
2.23 DISCLOSURE. No representation, warranty or other statement by the
Company or any of the Principal Shareholders
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herein or in the Disclosure 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.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF UWSI
UWSI represents and warrants to the Company and the Shareholders that:
3.01 ORGANIZATION AND AUTHORITY. UWSI is a corporation validly existing
and in good standing under the laws of Wisconsin, with all requisite corporate
power and corporate authority to own its property and to carry on its business
as now being conducted.
3.02 CAPITALIZATION. The authorized capital stock of UWSI consists of (a)
50,000,000 shares of common stock, no par value per share, of which 12,599,715
shares are issued and outstanding, and (b) 500,000 shares of preferred stock, no
par value per share, of which no shares are issued and are outstanding. The
UWSI Common Stock to be issued in the Merger will be validly issued, fully paid
and nonassessable subject to Section 180.0622(2)(b) of the WBCL and judicial
interpretations thereof. All of the outstanding shares of UWSI Common Stock
have been issued pursuant to and in accordance with the 1933 Act and applicable
state securities laws and rules and regulations under such laws, or valid
exemptions therefrom.
3.03 AUTHORIZATION. UWSI has full power and authority to enter into this
Agreement and the Plan of Merger and to carry out its obligations hereunder and
thereunder. The transactions contemplated hereby and thereby have been duly
authorized by its Board of Directors , and no other corporate proceedings on
the part of UWSI are necessary to authorize this Agreement, the Plan of Merger
and the transactions contemplated hereby and thereby, except for the approval of
UWSI shareholders. Subject to the approval of UWSI's shareholders, this
Agreement and the Plan of Merger are valid and binding obligations of UWSI ,
enforceable against it in accordance with their 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.
Neither the execution and delivery of this Agreement nor the Plan of Merger by
UWSI nor the consummation of the transactions contemplated hereby and thereby,
nor compliance with any of the provisions hereof or thereof will (i) violate,
conflict with, or result in a breach of any provisions of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration,
under any of the terms, conditions or
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provisions of (x) its articles of incorporation or by-laws, or (y) any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which UWSI is a party, or by which any property or
assets of the foregoing may be subject, or (ii) violate any judgment, ruling,
order, writ, injunction, decree, statute, rule or regulation applicable to UWSI
or any of its properties or assets, except where such violations would not
materially impair the ability of UWSI to consummate the transactions
contemplated herein. Other than in connection with or in compliance with the
provisions of the DGCL, the WBCL, the 1933 Act, the securities laws of the
various states, the insurance laws of various states and the Hart-Scott-Rodino
Act, no notice to, filing with, or authorization, consent or approval of, any
public body or authority is necessary for the consummation by UWSI of the
transactions contemplated by this Agreement and the Plan of Merger.
3.04 REGISTRATION STATEMENT, ETC. None of the information to be supplied
by UWSI insofar as such information relates to UWSI 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 UWSI 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 UWSI with the Commission in connection with the
Merger will comply in all material respects with the provisions of applicable
federal and state securities laws.
3.05 BROKERS AND FINDERS. Other than fees payable to Merrill Lynch & Co.,
neither UWSI 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 UWSI in connection with this Agreement or the Plan
of Merger or the transactions contemplated hereby and thereby.
3.06 DISCLOSURE. No representation, warranty or other statement by UWSI
herein or in any other document made in connection with this Agreement,
contains or will contain an untrue statement of a material fact, or omits or
will omit to state a
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material fact necessary to make the statements contained herein or therein
misleading.
3.07 SEC REPORTS. Each report filed by UWSI under the Securities
Exchange Act of 1934, as amended and the rules and regulations promulgated
thereunder (collectively, the "1934 Act") since June 30, 1995 did not, on the
date of such report 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. All financial statements included in the reports referred to in
the preceding sentence were prepared in accordance with GAAP except as noted
therein, and fairly present the information purported to be shown therein
(subject only to normal, recurring adjustments in the case of any unaudited
statements, none of which is material).
ARTICLE IV
CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME
4.01 CONDUCT OF THE COMPANY'S BUSINESS PRIOR TO THE EFFECTIVE TIME.
During the period from the date of this Agreement to the Effective Time, the
Company and the Controlled Subsidiaries shall conduct their respective
operations according to the ordinary and usual course of business consistent
with past and current practices and use their reasonable best efforts to
maintain and preserve their business organization, prospects, employees and
advantageous business relationships and shall not, without the prior written
consent of the President of UWSI, take any action or permit to occur any event
set forth in Section 2.08.
ARTICLE V
ADDITIONAL AGREEMENTS
5.01 ACCESS AND INFORMATION. (a) Prior to the Effective Time, the Company
shall on reasonable notice to the Company allow UWSI, and its accountants,
counsel and other representatives and advisers full and complete access during
reasonable business hours to all properties, books, contracts, commitments,
records, documents and facilities of the Company, the Company shall furnish
promptly to UWSI all other information concerning the business, properties and
personnel of the Company and the Controlled Subsidiaries as UWSI may reasonably
request, and the Company will make the officers, employees, agents, independent
accountants and actuaries of the Company and Controlled Subsidiaries available
to discuss such aspects of the Company and the Controlled Subsidiaries as may be
reasonably requested by UWSI.
(b) UWSI shall make available to executive officers of the Company, its
accountants, counsel and the executive officers of
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UWSI to discuss such aspects of UWSI as may be reasonably requested by the
Company.
(c) Each of the Company and UWSI acknowledge that the access provided for
in this Section 5.01 is provided for the sole reason of allowing each of UWSI
and the Company 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 the Company and UWSI 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 the Company and UWSI shall inform its
respective directors, officers, employees, and agents of such securities laws.
5.02 REGISTRATION STATEMENT AND PROXY STATEMENT. As soon as reasonably
practicable after the date hereof, UWSI shall prepare the Proxy Statement and
UWSI shall prepare and file with the Commission and diligently pursue to
effectiveness the Registration Statement, of which the Proxy Statement shall be
a part. In connection with the foregoing, (a) UWSI and the Company will comply
fully with the requirements of applicable state securities laws, the 1933 Act,
and the rules and regulations of the Commission under such laws applicable to
the offering and sale of UWSI Common Stock in connection with the Merger and the
solicitation of proxies for the meeting of the shareholders of the Company
described below and (b) the Company shall furnish to UWSI such information
relating to the Company and its affiliates and the transactions contemplated by
this Agreement and the Plan of Merger and such further and supplemental
information as may be necessary or as may be reasonably requested by UWSI 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 the Company or UWSI 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. UWSI shall also take any action required to be taken under any
applicable state securities laws in connection with the issuance of the shares
of UWSI Common Stock to be issued as set forth in the Plan of Merger, and the
Company shall furnish all information concerning the Company and the holders of
the Company Common Stock and other assistance as UWSI may reasonably request in
connection with any such action. Following the Effective Time, UWSI will
register the shares of UWSI Common Stock underlying the Options on Form S-8.
5.03 COMPANY SHAREHOLDERS' APPROVAL. The Company shall call a special
meeting of its shareholders to be held no later than 20 days following
effectiveness of the Registration Statement for the purpose of considering and
voting upon the approval and adoption
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of the Plan of Merger. The Company shall comply fully with the applicable
provisions of the DGCL relating to the call and holding of such meeting of its
shareholders.
5.04 UWSI SHAREHOLDERS APPROVAL. UWSI 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 (i) the
approval and adoption of the Plan of Merger and (ii) the increase in the number
of shares of UWSI Common Stock issuable pursuant to the UWSI Equity Incentive
Plan to cover the options on UWSI Common Stock being granted pursuant to the
Employment Agreements referred to in Section 6.03(i). UWSI shall comply fully
with the applicable provisions of the WBCL and the 1934 Act in connection with
such shareholder approval.
5.05 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 and
regulations to consummate and make effective the transactions contemplated by
this Agreement and the Plan of Merger, including, without limitation, using
reasonable efforts to satisfy the conditions contained in Article VI hereof.
The Company and UWSI will use their best efforts to obtain consents of all third
parties and governmental bodies necessary or, in the reasonable opinion of UWSI,
desirable for the consummation of the transactions contemplated by this
Agreement and the Plan of Merger. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement and the Plan of Merger, the proper officers and/or directors of the
Company or UWSI, as the case may be, shall take all such necessary action.
Prior to the Effective Time, each Principal Shareholder shall (i) own, of record
and beneficially, all right, title and interest to the shares of Company Common
Stock owned by him as of the date hereof, free and clear of all security
interests, liens, claims, pledges, escrows, options, warrants, rights of
purchase, equities, charges, encumbrances, proxies, voting trusts and
restrictions on voting rights whatsoever, and (ii) not enter into any contract,
agreement, understanding or restriction of any kind relating to any shares of
Company Common Stock. Subject to the provisions of Section 5.05, or without
UWSI's prior written consent, during the period from the date of this Agreement
to the Effective Time, or such earlier termination of the Agreement pursuant to
Article VII hereof, the Principal Shareholders shall not and the Company shall
not and shall cause its directors, officers, agents and employees not to
solicit, authorize the solicitation of or enter into any discussion (or continue
any discussion) with any third party (including the provision of any information
to a third party regarding the Company) concerning any offer or possible offer
from any such third party (i) to purchase any Company Common Stock, any option
or
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warrant to purchase Company Common Stock, or any securities convertible into
Company Common Stock or any other security of the Company, (ii) to purchase,
lease or otherwise acquire all or a substantial portion of the assets of the
Company or (iii) to merge, consolidate or otherwise combine with the Company.
5.06 INTERIM FINANCIAL STATEMENTS. During the period prior to the
Effective Time, the Company shall deliver to UWSI monthly an unaudited balance
sheet and income statement as of the end of such month (the "Interim Financial
Statements"). The Interim Financial Statements shall be correct and complete
and shall fairly present the financial condition, stockholders' equity, and
results of operations of the Company as of the respective dates, and the
Interim Financial Statements shall be prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved.
5.07 INSURANCE REGULATORY APPROVALS. As soon as practicable in conjunction
with the execution and delivery of this Agreement, UWSI will file with the
Department of Insurance of each state listed on the Disclosure Schedule, a Form
A or similar document seeking approval of the Merger, and UWSI and the Company
each hereby agrees that it will in good faith take, or cause to be 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, including, without limitation, approval
of the Departments of Insurance listed on the Disclosure Schedule.
5.08 HART-SCOTT-RODINO COMPLIANCE. UWSI, the Company and any other party
required by law shall as soon as practicable file Notification and Report Forms
under the Hart-Scott-Rodino 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. UWSI, the Company and any other parties required
by law, 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 Merger 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.
5.09 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
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the failure to satisfy any of the conditions specified in Article VI hereof.
5.10 VOTING AGREEMENT. The Principal Shareholders shall vote their
shares of Company Common Stock and BCBSUW shall vote its shares in UWSI in
favor of the Plan of Merger.
5.11 BEST EFFORTS. Each of UWSI, the Company and the Principal
Shareholders agree to use its or his best efforts to take all necessary actions
to cause the Merger to be consummated.
5.12 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 and approval of all parties hereto.
5.13 EXPENSES. UWSI shall be responsible for its expenses incurred in
connection with this Agreement and the transactions contemplated hereby. The
Company shall be responsible for $150,000 of the fees and expenses of Godfrey &
Kahn, S.C. incurred in connection with the transactions contemplated by this
Agreement on behalf of the Company. The Shareholders shall be responsible for
the remaining expenses of Godfrey & Kahn, S.C. since June 1, 1996, and all fees
and expenses of any financial advisors engaged by the Company, any Controlled
Subsidiary or the Principal Shareholders incurred in connection with this
Agreement and the transaction contemplated hereby. Any Shareholders required by
law to make filings under the Hart-Scott-Rodino Act as acquiring persons (as
defined thereunder) shall be responsible for the expenses of any filing fees
therefor. The Company shall be responsible for any remaining expenses incurred
by the Company or the Principal Shareholders in the normal course of completing
the transactions contemplated hereby.
5.14 CERTAIN AGREEMENTS. The Company and the Principal Shareholders shall
use their reasonable best efforts to cause:
(i) American Medical Security Insurance Company ("AMSIC") to transfer
to the Company all of the issued and outstanding capital stock of American
Medical Security Insurance Company of Georgia, American Medical Security
Insurance Company of Ohio and Personal Physicians Care, Inc.;
(ii) AMSIC to transfer to the Company a dividend of $10 million;
(iii) the Company to pay in full that Note of the Company in favor
of Bank One, Green Bay dated February 1, 1996; and
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(iv) the Company to consent to the substitution of United Wisconsin
Life Insurance Company for United Wisconsin Insurance Company as a partner in
U&C Real Estate Partnership.
5.15 UWSI CAPITALIZATION. The number of shares of UWSI Common Stock (i)
to be received by the Shareholders in the Merger (ii) issuable upon exercise of
the Options shall be adjusted for any stock split, stock dividend,
recapitalization or similar event affecting UWSI Common Stock prior to the
Effective Time.
ARTICLE VI
CONDITIONS
6.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO CONSUMMATE THE MERGER. The
respective obligations of each party to consummate the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) HSR WAITING PERIOD. All applicable waiting periods under the
Hart-Scott-Rodino 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) COMPANY AUTHORIZATION. The Plan of Merger shall have been approved
and adopted by the requisite vote of the holders of the outstanding shares of
Company Common Stock.
(d) UWSI AUTHORIZATIONS. The Plan of Merger and the increase in the
shares of UWSI Common Stock issuable pursuant to the UWSI Equity Incentive Plan
to cover the options on UWSI Common Stock being granted pursuant to the
Employment Agreements referred to in Section 6.03(i) hereof shall each have been
approved by the requisite vote of the holders of UWSI Common Stock.
(e) LISTING. The shares of UWSI Common Stock to be issued in the Plan of
Merger and upon exercise of the Options, shall have been approved for listing on
the New York Stock Exchange subject to notice of issuance.
(f) PROCEEDINGS. At the Effective Time there shall be no action or
proceeding initiated by any governmental agency or any
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third party pending which seeks to restrain, prohibit or invalidate any material
transaction contemplated by this Agreement or the Plan of Merger 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.
(g) INSURANCE REGULATORY APPROVALS.
(i) This Agreement, and all aspects of the transactions contemplated
hereby, shall have received all appropriate and necessary insurance regulatory
consents and approvals ("Approvals") as contemplated in Section 5.06, which
Approvals shall be in full force and effect;
(ii) any conditions and directions contained in the Approvals shall
have been fully complied with in all material respects; and
(iii) the Approvals shall not modify the terms and conditions of
this Agreement, and the transactions contemplated herein, in any material
respect.
6.02 CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE PRINCIPAL
SHAREHOLDERS TO CONSUMMATE THE MERGER. The obligations of the Company and the
Principal Shareholders to consummate the Merger shall be subject to the
fulfillment (or waiver by the Company and the Principal Shareholders) at or
prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of UWSI set forth in Article III hereof shall be true and correct 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 or
approved by the Company, and the Company shall have received a certificate
signed by the Chief Executive Officer, the President or an Executive Vice
President of UWSI to that effect.
(b) PERFORMANCE OF OBLIGATIONS. UWSI shall have performed all obligations
required to be performed by it under this Agreement prior to the Effective Time,
and the Company shall have received a certificate signed by the Chairman of the
Board, the President or an Executive Vice President of UWSI to that effect.
(c) PERMITS, AUTHORIZATIONS, ETC. UWSI 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 Merger.
(d) OPINION OF COUNSEL. Michael Best & Friedrich, counsel for UWSI, shall
have furnished its opinion to the Company as of the
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Effective Time in form and substance reasonably satisfactory to the Company.
(e) OPINION OF TAX COUNSEL. The Company shall have received from Godfrey
& Kahn an opinion, in form and substance reasonably satisfactory to the
Company, to the effect that, on the basis of the facts, representations and
assumptions set forth in such opinion, and based on the Code and the regulations
and interpretations thereunder as of the date of such opinion, that (a) the
Merger will for federal income tax purposes constitute a reorganization within
the meaning of Section 368 of the Code, (b) no gain or loss will be recognized
by the Company Shareholders to the extent that they receive UWSI Common Stock
solely in exchange for shares of Company Common Stock; (c) the gain, if any, to
be realized by Company Shareholders who exchange their Company Common Stock for
UWSI Common Stock and cash will be the excess of (i) the amount of cash plus the
fair market value at the Effective Time of the UWSI Common Stock received over
(ii) the basis of the Company Common Stock to be surrendered in exchange thereof
and such gain will be recognized on the exchange, but in an amount not in excess
of the cash to be received; (d) the basis of the shares of UWSI Common Stock to
be received by the Company Shareholders will be the same as the basis of the
Company Common Stock surrendered in exchange therefor, adjusted as provided in
Section 358(a) of the Code in the event that any cash is received; and (e) the
holding period of UWSI Common Stock received by the Company Shareholders will
include the holding period of the Company Common Stock surrendered in exchange
therefor, provided that the Company Shareholders held and will hold the Company
Common Stock and UWSI Common Stock as capital assets. In rendering such
opinion, Godfrey & Kahn may rely upon representations contained in certificates
of officers of UWSI, the Company and others.
(f) REGISTRATION RIGHTS AND STOCK RESTRICTION AGREEMENT. UWSI shall
have executed and delivered the Registration Rights and Stock Restriction
Agreement (the "Registration Rights Agreement") in substantially the form of
Exhibit B hereto.
6.03 CONDITIONS TO OBLIGATIONS OF UWSI TO CONSUMMATE THE MERGER. The
obligations of UWSI to consummate the Merger shall be subject to the fulfillment
(or waiver by UWSI) at or prior to the Effective Time of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company and the Principal Shareholders set forth in Article II hereof
shall be true and correct as of the date of this Agreement and as of the
Effective Time as though made on and as of the Effective Time, except for such
matters as would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole, and UWSI shall have received a certificate
signed by the Principal Shareholders and by the President of the Company to that
effect.
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(b) PERFORMANCE OF OBLIGATIONS. The Company and the Principal
Shareholders shall have performed all obligations required to be performed by
it or them under this Agreement prior to the Effective Time, and UWSI shall have
received a certificate signed by the Principal Shareholders and by the President
of the Company to that effect.
(c) PERMITS, AUTHORIZATIONS, ETC. The Company shall have obtained any and
all consents or waivers from other parties to loan agreements or other contracts
material to the Company's business for the lawful consummation of the Merger,
and the Company and UWSI shall have obtained any and all permits,
authorizations, consents or approvals of state securities commissions and of any
other public body or authority required for the lawful consummation of the
Merger.
(d) AGREEMENTS OF AFFILIATES. Each person who is identified on the
Disclosure Schedule pursuant to Section 2.03 hereof as an "affiliate" shall have
delivered to UWSI a written agreement in the form of Exhibit C hereto.
(e) FINANCIAL STATEMENTS. UWSI shall have received the Interim Financial
Statements.
(f) OPINION OF COUNSEL. Godfrey & Kahn, counsel for the Company, shall
have furnished to UWSI its opinion as of the Closing in form and substance
satisfactory to UWSI.
(g) OPINION OF TAX COUNSEL. UWSI shall have received from Michael Best &
Friedrich an opinion, in form and substance reasonably satisfactory to UWSI, to
the effect that, on the basis of the facts, representations and assumptions set
forth in such opinion, and based on the Code and the regulations and
interpretations thereunder as of the date of such opinion, the Merger will for
federal income tax purposes constitute a reorganization within the meaning of
Section 368 of the Code. In rendering such opinion, Michael Best & Friedrich
may rely upon representations contained in certificates of officers of UWSI, the
Company and others.
(h) DISSENTING SHAREHOLDERS. UWSI shall have received a certificate
signed by the President of the Company to the effect that shareholders of the
Company owning no more than five percent of the Company's Common Stock have
filed with the Company written objections to the Merger under Section 262 of the
DGCL.
(i) EMPLOYMENT AGREEMENTS. Hilliard and Weyers, respectively, shall have
executed the Employment Agreements in the form previously agreed to.
(j) TERMINATION OF EXISTING EMPLOYMENT AGREEMENTS. The Company shall
have terminated (at no additional expense to the
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Company) the current Employment Agreements between the Company and Hilliard and
Weyers, respectively.
(k) OPTIONS. The substitution of UWSI Options (as such term is defined in
the Plan of Merger) for Options shall be approved by the Boards of Directors of
the Company and UWSI. The shareholders of UWSI shall have approved the option
plan amendment contemplated by Section 2.2(b) of the Plan of Merger. The
Management Review Committee which administers such option plan shall have
approved the substitution of options contemplated by Section 2.2(b) of the Plan
of Merger and the issuance of UWSI Options to the Principal Shareholders, as
contemplated in their respective Employment Agreements.
(l) BRING DOWN OF FAIRNESS OPINION. Merrill Lynch & Co. shall have
confirmed or redelivered its opinion previously delivered to UWSI concerning
the fairness, from a financial point of view, of the Merger to the shareholders
of UWSI. Such confirmation or redelivery shall be dated the date on which
proxy materials are first mailed to UWSI Shareholders for the special meeting of
shareholders referred to in Section 5.04 hereof.
(m) ESCROW AGREEMENT. The Shareholders shall have deposited the Escrow
Amount into, and Hilliard, as Agent, shall have executed, an Escrow Agreement in
the form attached hereto as Exhibit D (the "Escrow Agreement").
ARTICLE VII
TERMINATION, AMENDMENT
7.01 TERMINATION.
(a) This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the shareholders of the
Company:
(i) by mutual consent of the Company and UWSI;
(ii) by any of the Company, the Principal Shareholders or UWSI
if the Merger has not taken place by June 30, 1997;
(iii) by UWSI if any of the conditions contained in Sections 6.01
and 6.03 have not been satisfied prior to the Closing; or
(iv) by the Company if any of the conditions contained in
Sections 6.01 or 6.02 have not been satisfied prior to the Closing.
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(b) In the event this Agreement is terminated pursuant to Section 7.01:
(i) all obligations and rights of the parties hereunder shall cease and the
parties shall have all of the rights and obligations which existed immediately
prior to the execution of this Agreement; and (ii) 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).
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 Board of Directors at any time prior to the
Effective Time; provided, however, that, after the approval and adoption of the
Plan of Merger by the shareholders of the Company, no such amendment,
modification or supplement shall change the amount or the form of the
consideration to be delivered to the holders of Company Common Stock or Options
as contemplated by this Agreement and the Plan of Merger.
ARTICLE VIII
INDEMNIFICATION
8.01 INDEMNIFICATION BY SHAREHOLDERS. As UWSI's sole and exclusive remedy
for breach of this Agreement from and after the Effective Time, the Shareholders
of the Company other than UWSI (the "Shareholders"), shall indemnify, defend and
hold UWSI and its subsidiaries, directors, officers, employees, agents and
shareholders (collectively, "UWSI" as used in this Article VIII) harmless from
and against any damages, liability, loss, cost or deficiency (including, but
not limited to, reasonable attorneys' fees ) net of any tax benefits, insurance
proceeds or similar benefits, arising out of, resulting from or relating to:
(a) any inaccuracy in or breach of a representation or warranty
of the Company or the Shareholders pursuant to this Agreement or any
failure of the Company or the Principal Shareholders to duly perform or
observe any term, provision, covenant or agreement to be performed or
observed by them pursuant to this Agreement.
(b) the Employee Claim (as defined in the letter from the
Company to UWSI of even date herewith) (collectively, "UWSI Damages").
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8.02 LIMITATIONS.
(a) UWSI DAMAGES. No indemnification shall be payable by the
Shareholders to UWSI with respect to an Indemnified Claim (as hereinafter
defined) for UWSI Damages pursuant to Section 8.01(a) unless the Agent (as
such term is defined in the Escrow Agreement) shall have received notice
thereof on or before June 30, 1997 or, if the Effective Time is after
December 31, 1996, on or before nine months after the Effective Time;
Further, no claim pursuant to Section 8.01(a) shall be made until UWSI's
Damages for all Indemnified Claims pursuant to Section 8.01(a), in the
aggregate, exceed Seven Hundred Fifty Thousand Dollars ($750,000) (the
"Basket Amount"). For the purposes of determining whether a breach or
inaccuracy of a representation, warranty or covenant contained in this
Agreement has occurred, which can give rise to an Indemnified Claim and for
the purposes of calculating the amount of any Indemnified Claim, such
determination shall be made by considering each of such representations,
warranties or covenants as if the terms "material", "materially" or
"Material Adverse Effect" did not appear therein. At such time that UWSI's
Damages under Section 8.01(a) exceed the Basket Amount the Shareholders
shall be liable to UWSI only for the portion of such UWSI's Damages that
exceed the Basket Amount.
(b) EMPLOYEE CLAIM. No indemnification shall be payable by
the Shareholders to UWSI with respect to an Indemnified Claim pursuant to
Section 8.01(b) unless the Agent shall have received notice thereof on or
before three years after the Effective Time. Further, no claim hereunder
shall be made until UWSI's Damages for all Indemnified Claims under Section
8.01(b) in the aggregate, exceed Seven Hundred Fifty Thousand Dollars
($750,000) (the "Employee Basket Amount"). At such time that UWSI's
Damages under Section 8.01(b) exceed the Employee Basket Amount, the
Shareholders shall be liable to UWSI for only fifty percent (50%) of the
portion of such UWSI's Damages for Section 8.01(b) which exceed the
Employee Basket Amount.
(c) MAXIMUM AMOUNT. In no event shall the Shareholders'
liability with respect to the Employee Claim exceed One Million Dollars
($1,000,000), and in no event shall the Shareholders' liability with
respect to all Indemnified Claims, in the aggregate, including the Employee
Claim, exceed Eight Million Dollars ($8,000,000) (the "Escrow Amount")
which sum shall be deposited into escrow concurrently with the Effective
Time pursuant to the Escrow Agreement.
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8.03 PROCEDURE.
(a) NOTICE OF CLAIMS. UWSI shall provide the Agent quarterly
with a list of all Indemnified Claims (each of which shall be in a minimum
amount of $10,000) that UWSI is applying to the Basket Amount. Once the
Indemnified Claims exceed the Basket Amount, UWSI shall simultaneously give
the Agent and the Escrow Agent (as such term is defined in the Escrow
Agreement) prompt notice of any claim, demand, assessment, action, suit or
proceeding to which UWSI believes the indemnity set forth in section 8.01
applies each of which shall be in the minimum amount of $10,000 (an
"Indemnified Claim"); provided however that no Indemnified Claim shall be
made for a breach or inaccuracy of any representation or warranty, if
Joseph Decker, Gail L. Hanson, Samuel V. Miller or C. Edward Mordy had
knowledge of such a breach or inaccuracy at the time it was made. Such
notice shall provide in reasonable detail such information as UWSI may have
with respect to such Indemnified Claim (including, without limitation,
copies of any summons, complaints or other pleadings which may have been
served on UWSI or its agents and any written claim, demand, invoice,
billing or other document evidencing the same). If such Indemnified Claim
is evidenced by a court pleading, UWSI shall give such notice within five
(5) days of receipt of such pleading. If such Indemnified Claim is
evidenced by some other writing from a third party, UWSI shall give such
notice within ten (10) days of the date it receives such writing. If the
Agent shall object to such notice of claim, the Agent shall simultaneously
deliver a written notice of objection to UWSI and the Escrow Agent within
fifteen (15) days after UWSI's delivery of the notice of claim. Such
notice of objection shall set forth the grounds upon which the objection is
based and state whether the Agent objects to all or only a portion of the
matter described in the notice of claim. If the notice of objection shall
not have been so delivered within such fifteen (15) day period, all
Shareholders (as defined in the Escrow Agreement) shall be conclusively
deemed to have acknowledged the correctness of the claim or claims
specified in the notice of claim for the full amount thereof, and the
UWSI's Damages set forth in the notice of claim shall be promptly paid to
UWSI from the Escrow by the Escrow Agent, without the necessity of further
action, as provided in the Escrow Agreement to the full extent of the
amount of funds held in the Escrow. If the Agent shall make timely
objection to a claim or claims set forth in any notice of claim, and if
such claim or claims shall not have been resolved or compromised within
sixty (60) days from the date of delivery of the notice of objection, then
such claims shall be settled by arbitration pursuant to Section 9.07
hereof. The arbitrator shall promptly obtain such information regarding the
matter the arbitrator deems necessary and shall decide the matter and
render a written
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award which shall be delivered to UWSI, the Agent and the Escrow Agent.
Any award shall be a conclusive determination of the matter and shall
be binding upon UWSI and the Shareholders. If, by arbitration, it
shall be determined that UWSI shall be entitled to any UWSI's Damages
by reason of its claim or claims, the UWSI's Damages so determined
shall be paid to UWSI by the Escrow Agent in the same manner as if the
Agent had not delivered a notice of objection.
(b) CONTROL OF DEFENSE OF CLAIMS. If UWSI's request for
indemnification arises from the claim of a third party, (i) UWSI may assume
control of the defense of such Indemnified Claim or any litigation
resulting from such Indemnified Claim at its own expense by giving the
Principal Shareholders notice of UWSI's decision to do so or (ii) UWSI may
allow the Agent to assume control of such defense by giving written notice
to the Agent. If the Agent elects to assume such defense after written
notice by UWSI, or if within ten (10) days after delivery of such notice
the Agent has not notified UWSI in writing of its intent to assume such
defense, such defense shall be conducted at the Shareholders' sole expense.
Notwithstanding UWSI's assumption of the defense of an Indemnified Claim
pursuant to Section 8.03(b)(i) hereof, the Principal Shareholders shall
have the right to participate in the defense of such Indemnified Claim at
their own expense.
8.04 INDEMNIFICATION BY UWSI. As the Shareholders' sole and exclusive
remedy for breach of this Agreement from and after the Effective Time, UWSI
agrees to indemnify, defend and hold the Shareholders, harmless from and against
any damage, liability, loss, cost or deficiency (including, but not limited to,
reasonable attorneys' fees) arising out of, resulting from or relating to:
(a) any inaccuracy in or breach of representation or warranty of
UWSI pursuant to this Agreement; and
(b) any failure to duly perform or observe any term, provision
or covenant to be performed or observed by UWSI pursuant to this
Agreement.
8.05 PROCEDURE. The Principal Shareholders, acting on behalf of the
Shareholders, shall give UWSI prompt notice of any claim, demand, assessment,
action, suit or proceeding to which the Principal Shareholders believe the
indemnity set forth in section 8.04 applies (for purposes of this Section 8.05,
an "Indemnified Claim"). Such notice shall provide in reasonable detail such
information as the Principal Shareholders may have with respect to such
Indemnified Claim (including, without limitation, copies of any summons,
complaints or other pleadings which may have been served on Shareholders or
their respective agents and any written claim, demand, invoice, billing or other
document evidencing the
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same). If such Indemnified Claim is evidenced by a court pleading, UWSI shall
be given such notice within five (5) days of receipt of such pleading. If such
Indemnified Claim is evidenced by some other writing from a third party, UWSI
shall be given such notice within ten (10) days of the date it receives such
writing. If UWSI shall object to such notice of claim, the UWSI shall deliver a
written notice of objection to the Principal Shareholders within fifteen (15)
days after delivery of the notice of claim. Such notice of objection shall set
forth the grounds upon which the objection is based and state whether UWSI
objects to all or only a portion of the matter described in the notice of claim.
If the notice of objection shall not have been so delivered within such fifteen
(15) day period, UWSI shall be conclusively deemed to have acknowledged the
correctness of the claim or claims specified in the notice of claim for the full
amount thereof, and the damages set forth in the notice of claim shall be
promptly paid to Principal Shareholders (on behalf of all Shareholders), in
cash. If UWSI shall make timely objection to a claim or claims set forth in any
notice of claim, and if such claim or claims shall not have been resolved or
compromised within sixty (60) days from the date of delivery of the notice of
objection, then such claims shall be settled by arbitration pursuant to Section
9.07 hereof. The arbitrator shall promptly obtain such information regarding
the matter the arbitrator deems necessary and shall decide the matter and render
a written award which shall be delivered to UWSI and the Principal Shareholders.
Any award shall be a conclusive determination of the matter and shall be binding
upon UWSI and the Shareholders.
ARTICLE IX
GENERAL PROVISIONS
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); (iii) the first business day after
being deposited with Federal Express or any other recognized national overnight
courier service or (iv) on the business day on which it is sent and received by
facsimile, in each case to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) If to UWSI or BCBSUW:
401 West Michigan Street
Milwaukee, WI 53203
Attention: Thomas R. Hefty
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With copies to:
Geoffrey R. Morgan
Michael Best & Friedrich
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
(b) If to the Company or the Principal Shareholders:
American Medical Security Group, Inc.
3100 AMS Boulevard
Green Bay, WI 54313
Attention: President
American Medical Security Group, Inc.
3100 AMS Boulevard
Green Bay, WI 54313
Attention: General Counsel
American Medical Security Group, Inc.
3100 AMS Boulevard
Green Bay, WI 54313
Attention: Wallace J. Hilliard
American Medical Security Group, Inc.
3100 AMS Boulevard
Green Bay, WI 54313
Attention: Ronald A. Weyers
to Principal Shareholders:
Wallace J. Hilliard
4443 Indian Trails
Green Bay, WI 54313
Ronald A. Weyers
2643 Good Sheperd Lane
Green Bay, WI 54313
with copies to:
Benjamin W. Laird
Godfrey & Kahn, S.C.
333 Main Street, Suite 600
Green Bay, WI 54307-3067
Randall J. Erickson
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
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9.02 MISCELLANEOUS. This Agreement (including the exhibits, 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) is not intended to confer upon any other person any rights
or remedies hereunder; and
(iii) shall not be assigned by operation of law or otherwise; and
(iv) 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.
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 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.
9.04 SEVERABILITY. If any provision of this Agreement shall be held
by any court of competent jurisdiction to be illegal, invalid or unenforceable,
such provision shall be construed and enforced as if it had been more narrowly
drawn so as not to be illegal, invalid or unenforceable, and such illegality,
invalidity or unenforceability shall have no effect upon and shall not impair
the enforceability of any other provision of this Agreement.
9.05 GOVERNING LAW. This Agreement shall be construed in accordance
with the DGCL, to the extent applicable, and the law of the State of Wisconsin
(without regard to principles of conflicts of laws) applicable to contracts made
and to be performed within such State.
9.06 "KNOWLEDGE". As used herein, any reference to the "knowledge"
of the Company or the Shareholders, or the like, shall include the knowledge of
(i) with respect to the Company, those persons listed on the Disclosure
Schedule after reasonable inquiry, and (ii) the Principal Shareholders,
respectively, each after making reasonable inquiry of those persons listed on
Section 9.06
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of the Disclosure Schedule and, if any such person fails to make such inquiry,
shall include constructive knowledge of such facts as would have been learned
had such reasonable inquiry been made; provided however, that such persons shall
not have any duty to make any inquiry of third parties who are not officers,
directors, employees or agents (including, without limitation, attorneys and
accountants) of the Company or a Controlled Subsidiary.
9.07 ARBITRATION. Any controversy or dispute arising out of or
relating to the payment of Indemnified Claims of either UWSI or Shareholders
shall be settled by a single arbitrator in arbitration conducted in Chicago,
Illinois in accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon the award rendered by the arbitrator
may be entered in any court having jurisdiction thereof. The arbitrator's
decision shall be in writing and shall be final and nonappealable. The
arbitrator also shall make a determination regarding which party's legal
position in any such controversy or claim is the more substantially correct (the
"Prevailing Party") and the arbitrator may require the other party to pay the
reasonable legal and other professional fees and costs incurred by the
Prevailing Party in connection with such arbitration proceeding and any
necessary court action.
IN WITNESS WHEREOF, UWSI and the Company have caused this Agreement to be
signed by their respective officers thereunto duly authorized, and the
Principal Shareholders have executed this Agreement, all as of the date first
written above.
UNITED WISCONSIN SERVICES, INC.
By: /s/ THOMAS R. HEFTY
----------------------------------
Its:
----------------------------------
AMERICAN MEDICAL SECURITY GROUP, INC.
By: /s/ W.J. HILLIARD
------------------------------------
Its: President
------------------------------------
/s/ WALLACE J. HILLIARD
------------------------------------------
WALLACE J. HILLIARD, individually
and as Trustee under the
Voting Trust Agreement
/s/ RONALD A. WEYERS,
------------------------------------------
RONALD A. WEYERS, individually and
as successor Trustee under the Voting
Trust Agreement
35
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BLUE CROSS & BLUE SHIELD
UNITED OF WISCONSIN (solely for
purposes of Section 5.10 hereof)
By: /s/ THOMAS R. HEFTY
-----------------------------------
Its:
-----------------------------------
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EXHIBIT A
PLAN OF MERGER
BY AND BETWEEN
UNITED WISCONSIN SERVICES, INC.
AND
AMERICAN MEDICAL SECURITY GROUP, INC.
Plan of Merger, dated as of _______________, 1996, by and between
AMERICAN MEDICAL SECURITY GROUP, INC., a Delaware corporation ("AMS"), and
UNITED WISCONSIN SERVICES, INC., a Wisconsin corporation ("UWSI" or the
"Surviving Corporation"). AMS and UWSI are sometimes hereinafter referred to as
the "Constituent Corporations."
AMS, UWSI, Blue Cross & Blue Shield United of Wisconsin and certain
shareholders of AMS have entered into an Agreement and Plan of Merger (the
"Agreement") which Agreement provides for the merger of AMS with and into UWSI
(the "Merger"). The respective Boards of Directors of AMS and UWSI each deem
the Merger desirable and in the best interests of their respective shareholders.
The respective Boards of Directors of AMS and UWSI by resolutions duly adopted,
have approved this Plan of Merger and have directed that it be submitted to
their respective shareholders for approval in accordance with the provisions of
the Delaware General Corporation Law (the "DGCL") and Wisconsin Business
Corporation Law ("WBCL"), respectively.
In consideration of the mutual agreements, provisions and covenants
herein contained, and for the purpose of prescribing (a) the terms and
conditions of the Merger and the mode of carrying the same into effect; (b) the
manner and the basis of converting the shares of common stock, $1.00 par value
per share, of AMS (the "AMS Common Stock") outstanding immediately prior to the
Effective Time (as hereinafter defined) other than AMS Common Stock owned by
UWSI (the "Outstanding Shares") into (i) 4,000,000 shares of common stock, no
par value per share, of UWSI (the "UWSI Common Stock"), as authorized at the
Effective Time under the provisions of UWSI's Articles of Incorporation less the
number of shares of UWSI Common Stock issuable pursuant to AMS Options (as
hereinafter defined) immediately prior to the Effective Time and (ii) the right
to receive an amount, in cash and without interest, equal to $67,010,000 less
expenses attributable to holders of the Outstanding Shares pursuant to the
Agreement (collectively, the "Cash Consideration"); and (c) such other
provisions as are deemed necessary or desirable, the parties hereto hereby
agree, subject to the terms and conditions hereinafter set forth as follows:
ARTICLE I
THE MERGER
Section 1.1 MERGER OF AMS INTO UWSI. In accordance with the provisions
of this Plan of Merger, Section 252 the DGCL and Section 1107 of the WBCL, AMS
shall be merged with and into UWSI, which shall be the surviving corporation.
After the Effective Time (as defined in Section 1.5 hereof) the Surviving
Corporation shall continue its corporate existence as a Wisconsin corporation.
At
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the Effective Time the separate existence and corporate organization of AMS
shall cease.
Section 1.2 EFFECT OF THE MERGER.
(a) ARTICLES OF INCORPORATION. The Articles of Incorporation of UWSI
in effect at the Effective Time shall be the Articles of Incorporation of the
Surviving Corporation until amended in accordance with the provisions thereof
and the WBCL. A copy of the Articles of Incorporation of UWSI is attached
hereto as Appendix I.
(b) BY-LAWS. The By-laws of UWSI in effect at the Effective Time
shall be the By-laws of the Surviving Corporation until altered, amended or
repealed as provided therein and in the Articles of Incorporation of the
Surviving Corporation.
(c) OFFICERS AND DIRECTORS. The officers and directors of UWSI at
the Effective Time shall be the officers and directors of the Surviving
Corporation.
Section 1.3 ASSETS AND LIABILITIES. At the Effective Time, the
Surviving Corporation shall thereupon and thereafter possess title to all
property owned by each of the Constituent Corporations without reversion or
impairment; the Surviving Corporation shall have all liabilities of each
Constituent Corporation; a civil, criminal, administrative or investigatory
proceeding against either of the Constituent Corporations may be continued as if
the Merger did not occur or the Surviving Corporation may be substituted in the
proceeding for AMS.
Section 1.4 ADDITIONAL ACTIONS. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any further
assignments or assurances in law or any other acts are necessary or desirable
(a) to vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation, title to and possession of any property or right of AMS acquired or
to be acquired by reason of, or as a result of the Merger, or (b) otherwise to
carry out the purpose of this Plan of Merger, AMS and its proper officers and
directors shall be deemed to have granted to the Surviving Corporation and its
proper officers and directors, and each of them, an irrevocable power of
attorney to execute and deliver all such proper deeds, assignments and
assurances in law and to do all acts necessary or proper to vest, perfect or
confirm title to and possession of such property or rights in the Surviving
Corporation and otherwise to carry out the purposes of this Plan of Merger; and
the proper officers and directors of the Surviving Corporation, and each of
them, are fully authorized in the name of AMS or otherwise to take any and all
such action.
Section 1.5 EFFECTIVE TIME. The effective time of the Merger (the
"Effective Time") shall be the time on the date on which articles of merger,
substantially in the form of Appendix II attached hereto (the "Articles of
Merger"), are received by the Secretary of State of Delaware and Department of
Financial Institutions of the State of Wisconsin and subsequently stamped as
filed with the Secretary of State of Delaware and Department of
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Financial Institutions of the State of Wisconsin. The Articles of Merger shall
be filed in accordance with the provisions of the DGCL and WBCL as soon as
practicable following the Closing (as defined in the Agreement).
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1 AMS COMMON STOCK.
(a) AUTOMATIC CONVERSION. At the Effective Time, except as otherwise
provided in Section 2.4 hereof, the Outstanding Shares shall, by virtue of the
Merger and without any action on the part of any person or entity, be converted
into a combination of shares of UWSI Common Stock and the Cash Consideration,
without interest, in the manner determined by the holders of Outstanding Shares
as set forth on Appendix III attached hereto; provided, however, that Dissenting
Shares (as hereinafter defined) shall be dealt with as provided in Section 2.4
below. Outstanding Shares, if any, which at the Effective Time are either (i)
owned by UWSI, or (ii) are held in the treasury of AMS, shall be cancelled and
retired by virtue of the Merger without conversion into shares of UWSI Common
Stock or Cash Consideration.
(b) RECORD HOLDER. The person who is shown as the record holder of
any Outstanding Shares on AMS's stock transfer records shall be deemed for the
purposes of this Article II to be the "record holder" of such shares.
(c) EXCHANGE AGENT. The term "Exchange Agent" means any person
designated by UWSI to act as an Exchange Agent for purposes of this Agreement,
provided that if at any time such person shall not be ready, willing and able to
serve as Exchange Agent, or if UWSI shall not have designated any such person to
so serve, then UWSI shall be the Exchange Agent.
Section 2.2 SERIES A PREFERRED STOCK. At the Effective Time, all of the
issued and outstanding shares of Series A Preferred Stock, $1.00 par value per
share, of AMS, with a stated value of $1,000.00 per share, shall, by virtue of
the Merger and without any action on the part of any person or entity, be
cancelled and retired without any consideration.
Section 2.3 AMS OPTIONS.
As of the Effective Time, each then outstanding option to purchase
shares of AMS Common Stock, whether or not then vested or exercisable (each, an
"AMS Option")shall be assumed by the Company and converted into an option (a
"UWSI Option"), to purchase shares of UWSI Common Stock in an amount and at an
exercise price determined as provided below:
(i) The number of shares of UWSI Common Stock to be subject to a UWSI
Option shall be equal to the product of the number of shares of AMS Common
Stock subject to the AMS Option and _______; and
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(ii) The exercise price per share of UWSI Common Stock under the UWSI
Option shall be equal to the exercise price per share of AMS Common Stock
under the AMS Option divided by ______.
Except as provided above, UWSI Options shall be subject to the same terms and
conditions (including, without limitation, expiration date, and exercise
provisions) as were applicable to AMS Options immediately prior to the Effective
Time, except that the UWSI Options shall be fully vested. AMS Options shall not
be treated as expired solely due to the fact that UWSI exercised its option
under the Joint Venture Agreement. The surrender of an AMS Option to the
Company in exchange for a UWSI Option shall be deemed a release of any and all
rights the holder had or may have had in respect of such AMS Option and the
grant of UWSI Options with respect to all AMS Options held by such holder with
respect to which a UWSI Option is payable shall be conditioned on such holder
acknowledging the cancellation of all such AMS Options.
Section 2.4 DISSENTING SHARES. Outstanding Shares held by shareholders
of AMS who shall have taken all action prior to and including the Effective Time
necessary to permit such persons to pursue the appraisal remedies under Section
262 of the DGCL ("Dissenting Shares"), shall not be converted as provided
herein, but the holders thereof shall receive such consideration as is provided
in Section 262 of the DGCL; provided, however, that if any holders of Dissenting
Shares shall subsequently fail to comply with the procedures provided in the
DGCL or otherwise fail to establish their right to be paid for such Outstanding
Shares as provided by the DGCL, the Dissenting Shares of such holders shall
thereupon be deemed to have been converted as of the Effective Time in the same
manner as provided in this Article II for the other Outstanding Shares.
Section 2.5 EXCHANGE OF SHARES.
(a) PROCEDURE FOR EXCHANGE. As soon as practicable after the
Effective Time, the Exchange Agent (i) shall mail or deliver to each former
record holder of Outstanding Shares whose shares have been converted into UWSI
Common Stock in accordance with Appendix III hereto, and who has surrendered to
the Exchange Agent certificate(s) representing all Outstanding Shares owned of
record by such person, certificate(s) representing shares of UWSI Common Stock
and (ii) shall mail or deliver to such former record holder a check of UWSI in
the amount and in satisfaction of any cash payment required by Appendix III or
cash payment in lieu of fractional shares determined in accordance with Section
2.5(b). Until so surrendered, each certificate which, immediately prior to the
Effective Time, represented Outstanding Shares shall be deemed for all corporate
purposes (other than the payment of dividends or other distributions) to
represent shares of UWSI Common Stock to the extent indicated on Appendix III,
as though such surrender and exchange had taken place. No dividend or other
distribution payable to holders of UWSI Common Stock shall be paid to the
holders of certificates previously representing Outstanding Shares; provided,
however, that upon surrender of such certificates to UWSI or the Exchange Agent
there shall be paid, in the manner specified
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in the first sentence of this Section 2.5(a) with respect to cash payments in
lieu of fractional shares, to each record holder of the certificates issued in
exchange therefor the amount, without interest, of all dividends or other
distributions, if any, which shall have been declared and become payable after
the Effective Time with respect to the shares of UWSI Common Stock into which
the Outstanding Shares represented by such surrendered certificates shall have
been converted.
(b) NO FRACTIONAL SHARES. No fractional shares of UWSI Common Stock
shall be issued in the Merger. In lieu of the issuance or recognition of
fractional shares of UWSI Common Stock, or interests or rights therein, each
fractional share of UWSI Common Stock which, for this Section 2.5(b), would have
been issuable pursuant to Section 2.1, shall, on a holder by holder basis, be
aggregated, and be converted, to the fullest extent possible, into whole shares
of UWSI Common Stock. Each remaining fractional share of UWSI Common Stock, if
any, shall be converted into a right to receive cash, without interest, in an
amount equal to the product of (A) such fraction of a share of UWSI Common
Stock, and (B) $____.
(c) STATUS OF SHARES. All shares of UWSI Common Stock into which the
Outstanding Shares shall have been converted pursuant to this Article II shall
be deemed to have been issued in full satisfaction of all rights pertaining to
such converted shares, and shall be fully paid and nonassessable.
(d) NO FURTHER TRANSFERS. From and after the Effective Time there
shall be no transfers of Outstanding Shares on the stock transfer books of the
Surviving Corporation. If, after the Effective Time, certificates representing
such shares are presented to the Surviving Corporation, they shall be cancelled
and exchanged for certificates representing shares of UWSI Common Stock and the
right to receive cash in lieu of fractional shares of UWSI Common Stock as
herein provided.
(e) ROUNDING OF DOLLAR AMOUNTS. All amounts payable in cash
hereunder shall be rounded to the nearest $0.01.
ARTICLE III
AMENDMENT AND TERMINATION
Section 3.1 AMENDMENT. This Plan of Merger may not be amended except by
an instrument in writing signed on behalf of each of the parties hereto.
Section 3.2 TERMINATION. At any time prior to the Effective Time,
whether before or after approval by the shareholders of each of AMS and UWSI,
this Agreement may be terminated and the Merger abandoned by mutual agreement of
the Board of Directors of UWSI and AMS, and shall terminate automatically upon
termination of the Agreement prior to the Closing. If terminated as provided in
this Section 3.2, this Plan of Merger shall forthwith become wholly void and of
no further force and effect.
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ARTICLE IV
MISCELLANEOUS
Section 4.1 COUNTERPARTS. This Plan of Merger may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one agreement.
Section 4.2 GOVERNING LAW. This Plan of Merger shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Wisconsin, except only to the extent that Sections 252 and 262 of the
DGCL are specifically applicable hereto.
IN WITNESS WHEREOF, each Constituent Corporation has caused this Plan of
Merger to be executed on its behalf by its officers hereunto duly authorized,
all on the date first above written.
UNITED WISCONSIN SERVICES, INC.
By:
-------------------------------
Its:
------------------------------
AMERICAN MEDICAL SECURITY GROUP, INC.
By:
-------------------------------
Its:
------------------------------
42
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EXHIBIT B
REGISTRATION RIGHTS AND STOCK
RESTRICTION AGREEMENT
This Agreement, ("Agreement") is made and entered into as of this ____ day
of ______________, 1996 by and among United Wisconsin Services, Inc., a
Wisconsin corporation (the "Company"), Wallace J. Hilliard and Ronald A. Weyers
(individually a "Holder" and collectively the "Holders").
RECITALS
WHEREAS, the Company, Blue Cross & Blue Shield United of Wisconsin
("BCBSUW"), American Medical Security Group, Inc., a Delaware corporation
("AMSG"), and the Holders are parties to an Agreement and Plan of Merger dated
as of July 31, 1996 (the "Merger Agreement") pursuant to which, among other
things, the Holders are acquiring shares of common stock, no par value, of the
Company ("UWSI Common Stock") and in connection with employment agreements being
entered into with American Medical Security Holdings, Inc., a Nevada corporation
and wholly owned subsidiary of UWSI ("Holdings"), are acquiring options to
purchase shares of UWSI Common Stock ("Options").
WHEREAS, pursuant to the Merger Agreement, AMSG was merged into UWSI and
the assets previously held by AMSG were transferred by operation of law to UWSI,
and the parties hereto anticipate that UWSI will transfer substantially all of
such assets to Holdings.
WHEREAS, in connection with the transactions contemplated by the Merger
Agreement, the Holders desire to obtain certain registration rights with respect
to UWSI Common Stock to be received in the Merger and the Options, and UWSI
desires to enter into the agreements with the Holders as set forth below.
NOW THEREFORE, the parties agree as follows:
ARTICLE I
REGISTRATION RIGHTS
Section 1.01 GENERAL. For purposes of Article I: (i) the terms
"register", "registered" and "registration" refer to a registration effected by
preparing and filing a registration statement (a "registration statement") in
compliance with the Securities Act of 1933, as amended (the "1933 Act"), and the
declaration or ordering of effectiveness of such registration statement; and
(ii) the term "Registrable Securities" means the ______ shares of UWSI Common
Stock to be received by the Holders in the Merger and any shares of UWSI common
stock acquired by the Holders through the exercise of Options or any securities
issued in exchange therefor in the event of a recapitalization, stock split,
merger, consolidation or other combination or exchange of shares. Capitalized
terms used herein and not defined shall have the meanings set forth in the
Merger Agreement.
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Section 1.02 REQUEST FOR REGISTRATION. Subject to Section 1.07(a)
hereof, at any time on or after the date hereof if the Company shall receive a
written request (specifying that it is being made pursuant to this Section 1.02)
from both Holders that the Company register at least fifty percent (50%) of the
then outstanding Registrable Securities, then the Company shall use its best
efforts to cause to be registered all Registrable Securities that the Holders
have requested be registered. Notwithstanding the foregoing, the Company shall
not be obligated to effect a registration pursuant to this Section 1.02 during
the period starting with the date forty-five (45) days prior to the Company's
estimated date of filing of, and ending on a date one-hundred-eighty (180) days
following the effective date of, a registration statement pertaining to an
underwritten public offering of UWSI Common Stock for the account of the
Company. The Company shall be obligated to effect not more than two (2)
registrations pursuant to this Section 1.02. Any request for registration under
this Section must be for a firmly underwritten public offering in accordance
with terms agreed upon between the underwriter or underwriters and the Holders
to be managed by an underwriter or underwriters designated by the Holders and
reasonably acceptable to the Company. Notwithstanding anything else in this
Agreement to the contrary, all of the Company's obligations under this Section
shall expire on the earlier of the fifth anniversary of the date hereof or the
date on which the Holders own in the aggregate less than three percent of the
outstanding UWSI Common Stock. Subject to the provisions of Section 1.07(a)
hereof, the Company shall be permitted to cause to be registered additional
shares of UWSI Common Stock (whether previously unissued or owned by a person
or entity designated by UWSI) in connection with any registration effected
pursuant to this Section 1.02. If, while a registration request is pending
pursuant to this Section 1.02, the Company has determined in good faith that (A)
the filing of a registration statement could jeopardize or delay any
contemplated material transaction other than a financing plan involving the
Company or would require the disclosure of material information that the Company
had a bona fide business purpose for preserving as confidential; or (B) the
Company then is unable to comply with requirements of the Securities and
Exchange Commission ("SEC") applicable to the requested registration
(notwithstanding its best efforts to so comply), the Company shall not be
required to effect a registration pursuant to this Section 1.02 until the
earlier of (1) the date upon which such contemplated transaction is completed or
abandoned or such material information is otherwise disclosed to the public or
ceases to be material or the Company is able to so comply with applicable SEC
requirements, as the case may be, and (2) 45 days after the Company makes such
good-faith determination.
Section 1.03 COMPANY REGISTRATION. Subject to Section 1.07(b)
hereof, if at any time the Company determines to register any UWSI Common Stock
under the 1933 Act in connection with the public offering of such securities
solely for cash on a form that would also permit the registration of any of the
Registrable Securities, the Company shall promptly give the Holders written
notice of such determination. Upon the written request of any Holder received
by the Company within thirty (30) days after the giving of any such notice by
the Company, the Company shall use its best efforts to cause to be registered
all of the Registrable Securities that the Holders have requested be registered
together with the registration of the UWSI Common Stock otherwise being
registered by the Company. Notwithstanding anything else in this Agreement to
the contrary, all of the Company's obligations under this Section shall expire
on the earlier of the fifth anniversary of the date hereof or the date on which
the Holders own in the aggregate less than three percent of the outstanding UWSI
Common Stock. The Company
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shall be obligated to include Registerable Securities in not more than two (2)
registrations pursuant to this Section 1.03. The Company may, for any reason or
for no reason, elect to either not file or withdraw the filing of any
registration statement relating to a registration described in this Section 1.03
at any time prior to the effectiveness thereof and in such case the request by
the Holders to be included in such registration will not be deemed to have been
the exercise of one registration right under this Section 1.03.
Section 1.04 OBLIGATIONS OF THE COMPANY. Whenever the Company shall
be required under Sections 1.02 or 1.03 hereof to use its best efforts to effect
the registration of any Registrable Securities, the Company shall:
(a) as expeditiously as reasonably possible, prepare and file with
the Securities and Exchange Commission ("SEC," which term includes any successor
agency) a registration statement with respect to such Registrable Securities and
use its reasonable efforts to cause such registration statement to become and
remain effective under the 1933 Act, except that the Company shall in no event
be obligated to cause any such registration to remain effective for more than
three months;
(b) as expeditiously as reasonably possible, prepare and file with
the SEC such amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the 1933 Act with respect to the
disposition of all securities covered by such registration statement;
(c) as expeditiously as reasonably possible, furnish to the Holders
such numbers of copies of a prospectus, including a preliminary prospectus, and
such other documents as they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them;
(d) as expeditiously as reasonably possible, use its reasonable
efforts to register and qualify the securities covered by such registration
statement under such securities or Blue Sky laws of such jurisdictions as shall
be reasonably appropriate or requested by the Holders, except that the Company
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such jurisdiction;
(e) advise each Holder, promptly after it shall receive notice or
obtain knowledge thereof, of (i) the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose, and (ii) any similar action by
any regulatory agency of competent jurisdiction under the securities or Blue Sky
laws of any jurisdiction, and in any such case promptly use its reasonable best
efforts to prevent the issuance of any stop order or the taking of any such
similar action or to obtain its withdrawal if such stop order should be issued
or any such similar action shall be taken; and
(f) furnish to each Holder of Registrable Securities covered by such
registration statement copies of all documents proposed to be filed with respect
to any
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amendment or supplement to such registration statement or prospectus at a
reasonable time prior to such filing.
Section 1.05 FURNISH INFORMATION. It shall be a condition precedent
to the obligations of the Company to take any action pursuant to this Article I
that the Holders shall furnish to the Company such information regarding them,
the Registrable Securities held by them, and the intended method of disposition
of such securities and such other matters as may be required by the 1933 Act and
other applicable law and regulation as the Company shall request and as shall be
required in connection with the action to be taken by the Company.
Section 1.06 EXPENSES OF REGISTRATION. In connection with a
registration pursuant to Section 1.02, all underwriter's discounts and
commissions, all registration and qualification fees, printers' and any
extraordinary accounting fees, required as a result of the Holders'
registration, shall be borne by the Holders and, all such expenses incurred in
connection with a registration pursuant to Section 1.03 shall be borne by the
Company, the Holders and any other sellers pro rata in relation to the number of
shares of UWSI Common Stock being registered by each such party. For any
registrations pursuant to Sections 1.02 or Section 1.03, all parties shall pay
all of their own respective attorneys' fees.
Section 1.07 UNDERWRITING REQUIREMENTS.
(a) In connection with any registration requested by Holders under
Section 1.02, the Company shall not be required under Section 1.02 to register
any Registrable Securities of any Holder unless such Holder accepts the terms of
the underwriting required by Section 1.02, and then only in such quantity as
will not, in the written opinion of the managing underwriters, exceed the
maximum number of shares that can be marketed at a price reasonably related to
the then current market price for such shares, or otherwise materially and
adversely affect such offering or the trading market for such shares (the
"Maximum Feasible Quantity"). All securities sold to cover any over-allotment
shall be apportioned among the Holders and the Company in proportion to the
total number of shares being sold by each, provided, however, that any such
over-allotment shall first be allocated to the Holders to the extent any of the
Registrable Securities of the Holders were not included in such registration
because the total number of Registrable Securities requested to be registered by
the Holders exceeded the Maximum Feasible Quantity for such registration, and
shall thereafter be allocated to the Company to the extent that the shares
requested to be registered by the Company were not included in such registration
because such shares, when added to the shares being registered by the Holders,
exceeded the Maximum Feasible Quantity for such registration.
(b) In connection with any registration in which Registerable
Securities are included pursuant to Section 1.03 hereof, the Company shall not
be required to include any of the Holders' Registrable Securities in such
registration unless the Holders accept the terms of the underwriting as agreed
upon between the Company and the underwriters selected by it, and then only in
such quantity as will not, when added to the shares otherwise being registered
by the Company, in the written opinion of the managing underwriters, exceed the
Maximum Feasible Quantity for such registration. All securities sold to cover
any over-allotment shall be apportioned among the Holders and the Company in
proportion to the total number of shares
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being sold by each; provided, however, that any such over-allotment shall first
be allocated to the Company to the extent any of the securities of the Company
were not included in such registration because the total number of Registrable
Securities included in such registration by the Holders, when added to the
shares otherwise being registered by the Company, exceeded the Maximum Feasible
Quantity for such registration, and shall thereafter be allocated to the Holders
to the extent that the Registrable Securities requested to be registered by the
Holders were not included in such registration because such shares when added to
the shares being requested by the Company, included the Maximum Feasible
Quantity for such registration.
ARTICLE II
STANDSTILL
Section 2.01 PURCHASES OF VOTING SECURITIES. Hilliard and Weyers
each agrees that, for a period of ten years from the date of this Agreement,
without the prior written consent of the Company, he will not acquire, offer or
propose to acquire, directly or indirectly, by purchase or otherwise, any
securities of the Company, other than pursuant to the Options, with the power to
vote with respect to the election of directors generally ("Voting Securities"),
or direct or indirect rights or options to acquire (through purchase, exchange,
conversion or otherwise) any Voting Securities, if any such acquisitions would
require any regulatory approval, application or notification other than as
required by the 1934 Act.
Section 2.02. OTHER STANDSTILL PROVISIONS. Hilliard and Weyers each
agrees that for a period of three years from the date of this Agreement, without
the prior written consent of the Company, he will not:
(a) make, or in any way participate, directly or indirectly, in any
"solicitation" of "proxies" (as such terms are defined in Rule 14a-1 under
the 1934 Act) to vote any Voting Securities, initiate or propose any
shareholder proposal or induce or attempt to induce any other person to
initiate any shareholder proposal;
(b) make any proposal, whether written or oral, to the Board of
Directors of the Company, or to any director or officer of the Company, or
otherwise make any public announcement or proposal whatsoever with respect
to a merger or other business combination, sale or transfer of assets,
liquidation or other extraordinary corporate transaction with the Company;
(c) form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the 1934 Act) with respect to any securities
of the Company or otherwise act, alone or in concert with others, to seek
to exercise any control or influence over the management, Board of
Directors or policies of the Company other than pursuant to his employment
with the Company or any of its subsidiaries.
Section 2.03. NO PUBLIC REQUESTS. Hilliard and Weyers each agrees that he
will not make a public request to the Company (or its directors, officers,
shareholders, employees or agents) to amend or waive any provisions of this
Article III, including without limitation any
47
<PAGE>
public request to permit him or any other person to take any other action
referred to in Sections 3.01 and 3.02 hereof.
ARTICLE III
VOTING AGREEMENT
Hilliard and Weyers each agree for a period of ten years from the date
hereof, to vote all shares of UWSI Common Stock owned or held by them
respectively, (or over which they have or share voting power) in accordance with
BCBSUW directions on any matters relating to or affecting the Blue Cross Blue
Shield Association market conditions or rules and regulations, as may be
determined in good faith by the BCBSUW Board of Directors.
ARTICLE IV
GENERAL PROVISIONS
Section 4.01 NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed given (i) when delivered
personally; (ii) the second business day after being deposited in the United
States mail registered or certified (return receipt requested); (iii) the first
business day after being deposited with Federal Express or any other recognized
national overnight courier service or (iv) on the business day on which it is
sent and received by facsimile, in each case to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) If to the Company:
United Wisconsin Services, Inc.
401 West Michigan Street
Milwaukee, WI 53203
Attention: Thomas R. Hefty, President
With a copy to:
Michael Best & Friedrich
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Geoffrey R. Morgan, Esq.
48
<PAGE>
(b) If to the Holders:
Wallace J. Hilliard
4443 Indian Trails
Green Bay, WI 54313
Ronald A. Weyers
2643 Good Sheperd Lane
Green Bay, WI 54313
With a copy to:
Godfrey & Kahn, S.C.
333 Main Street, Suite 600
Green Bay, WI 54307-3067
Attention: Benjamin W. Laird, Esq.
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
Attention: Randall J. Erickson, Esq.
Section 4.02 MISCELLANEOUS. This Agreement (including the exhibits,
documents and instruments referred to herein or therein):
(a) constitutes the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof;
(b) is not intended to confer upon any person which is not a party
hereto any rights or remedies hereunder;
(c) shall not be assigned by operation of law or otherwise; and
(d) may be executed in two or more counterparts which together shall
constitute a single agreement.
Section 4.03 WAIVER: REMEDIES. No delay or failure on the part of
any party hereto to exercise any right, power, or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part of any party
hereto of any right, power, or privilege hereunder operate as a waiver of any
other right, power, or privilege hereunder, nor shall any single or partial
exercise of any right, power, or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power, or privilege
hereunder.
49
<PAGE>
Section 4.04 SEVERABILITY. If any provision of this Agreement shall
be held by any court of competent jurisdiction to be illegal, invalid or
unenforceable, such provision shall be construed and enforced as if it had been
more narrowly drawn so as not to be illegal, invalid or unenforceable, and such
illegality, invalidity or unenforceability shall have no effect upon and shall
not impair the enforceability of any other provision of this Agreement.
Section 4.05 GOVERNING LAW. This Agreement shall be construed in
accordance with the law of the State of Wisconsin (without regard to principles
of conflicts of laws) applicable to contracts made and to be performed within
such State.
United Wisconsin Services, Inc.
By:
------------------------------------
---------------------------------------
Wallace J. Hilliard
---------------------------------------
Ronald A. Weyers
50
<PAGE>
EXHIBIT C
AFFILIATE AGREEMENT
United Wisconsin Services, Inc.
- --------------------------------
- --------------------------------
Ladies and Gentlemen:
Reference is made to the Agreement and Plan of Merger (the "Agreement
and Plan of Merger") dated as of July ___, 1996, by and among United Wisconsin
Services, Inc., a Wisconsin corporation ("UWSI"), Blue Cross & Blue Shield
United of Wisconsin, American Medical Security Group, Inc., a Delaware
corporation (the "Company") and Wallace J. Hilliard (individually and as
trustee) and Ronald A. Weyers (individually and as successor trustee), which
provides that the Company will be merged with and into UWSI (the "Merger") and
the outstanding shares of common stock of the Company ("Company Common Stock")
will be converted into a combination of shares of common stock of UWSI ("UWSI
Common Stock") and cash.
The undersigned has been advised that the issuance of shares of UWSI
Common Stock to the undersigned in connection with the Merger has been
registered with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act"), on a Registration
Statement on Form S-4 and that such registration does not cover any resale or
other disposition of UWSI Common Stock. The undersigned also has been advised
that the undersigned may be deemed to be an affiliate of the Company within the
meaning of Rule 145 of the rules and regulations of the SEC under the Securities
Act and that the shares of UWSI Common Stock acquired by the undersigned in
connection with the Merger may only be disposed of in conformity with the
provisions hereof.
The undersigned represents and warrants to and agrees with UWSI as
follows:
(a) The undersigned has full power to execute this Agreement and to
make the representations, warranties and agreements herein, and to perform the
obligations of the undersigned hereunder.
(b) The undersigned will not sell, exchange, transfer or otherwise
dispose of any shares of UWSI Common Stock which the undersigned may acquire in
connection with the Merger or any securities which may be paid as a dividend or
otherwise distributed thereon or with respect thereto or issued or delivered in
exchange or substitution therefor (all such shares and other securities being
herein sometimes collectively referred to as "Restricted
<PAGE>
Securities"), or any option, right or other interest with respect to any
Restricted Securities, unless such sale, exchange, transfer or disposition is
effected (i) in conformity with the terms of Rule 145(d) or (ii) pursuant to an
effective registration statement under the Securities Act (provided that the
undersigned may make bona fide gifts or other dispositions without consideration
so long as the recipients thereof agree not to sell, exchange, transfer or
otherwise dispose of the UWSI Common Stock except as provided herein). If UWSI
or its counsel reasonably believes that the provisions of Rule 145 have not been
or would not be complied with, or if requested by UWSI or its counsel in
connection with a proposed disposition other than pursuant to Rule 145 or in a
registered offering, the undersigned shall furnish to UWSI a copy of a "no
action" letter or other communication from the staff of the SEC, or an opinion
of counsel in form and substance reasonably satisfactory to UWSI and its
counsel, to the effect that the applicable provisions of paragraphs (c), (e),
(f) and (g) of Rule 144 under the Securities Act (which provisions are
incorporated into Rule 145(d)) have been complied with or that the disposition
may be otherwise effected in the manner proposed in compliance with the
Securities Act.
(c) The undersigned has no present plan or intent, and as of the
effective date of the Merger shall have no present plan or intent, to engage in
a sale, exchange, transfer, distribution (including a distribution by a
partnership to its partners, a corporation to its shareholders, or a trust to
its beneficiaries), redemption, pledge or reduction in any way of the
undersigned's risk of ownership, by short sale or otherwise, or other
disposition, directly or indirectly (collectively, a "Sale") with respect to any
of the UWSI Common Stock to be received by the undersigned in the Merger. The
undersigned is not aware of, or participating in any plan or intent on the part
of any of the shareholders (a "Plan") to engage in any Sale of the UWSI Common
Stock to be issued in the Merger. A Sale of UWSI Common Stock shall be
considered to have occurred pursuant to a Plan if, for example, such Sale occurs
in a transaction that is in contemplation of, or related to, the Merger (a
"Related Transaction"). In addition, Company shares (i) with respect to which
dissenters' rights are exercised and (ii) with respect to which a pre-Merger
Sale occurs in a Related Transaction, shall be considered to be shares that are
exchanged for UWSI Common Stock which are disposed of pursuant to a Plan.
The undersigned understands that stop transfer instructions will be
given to UWSI's transfer agent with respect to the Restricted Securities and
agrees that no transfers of the Restricted Securities will be made by UWSI
unless and until the undersigned has complied with the provisions of this
Agreement. The undersigned also understands that there will be placed on the
certificates for the Restricted Securities, or any substitutions therefor, a
legend stating in substance:
<PAGE>
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145, PROMULGATED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), APPLIES AND MAY ONLY BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN
THE REGISTERED HOLDER HEREOF AND UWSI CO., A COPY OF WHICH AGREEMENT IS ON
FILE AT THE PRINCIPAL OFFICES OF UWSI CO."
UWSI agrees that such stop transfer instructions and legend will be
promptly removed upon the sale, exchange, transfer or other disposition of
Restricted Securities in full compliance with the provisions of this Agreement.
This Agreement shall be binding upon, and enforceable against
administrators, executors, personal representatives, heirs, legatees and
devisees of the undersigned and any pledgee holding the Restricted Securities as
collateral.
Very truly yours,
------------------------------------
Signature
------------------------------------
Print Name
Agreed to and accepted this
- ----- day of ---------, 1996
UNITED WISCONSIN SERVICES, INC.
By:
----------------------------
Title:
-------------------------
<PAGE>
EXHIBIT D
ESCROW AGREEMENT
This ESCROW AGREEMENT is made this ____ day of _____________, 1996, by and
among UNITED WISCONSIN SERVICES, INC., a Wisconsin corporation ("UWSI"), WALLACE
J. HILLIARD ("Agent") and _________________________, a _________________ (the
"Escrow Agent").
RECITALS:
WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated July
31, 1996 (the "Merger Agreement"), by and among UWSI, Blue Cross & Blue Shield
United of Wisconsin, American Medical Security Group, Inc., a Delaware
corporation ("AMSG"), Agent (individually and as trustee under the Voting Trust
Agreement, as defined in the Merger Agreement) and Ronald A. Weyers
(individually and as successor trustee under the Voting Trust Agreement), and
pursuant to the Plan of Merger of even date herewith between UWSI and AMSG, AMSG
has been merged with and into UWSI, which is the surviving corporation;
WHEREAS, the former shareholders of AMSG (the "Shareholders") irrevocably
have appointed the Agent as their agent and attorney-in-fact to act on the
Shareholders' behalf with respect to this Agreement;
WHEREAS, pursuant to the Merger Agreement, UWSI has deposited with the
Escrow Agent the sum of $8,000,000 in cash to be held in escrow and disbursed by
the Escrow Agent, subject to the terms, provisions and conditions hereinafter
set forth, as security for payment to UWSI of the Shareholders' obligations to
indemnify UWSI pursuant to Article VIII of the Merger Agreement for breaches of
certain Shareholders' and the Company's representations, warranties covenants
and other agreements contained in the Merger Agreement;
NOW, THEREFORE, in satisfaction of a condition of the consummation of the
transactions contemplated by the Merger Agreement,
IT IS HEREBY AGREED AS FOLLOWS:
AGREEMENT:
1. ACCEPTANCE OF ESCROW. The Escrow Agent hereby agrees to act as Escrow
Agent hereunder and confirms receipt from UWSI of the sum of $8,000,000. Such
sum and any income and proceeds therefrom which are not distributed in
accordance with the terms hereof as
<PAGE>
shall be held from time to time by the Escrow Agent hereunder are hereinafter
referred to as the "Escrowed Funds."
2. INVESTMENT OF ESCROWED FUNDS. The Escrow Agent shall invest and
reinvest the Escrowed Funds as the Agent may from time to time direct in any
Permitted Investments consistent with the duration, term and provisions of this
Escrow Agreement. The term "Permitted Investments" shall mean:
(a) Commercial paper of any United States issuer rated "Prime-1" or
greater by Moody's Investors Service, Inc. or rated "A-1" or greater by Standard
& Poor's Corporation;
(b) Direct obligations of the United States of America or any agency
thereof, or any state;
(c) Certificates of deposit of any commercial bank which is a member
of the Federal Reserve System and which has capital, surplus and undivided
profits (as shown upon its most recently published statement of condition)
aggregating not less than $100,000,000; and
(d) Such other investments as may be mutually agreed in writing upon
by UWSI and the Agent and communicated to the Escrow Agent.
3. COMPENSATION, COSTS AND EXPENSES OF ESCROW AGENT. The Escrow Agent
shall be entitled to a reasonable fee for its services, and shall be reimbursed
for out-of-pocket costs and expenses, including reasonable attorneys' fees,
incurred by it in rendering its services hereunder. Half of such fees and
expenses shall be borne by each of UWSI and the Shareholders (pro-rata in
accordance with their respective ownership of AMSG common stock immediately
prior to the Effective Time, as defined in the Merger Agreement). UWSI shall
pay such fees and expenses within ten (10) days of receipt of an invoice from
the Escrow Agent. The Shareholders' share of such fees shall be deducted from
the Escrowed Funds. Such fees and expenses shall not exceed the fees and
expenses charged by the Escrow Agent for comparable services to others.
4. DISBURSEMENTS OF ESCROWED FUNDS; TERMINATION.
(a) INCOME. All income received on the Escrowed Funds shall be
retained by the Escrow Agent, and shall be added to and considered a part of the
Escrowed Funds, until the termination of this Escrow Agreement as provided in
Section 4(d) hereof. Income generated by the Escrowed Funds shall not be
available for indemnification payments pursuant to Article VIII of the Merger
Agreement to the extent that such payments would exceed $8,000,000 in the
aggregate.
2
<PAGE>
(b) PRINCIPAL.
(i) SECURITY FOR SHAREHOLDERS' INDEMNIFICATION. If the Escrow
Agent receives a notice of claim pursuant to Section 8.03(a) of the Merger
Agreement, seeking the payment of (A) a claim pursuant to Section 8.01(a) of the
Merger Agreement, or (B) a claim pursuant to Section 8.01(b) of the Merger
Agreement (an "Escrow Claim"), and if the Agent has not delivered to the Escrow
Agent the notice of objection described in Section 8.03(a) of the Merger
Agreement, within fifteen (15) days after delivery of the notice of claim, the
Escrow Agent shall promptly pay and disburse to UWSI from the Escrowed Funds an
amount equal to the amount of such Escrow Claim. If, however, the Agent within
said 15-day time period delivers to the Escrow Agent such notice of objection,
objecting to the payment of all or a portion of the Escrow Claim so made by
UWSI, the Escrow Agent shall continue to hold the Escrowed Funds and shall not
make a payment or disbursement to UWSI (unless, and to the extent, that the
Agent does not object in its notice of objection to a portion of the Escrow
Claim -- in which event the Escrow Agent shall promptly pay and disburse to UWSI
from the Escrowed Funds an amount equal to such portion of the Escrow Claim with
respect to which no objection was made) pending receipt of written instructions
signed by UWSI and Agent directing the disposition of the Escrow Claim or, in
the absence of such written instructions, receipt of a written copy of the
arbitrator's determination of such Escrow Claim as provided in Section 9.07 of
the Merger Agreement. Upon receipt of such written instructions or arbitrator's
determination, the Escrow Agent promptly shall pay and disburse to UWSI from the
Escrowed Funds the amount of the Escrow Claim, if any, so indicated as payable
to UWSI.
(ii) PARTIAL RELEASE. [Upon the expiration of nine (9) months
from the date hereof (if the Effective Time is on or prior to December 31,
1996)][On June 30, 1997 (if the effective time is after December 31, 1996)], the
Escrow Agent shall disburse to the Agent the balance of the Escrowed Funds then
held by the Escrow Agent hereunder, LESS an amount equal to (A) $1,000,000, PLUS
(B) the aggregate of all claims which have been asserted by UWSI pursuant to
Section 4(b)(i)(A) hereof prior to said date and which remain unresolved between
UWSI and the Agent on that date ("Class A Unresolved Claims"). All amounts
relating to Class A Unresolved Claims shall continue to be held in escrow only
until resolved and disposed of in accordance with this Agreement.
(iii) TERMINATION OF ESCROW. Upon the expiration of three (3)
years from the date hereof (the "Termination Date"), the Escrow Agent shall
disburse to the Agent the balance of the Escrowed Funds then held by the Escrow
Agent hereunder, less an amount equal to the aggregate (A) all Class A
Unresolved Claims which remain unresolved as of the Termination Date, and (B)
all claims which have been asserted by UWSI pursuant to Section
3
<PAGE>
4(b)(i)(B) hereof prior to the Termination Date which remain unresolved between
UWSI and the Agent on the Termination Date ("Class B Unresolved Claims"). All
amounts relating to Class B Unresolved Claims shall continue to be held in
escrow only until resolved and disposed of in accordance with this Agreement.
(c) JOINT WRITTEN INSTRUCTIONS. Notwithstanding anything to the
contrary contained herein, the Escrow Agent shall pay and disburse the Escrowed
Funds upon receipt of written instructions concerning the disposition thereof
signed by UWSI and the Agent.
(d) TERMINATION. The Escrow Agreement shall terminate and the Escrow
Agent shall be discharged of all responsibility hereunder at such time as the
Escrow Agent shall have completed its duties hereunder.
5. COORDINATION WITH MERGER AGREEMENT. The provisions of this Agreement
are intended to be in PARI MATERIA with the provisions of the Merger Agreement
governing the payment of the Escrowed Funds upon an occurrence of a claim for
indemnification. In the event of any inconsistency between this Agreement and
the Merger Agreement concerning the making of an Escrow Claim, the procedure for
the resolution thereof, the determination of the amount of money payable in
satisfaction of such Escrow Claim, the limitations and restrictions upon the
payment of an Escrow Claim, or any other matters affecting the Shareholders'
obligations to make indemnification payments to UWSI, the same shall be subject
to, and governed by, the applicable provisions contained in the Merger
Agreement.
6. REPORTS AND ACCOUNTINGS. As soon as possible after the end of each
calendar quarter, and at such other times as UWSI or the Agent may reasonably
request, the Escrow Agent shall provide UWSI and the Agent with a full
accounting of all investments of the Escrowed Funds and a report of all
transactions with respect to the Escrowed Funds (including receipts, investments
and disbursements) not previously reported.
7. RESPONSIBILITY OF ESCROW AGENT. The Escrow Agent shall be entitled to
rely upon written notices and instructions of UWSI and of the Agent pursuant to
this agreement and shall have no liability for any action taken in such reliance
or upon reliance on the sufficiency or adequacy of the notices, except in the
event of bad faith, negligence or wilful misconduct. The Escrow Agent is hereby
expressly authorized and directed to disregard any and all notices or warnings,
other than notices, instructions or directions herein expressly provided for,
whether given by the parties hereto or by any other person, firm or corporation,
excepting only the orders or processes of courts with proper jurisdiction. It
is agreed by the parties hereto that the Escrow Agent assumes no
4
<PAGE>
responsibility to UWSI, the Agent, the Shareholders, or to any other person
other than to hold, invest by direction and disburse the Escrowed Funds pursuant
to the terms of this Escrow Agreement. The Escrow Agent shall not be liable as
such for any investment losses arising out of the investment of the Escrowed
Funds in accordance herewith. UWSI and the Shareholders jointly and severally
agree to indemnify and hold the Escrow Agent harmless with respect to any loss
or liability or cost and expense reasonably incurred by it arising out of
anything done by it in good faith in accordance with the terms hereof. The
Escrow Agent may consult with legal counsel in the event of any dispute or
question as to the construction of any of the provisions herein or its duties
hereunder, and it shall incur no liability and shall be fully protected in
acting in accordance with the opinion and instruction of such counsel.
8. NOTICES. All notices required or permitted to be given shall be given
in the manner, and with the effect, described in Section 9.01 of the Merger
Agreement. Notices to the Escrow Agent shall be delivered to:
-----------------------------
-----------------------------
-----------------------------
-----------------------------
9. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Wisconsin (regardless of such
State's conflict of laws principles), and without reference to any rules of
construction regarding the party responsible for the drafting hereof.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
UNITED WISCONSIN SERVICES, INC.
By:
--------------------------------
Its:
------------------------------
-----------------------------------
WALLACE J. HILLIARD, Agent
ESCROW AGENT:
-----------------------------------
By:
--------------------------------
Authorized Officer
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1996 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 414,924
<DEBT-CARRYING-VALUE> 10,635
<DEBT-MARKET-VALUE> 10,708
<EQUITIES> 64,787
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 490,346
<CASH> 16,658
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 641,574
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 46,599
<POLICY-OTHER> 236,330
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 44,888
0
0
<COMMON> 12,600
<OTHER-SE> 192,549
<TOTAL-LIABILITY-AND-EQUITY> 641,574
525,769
<INVESTMENT-INCOME> 14,755
<INVESTMENT-GAINS> 7,484
<OTHER-INCOME> 14,108
<BENEFITS> 437,706
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 108,378
<INCOME-PRETAX> 5,900
<INCOME-TAX> 2,413
<INCOME-CONTINUING> 3,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,487
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
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</TABLE>
