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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 Identification 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, no par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of February 28, 1997, there were issued and outstanding 16,371,806 shares
of Common Stock; the aggregate market value of the shares of such stock held by
non-affiliates of the registrant was $435,899,335 as of the same date, assuming
solely for purposes of this calculation that all directors and executive
officers of the Registrant are "affiliates." This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of United Wisconsin Services, Inc. Proxy Statement dated
April 18, 1997 (Part III)
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UNITED WISCONSIN SERVICES, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1996
PAGE
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PART I
Item 1 Business........................................................ 3
Item 2 Properties...................................................... 16
Item 3 Legal Proceedings............................................... 16
Item 4 Submission of Matters to a Vote of Security Holders............. 17
Executive Officers of the Registrant........................... 17
PART II
Item 5 Market for Registrant's Common Equity........................... 19
Item 6 Selected Financial Data......................................... 19
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 20
Item 8 Financial Statements and Supplementary Data..................... 29
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 63
PART III
Item 10 Directors and Executive Officers of the Registrant.............. 63
Item 11 Executive Compensation.......................................... 63
Item 12 Security Ownership of Certain Beneficial Owners and Management.. 63
Item 13 Certain Relationships and Related Transactions.................. 63
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 64
Schedule II - Condensed Financial Information of
Registrant..................................................... 65
Schedule IV - Reinsurance....................................... 68
Schedule V - Valuation and Qualifying Accounts.................. 69
Signatures............................................................... 70
Index to Exhibits........................................................ 71
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PART I
ITEM 1. BUSINESS
GENERAL
United Wisconsin Services, Inc. is a Wisconsin corporation organized in
1983. Its principal executive offices are located at 401 West Michigan Street,
Milwaukee, Wisconsin 53203 and its telephone number at that address is (414)
226-6900. As used herein, the terms "the Company" or "UWS" include United
Wisconsin Services, Inc. and its subsidiaries. This Annual Report on Form 10-K
contains both historical and forward looking information. The forward looking
statements may be significantly impacted by risks and uncertainties and are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. There can be no assurance that the Company can
duplicate its past performance or that expected future results will be
achieved. Readers are cautioned that a number of factors, which are described
herein, could adversely affect the Company's ability to achieve these results,
including the effects of health care reform, the continuation and renewal of
the Company's joint ventures, and the effects of other general business
conditions, including but not limited to, competition, medical cost trends,
changes in reserve estimates, terms of provider contracts, premium rate
changes, government regulation, capital requirements, administrative costs,
general economic conditions and the retention of key employees.
The Company is a leading managed care and employee benefits company serving
markets in more than 44 states. The products and services offered by the
Company comprise a broad range of group medical and related benefit products
which provide employers with cost effective solutions to their employee
benefits needs. The medical products are delivered through health maintenance
organizations ("HMO") and preferred provider organizations ("PPO") that
encourage or require use of contracting providers. HMOs and PPOs control
health care costs by various means, including utilization controls such as pre-
admission approval for hospital inpatient services, pre-authorization of
outpatient surgical procedures, and utilization of contracted physicians. The
Company also offers various specialty products and services including group
life, dental, disability income, workers' compensation, and electronic claim
transmission services.
Since its acquisition by the Company in 1992, Valley Health Plan, Inc.
("Valley"), an HMO in northwestern Wisconsin, has operated as a joint venture
with Midelfort Clinic-Mayo Regional Health System ("Midelfort"), its main
provider. The joint venture and related agreements define terms of the
relationship among the Company, Valley and Midelfort including payment for
services and buyback rights among the joint venture partners. In December
1996, the original five year term of the joint venture agreement was extended
through December 31, 1999. Unity Health Plans Insurance Corporation ("Unity"),
an HMO serving western Wisconsin, was formed by the combination of HMO of
Wisconsin Health Insurance Corporation and the business of U-Care HMO, Inc.
which were purchased by the Company effective October 1, 1994. Unity is
operated as a joint venture among the Company, Community Health Systems, LLC
and University Health Care, Inc. ("UHC") which through their affiliates,
Community Physicians' Network, Inc. ("CPN") and the University of Wisconsin-
Madison Medical Center, constitute the provider networks for Unity. The
original term of the joint venture agreement extends through September 30, 1999
and, along with related agreements, defines the payment terms and buyback
provisions of the joint venture partners.
From 1988 through November 1996, the Company's small group business was
marketed and administered under a joint venture arrangement with American
Medical Security Group, Inc. ("AMSG"). Under this arrangement, the premiums and
earnings were generally split between the Company and AMSG with each party
reporting fifty percent of premium and earnings. In addition, the Company's
investment of 12% of the outstanding common stock of AMSG was reported on a cost
basis.
On December 3, 1996, the Company acquired via merger the 88% of AMSG which
it did not previously own. Consideration paid in the acquisition was $71.8
million in cash and 3.7 million newly issued shares of UWS common stock.
American Medical Security Holdings, Inc. ("AMS") was established as a holding
company replacing
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AMSG for the coordination of the small group business. Beginning in December
1996, 100% of the AMS small group results of operations are reflected in the
Company's financial statements.
The Company's HMO products are sold primarily by a salaried sales force to
employers and other groups including Medicaid eligible individuals throughout
Wisconsin. The small group PPO and complementary products are sold by an
agency sales force to employer groups with an average size of less than ten
employees in more than 30 states largely in the Midwest and south. Specialty
products and services are sold through a variety of distribution channels to
employer groups and providers in Wisconsin and throughout the United States.
HMO PRODUCTS
PRODUCTS
Compcare Health Services Insurance Corporation ("Compcare") offers both
federally and non-federally qualified HMO managed health care products. The
Company's federally qualified products have government mandated benefits and
range from first dollar coverage to various combinations of co-payments that
are paid by the member when services are rendered. Federally qualified
products traditionally have maximum limits on co-payments and require minimum
benefit levels. Compcare's federally qualified products have been attractive
to organized labor groups, which usually require in their collective bargaining
agreements that the employer offer a federally qualified HMO product. In
addition, Compcare is the only federally qualified HMO in Wisconsin to market
non-qualified products. The Company believes that Compcare's ability to
provide both federally qualified and non-federally qualified HMO managed health
care products allows Compcare to respond to employer needs by providing the
employer with a broad range of coverage options.
Valley offers the following plans: (i) the Group Plan, a comprehensive HMO
plan; (ii) the Partner Plan, a traditional HMO plan which incorporates co-
payments; (iii) Point-of-Service ("POS") products, which combined a traditional
HMO plan with an out-of-network benefit with deductible and coinsurance; (iv)
AgriHealth, an individual plan offered to farmers; (v) a second AgriHealth
product ("AgriHealth II"), an individual product with front-end deductible and
coinsurance; (vi) a Medicare Supplement product, an individual product designed
to close the gap between health care costs incurred and government programs
allowed payments; (vii) a small group product, combining managed care with
deductibles and co-payments; and (viii) an HMO Medicaid plan, which is a
comprehensive HMO plan for Medicaid recipients.
Unity offers a comprehensive group plan which incorporates some co-payments
and deductibles and a modified comprehensive group plan which incorporates co-
payments and deductibles as well as coinsurance on certain benefits such as
hospitalization and specialty care. Unity also offers an individual plan,
including an in-area conversion plan, and a Medicare Supplement ("Select")
plan. In addition, Unity markets POS plans with a wide variety of benefit
options.
The POS plans provide significant incentives for their members to utilize
the plans' managed care benefits and provide reduced benefits and increased
deductibles and co-payments when services are rendered by providers outside of
the HMO networks. In order to receive the higher level of benefits available
within the network, a member must follow gatekeeper requirements by receiving
care from a primary care physician or be referred to a specialist by the
primary care physician. These incentives lower the overall premium for the
group, even though the POS premiums tend to be slightly higher than comparable
traditional HMO products. As a result, POS plans provide a greater level of
health care cost control than an offering of a traditional HMO and an indemnity
plan. POS plans are sold generally as a complete replacement for an employer's
HMO and indemnity offerings.
MARKETING
Marketing HMO products generally is a two-step process. Presentations are
made first to employers. Once selected by an employer, the Company then
directly solicits members from the employee base. During periodic
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"open enrollments", when employees are permitted to change health care
programs, the Company uses advertising and work site presentations to attract
new members. Virtually all of the HMO employer group contracts are renewable
annually, and enrollment is continuously affected by employee turnover within
employer groups.
As of December 31, 1996, HMO membership consisted of the following:
Commercial
HMO POS Medicaid Total
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Compcare 106,489 23,492 19,655 149,636
Valley 20,991 11,012 1,303 33,306
Unity 62,997 10,366 5,784 79,147
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190,477 44,870 26,742 262,089
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------- ------ ------ -------
Significant factors in HMO selection by employers and employees include the
composition of provider networks, quality of services, price, choice and scope
of benefits and market presence. To the extent permitted by the Office of the
Commissioner of Insurance for the State of Wisconsin ("OCI") and the federal
government, the Company can offer an employer a wide spectrum of benefit
options, including federally qualified and non-federally qualified products.
To address rising health care costs, some employers now consider a variety of
health care options to encourage employees to use the most cost-effective form
of health care services. These options, which include HMOs, POS and PPO plans,
may either be self-funded or provided by third parties.
Compcare's operations in the seven counties in southeastern Wisconsin
account for approximately 93.7% of its medical membership. Valley operates
in a 15 county area in western Wisconsin and Unity operates in a 31 county area
in southwestern and central Wisconsin. During 1996, the Company entered into
two strategic partnerships to offer HMO products in northern Wisconsin.
Compcare Northwest is a partnership with the Duluth Clinic to bring managed
care operations to the underserved rural market. Northwoods Health Plans, LLC,
is a joint venture formed with Howard Young Health Care, Inc., a leading
provider of health care services in north central Wisconsin. The Company
believes that expansion efforts should contribute to increased enrollment by
attracting new employer groups, by increasing penetration in existing employer
groups, and by broadening the Company's access to the Medicaid population.
Through the Service Agreement, the Company utilizes Blue Cross & Blue Shield
United of Wisconsin's ("BCBSUW") salaried sales force, consisting of 19 account
representatives and customer relations personnel, 30 account executives, one
agency manager, four agency consultants, and four sales directors, to market
HMO products. The Company directly employs a sales staff of nine account
executives, seven account representatives and customer relations personnel and
one sales director, one agency manager and one agency consultant who market
products for Unity as well as BCBSUW.
PROVIDERS
Compcare, Valley and Unity contract with physicians and hospitals to provide
medical services to their members. Members designate one physician in the
network as their primary care provider and are required to seek non-emergency
care from this physician.
Compcare has an extensive provider network in southeastern Wisconsin, which
included 3,020 physicians, as of December 31, 1996. Compcare is the only HMO
that contracts with all eight of the largest multi-specialty clinics in
Milwaukee for the provision of health care services to its members. This
network is augmented by individual physicians, hospitals and IPAs affiliated
with Milwaukee's large hospitals. Providers outside of Milwaukee consist of
multi-specialty clinics and hospitals. Ancillary services are provided under
capitated arrangements through sub-networks including chiropractic, mental
health, oral surgery, home care, durable medical equipment and vision.
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Approximately 86% of Valley's physician services are provided under an
arrangement with Midelfort Clinic, Ltd., a Mayo Regional Practice, which the
Company believes is the leading medical clinic in Eau Claire, Wisconsin.
Arrangements with three smaller area clinics comprise the majority of the other
Valley physician services provided. As of December 31, 1996, Valley's provider
network consisted of 334 physicians. Valley has contracts with six hospitals
which have accounted for the majority of Valley's hospital services.
Unity contracts with CPN, an Independent Physician Association ("IPA"), and
UHC, an affiliate of the University of Wisconsin Hospital and Clinics, which
together provide 100% of the physician services for Unity's membership
throughout its 31 county service area. CPN and UHC collectively contract with
approximately 400 primary care providers and 2,100 specialists and ancillary
health care providers. In addition, Unity contracts directly with
approximately 50 acute care and specialty care hospitals.
Compcare, Valley and Unity manage the cost of health care provided to their
members through the method of payment and risk-sharing programs with physician
groups and hospitals and with their utilization management program. The method
of payment consists of a mixture of capitation, fee schedules and discounted
fee-for-service arrangements. Capitation allows the payment of a fixed amount
per member per month to providers, regardless of services provided, which
stabilizes medical and dental costs. Capitation encourages providers to avoid
unnecessary utilization of hospital, physician and ancillary health care
services. For the year ended December 31, 1996, approximately 34%, 25% and 100%
of Compcare's, Valley's and Unity's medical benefits, respectively, were
provided under capitated arrangements.
For certain medical providers, compensation for services is calculated on a
discounted fee-for-service basis. Under this arrangement, the Company will
reimburse physician groups for services rendered based upon negotiated fee
schedules or usual and customary charges less an agreed upon discount.
Hospitals may be reimbursed at a set per diem rate for each inpatient day, on a
flat rate per procedure basis, or on a discounted charge basis. In
fee-for-service arrangements, risks associated with utilization are retained by
Compcare and Valley. However, such arrangements provide Compcare and Valley
with greater pricing flexibility and opportunities to benefit by application of
underwriting on a group specific or individual basis. Furthermore, fee
schedule-based compensation allows Compcare and Valley to better target
improvement in loss ratios through product development and benefit
modification. Such changes are more difficult in a capitated system since
capitation levels must be renegotiated before any effective changes can be made
to benefits or products.
Many physician groups and hospitals in Compcare's provider network elect to
participate in stop-loss arrangements with the Company. These arrangements
limit the facility's or group's claim liability to a fixed amount per member
per year. Claim costs in excess of stop-loss limits are reimbursed by Compcare.
COST CONTAINMENT
Medical management and cost containment services for Compcare are provided
by Meridian Managed Care, Inc. (see Specialty Managed Care Products and
Services - MANAGED CARE CONSULTING). Services for Valley and Unity are
coordinated by medical directors in conjunction with the medical staffs of
their joint venture partners.
MANAGEMENT INFORMATION SERVICES
Each of the Company's HMOs utilizes information systems developed and/or
customized specifically to meet the needs of the HMO. The information systems
support marketing, sales, underwriting, contract administration, billing,
financial and other administrative functions as well as provider capitation and
claims administration, provider management, quality management and utilization
review.
The Company continually evaluates, upgrades and enhances the information
systems which support its operations. Information systems utilized by Compcare
and Valley are outsourced to a third party. Compcare is in the process of
changing its outsourcing vendor to upgrade its capabilities.
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SMALL GROUP PRODUCTS
PRODUCTS
AMS markets to individuals and small employers through a diverse offering of
fully insured and self-insured PPO and traditional indemnity benefit plans
covering approximately 410,200 lives. The average group size is 3 employees.
AMS specializes in customizing employee benefit packages for individuals and
businesses through IT'S YOUR CHOICE, a benefit option which allows businesses
to offer employees multiple medical plans in a single package. CUSTOM PLUS is
a voluntary program that allows employees to elect optional benefits such as
life, dental, and short-term disability benefits with no minimum participation
or employer contribution. PPO CARE EVERYWHERE is a national program offered to
all AMS groups and employees with PPO plans to provide network benefits for
treatment provided by participating networks while traveling away from their
home network service area. LIFESTYLE CHOICE$ is a voluntary health awareness
program designed to identify health risks and encourage positive lifestyle
choices to reduce those risks. AMS helps employers assess their wellness
programs, makes recommendations for improvement and supplies any needed
resources for wellness program development.
AMS includes Nurse Healthline, Inc., a confidential telephonic health
advisory service providing information about health conditions, medications,
cost-effective treatments and the location of a network provider. It is
available 24 hours a day, 365 days a year and is included with every health
benefit plan.
AMS offers a full line of ancillary products to individuals and groups in
conjunction with health care products including dental, employee and dependent
term life, accidental death and dismemberment ("AD&D"), and short-term
disability.
The Premium Savings Plan, a section 125 Cafeteria Plan, is offered at no
cost to fully insured groups of two or more and permits pre-tax contribution
for employee health care premiums thereby reducing payroll taxes for the
employer. The Advantage Plan is another plan also available to groups and their
employees as a mechanism to fund unreimbursed medical, dental, or dependent
care expenses on a pre-tax basis. This feature also reduces the amount
employers pay in payroll taxes.
MARKETING
Small group products are marketed through licensed independent agents in 32
states and the District of Columbia. AMS has divided its sales territory into
five regions, each of which is the responsibility of a Regional Vice President
("RVP"). The RVPs work with a number of regional sales managers located in 33
offices throughout the United States in coordinating the sales and marketing
efforts.
As of December 31, 1996, AMS marketed products through approximately 46,200
independent agents. The leading states with respect to premium during 1996
were Texas, Florida, Illinois, Michigan and Wisconsin, which accounted for
47.4% of AMS premium. For the year ended December 31, 1996, the top ten
employer groups accounted for less than 1% of the premium on business sold by
AMS.
Independent agents are paid commissions on new and renewal sales.
Compensation of RVPs and regional sales managers is based upon the level of
commissions earned by the sales force for which they have responsibility.
Significant factors influencing an employer's selection of the Company's
small group products include price, flexibility of plan design, choice and
scope of benefits, quality of service, reputation and quality of relationships
with agents.
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PROVIDERS
AMS utilizes over 80 commercial provider networks in 34 states for its
managed care products. A master "payer" agreement is in place for each
provider network that allows AMS to access the provider contracts for its PPO
and exclusive provider organization ("EPO") products. These networks are made
available to both fully insured products as well as AMS's self-insured product
offerings.
AMS also directly owns or controls commercial PPO networks in Texas,
Florida, Iowa, Nebraska, Arizona and the Dakotas. These networks not only
service AMS business but are offered to other insurers and third party
administrators as a secondary source of income to AMS and to assure adequate
volumes of business to support the provider contract pricing concessions which
are largely volume related. AMS believes there is great value in owning
provider networks in select markets as a way to directly interact with the
provider networks as well as to effectively conduct its medical management
initiatives.
COST CONTAINMENT
AMS obtains medical management services through both external and internal
programs. Traditional utilization review for its managed care products is
purchased from commercial PPO networks, including those owned or controlled by
AMS. Precertification and case management is performed by AMS staff in their
respective home offices through a combination of internally developed and
commercially purchased software packages to prompt, guide and record medical
management decisions. In addition, AMS has developed a series of programs to
enhance its medical management effort and to offer preventative services.
First, AMS has created LifestyleChoice$, an annual screening and evaluation
of health care status available to covered employees and their dependents.
This "wellness" screening program, along with individualized recommendations
and a periodic newsletter, guides members to ways for improving their health.
Second, AMS has developed a disease management program for insured members
with chronic medical conditions such as asthma and diabetes. Disease
management staff members frequently contact these "at risk" members to promote
education and understanding of their medical condition and how to obtain and
use resources efficiently.
Third, AMS has developed a demand management telephonic service entitled
Nurse Healthline. AMS insureds and families can access Nurse Healthline nurses
24 hours a day, seven days a week. By using a computerized algorithm based
system, the nurses are able to determine the severity of the problem and assist
the insured in making an informed healthcare decision.
MANAGEMENT INFORMATION SYSTEMS
AMS's health, dental, life, and short-term disability products use custom
built management information systems for all administrative processing tasks.
These systems include underwriting, billing, enrollment, claims processing,
utilization management, sales reporting, network analysis and service and
status reporting. These systems support all products and provider
arrangements. The management information systems handle electronic receipt of
claims, referrals and eligibility with networks and providers. The systems
support both fully insured and self-insured administrative needs.
AMS's management information systems are state of the art and modular.
Evaluation and upgrades occur continuously. An artificial intelligence system
is used for claims processing, eligibility, and enrollment tasks. The systems
are flexible which allow quick new product introduction and legislative
updates. In addition to electronic receipt of information, AMS systems can
also electronically scan and image documents. AMS uses extensive personal
computer-based network and software solutions that are integrated with its
mainframe system which allows for its continuous enhancement with technology
upgrades and other software solutions.
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AMS is nearing completion of development of a data warehouse that will
provide eligibility, sales, billing, claims, provider and financial data.
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES
The Company expects to focus on the growth of the specialty products and
services it offers. Such products and services include prepaid dental care,
life and disability insurance, workers' compensation, managed care consulting,
electronic claims processing, pharmaceutical services and other medical
benefits.
DENTAL
The Company provides prepaid dental services to 169,063 members through
Dentacare, which is the largest dental HMO in Wisconsin. Premium revenues
attributable to Dentacare were $27.1 million for the year ended December 31,
1996. Dentacare contracts with group dental practices on a capitated basis
throughout Wisconsin and northern Illinois. Members receive services through
their selected dental center. In addition, Dentacare offers POS and out-of-area
products. The Dentacare provider network had 232 dental providers as of
December 31, 1996.
Dentacare offers ten different products with varying benefit options, most
of which cover 100% of preventive and diagnostic services. Other services are
offered at various levels of coverage. All products cover pre-existing
conditions and the full range of dental services, including orthodontics.
LIFE AND DISABILITY
The Company offers group term life and AD&D coverages as well as dependent
life and accelerated death benefits. Short and long-term disability products
have been designed to provide income replacement for an employee who becomes
disabled through a non-work related situation. The Company's Rapid Pay plan is
a unique short-term disability product by which claimants receive benefits on a
timely basis with minimal up-front paperwork. As of December 31, 1996, the
Company had a total of 185,717 life and disability certificates. Premium
revenue related to life and disability products was $39.5 million for the year
ended December 31, 1996. Life products are sold through United Wisconsin Life
Insurance Company ("UWLIC"), which is licensed to do business in 38 states and
the District of Columbia. United Wisconsin Insurance Company ("UWIC"), which
sells disability products, is licensed in 35 states and the District of
Columbia.
An insurance company's rating is an important factor in establishing its
competitive position. In 1996, UWIC was assigned a rating of "A (Excellent)"
and UWLIC was assigned an "A- (Excellent)" by A.M. Best Company, Inc. ("Best").
The "A" and "A-" " (Excellent)" ratings are the third and fourth highest
ratings given to insurance companies.
MANAGED CARE WORKERS' COMPENSATION
Through United Heartland, Inc. ("United Heartland"), the Company applies
managed care techniques to the workers' compensation market in Wisconsin.
United Heartland is a managing general agent that until January 1, 1995 was
owned equally by the Company and Aon Corporation ("Aon"). On January 1, 1995,
the Company exercised its option to acquire Aon's interest in United Heartland,
thereby making United Heartland a wholly owned subsidiary of the Company. The
workers' compensation coverage sold through United Heartland is underwritten by
UWIC in those states where UWIC is licensed to provide such coverage. A
reinsurance partner underwrites risk for coverage in those states where UWIC is
not licensed to provide workers' compensation coverage. Premium revenue
produced by United Heartland approximated $20.7 million during 1996. During
1996, the Company retained 50% of the workers' compensation risk and ceded the
other 50% to a reinsurance partner.
The Company believes the key elements to success in the workers'
compensation insurance business are service to employers and control of
workers' compensation costs through comprehensive loss control and claims
management procedures. As part of its underwriting process, United Heartland
performs a loss control review of each prospective
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insured prior to making a commitment to provide coverage. It also scrutinizes
the employer's commitment toward developing or improving light duty/return to
work programs, safety awareness programs, supervisor training in accident
investigation and enforcement of safety in the workplace. United Heartland
also reviews the financial resources of the employers to verify an ability to
follow through on any commitments made that may require a capital expenditure.
In claims management, United Heartland utilizes medical management resources
to assist in the adjustment of its claims, which include: (i) access to
BCBSUW's usual and customary charges database; (ii) the PPO network established
by the Company for United Heartland clients; and (iii) access to the hospital
bill audit and medical staff of the Company as needed in claims handling. The
Company believes this managed care capability, combined with a commitment to
communicating with employers, employees and medical providers, assists United
Heartland in monitoring the major cost factors of workers' compensation claims.
Cost savings have been demonstrated as United Heartland's customers over the
five year period ended December 31, 1996 have experienced a 16 percent drop in
the cost of their workers' compensation claims.
MANAGED CARE CONSULTING
Through Meridian Resource Corporation ("Meridian"), the Company specializes
in providing consulting and technical services to insurance companies,
employers, providers, government agencies, coalitions and other organizations
to make sound decisions regarding health care benefits and more effective
health care delivery. Consulting services include: health care data analysis,
hospital cost indexing and analysis, feasibility studies and economic analysis.
Technical services include: hospital bill audit, data analysis and reporting,
claims audit, and subrogation recovery services. Meridian has also established
a niche for itself in collecting salvage and subrogation recoveries for self-
insured groups and other health insurers.
In order to promote team work, collaboration and increase the effectiveness
of its managed care programs, the Company has consolidated its medical
management functions into its wholly owned subsidiary Meridian Managed Care,
Inc. ("MMC"). Within MMC are formal programs in Care Services Management,
Quality Improvement, Network Management, Pharmacy Services, as well as a
Medical Director function. MMC primarily serves the population of Compcare and
BCBSUW but also markets its programs to non-affiliated organizations.
MMC controls costs by promoting quality and efficiency, on behalf of
enrolled individuals and populations, across the continuum of care. This broad
based program allows MMC to effectively manage care within diverse products,
networks and geography. Central to its effectiveness is promoting and
developing partnerships with providers. Physicians play an active role in MMC
programs. MMC's full time Medical Directors, along with a panel of practicing
community physicians serving as Consulting Medical Directors are involved in
all aspects of planning, implementation and administration of MMC processes.
This ensures our programs promote best practices while being sensitive to the
current structure of our local care delivery systems.
Meridian's Utilization Management Program provides comprehensive, custom-
designed strategies which protect our members and control costs by ensuring
cost effective, quality care. Meridian's traditional Utilization Management
Program offers inpatient prior authorization, admission review, continued stay
review, discharge planning, patient education, appropriateness review, and
outpatient procedure review. The Company's focused review program uses
outcomes analysis to measure and shape health care delivery by working with
hospitals and affiliated physicians. Data is analyzed to identify providers
producing favorable treatment outcomes in a cost-effective manner and then
promoting local best practice.
Case management identifies high risk and/or high cost care. By focusing on
these cases, case managers can negotiate cost effective alternatives to care,
decrease hospitalization, and reduce health care costs. Case Managers also
work with hospital discharge planners and family members to provide assistance
in determining the availability of benefits.
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Studies show that 47% of emergency room visits are inappropriate. MMC's
nurseline triage program is designed to reduce an expensive inefficiency in
today's health care delivery system. Nurses are available 24 hours a day,
seven days a week, to help make informed health care decisions. The nurses use
clinically developed algorithms to provide primary care assessment, decision
counseling, self-care information and referrals. They help callers make
appropriate decisions about primary health care needs, disease prevention,
major medical procedures, and provider selection.
The Company's disease management program is designed to limit or slow the
progression of the disease process while improving or maintaining the patient's
health. Specific disease state programs are developed based on the needs of
the population. These programs include asthma, diabetes, congestive heart
failure and prenatal programs. MMC has been able to demonstrate significant
cost savings, improved satisfaction, as well as improved outcomes in these
small, high cost, vulnerable populations.
Meridian's Health Policy Department is responsible for evaluating new
emerging and existing technologies to assist in establishing direction to the
Company for medical guidelines, policies and procedures. Qualified practicing
community physicians are actively involved with the technical assessment
bringing local expertise of national and community standards of care and best
practices.
MMC operates a comprehensive, Board of Directors approved Quality
Improvement ("QI") Program. This QI program seeks to assure quality of care
through a comprehensive system of monitoring mechanisms designed to identify
problems in the delivery of health care services to its members or to identify
opportunities for improvement in these services, both at the plan-wide and
provider level.
The QI program is designed to meet or exceed National Committee for Quality
Assurance ("NCQA") expectations. The Company performs in-depth credentialing
of its broad networks and performs population based QI studies and initiatives.
MMC actively involves community physicians in reviewing QI, satisfaction,
Health Plan Employer Data and Information Set ("HEDIS"), outcomes, and other
data to guide its efforts at guideline development, study design, program
structure and other aspects of the medical management programs through formal
QI and credentialing committees.
Network management, in addition to network development and maintenance,
provides analysis and profiling of the delivery of services by contracted
facilities, physicians and other vendors. Eighty-four percent of physicians in
Wisconsin practice in a group practice. Therefore, analysis primarily focuses
on process and outcome measures related to population associated with organized
systems of care. By adjusting the data for severity using Ambulatory Care
Groups, the Company has discovered trends and variations that have lead to
sophisticated and useful provider feedback. This data has also allowed the
Company to refine its best practice benchmarks and provide input into contract
evaluation and improvement of care management processes.
Pharmacy Management Services promotes appropriate and cost effective
pharmaceutical utilization through formulary development, pharmacy network
management, pharmacy and therapeutics committee, and concurrent and
retrospective drug utilization review. Central to the program is the pharmacy
benefit management company, The Right Rx, that performs rebate management for
Compcare, BCBSUW and non-affiliated clients, representing approximately 1.4
million lives.
Revenues from managed care consulting services amounted to $8.9 million for
the year ended December 31, 1996.
ELECTRONIC CLAIM SUBMISSION
United Wisconsin Proservices, Inc. ("Proservices") provides software and
claim submission services and has created the largest provider/insurer network
for such services in Wisconsin, extending to 4,000 providers including
hospitals, physicians and 400 home health agencies and more than 350 insurers.
Proservices electronically transmits
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more than six million medical claims annually for such clients as Medicare,
Medicaid, private insurers, TPAs and re-pricers. During 1996, Proservices
purchased clinic management software as a companion product to its existing
software. Along with the software, Proservices secured contract licenses of
78 home health care providers.
MANAGED MENTAL HEALTH
The Company owns a 53 percent interest in CNR Health, Inc. ("CNR") which
provides cost-effective health care management for mental health and substance
abuse services including network development, claims processing, and stand-
alone and integrated Employee Assistance Programs. The behavioral health carve
out program is available on a self-funded or insured basis. Insured products
are underwritten by UWLIC. CNR also provides medical/surgical utilization
management, large case management, and specialty programs for accident and
disability, prenatal care and workers' compensation. CNR manages over 826,000
lives. For the year ended December 31, 1996, CNR's revenue was $16.4 million.
COMPETITION
The managed care industry is highly competitive. During the past few years,
the managed care industry in Wisconsin and the upper Midwest has experienced
consolidation. The Company believes the principal competitive features
affecting its ability to retain and increase membership include the price of
benefit plans offered, the composition of provider networks, quality of
service, responsiveness to user demands, financial stability, comprehensiveness
of coverage, diversity of product offerings and market presence and reputation.
Although the Company is a leading provider of managed care services in
Wisconsin, the Company may experience increased competition in the future.
Many of the Company's competitors are larger, have considerably greater
financial resources and distribution capabilities and offer more diversified
types of insurance coverage than the Company. In addition, because most of the
Company's products are marketed to some extent through independent agencies,
most of which represent more than one company, the Company experiences
competition within each agency.
Since 1988, a number of large national multiline insurers have exited the
small group health insurance market. The major competition for the Company's
small group health care products sold by AMS comes from national and regional
firms with a specific focus on the small group market. The small group,
agency-controlled market is price sensitive, and the business is put out for
bid more frequently than larger group business. Insurers in the small group
health care product market compete primarily on the basis of price,
responsiveness to user demands, diversity of product offerings, quality of
service, reputation and quality of agency relations.
REINSURANCE
The Company maintains in force both "quota share" and "excess of loss"
reinsurance treaties. Quota share reinsurance is a contractual arrangement
whereby the reinsurer assumes an agreed percentage of certain risks insured by
the ceding insurer and shares premium revenue and losses proportionately. The
Company's quota share reinsurance treaties allocate the total amount of
business subject to the treaties between the Company and the respective parties
to the treaties. The excess of loss reinsurance treaties relate primarily to
Specialty Managed Care Products and Services. Except for affiliates of the
Company, all reinsurers with which the Company contracts are rated "A-
(Excellent)" or better by Best.
INVESTMENTS
The Company attempts to minimize its business risk through conservative
investment policies. Investment guidelines set quality, concentration and
return parameters. Individual fixed income issues must carry an investment
grade rating at the time of purchase, with an ongoing average portfolio rating
of "A-" or better, based on ratings of Standard & Poor's Corporation or another
nationally recognized securities rating organization. The Company invests in
securities authorized by applicable state laws and regulations and follows
investment policies designed to maximize
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yield, preserve principal and provide liquidity. The Company's portfolio
contains no investments in mortgage loans or non-publicly traded securities
except for investments in affiliates.
With the exception of short-term investments and securities on deposit with
various state regulators, investment responsibilities have been delegated to
external investment managers. Such investment responsibilities, however, must
be carried out within the investment parameters established by the Company,
which are amended from time to time.
Securities which may be sold prior to maturity to support the Company's
investment strategies, such as in response to changes in interest rates, the
yield curve concentration or sector concentration, are classified as available
for sale and are stated at market value with unrealized holding gains and
losses reported as a component of shareholders' equity in accordance with
Statement of Financial Accounting Standard No. 115. Securities for which the
Company has both the positive intent and ability to hold to maturity are
recorded at amortized cost. Bonds which are held to meet deposit requirements
of the various states are classified as held to maturity. All other bonds are
classified as available for sale.
The table below reflects investment results for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Average invested assets (1) $399,354 $479,885 $523,066
Net investment income (2) 22,144 27,278 30,918
Average yield 5.54% 5.68% 5.91%
Net realized gains (losses) $1,649 $12,915 $12,996
Net unrealized gains (losses)
on stocks and bonds (17,013) 20,649 10,101
__________________
(1) Average of aggregate investment amounts at the beginning of each year
and at the end of each quarter during 1994 and the end of each month
during 1995 and 1996.
(2) Amounts are calculated net of investment expenses, but prior to
adjusting for other interest income and expense. Includes interest
expense on surplus note of $196,000 and $1,228,000 in 1995 and 1996,
respectively.
REGULATION
Government regulation of employee benefit plans, including health care
coverage, health plans and the Company's specialty managed care products, is a
changing area of law that varies from jurisdiction to jurisdiction and
generally gives responsible administrative agencies broad discretion. The
Company believes that it is in compliance in all material respects with the
various federal and state regulations applicable to its current operations. To
maintain such compliance, it may be necessary for the Company or a subsidiary
to make changes from time to time in its services, products, structure or
operations. Additional governmental regulation or future interpretation of
existing regulations could increase the cost of the Company's compliance or
otherwise affect the Company's operations, products, profitability or business
prospects.
The Company is unable to predict what additional government regulations, if
any, affecting its business may be enacted in the future or how existing or
future regulations might be interpreted. A number of jurisdictions have enacted
small group insurance and rating reforms which generally limit the ability of
insurers and health plans to use risk selection as a method of controlling
costs for small group business. These laws may generally limit or eliminate
use of pre-existing conditions exclusions, experience rating and industry class
rating and limit the amount of rate increases from year to year. Under these
laws, cost control through provider contracting and managing care may become
more important, and the Company believes its experience in these areas will
allow it to compete effectively.
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Increasingly, states are considering various health care reform measures and
are adopting laws or regulations, which may limit the Company's health plans'
and insurance operations' ability to control which providers are part of their
networks and may hinder their ability to effectively manage utilization and
cost. The Company is unable to predict what reforms, if any, may be enacted or
how these reforms would affect the Company's operations.
HMOS. Wisconsin and the other states in which the Company offers HMO
products have enacted statutes regulating the activities of those health plans.
Most states require periodic financial reports from HMOs licensed to operate in
their states and impose minimum capital or reserve requirements. In addition,
certain of the Company's subsidiaries are required by state regulatory agencies
to maintain restricted cash reserves represented by interest-bearing
instruments which are held by trustees or state regulatory agencies to ensure
that adequate financial services are maintained or to act as a fund for
insolvencies of other HMOs in the state.
As a federally qualified HMO, Compcare must file periodic reports with, and
is subject to periodic review by, the Department of Health and Human Services,
the Health Care Financing Administration and the Office of Prepaid Health Care.
The Company's other HMOs are only subject to state regulation because they are
not federally qualified HMOs.
The Company's HMOs which have Medicaid contracts are subject to both federal
and state regulation regarding services to be provided to Medicaid enrollees,
payment for those services and other aspects of the Medicaid program. Medicaid
has in force and/or has proposed regulations relating to fraud and abuse,
physician incentive plans and provider referrals which may affect the Company's
operations.
Several of the Company's health plans have contracts with the Federal
Employees Health Benefit Plan ("FEHBP"). These contracts are subject to
extensive regulation, including complex rules relating to the premiums charged.
FEHBP has the authority to retroactively audit the rates charged and frequently
seeks premium refunds and other sanctions against health plans participating in
the program. The Company's health plans which have contracted with FEHBP are
subject to such audits and may be requested to make such refunds.
INSURANCE REGULATION. The Company's insurance subsidiaries are subject to
regulation by the Department of Insurance in each state in which the entity is
licensed. Regulatory authorities exercise extensive supervisory power over
insurance companies in regard to the licensing of insurance companies; the
amount of reserves which must be maintained; the approval of forms and
insurance policies used; the nature of, and limitation on, an insurance
company's investments'; periodic examination of the operations of insurance
companies; the form and content of annual statements and other reports required
to be filed on the financial companies condition of insurance companies; and
the establishment of capital requirements for insurance companies. The
Company's insurance company subsidiaries are required to file periodic
statutory financial statements in each jurisdiction in which they are licensed.
Additionally, such companies are periodically examined by the insurance
departments of the jurisdiction in which they are licensed to do business.
The NAIC adopted the Risk-Based Capital ("RBC") for Life and/or Health
Insurers Model Act ("RBC Model Act"), effective December 31, 1993, to evaluate
the adequacy of statutory capital and surplus in relation to investment and
insurance risks associated with: (i) asset quality; (ii) mortality and
morbidity; (iii) asset and liability matching; and (v) other business factors.
The RBC Model Act formula is used by the states to monitor trends in statutory
capital and surplus for the purpose of initiating regulatory action. The NAIC
adopted similar RBC requirements for property and casualty insurance companies
effective December 31,1994 and currently is developing RBC requirements for
health organizations including HMOs. The Company has calculated the risk-based
capital for its life and property and casualty subsidiaries as of December 31,
1996 using the applicable RBC formula. These calculations produced risk-based
capital levels which exceed the levels at which the RBC formulas recommends
intervention by regulatory authorities. The proposed RBC requirements for HMOs
are not expected to have a significant effect on the Company's capital
requirements.
Under the Wisconsin Statutes, insurance companies must provide the OCI with
advance notice of any dividend that is more than 15% larger than any dividend
for the corresponding period of the previous year. In addition, the OCI
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may disapprove any "extraordinary" dividend; that is, any dividend which,
together with other dividends paid by an insurance company in the prior
twelve months, exceeds the lesser of: (i) 10% of statutory capital and
surplus as of the preceding December 31; or (ii) with respect to a life
insurer, net income less realized gains for the calendar year preceding the
date of the dividend; or (iii) with respect to a non-life insurer, the
greater of (ii) above or the aggregate net income less realized gains for the
three calendar years preceding the date of the dividend less distributions
made within the first two of those three years.
Based upon the financial results of the Company's insurance subsidiaries for
the year ended December 31, 1996 and after taking into consideration the $15.0
million in extraordinary dividends paid from the insurance subsidiaries to UWS
in 1996, $8.8 million remains available for 1997 dividend payments to the
Company from its insurance subsidiaries without regulatory approval.
INSURANCE HOLDING COMPANY REGULATIONS. The Company is a holding company
which conducts all of its business through subsidiaries and is subject to
insurance holding company laws and regulations. Under Wisconsin law,
acquisition of control of the Company, and thereby indirect control of its
insurance subsidiaries, requires the prior approval of the OCI. "Control" is
defined as the direct or indirect power to direct or cause the direction of the
management and policies of a person. Any purchaser of 10% or more of the
outstanding voting stock of a corporation is presumed to have acquired control
of the corporation and its subsidiaries unless the OCI, upon application,
determines otherwise.
Each of the Company's insurance subsidiaries are subject to regulation under
state insurance holding company regulations. Such insurance holding company
laws and regulations generally require registration with the state Department
of Insurance and the filing of certain reports describing capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations. Various notice and reporting requirements generally apply
to transactions between companies within an insurance holding company system,
depending on the size and nature of the transactions. Certain state insurance
holding company laws and regulations require prior regulatory approval or, in
certain circumstances, prior notice of, certain material intercompany transfers
of assets as well as certain transactions between the regulated companies,
their parent holding companies and affiliates, and acquisitions.
TPAs. Certain subsidiaries of the Company are also licensed as third-party
administrators ("TPAs") in states where such licensing is required for their
activities. TPA regulations, although differing greatly from state to state,
generally contain certain required administrative procedures, periodic
reporting obligations and minimum financial requirements.
PPOs. Certain of the Company's subsidiaries' operations may be subject to
PPO regulation in certain states. PPO regulations generally contain certain
network, contracting, financial and reporting requirements which vary from
state to state.
UTILIZATION REVIEW REGULATIONS. A number of states have enacted law and/or
adopted regulations governing the provision of utilization review activities.
Generally, these laws and regulations require compliance with specific
standards for the delivery of services, confidentiality, staffing, and policies
and procedures of private review entities, including the credentials required
of personnel. Some of these laws and regulations may affect certain operations
of the Company's business units.
ERISA. The provision of goods and services to or through certain types of
employee health benefit plans is subject to the Employee Retirement Income
Security Act of 1974 ("ERISA"). ERISA is a complex set of laws and regulations
that are subject to periodic interpretation by the United States Department of
Labor. ERISA places certain controls on how UWS's business units may do
business with employers covered by ERISA, particularly employers that maintain
self-funded plans. The Department of Labor is engaged in an ongoing ERISA
enforcement program which may result in additional constraints on how ERISA-
governed benefit plans conduct their activities. There recently have been
legislative attempts to limit ERISA's preemptive effect on state laws. If such
limitations were to be enacted, they might increase UWS's liability exposure
under state law-based suits relating to employee health benefits offered by
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UWS's health plans and specialty businesses and may permit greater state
regulation of other aspects of those businesses' operations.
EMPLOYEES
As of February 28, 1997, the Company had 3,485 full-time and 176 part-time
employees, of whom 514 were managerial and supervisory personnel. Of these
employees, 129 were represented by a union. The Company considers its
relations with its employees to be good.
TRADEMARKS
"Compcare" is a federally registered service mark of the Company. The
Company has filed for and maintains several other trademarks and trade names at
the federal level and in the State of Wisconsin. Although the Company considers
its registered service marks, trademarks and trade names important in the
operation of its business, the business of the Company is not dependent on any
individual service mark, trademark or tradesman.
ITEM 2. PROPERTIES
The Company owns a 380,000 square foot office building in Green Bay,
Wisconsin which houses employees who service the small group business. The
Company also occupies common facilities with BCBSUW and is charged a
proportionate share of the cost of such facilities under the Service Agreement.
The Company's corporate headquarters are principally located in Milwaukee,
Wisconsin in a 235,000 square foot building leased by BCBSUW. The Company also
utilizes space in a Milwaukee regional office leased by BCBSUW, which has
approximately 299,000 square feet of office and warehouse space. In addition,
the Company's business is sold and serviced in four other Wisconsin regional
offices leased by BCBSUW and a 40,000 square foot facility in Sauk City,
Wisconsin owned by Unity.
ITEM 3. 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 is 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.
In May, 1995, the Seventh Circuit stayed the injunctive order pending the
Court's ruling on the case. On September 18, 1995 the Seventh Circuit affirmed
the District Court's decision on the per se violation of dividing the market
and ordered another trial to determine the damages resulting from the
violation. The Seventh Circuit reversed the District Court on the other
counts.
On October 2, 1995, BCBSUW and Compcare filed a petition for a rehearing
with the Seventh Circuit. The U.S. Justice Department and the Federal Trade
Commission filed an amici brief in support of BCBSUW and Compcare.
The Seventh Circuit denied the rehearing petition but on October 13, 1995,
issued amendments to its original decision. On October 18, 1995 BCBSUW and
Compcare filed a motion to stay the retrial pending their Petition for a
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Writ of Certiorari to the U.S. Supreme Court which the Seventh Circuit
granted. In January 1996, BCBSUW and Compcare filed a petition for a Writ of
Certiorari ("Petition") with the U.S. Supreme Court on the reversed counts.
The U.S. Supreme Court denied the Petition in March 1996. The case has 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 April
14, 1997.
On April 20, 1995, April 27, 1995 and May 10, 1995, suits against the
Company and certain of its officers were filed in United States District Court
for the Eastern District of Wisconsin on behalf of purchasers of the Company's
common stock between February 7, 1995 and April 18, 1995. The suits allege
that the Company violated federal securities laws by issuing false and
misleading statements regarding the Company, its financial condition and
operations and seek damages yet to be defined. The suits were subsequently
consolidated into one action. The Company and its officers have denied the
plaintiffs' allegations and announced that they will vigorously defend the
consolidated action. Motions to Dismiss filed on behalf of the defendants are
pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 1996, a special meeting of the shareholders of UWS was held
at which the following matters were submitted to and voted on by the
shareholders. The results of the votes are set forth below:
1. Shareholders voted to approve the merger of AMSG with and into UWS
pursuant to an Agreement and Plan of Merger among AMSG, UWS, BCBSUW,
Wallace J. Hilliard and Ronald A. Weyers; 10,031,844 votes were for the
proposal, 24,281 votes were against the proposal, and there were 19,699
abstentions and 0 broker non-votes.
2. Shareholders voted to approve amendments to the United Wisconsin
Services, Inc. Equity Incentive Plan to (i) increase the number of shares
available for granting thereunder, (ii) limit the number of shares which
may be granted to individual participants, (iii) change the requirements
for membership on the committee which administers the plan, and (iv)
permit the gifting of non qualified options; 9,726,754 votes were for the
proposal, 306,475 votes were against the proposal, and there were 42,595
abstentions and 0 broker non-votes.
The foregoing matters are described in detail in UWS's definitive Joint
Proxy Statement/Prospectus dated September 17, 1996 for the special meeting of
stockholders held on October 30, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 10, 1997 the Executive Officers of the Company are as follows:
Name Age Title
Thomas R. Hefty 49 Chairman of the Board, President, Chief Executive
Officer and Director
Stephen E. Bablitch 43 Vice President, General Counsel and Secretary
Devon W. Barrix 54 Vice President
Roger A. Formisano 48 Executive Vice President and Chief Operating
Officer and President of Compcare and Meridian
Mark H. Granoff 50 Vice President and President of UWIC and UWLIC
Gail L. Hanson 41 Vice President and Treasurer
Samuel V. Miller 51 Executive Vice President
C. Edward Mordy 53 Vice President and Chief Financial Officer
Emil E. Pfenninger 45 Vice President and President of United Heartland
Penny J. Siewert 40 Vice President of Regional Services
Mary Traver 46 Vice President
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed. There are no family
relationships among any of the directors and/or executive officers of the
Company.
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Thomas R. Hefty has been a director of the Company since 1983, and was
elected President in December 1986 and Chairman of the Board in July 1991.
Since 1987, he has served in various capacities with the Company's subsidiaries
and joint ventures. Mr. Hefty has been Chairman of the Board and a director of
BCBSUW since 1988, having joined BCBSUW in 1982 and later serving as President.
From 1979 to 1982, Mr. Hefty was Deputy Insurance Commissioner for the State of
Wisconsin.
Stephen E. Bablitch joined the Company in October 1996 as General Counsel,
Vice President and Secretary. Mr. Bablitch has been General Counsel, Vice
President and Secretary of BCBSUW since October 1996 as well. Prior to joining
the Company and BCBSUW, Mr. Bablitch was an attorney with Dewitt, Ross and
Stevens, Madison, Wisconsin from 1991 to 1996.
Devon W. Barrix was elected a Vice President of the Company on December 14,
1994 following the Company's acquisition of Unity and its parent, HMO-W,
Incorporated. Mr. Barrix was the Chief Executive Officer of Unity (formerly
HMO of Wisconsin Insurance Corporation) from 1985 until November 1994 and was
the President of Unity until August 1996. He now serves as Vice President of
Business Development.
Roger A. Formisano was elected Executive Vice President and Chief Operating
Officer of the Company in August 1995. Mr. Formisano had been a Vice President
of the Company since February 1992. He serves as President of Compcare and
Meridian. Mr. Formisano was a Professor in the School of Business of the
University of Wisconsin-Madison from 1978 to 1993. He also serves in various
capacities with the Company's subsidiaries and joint ventures, and is a
director of Integrity Mutual Insurance Company and Wisconsin Sports Authority,
Inc., both privately held companies.
Mark H. Granoff was elected a Vice President of the Company in August 1991
and was elected President of UWIC and UWLIC in July 1991. He has served in
various capacities with some of the Company's other subsidiaries since April
1991. Mr. Granoff has been a Vice President of BCBSUW since 1990. Prior to
joining BCBSUW, from 1988 to 1990 Mr. Granoff served as Employee Benefits
Marketing Vice President for Business Men's Assurance Company of America, an
insurance company.
Gail L. Hanson has been Treasurer of the Company since 1987 and was elected
Vice President in August 1996. She has served in various capacities with the
Company's subsidiaries since 1984. Ms. Hanson was elected Vice President and
Treasurer of BCBSUW in August 1996 and had been Assistant Vice President and
Treasurer since 1987, having joined BCBSUW in 1984 as the Controller of UWIC.
Samuel V. Miller was elected Executive Vice President of the Company in
December 1995. He was elected President and Chief Operating Officer of AMS in
October 1996. Mr. Miller was Senior Vice President and a member of the
planning group for the Travelers Group from 1994 to 1995. From 1987 to 1994,
Mr. Miller served as President and Chief Executive Officer of Amex Life
Assurance Co., a subsidiary of the American Express Company.
C. Edward Mordy has been a Vice President and the Chief Financial Officer of
the Company since 1987. He has served in various capacities with the Company's
subsidiaries since 1987. Mr. Mordy has been a Vice President and Corporate
Controller of BCBSUW since 1986.
Emil E. Pfenninger was elected a Vice President of the Company in February
1995 and President of United Heartland in September 1990. Mr. Pfenninger was
the Underwriting Manager with CNA Insurance Companies from December 1987 to
September 1990.
Penny J. Siewert was elected Vice President of Regional Services of the
Company in August 1995. Ms. Siewert joined BCBSUW in 1977 and has served in
various capacities. Ms. Siewert was elected Vice President of Operations for
BCBSUW in 1990, Vice President of Special Markets for BCBSUW in 1992, and Vice
President of Regional Services for BCBSUW in 1995.
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Mary Traver is a Vice President of the Company. Ms. Traver was Vice
President and General Counsel of the Company from 1988 to 1996 and Secretary
from January 1992 to 1996. She has served in various capacities with some of
the Company's subsidiaries and joint ventures since 1987. Ms. Traver was
General Counsel of BCBSUW from 1987 to 1996, Secretary of BCBSUW from 1992 to
1996, and a Vice President of BCBSUW since 1988. She assumed the position of
Regional Vice President for the Southwestern region of BCBSUW in 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY.
The Common Stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "UWZ". The following table sets forth the per share high and low sale
prices for the Common Stock as reported on the NYSE for the periods indicated
and the cash dividends paid per share for those periods.
High Low Cash Dividends Paid
------ ------ -------------------
YEAR ENDED DECEMBER 31, 1996:
First Quarter $23.88 $19.63 $0.12
Second Quarter 26.00 19.38 0.12
Third Quarter 29.25 21.13 0.12
Fourth Quarter 29.25 23.50 0.12
High Low Cash Dividends Paid
------ ------ -------------------
YEAR ENDED DECEMBER 31, 1995:
First Quarter $44.38 $30.75 $0.12
Second Quarter 40.88 18.63 0.12
Third Quarter 24.50 18.50 0.12
Fourth Quarter 26.50 20.50 0.12
The dividend for the fourth quarter of 1996 of $0.12 per share was paid on
March 26,1997 to shareholders of record at the close of business on March 12,
1997.
As of March 1, 1997, there were 316 shareholders of record of Common Stock.
Based on information obtained from the Company's Transfer Agent and from
participants in security position listings and otherwise, the Company has
reason to believe there are more than 5,600 beneficial owners of shares of
Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected financial data as of and for each of the five years
in the period ended December 31, 1996 have been derived from the Company's
consolidated financial statements, which have been audited by Ernst & Young,
LLP, independent auditors. The following data should be read in conjunction
with the Company's consolidated financial statements, the related notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Premium revenue $ 395,672 $ 554,135 $ 730,980 $ 973,279 $ 1,089,134
Other revenue 6,526 7,955 15,997 24,191 30,567
Investment income 13,430 16,634 22,112 27,932 30,614
Realized investment gains 3,135 3,992 1,649 12,915 12,996
--------- --------- --------- ----------- -----------
Total revenues 418,763 582,716 770,738 1,038,317 1,163,311
Expenses:
Medical and other benefits 311,906 428,316 556,090 815,616 897,582
Commission expenses 17,559 33,917 52,850 64,451 72,165
Administrative expenses 45,123 63,372 89,637 116,470 142,932
Premium taxes and other assessments 3,203 5,916 9,066 12,891 14,141
Interest and profit sharing on
joint ventures 3,941 5,727 7,638 15,170 13,606
Interest expense on debt -- 1,560 3,487 3,483 3,761
Interest expense with affiliate -- -- -- -- 564
Amortization of goodwill and other
intangibles 152 80 195 678 1,511
Dividends on preferred stock of
subsidiary 2,449 2,449 2,449 204 --
--------- --------- --------- ----------- -----------
Total expenses 384,333 541,337 721,412 1,028,963 1,146,262
--------- --------- --------- ----------- -----------
Income before income tax expense and
cumulative effect of accounting
changes 34,430 41,379 49,326 9,354 17,049
Income tax expense 8,566 14,536 16,563 2,981 6,846
--------- --------- --------- ----------- -----------
Income before cumulative effect of
accounting changes 25,864 26,843 32,763 6,373 10,203
Cumulative effect of accounting
changes -- 98 -- -- --
--------- --------- --------- ----------- -----------
Net income $ 25,864 $ 26,941 $ 32,763 $ 6,373 $ 10,203
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Earnings per common share $ 2.34 $ 2.43 $ 2.81 $ 0.50 $ 0.79
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Weighted average common shares
outstanding 11,070 11,070 11,601 12,551 12,892
Cash dividends per common share $ 0.48 $ 0.48 $ 0.48 $ 0.48 $ 0.48
OPERATING STATISTICS:
Medical loss ratio(1) 81.0% 78.5% 77.1% 85.4% 84.4%
Selling, general and
administrative expense ratio(1) 12.5% 15.1% 16.8% 15.9% 16.1%
BALANCE SHEET DATA:
Cash and investments $ 239,920 $ 353,983 $ 455,886 $ 581,637 $ 518,269
Total assets 274,393 416,203 556,171 721,289 836,120
Medical and other benefits payable 51,119 114,248 162,933 245,118 240,338
Debt -- 45,000 44,960 44,898 55,788
Preferred stock of subsidiary 30,000 30,000 30,000 -- --
Redeemable preferred stock -- 1,370 2,007 -- --
Total shareholders' equity 98,108 125,387 171,705 212,411 313,655
</TABLE>
(1) Ratios are based on premium revenues and related expenses for HMO products.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations.
19
<PAGE>
ITEM 7. 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 managed care and life products sold
through American Medical Security Holdings, Inc. (AMS), formerly American
Medical Security Group, Inc., 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.
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
---- ---- -----
(AS A PERCENTAGE OF THE TOTAL)
PREMIUM AND OTHER REVENUE
HMO products 37.6% 40.3% 39.3%
AMS products 52.5 49.7 50.3
Specialty managed care products
and services 11.1 10.8 10.8
Intercompany eliminations (1.2) (0.8) (0.4)
----- ----- -----
Total 100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
(IN MILLIONS OF DOLLARS)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
HMO products $ 7.1 $ 2.4 $ 8.1
AMS products (2.9) (7.6) 34.6
Specialty managed care products
and services 21.0 19.0 10.4
Holding company expenses (8.2) (4.4) (3.8)
----- ----- -----
Total $17.0 $ 9.4 $49.3
----- ----- -----
----- ----- -----
Reclassifications have been made to the product line amounts shown above
for 1994 and 1995 to conform with the 1996 presentation. The life products sold
by AMS are now included in the AMS products category; previously, they were
included with specialty products and services. This reclassification was made
in conjunction with the AMS merger (AMS Merger), as discussed further below.
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 in 1996 increased 12.0% to $1.16 billion from $1.04 billion
in 1995. Total revenues in 1995 increased 34.7% from $770.7 million in 1994.
These increases were due primarily to increased premium revenue.
PREMIUM AND OTHER REVENUE -- HMO premiums in 1996 increased 4.9% to $421.2
million from $401.6 million in 1995. HMO premiums in 1995 increased 36.9% from
$293.4 million in 1994. The increase in HMO premiums for 1995 was due primarily
to the acquisition of HMO-W, Incorporated and the business of U-Care HMO, Inc.
(U-Care), both effective October 1, 1994, which accounted for $76.3 million of
the 1995 increase. Upon acquisition, the business of U-Care was transferred to
Unity (formerly HMO of Wisconsin Insurance Corporation),
20
<PAGE>
an insurance subsidiary of HMO-W, Incorporated, via a bulk reinsurance
transaction. Average HMO medical premium per member in 1996 increased 2.9%
from 1995. Average HMO medical premium per member in 1995 increased 4.6%
from 1994. The average number of HMO medical members in 1996 increased 1.6%
to 259,506 from 255,471 in 1995. The average number of HMO medical members
in 1995 increased 33.0% from 192,017 in 1994, due primarily to the HMO
acquisitions in the fourth quarter of 1994.
Premiums on AMS products in 1996 increased 18.2% to $585.2 million from
$495.3 million in 1995, which followed a 31.7% increase from $376.0 million in
1994. The increase in AMS premiums for 1996 was due primarily to the
acquisition of the 88% of AMS that the Company did not already own. See Note 2
of Notes to the Consolidated Financial Statements. Prior to the merger of the
Company and AMS effective December 3, 1996, the Company retained 50% of the
premium revenue and 50% of the profit (loss) on small group managed care and
life business sold by AMS. Following the AMS Merger, the Company retained 100%
of the premium revenue and 100% of the profit (loss) on small group managed care
and life business sold by AMS. This additional 50% of premium revenue for the
month of December 1996 accounted for $43.7 million or 48.6% of the premium
revenue increase in 1996. The increase in AMS premiums for 1995 was due
primarily to substantial growth in the average number of insured medical
contracts outstanding. The average number of small group insured medical
contracts outstanding increased 6.1% in 1996 to 313,613 from 295,457 in 1995.
The average number of small group insured medical contracts during 1995
increased 31.1% from 225,417 in 1994. Average insured medical premium per
contract increased 4.9% during 1996 and 1.4% during 1995, compared with the
respective prior year average premium amounts. In general, targeted premium
rate increases were offset by a shift to products with lower benefit levels and
contract growth in lower cost geographic areas. See "Expense Ratios - Medical
Loss Ratio" for a further discussion of pricing actions on small group products.
Premium and other revenue from specialty managed care products and services
in 1996 increased 14.8% to $124.1 million from $108.1 million in 1995. Premium
and other revenue in 1995 increased 34.4% from $80.4 million in 1994. The
increase in 1996 was due to (i) an increase in premium revenues of $6.4 million,
including an increase of $2.2 million for life and disability products and an
increase of $3.6 million for dental products, driven by increases in contracts,
and (ii) an increase in other revenues of $9.6 million due primarily to
increased managed care and consulting services and a gain on the sale of the
vision line of business. The increase in 1995 was due to (i) an increase in
premium revenues of $15.1 million, including an increase of $2.6 million for
life and disability products and an increase of $2.2 million for dental
products, driven by increases in contracts, an increase of $5.1 million in
workers' compensation premiums, and an increase of $4.7 million in premiums
assumed under certain federal and state reinsurance programs, and (ii) an
increase in other revenues of $12.6 million due primarily to increased managed
care and consulting services.
INVESTMENT INCOME -- Investment income in 1996 increased 9.6% to $30.6
million from $27.9 million in 1995. Investment income in 1995 increased 26.3%
from $22.1 million in 1994. These increases were due primarily to an increased
level of invested assets due to growth in premiums and recent capital raising
activities. In July 1994, the Company issued 1,000,000 new shares of its common
stock (Common Stock) in a public offering and in February 1995 issued another
484,500 new shares of Common Stock to the public. The net proceeds of $26.1
million from the 1994 stock offering and $16.6 million from the 1995 stock
offering contributed to the increased level of invested assets. Offsetting
these increases, UWIC expended $30.0 million in January 1995 to redeem its
outstanding preferred stock.
Average invested assets in 1996 increased 9.0% to $523.1 million from
$479.9 million in 1995. Average invested assets in 1995 increased 20.2% from
$399.4 million in 1994. Average annual investment yields, excluding net
realized gains, were 5.9%, 5.7% and 5.5% for 1996, 1995 and 1994, respectively.
Net realized investment gains in 1996 increased to $13.0 million from $12.9
million in 1995. Net realized investment gains in 1995 increased to $12.9
million from $1.6 million in 1994. Investment gains are realized in the normal
investment process in response to market opportunities. During 1996, securities
were sold as funds were transferred from United Wisconsin Insurance Company
(UWIC) to United Wisconsin Life Insurance Company (UWLIC) associated with the
transfer of claim reserves on AMS' small group managed care business and to
effect capital contributions totaling $70.0 million from the Company to UWLIC to
provide UWLIC with sufficient capital to support the transfer from UWIC to UWLIC
of the small group managed care business sold by AMS. The transfer
21
<PAGE>
of the small group managed care business and supporting capital from UWIC to
UWLIC was completed in anticipation of the Company's acquisition of the
remaining interest in AMS through the AMS Merger. See "Liquidity and Capital
Resources". The source of funds for these capital contributions was a
dividend from subsidiaries in December 1995, which was substantially
collected from UWIC. During 1995, gains were realized as appreciated equity
securities were sold in the process of rebalancing the portfolio to its
targeted equity exposure. Prior to the AMS Merger, the Company held funds on
behalf of an insurance subsidiary of AMS, an affiliated reinsurer.
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 a component of 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 AMS
products was 84.4% in 1996 compared with 85.4% in 1995 and 77.1% in 1994. The
increase in the combined medical loss ratio in 1995 was due to increases in both
the HMO and AMS component loss ratios. In 1996, both the HMO and AMS component
loss ratios decreased, as discussed below.
The medical loss ratio for HMO products in 1996 was 89.8%, compared with
91.1% in 1995 and 88.0% in 1994. The 1995 increase is attributed to the
competitive market conditions in southeastern Wisconsin, where pricing pressures
coupled with increased utilization have had an adverse impact on Compcare's loss
ratio. The Company has taken steps to lower the medical loss ratio for HMO
products, including, among other actions, renegotiation of provider contracts,
selectively increasing premium rates, review of underwriting practices, review
of managed care procedures, and selective product design changes.
The medical loss ratio for AMS products in 1996 was 80.3%, compared with
80.5% in 1995 and 68.3% in 1994. The increase in the medical loss ratio for AMS
products since 1994 was due primarily to higher than expected incurred claims,
beginning in the fourth quarter of 1994 and accelerating into the first and
second quarters 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 1995 by
approximately 1.2 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 increase in
the rate of health care inflation. The rate of change for health care costs for
the small group managed care 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 steadily decreased from approximately 14% to approximately 8%
currently. 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 marketplace. The small group managed care 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 managed care business, including (i)
implementation of increased renewal price quotes, (ii) modification of the
design of certain small group managed care products to adjust to the changed
market conditions, inflation patterns and utilization trends, (iii) a tightening
of underwriting practices by type of risk and state, (iv) review and
modification of provider contracting arrangements, including direct contracting
with providers to better control health care costs, (v) review and modification
of claims processing practices and procedures, and (vi) review of profitability
by market and state.
During the fourth quarter of 1996, as part of the Company's state-by-state
review of market profitability, a pre-tax charge of $2.0 million was recorded
for the accelerated recognition of losses on two discontinued blocks of AMS
small group managed care business in Texas and Kentucky. This one-time charge
is not included in the reported medical loss ratio for AMS products for 1996.
COMMISSION EXPENSE RATIO -- The commission ratio for AMS medical products
decreased to 11.4% in 1996 from 12.1% in 1995 and 12.8% in 1994. Over time,
renewal business has gradually represented a larger proportion
22
<PAGE>
of the total AMS medical business. Since renewal commissions are typically
lower than commissions on new sales, this has contributed to the decrease in
the AMS medical commission ratio. The commission ratio on AMS Life products
reflected a similar trend, decreasing to 19.3% in 1996 from 19.9% in 1995 and
21.4% in 1994. The commission ratio for HMO products has remained relatively
steady at 0.5% for 1996, 1995 and 1994. AMS 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 force are included in administrative
expenses and are, therefore, not reflected in the commission expense ratio.
ADMINISTRATIVE EXPENSE RATIO -- The administrative expense ratio for AMS
medical and life products combined has remained relatively steady at 10.2% in
1996, compared with 10.1% in 1995 and 10.0% in 1994. Prior to the AMS Merger,
the Company paid a negotiated fee to a third party administrator (TPA)
subsidiary of AMS to administer the business underwritten by the Company, which
contributed to the stability of this ratio. Following the AMS Merger, any
profit or loss of AMS' TPA subsidiary will be recorded on the books of the
Company. AMS has taken steps recently to reduce administrative expenses related
to the processing of AMS medical and life products, including recent staff
reductions and an ongoing intensive review of operating expenses for every
department within AMS.
The administrative expense ratio for HMO products was 8.4% in 1996, 7.9% in
1995, and 8.9% in 1994. The decrease in 1995 was due primarily to a reduction
in expenses related to the Company's profit sharing and bonus programs for
employees due to the lower profits in 1995.
OTHER EXPENSES
Premium taxes and other assessments for 1996 increased to $14.1 million,
from $12.9 million in 1995 and $9.1 million in 1994. These increases were due
primarily to premium taxes on the increased volume of business sold by AMS
outside Wisconsin. Premium taxes and other assessments also include expenses
related to Wisconsin's Health Insurance Risk Sharing Plan (HIRSP), a state
program that provides health insurance to individuals who cannot obtain
commercial health coverage. HIRSP is subsidized by health insurance carriers
doing business in the State of Wisconsin. Expenses related to HIRSP fluctuate
based on assessments from the state and totaled $1.7 million, $3.3 million and
$1.5 million in 1996, 1995 and 1994, respectively.
Interest and profit sharing on joint ventures was $13.6 million in 1996,
compared with $15.2 million in 1995 and $7.6 million in 1994. Of these
balances, $2.8 million, $2.6 million and $1.4 million in 1996, 1995 and 1994,
respectively, represent profit sharing expenses related to the Unity and Valley
acquisitions, and $10.7 million, $12.4 million and $6.1 million in 1996, 1995
and 1994, respectively, were due to investment income and realized investment
gains on funds held by the Company on behalf of an insurance subsidiary of AMS.
The gross funds held balance, which includes amounts for both medical and other
benefits payable and undistributed profits subject to allocation of investment
returns, increased during the three-year period from $88.7 million at the
beginning of 1994 to $121.7 million at November 30, 1996, just prior to the AMS
Merger. Following the AMS Merger, the funds held balance is eliminated in
consolidation. See "Investment Income and Realized Gains" for a discussion of
the increase in realized gains in 1996.
As discussed further in Note 2 of Notes to Consolidated Financial
Statements, the Company borrowed $70 million from Blue Cross & Blue Shield
United of Wisconsin (BCBSUW) to fund a portion of the AMS Merger. Interest
expense related to this note totaled $0.6 million in 1996. In conjunction with
the AMS Merger, the Company also recorded $150.0 million of goodwill and other
intangibles and $22.2 million of related deferred taxes. Amortization expense
for the month of December 1996 of $0.6 million related to these intangibles,
along with the $0.6 million of debt service costs are included in pre-tax income
for AMS products.
Amortization of goodwill and other intangibles recorded on the consolidated
statements of income totaled $1.5 million in 1996, including amounts related to
the AMS Merger discussed above plus $0.8 million related to other acquisitions,
compared with $0.7 million and $0.2 million of amortization expense in 1995 and
1994, respectively.
23
<PAGE>
In 1995, the Company granted an executive officer of the Company an option
to purchase 7,113 shares of common stock of AMS owned by the Company which upon
completion of the AMS Merger, were converted into options to purchase shares of
the Common Stock. Upon conversion, the Company recorded compensation expense
of $2.1 million. This non-recurring charge was included as an expense of the
parent company and was not reported in pre-tax income for AMS products.
NET INCOME
Consolidated net income in 1996 increased 60.1% to $10.2 million from $6.4
million in 1995. Consolidated net income in 1995 decreased 80.5% from $32.8
million in 1994. The lower earnings in 1995 were due primarily to the increase
in health care costs for small group managed care products and to a lesser
extent for HMO products. Earnings per share increased to $0.79 in 1996,
compared with $0.50 in 1995 and $2.81 in 1994.
The Company's effective tax rate was 40.2% in 1996, compared with 31.9% in
1995 and 33.6% in 1994. The increase in the effective tax rate in 1996 was due
primarily to a higher proportion of the Company's income being generated by its
HMO subsidiaries, which record higher effective tax rates than the Company's
other subsidiaries due to state tax implications.
AMS products recorded a pre-tax loss of $2.9 million in 1996, compared with
a pre-tax loss of $7.6 million in 1995 and pre-tax income of $34.6 million in
1994. The improvement in 1996 is due primarily to an increase of $6.1 million
in investment income and realized gains, net of amounts allocated to an
insurance subsidiary of AMS prior to the AMS Merger. This increase in
investment income is due to the reallocation of capital in 1996 to support this
line of business. The decrease in pre-tax income in 1995 is due to the increase
in the medical loss ratio. See "Expense Ratios - Medical Loss Ratio."
Following the AMS Merger, pre-tax income for AMS products includes 100% of the
profit or loss on the business sold by AMS, as well as interest expense and
amortization of goodwill and other intangibles recorded in conjunction with the
AMS Merger, as discussed previously. In addition, pre-tax income for AMS
products includes the financial results for all other AMS subsidiaries acquired
in the AMS Merger. The financial results of these other subsidiaries were not
material to the 1996 financial statements.
Pre-tax income for HMO products in 1996 nearly tripled to $7.1 million from
$2.4 million in 1995, due primarily to an improved medical loss ratio. Pre-tax
income for HMO products in 1995 decreased 70.4% from $8.1 million in 1994, due
primarily to an increase in the medical loss ratio. See "Expense Ratios -
Medical Loss Ratio."
Pre-tax income for specialty managed care products and services in 1996
increased 10.3% to $21.0 million from $19.0 million in 1995, due primarily to
an increase of $3.5 million in the net underwriting gain related to life and
disability products, a $1.6 million gain recorded on the sale of the vision line
of business, partially offset by a decrease of $2.1 million in investment income
and realized gains related to all specialty products and services due to the
capital reallocation to support AMS products. Pre-tax income for specialty
managed care products and services in 1995 increased 83.5% from $10.4 million in
1994, due primarily to an increase of $7.6 million in investment income and
realized gains related to all specialty products and services, and an increase
of $1.1 million in the net underwriting gain related to workers' compensation
products.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of premium revenue
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 1996, however, net cash provided by or used in operating
activities amounted to a use of $9.9 million, compared with $48.7 million
provided in 1995 and $94.3 million provided in 1994. The decrease in cash
flow from operations in 1996 and 1995 was due primarily to a reduction in the
funds held on behalf of American Medical Security Insurance Company (AMSIC)
due to the reduced profitability on the business sold by AMS and cash
payments to AMSIC totaling $17.0 million during
24
<PAGE>
the first eleven months of 1996. 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 1996 to meet short-term cash needs,
and $1.2 million was outstanding on this line of credit at December 31, 1996.
Prior to the AMS Merger, the Company held funds in accordance with the AMS
joint venture agreement. Investment income and realized investment gains or
losses were credited to AMSIC on the funds held balance at the Company's average
portfolio rate. The Company held $121.7 million of funds on behalf of AMSIC at
November 30, 1996, just prior to the AMS Merger. Following the AMS Merger, the
funds held balance was eliminated in consolidation. The Company held $143.7
million of funds on behalf of AMSIC at December 31, 1995, of which $83.4 million
was utilized to offset reinsurance recoverable balances from AMSIC on the
Company's balance sheet in accordance with SFAS No. 113.
The Company's investment portfolio consists primarily of investment
grade bonds and has a limited exposure to equity securities. At December 31,
1996, $407.4 million or 87.2% of the Company's total investment portfolio
was invested in bonds. At December 31, 1995, $471.8 million or 86.8% of the
Company's total investment portfolio was invested in bonds. At December 31,
1996 and 1995, 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 $1.4 million and $10.6 million at December 31, 1996 and
1995, 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. See Notes 1 and 4 to Notes to
Consolidated Financial Statements for a discussion of the accounting
treatment of unrealized holding gains and losses on bonds classified as
available for sale. The Company has no investments in mortgage loans,
non-publicly traded securities (except for principal only strips of U. S.
Government securities), real estate held for investment or financial
derivatives.
In May 1994, the Company acquired a majority interest in CNR for a
combination of cash and common stock. CNR manages mental health, substance
abuse, and medical benefits for over 800,000 members in the United States as of
December 31, 1996. CNR is headquartered in West Allis, Wisconsin, and has
regional offices in Houston and Dallas.
In November 1994, the Company purchased all of the assets of U-Care and
certain assets from University Health Care, Inc. (UHC), an affiliate of U-Care,
for cash approximating $3.8 million, and purchased all of the outstanding common
stock of HMO-W, Incorporated for cash approximating $7.6 million. Effective
October 1, 1994, the Company contributed the assets acquired in the U-Care
transaction to Unity, a wholly owned subsidiary of HMO-W, Incorporated. Both
acquisitions were effective October 1, 1994, and on a combined basis, they added
members of 79,000, 71,000 and 63,000 to the Company's HMO membership as of
December 31, 1996, 1995 and 1994, respectively.
At December 31, 1995 the Company owned 11.9% of the common stock of AMS,
which was recorded at cost of $1.3 million at December 31, 1995 and is included
in other assets on the consolidated balance sheet. Effective December 3, 1996,
the Company acquired the remaining 88.1% interest in AMS that it did not already
own. The acquisition was accomplished through the merger of AMS with and into
the Company pursuant to the terms of an Agreement and Plan of Merger dated July
31, 1996, by and between AMS, BCBSUW, the Company and the two principal AMS
shareholders. UWS is the surviving corporation in the merger. The aggregate
consideration for the merger was cash of $71.8 million, including expenses, and
$98.7 million representing the market value of 3,694,280 newly issued shares of
Common Stock and options to purchase Common Stock. Most of the cash came from
$70.0 million borrowed from BCBSUW, which, after the merger, owns approximately
38% of Common Stock. See Note 6 of Notes to Consolidated Financial Statements
for the terms of the note payable to BCBSUW.
In July 1994, the Company completed a public offering of 1,000,000 shares
of Common Stock. In conjunction with this offering, BCBSUW sold 1,566,200
shares of Common Stock and the United Wisconsin Services Foundation, Inc. sold
100,000 shares of Common Stock. Net proceeds to the Company, after estimated
offering expenses, totaled $26.1 million. In February 1995, the Company
completed a public offering of 484,500 shares of Common Stock, and BCBSUW sold
930,000 shares of Common Stock. Net proceeds to the Company, after offering
25
<PAGE>
expenses, totaled $16.6 million. The net proceeds of the July 1994 and February
1995 offerings are being used by the Company for general corporate purposes,
including supporting the growth of its businesses, and for possible entry into
additional geographic areas and related lines of business through strategic
acquisitions.
In January 1995, UWIC expended $30.0 million to redeem its outstanding
preferred stock in accordance with the terms of the preferred stock. The
Company also expended $2.0 million in January 1995 to redeem its Series A
redeemable preferred stock, which was previously used as the employer's matching
contribution under the Company's saving plan for employees of the Company and
BCBSUW. Effective January 1, 1995, the Company purchased Aon Corporation's 50%
equity ownership in United Heartland for $0.5 million, and United Heartland is
now a wholly owned subsidiary of the Company.
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, 1996 was 28.8%, due
principally to the growth of AMS products. While the future rate of growth is
uncertain, growth in premium revenue is expected to continue.
As a holding company, the Company relies on dividends from its subsidiaries
to meet its cash flow needs. Dividends paid by the subsidiaries to the Company
totaled $20.7 million, $81.9 million and $2.9 million in 1996, 1995 and 1994,
respectively. Dividends are limited by state insurance regulations as discussed
in Note 15 to Notes to Consolidated Financial Statements. Based upon the
financial statements of the Company's insurance subsidiaries as of December 31,
1996, as filed with the insurance regulators, the aggregate amount available for
dividends in 1997 without regulatory approval is $8.8 million.
In December 1995, UWIC borrowed $65.0 million from BCBSUW under a Surplus
Note Agreement, which was guaranteed by the Company. The Surplus Note provided
UWIC with regulatory capital needed to replace capital paid to the Company in
the form of a dividend in December 1995. The dividend and Surplus Note were
part of a capital restructuring plan designed to transfer capital from UWIC to
UWLIC to support UWLIC's retention of the AMS medical business beginning in
1996. The entire $65.0 million was repaid to BCBSUW in 1996.
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. Insurance subsidiaries are required
to maintain certain levels of statutory capital and surplus. In Wisconsin,
where a large percentage of the Company's premium is written, these levels are
based upon the amount and type of premiums written and are calculated separately
for each subsidiary. As of December 31, 1996, statutory capital and surplus for
each of these insurance subsidiaries exceeded required levels.
In compliance with applicable state insurance regulations, certain
insurance subsidiaries have deposited securities with various states
aggregating $5.8 million at December 31, 1996. In addition, HMOs are
required to maintain a deposit with the State of Wisconsin for future
assessments for HMO insolvencies. As of December 31, 1996, the combined
deposit for the Company's consolidated HMOs was $4.7 million. States in
which the insurance subsidiaries 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 other of the
Company's 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 requirement.
The Company believes that internally generated funds and periodic
borrowings on its bank line of credit will be sufficient to finance planned
growth for the foreseeable future. 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.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The quarterly consolidated results of operations of the Company are
summarized in Note 17 to Notes to Consolidated Financial Statements.
INFLATION
Health care costs have been rising and are expected to continue to rise at
a rate that exceeds the consumer price index. The Company's cost control
measures, risk-sharing incentive arrangements with medical care providers, and
premium rate increases are designed to reduce the adverse effect of medical cost
inflation on its operations. In addition, the Company utilizes its ability to
apply appropriate underwriting criteria in selecting groups and individuals and
in controlling the utilization of health care services. However, there can be
no assurance that the Company's efforts will fully offset the impact of
inflation or that premium revenue increases will equal or exceed increasing
health care costs.
HEALTH CARE REFORM
In recent years, many states, including certain of the principal states in
which the Company does business, have enacted or are considering various health
care reform statutes. These include small group reform statutes that limit the
ability of insurers to underwrite and rate, and statutes that provide for the
creation of regional purchasing pools. Implementation of such reform measures
by a substantial number of states, particularly measures mandating purchasing
pools, could significantly increase competition in the health care industry. In
1996, Congress enacted H.R. 3103, the Kennedy-Kassebaum bill, which provides for
guaranteed issue, group-to-individual portability and pre-existing condition
limitations for certain insurance coverages. It also requires states to
evaluate and potentially rewrite their laws to conform to new guidelines. The
impact of such newly enacted legislation on the Company cannot yet be
determined.
RECENT ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board (FASB) recently issued the
following accounting standard. A brief description of the standard follows,
along with a discussion of the estimated impact of the adoption of the standard
on the Company's consolidated financial statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION -- In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-based Compensation'" which became effective
for the Company in 1996. As allowed by SFAS No. 123, the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25) and related Interpretations in accounting for its
employee stock options. Under APB 25, when the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recorded. The required pro forma
information regarding net income and earnings per share has been included in
Note 16 of the Notes to Consolidated Financial Statements.
YEAR 2000 SOFTWARE COMPATIBILITY
The Company is continually updating its information systems capabilities,
and has evaluated all significant computer software applications for
compatibility with the year 2000. With the system changes implemented to date
and other planned changes, the Company anticipates that its computer software
applications will be compatible with the year 2000. Expenditures specifically
related to software modifications for year 2000 compatibility are not expected
to be material.
FORWARD LOOKING STATEMENTS
This report contains certain forward looking statements with respect to the
financial condition, results of operations and business of the Company. Such
forward looking statements are subject to inherent risks and uncertainties that
may cause actual results to differ materially from those contemplated by such
forward looking statements. Factors that may cause actual results to differ
materially from those contemplated by such forward
27
<PAGE>
looking statements include, among others, the following possibilities: (1)
the steps being taken to improve the profitability of the small group managed
care business and to reduce the administrative expense ratio for small group
managed care products do not have the effect that the Company expects; (2)
competitive pressure in the health care industry increases significantly; and
(3) general economic conditions, either nationally or in the states in which
the Company does business are less favorable than expected.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Form 10-K
Page Number
-----------
Report of Independent Auditors.................................... 30
Consolidated Balance Sheets at December 31, 1996 and 1995......... 31
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994................................. 33
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994........................... 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 ................................ 35
Notes to Consolidated Financial Statements........................ 36
29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
United Wisconsin Services, Inc.
We have audited the accompanying consolidated balance sheets of United
Wisconsin Services, Inc. (the Company) as of December 31, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedules listed in the index at
item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for certain investments in debt and
equity securities.
Ernst & Young, LLP
Milwaukee, Wisconsin
February 14, 1997
30
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------
ASSETS 1996 1995
-------- --------
(In thousands)
Investments:
Bonds available for sale, at
market $394,615 $461,915
Bonds held to maturity, at
amortized cost 12,823 9,850
-------- --------
Total bonds 407,438 471,765
Stocks, at market 59,685 71,582
-------- --------
Total investments 467,123 543,347
Cash and cash equivalents 51,146 38,290
Receivables:
Due from affiliates 2,641 14,789
Other receivables 74,167 73,265
-------- --------
Total receivables 76,808 88,054
Property and equipment - net 53,103 10,037
Goodwill and other intangibles (net of
accumulated amortization of $2,397,000
and $996,000) 155,458 6,851
Other assets 32,482 34,710
-------- --------
Total assets $836,120 $721,289
-------- --------
-------- --------
31
<PAGE>
DECEMBER 31,
------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
-------- --------
(In thousands)
Liabilities:
Medical and other benefits payable $240,338 $245,118
Advance premiums 51,514 41,456
Due to affiliates 74,005 71,508
Funds held on behalf of affiliated reinsurers -- 60,041
Payables and accrued expenses 50,879 30,300
Other liabilities 49,941 15,557
Debt 55,788 44,898
-------- --------
Total liabilities 522,465 508,878
Commitments and contingencies (Notes 10 and 12)
Redeemable preferred stock:
Series A Adjustable Rate Nonconvertible,
$1,000 stated value, 25,000 shares
authorized, none issued or outstanding -- --
Shareholders' equity:
Preferred stock (no par value, 475,000 shares
authorized, none issued or outstanding) -- --
Common stock (no par value, $1 stated value,
50,000,000 shares authorized, 16,293,995 and
12,599,715 shares issued and outstanding at
December 31, 1996 and 1995, respectively) 16,294 12,600
Paid-in capital 184,019 86,902
Retained earnings 107,073 103,361
Unrealized gains on investments 6,269 9,548
-------- --------
Total shareholders' equity 313,655 212,411
-------- --------
Total liabilities and
shareholders' equity $836,120 $721,289
-------- --------
-------- --------
The accompanying notes are an integral part
of the Consolidated Financial Statements.
32
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Premium revenue $1,089,134 $ 973,279 $730,980
Other revenue 30,567 24,191 15,997
Investment income 30,614 27,932 22,112
Realized investment gains 12,996 12,915 1,649
---------- --------- ---------
Total revenues 1,163,311 1,038,317 770,738
Expenses:
Medical and other benefits 897,582 815,616 556,090
Commission expenses 72,165 64,451 52,850
Administrative expenses 142,932 116,470 89,637
Premium taxes and other assessments 14,141 12,891 9,066
Interest and profit sharing on joint
ventures 13,606 15,170 7,638
Interest expense on debt 3,761 3,483 3,487
Interest expense with affiliate 564 -- --
Amortization of goodwill and other
intangibles 1,511 678 195
Dividends on preferred stock of
subsidiary -- 204 2,449
---------- --------- ---------
Total expenses 1,146,262 1,028,963 721,412
---------- --------- ---------
Income before income tax expense 17,049 9,354 49,326
Income tax expense 6,846 2,981 16,563
---------- --------- ---------
Net income $ 10,203 $ 6,373 $ 32,763
---------- --------- ---------
---------- --------- ---------
Earnings per common share $ 0.79 $ 0.50 $ 2.81
---------- --------- ---------
---------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of the Consolidated Financial Statements.
33
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON UNREALIZED TOTAL
SHARES COMMON PAID-IN RETAINED GAINS (LOSSES) SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL EARNINGS ON INVESTMENTS EQUITY
----------- ------- ------- --------- -------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 11,069,981 $11,070 $36,411 $ 75,960 $ 1,946 $125,387
Net income 32,763 32,763
Capital contributions 7,167 7,167
Cash dividends paid:
Common ($.48 per share) (5,570) (5,570)
Redeemable preferred (133) (133)
Issuance of common stock:
Acquisition of subsidiary 45,234 45 1,357 1,402
Public offering 1,000,000 1,000 25,108 26,108
Adjustment to beginning balance for
change in accounting method 2,650 2,650
Change in unrealized gains (losses)
on investments (18,069) (18,069)
----------- ------- -------- -------- -------------- -----------
Balance at December 31, 1994 12,115,215 12,115 70,043 103,020 (13,473) 171,705
Net income 6,373 6,373
Capital contribution 716 716
Cash dividends paid on common
stock ($.48 per share) (6,032) (6,032)
Issuance of common stock through
public offering 484,500 485 16,143 16,628
Change in unrealized gains (losses)
on investments 23,021 23,021
----------- ------- -------- -------- -------------- -----------
Balance at December 31, 1995 12,599,715 12,600 86,902 103,361 9,548 212,411
Net income 10,203 10,203
Cash dividends paid on common stock
($.48 per share) (6,491) (6,491)
Issuance of common stock and options related
to acquisition of subsidiary 3,694,280 3,694 97,117 100,811
Change in unrealized gains (losses)
on investments (3,279) (3,279)
----------- ------- -------- -------- -------------- -----------
Balance at December 31, 1996 16,293,995 $16,294 $184,019 $107,073 $ 6,269 $ 313,655
----------- ------- -------- -------- -------------- -----------
----------- ------- -------- -------- -------------- -----------
</TABLE>
The accompanying notes are in integral part of the
Consolidated Financial Statements.
34
<PAGE>
UNITED WISCONSIN SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net income $ 10,203 $ 6,373 $ 32,763
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,446 2,379 3,118
Realized investment gains (12,996) (12,915) (1,649)
Deferred income tax expense (benefit) (158) (1,063) 2,114
Changes in other operating accounts,
net of acquisitions in 1996 and 1994:
Medical and other benefits payable (7,084) 82,185 40,294
Advance premiums (3,730) (236) 17,089
Due to/from affiliates 12,078 13,988 (20,791)
Other receivables 1,206 (34,165) (8,000)
Funds held on behalf of affiliated
reinsurers (20,735) (7,970) 15,973
Other - net 6,898 90 13,370
-------- -------- --------
Net cash provided by (used in)
operating activities (9,872) 48,666 94,281
Investing activities:
Acquisitions of subsidiaries (net of cash
and cash equivalents acquired of
$14,793,000 and $12,639,000 in 1996 and
1994, respectively) (56,837) -- 2,184
Purchases of available for sale investments (542,031) (666,031) (267,999)
Proceeds from sale of available for sale
investments 564,926 481,667 188,016
Proceeds from maturity of available for sale
investments 66,725 63,235 32,468
Purchases of held to maturity investments (3,989) (4,765) (2,179)
Proceeds from maturity of held to maturity
investments 3,366 3,470 1,800
Proceeds from sale of property and equipment 2,861 -- --
Additions to property and equipment (1,564) (1,344) (5,547)
Change in investment in unconsolidated
affiliates (212) 505 --
Change in other investments (399) (16,493) (465)
-------- -------- --------
Net cash provided by (used in)
investing activities 32,846 (139,756) (51,722)
Financing activities:
Capital contributions -- 716 3,842
Cash dividends paid (6,491) (6,162) (5,703)
Redemption of preferred stock of subsidiary -- (30,000) --
Redemption of redeemable preferred stock -- (2,007) --
Redeemable preferred stock issuance -- -- 637
Issuances of common stock -- 16,628 26,108
Repayment of debt (9,277) (62) (40)
Net borrowings under line of credit agreement 650 550 --
Proceeds from notes with affiliate 70,000 65,000 --
Repayment of notes with affiliate (65,000) -- --
-------- -------- --------
Net cash provided by (used in)
financing activities (10,118) 44,663 24,844
-------- -------- --------
Cash and cash equivalents:
Increase (decrease) during year 12,856 (46,427) 67,403
Balance at beginning of year 38,290 84,717 17,314
-------- -------- --------
Balance at end of year $ 51,146 $ 38,290 $ 84,717
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part
of the Consolidated Financial Statements.
35
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of United Wisconsin Services, Inc. (the Company) and all of its
majority-owned subsidiaries. The Company is affiliated with Blue Cross &
Blue Shield United of Wisconsin (BCBSUW).
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP). The
preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. Significant intercompany
accounts and transactions have been eliminated.
ORGANIZATION - The Company is a leading provider of managed health care
products and services. The Company's three primary product lines are (i)
Health Maintenance Organization (HMO) products, sold primarily in Wisconsin;
(ii) American Medical Security (AMS) products, including small group
preferred provider organization (PPO) products and life products, sold
throughout the United States; and (iii) specialty managed care products and
services, including dental, life, disability, workers' compensation, managed
care consulting, electronic claims processing, pharmaceutical services and
managed mental health services, sold throughout the United States.
INVESTMENTS - The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," on January 1, 1994 resulting in an increase in
shareholders' equity of $2,650,000. Bonds are divided into two categories:
held to maturity and available for sale. Bonds which the Company has the
intent and ability to hold to maturity are designated as held to maturity
and are stated at amortized cost.
The remainder of the Company's bonds are classified as available for sale.
Bonds available for sale are stated at market value and changes in market
value are reported as unrealized gains (losses) on investments in
shareholders' equity, net of applicable deferred taxes. In 1995, unrealized
gains(losses) are also net of amounts attributable to funds held on behalf
of an affiliated reinsurer. See Note 3.
Market values for bonds are principally a function of current interest
rates. The Company provides for potential losses on bonds upon early
indication that a decline in the market value of a particular bond may be
other than temporary. Premium and discount amortization on mortgage-backed
securities is adjusted to reflect anticipated prepayment patterns.
36
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stocks are stated at market value and changes in market value are reported
as unrealized gains (losses) on investments in shareholders' equity, net of
applicable deferred taxes. In 1995, unrealized gains (losses) are also net
of amounts attributable to funds held on behalf of an affiliated reinsurer.
Investment income is recognized when earned. Realized gains and losses are
calculated using the first-in, first-out method.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include operating
cash and short-term investments with original maturities of three months
or less. These amounts are recorded at cost, which approximates market.
RECEIVABLES - Receivables are stated at net realizable value, net of
allowances of $284,000 and $274,000 at December 31, 1996 and 1995,
respectively, based upon historical collection trends and management's
judgment of the ultimate collectibility of the accounts. These collection
trends are monitored and any adjustments required are reflected in earnings
currently.
GOODWILL AND OTHER INTANGIBLES - Goodwill and other intangibles represent
the excess of cost over the fair market value of tangible assets acquired in
business combinations accounted for by the purchase method of accounting.
These intangible assets are being amortized on a straight-line basis over a
period of 40 years or less.
DEFERRED ACQUISITION COSTS - Certain costs of acquiring new insurance
policies have been deferred. Deferred acquisition costs are included in
other assets and are being amortized over the estimated premium-paying
periods of the related policies.
REVENUE RECOGNITION - Premium revenues are earned on a pro-rata basis over
the terms of the policies, which are generally monthly.
MEDICAL AND OTHER BENEFITS - Medical and other benefits expense consists
principally of capitation expenses, health and disability claims and life
insurance benefits. Capitation represents monthly fees to participating
physicians and other medical specialists as compensation for providing
comprehensive health or dental care services. In addition, certain
subsidiaries have risk-sharing and bonus arrangements with certain
providers. Amounts are paid to or collected from these providers based on
their performance in controlling health care costs. These amounts are
estimated using formulae defined in the provider's contract and are accrued
during the contract period based upon current experience.
In addition to actual paid claims and capitation, these expenses include the
change in estimates of reported and unreported claims and accrued capitation
fees and adjustments, which are unpaid as of the balance sheet date. These
unpaid claim estimates are based on statistical analyses and are revised as
additional information becomes available. Any adjustments resulting from
these revisions are reflected in earnings currently. See Note 5.
37
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION - Property and equipment used in operations are depreciated
using the straight-line method over the estimated useful lives of the
respective assets. Depreciation expense was $2,421,000, $1,018,000 and
$695,000 in 1996, 1995 and 1994, respectively. For federal income tax
purposes, certain assets are depreciated using accelerated methods.
INCOME TAXES - Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for income tax
purposes. A valuation allowance is recorded on deferred tax assets that
more likely than not will not be realized.
EARNINGS PER COMMON SHARE - Earnings per common share are computed by
dividing net income by the weighted average number of common shares
outstanding. Weighted average common shares outstanding were 12,892,431,
12,550,601 and 11,601,355 in 1996, 1995 and 1994, respectively.
RECLASSIFICATIONS - Certain reclassifications have been made to the
consolidated financial statements for 1994 and 1995 to conform with the 1996
presentation.
2. MERGER AND ACQUISITIONS
The Company completed the following merger and acquisitions during 1994
through 1996.
CNR HEALTH, INC. - Effective May 26, 1994, the Company acquired 53% of the
outstanding common stock of CNR Health, Inc. (CNR) for $1,498,000 in cash
and 45,234 shares of the Company's common stock with a market value at the
date of acquisition of $1,402,000, for a total purchase price of
$2,900,000. CNR manages mental health, substance abuse and medical
benefits.
HMO-W, INCORPORATED - Effective October 1, 1994, the Company acquired
all of the outstanding common stock of HMO-W, Incorporated for cash
approximating $7,569,000.
U-CARE HMO, INC. - Effective October 1, 1994, the Company acquired all of
the assets of U-Care HMO, Inc. (U-Care) and certain assets from University
Health Care, Inc., an affiliate of U-Care, for cash approximating
$3,774,000.
AMERICAN MEDICAL SECURITY GROUP, INC. - At December 31, 1995, the Company
owned 15,000 shares of preferred stock and 12% of the common stock of
American Medical Security Group, Inc., which are recorded at cost of
$16,330,000 and are included in other assets. The preferred stock was
purchased in October 1995 at a cost of $15,000,000. The Company also had a
joint venture agreement with American Medical Security Group, Inc. and its
subsidiaries (AMSG) and was a party to related reinsurance agreements.
38
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGER AND ACQUISITIONS (CONTINUED)
Effective December 3, 1996, the Company acquired the remaining 88% of AMSG.
The acquisition was accomplished through the merger of AMSG with and into
the Company pursuant to the terms of an Agreement and Plan of Merger dated
July 31, 1996, by and between AMSG, BCBSUW, the Company and the two primary
shareholders of AMSG. The Company is the surviving corporation in the
merger.
The aggregate consideration for the merger was cash of $71,800,000,
including expenses, and $98,719,000 representing the market value of
3,694,280 newly issued shares of the Company's common stock and options to
purchase the Company's common stock. Most of the cash came from $70,000,000
borrowed from BCBSUW, which, after the merger, owns approximately 38% of the
Company's common stock. See Note 6. The merger agreement provides that
$8,000,000 of the cash consideration be deposited in escrow to indemnify the
Company for breaches of certain representations, warranties, covenants and
other agreements contained in the merger agreement. A bank has been named
as escrow agent and is authorized to disburse the funds in accordance with
an escrow agreement by and among the Company, a designated agent for the
former shareholders of AMSG, and the escrow agent.
In conjunction with the merger, $150,018,000 of goodwill and other
intangibles and $22,173,000 of related deferred tax liabilities were
recorded in the consolidated balance sheet and are being amortized over 3
to 40 years using the straight-line method. Upon merger, the U&C Real
Estate Partnership (the Partnership), a partnership between the Company
and AMSG, became wholly owned by the Company and is consolidated.
Upon merger, the AMSG preferred stock owned by the Company was cancelled and
the AMSG stock options were converted into options to purchase 305,696
shares of the Company's common stock at $4.66 per share. The Company also
granted options to purchase 1,000,000 shares of the Company's common stock
at $32.83 per share to two of the previous shareholders of AMSG.
In 1995, the Company granted an executive officer of the Company an option
to purchase 7,113 shares of common stock of AMSG owned by the Company at
$703 per share. In 1996, upon the merger of AMSG and the Company, these
stock options were converted into options to purchase 275,833 shares of the
Company's common stock at $18.13 per share. Upon conversion, the Company
recorded compensation expense of $2,137,000.
The above merger and acquisitions have been accounted for using the purchase
method of accounting, and the accompanying consolidated financial statements
include the results of operations from the respective dates of merger or
acquisition.
39
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGER AND ACQUISITIONS (CONTINUED)
The following unaudited pro forma information presents the consolidated
results of operations for 1996 and 1995 assuming the 1996 merger had
occurred on January 1, 1995, after giving effect to certain adjustments
arising from the recording of the transaction, including amortization of
goodwill and other intangibles, reduction of investment income due to cash
payments, interest expense on debt and intercompany eliminations.
Years ended
December 31,
-----------------------
1996 1995
----------- ----------
(In thousands,except per
share data)
Total revenues $ 1,701,096 $1,566,116
Net income (loss) (10,195) (7,284)
Earnings (loss) per common share (0.63) (0.45)
These pro forma results are not necessarily indicative of those that would
have occurred had the merger taken place on January 1, 1995, or future
results of operations for the combined companies.
In conjunction with several recent acquisitions, the Company has included
profit sharing and repurchase provisions in the acquisition agreements.
Profit sharing expense related to these acquisitions totaled $2,827,000,
$2,625,000 and $1,438,000 in 1996, 1995 and 1994, respectively, and is
recorded as interest and profit sharing on joint ventures. Total revenues
subject to repurchase options, pursuant to the various acquisition
agreements, totaled $191,342,000, $160,003,000 and $65,870,000 for 1996,
1995 and 1994, respectively. Total assets and total net assets subject to
repurchase options were $56,281,000 and $22,475,000, respectively, at
December 31, 1996 and $44,820,000 and $20,175,000, respectively, at December
31, 1995.
3. INVESTMENTS
Investment income is comprised of the following:
Years ended December 31,
1996 1995 1994
------- ------- -------
(In thousands)
Interest on bonds $28,986 $23,736 $19,976
Dividends on stocks 1,841 2,058 713
Interest on cash equivalents
and other investment income 2,669 2,443 2,119
------- ------- -------
Gross investment income 33,496 28,237 22,808
Investment expenses (1,350) (763) (664)
Other interest income (expense) (1,532) 458 (32)
------- ------- -------
$30,614 $27,932 $22,112
------- ------- -------
------- ------- -------
40
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The components of realized investment gains are as follows:
Years Ended December 31,
------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Stocks:
Gross realized gains $16,315 $14,934 $ 3,849
Gross realized losses (3,546) (3,634) (2,412)
Bonds available for sale:
Gross realized gains 4,561 4,065 1,239
Gross realized losses (4,334) (2,450) (1,027)
------- ------- -------
$12,996 $12,915 $ 1,649
------- ------- -------
------- ------- -------
Unrealized gains (losses) on investments, which are reflected as a component
of shareholders' equity, are as follows:
December 31,
------------------------------
1996 1995 1994
------- -------- --------
(In thousands)
Stocks:
Gross unrealized gains $ 9,638 $12,267 $ 2,340
Gross unrealized losses (928) (2,258) (1,861)
Deferred income tax expense (3,236) (3,557) (170)
Net unrealized (gains) losses
attributable to funds
held on behalf of an
affiliated reinsurer, net of
deferred income taxes -- (1,732) 117
Bonds available for sale:
Gross unrealized gains 3,996 10,794 253
Gross unrealized losses (2,714) (442) (17,616)
Deferred income tax (expense)
benefit, net of valuation
allowance (487) (3,745) --
Net unrealized (gains) losses
attributable to funds
held on behalf of an
affiliated reinsurer, net
of deferred income taxes -- (1,779) 3,464
------- ------- --------
$ 6,269 $ 9,548 $(13,473)
------- ------- --------
------- ------- --------
41
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated market values of bonds are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses values
--------- ---------- ---------- ---------
(In thousands)
At December 31, 1996:
Available for sale:
U.S. Treasury
securities $ 87,170 $ 966 $ (651) $ 87,485
State and municipal
securities 4,614 43 (14) 4,643
Foreign government
securities 16,249 259 (121) 16,387
Corporate
securities 189,822 2,120 (1,061) 190,881
Government agency
mortgage-backed
securities 95,478 608 (867) 95,219
--------- ---------- ---------- ---------
393,333 3,996 (2,714) 394,615
Held to maturity:
U.S. Treasury
securities 12,623 122 (13) 12,732
Corporate
securities 200 - - 200
--------- ---------- ---------- ---------
12,823 122 (13) 12,932
--------- ---------- ---------- ---------
$406,156 $ 4,118 $(2,727) $407,547
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
At December 31, 1995:
Available for sale:
U.S. Treasury
securities $148,686 $ 4,048 $ - $152,734
State and municipal
securities 17,668 148 (1) 17,815
Foreign government
securities 18,530 435 (20) 18,945
Corporate
securities 158,343 4,314 (167) 162,490
Government agency
mortgage-backed
securities 108,336 1,849 (254) 109,931
--------- ---------- ---------- ---------
451,563 10,794 (442) 461,915
Held to maturity:
U.S. Treasury
securities 9,850 295 (7) 10,138
--------- ---------- ---------- ---------
$461,413 $ 11,089 $ (449) $472,053
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
42
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated market values of bonds at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Estimated
Amortized market
cost values
--------- ---------
(In thousands)
Bonds available for sale:
Due in one year or less $ 2,899 $ 2,910
Due after one through five years 127,446 128,237
Due after five through ten years 121,958 122,227
Due after ten years 45,552 46,022
--------- ---------
297,855 299,396
Government agency mortgage-backed
securities 95,478 95,219
--------- ---------
$393,333 $394,615
--------- ---------
--------- ---------
Bonds held to maturity:
Due in one year or less $ 4,570 $ 4,565
Due after one through five years 5,235 5,347
Due after five through ten years 3,018 3,020
--------- ---------
$ 12,823 $ 12,932
--------- ---------
--------- ---------
The cost of stocks at December 31, 1996 and 1995 totaled $50,975,000 and
$61,573,000, respectively.
At December 31, 1996, the insurance subsidiaries had bonds and cash
equivalents on deposit with various state insurance departments with
carrying values of approximately $12,080,000.
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are summarized as follows:
December 31,
---------------------
1996 1995
--------- ---------
(In thousands)
Land and land improvements $ 4,271 $ 683
Building and building improvements 26,787 5,843
Computer equipment and software 16,854 5,315
Furniture and other equipment 18,163 3,962
--------- ---------
66,075 15,803
Less accumulated depreciation (12,972) (5,766)
--------- ---------
$ 53,103 $ 10,037
--------- ---------
--------- ---------
43
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT (CONTINUED)
The estimated useful lives are as follows: land improvements - 20-30 years;
building and building improvements - 10-40 years; computer equipment and
software - 3-5 years; and furniture and other equipment - 3-10 years.
5. MEDICAL AND OTHER BENEFITS PAYABLE
Activity in the liability for medical and other benefits payable is as
follows:
Years Ended December 31,
--------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
Balance as of January 1 $ 245,118 $ 162,933 $ 114,248
Less: HMO benefits payable (39,087) (31,503) (21,976)
Reinsurance
recoverables (101,069) (64,258) (43,952)
--------- --------- ---------
Net balance at January 1 104,962 67,172 48,320
Purchased reserves 77,846 -- --
Incurred related to:
Current year 526,776 434,846 286,806
Prior years (13,970) 6,255 (5,199)
--------- --------- ---------
Total incurred 512,806 441,101 281,607
Paid related to:
Current year (436,494) (336,567) (224,470)
Prior years (81,347) (66,744) (38,285)
--------- --------- ---------
Total paid (517,841) (403,311) (262,755)
--------- --------- ---------
Net balance at December 31 177,773 104,962 67,172
Plus: HMO benefits payable 44,276 39,087 31,503
Reinsurance
recoverables 18,289 101,069 64,258
--------- --------- ---------
Balance at December 31 $240,338 $245,118 $162,933
--------- --------- ---------
--------- --------- ---------
The liability for medical and other benefits payable at December 31, 1995
developed favorably in 1996 due primarily to lower than anticipated medical
costs and utilization. The liability for medical and other benefits payable
at December 31, 1994 developed unfavorably in 1995 due to higher than
expected medical inflation beginning in late 1994. The unfavorable
development was reflected in earnings when it became known. The liability
for medical and other benefits payable at December 31, 1993 developed
favorably in 1994 due primarily to lower than anticipated medical costs and
utilization.
44
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DUE TO AFFILIATES
SURPLUS NOTE - On December 15, 1995, a subsidiary of the Company borrowed
$65,000,000 from BCBSUW under a Surplus Note Agreement (Surplus Note), which
was guaranteed by the Company. The Surplus Note provided the subsidiary
with regulatory capital needed to replace capital paid to the Company in the
form of a dividend in December, 1995. The entire $65,000,000 was repaid to
BCBSUW in 1996. Interest expense on the Surplus Note totaled $1,228,000 and
$196,000 in 1996 and 1995, respectively, and is reflected as an offset to
investment income on the consolidated statements of income.
NOTE PAYABLE - On October 30, 1996, the Company borrowed $70,000,000 from
BCBSUW to fund the cash consideration for the AMSG merger. The Company
pledged the common stock of certain subsidiaries as collateral for the
loan. Interest is payable quarterly at a rate equal to the London
Interbank Offered Rate plus 1.25%, adjusted quarterly. The principal
balance is due on October 30, 1999. Interest expense on this note
totaled $564,000 in 1996.
7. LINES OF CREDIT
The Company and several subsidiaries have a bank line of credit, guaranteed
by BCBSUW, which permits aggregate borrowings to $20,000,000. Intercompany
guarantees exist which obligate the companies to reimburse BCBSUW should the
bank enforce the guarantee for their borrowing. Periodic borrowings have
been made on this line of credit. The outstanding line of credit balance
was $1,200,000 and $550,000 at December 31, 1996 and 1995, respectively, and
is included in other liabilities.
Beginning in 1996, a subsidiary of the Company has a bank line of credit
which permits borrowings to $2,000,000. No borrowings have been made on
this line of credit in 1996.
8. DEBT
SUBORDINATED NOTES - In July 1993, the Company issued $45,000,000 of
Subordinated Notes (Notes) bearing interest at a rate of 7.75% per year
until maturity or earlier redemption. The Notes will mature on July 1, 2000
and are currently redeemable at the option of the Company at 100% of the
principal amount, plus accrued interest. The Notes are subordinated in
right of payment to all existing and future Senior Indebtedness of the
Company and are junior to the claims of any secured obligations on specific
assets of the Company's subsidiaries. Certain covenants exist which, among
other matters, restrict the ability of the Company to incur additional
indebtedness, limit future cash dividends and transfers of assets and
require the maintenance of a minimum consolidated tangible net worth. At
December 31, 1996, the Company was in compliance with these covenants.
45
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DEBT (CONTINUED)
For the next five years, required principal amounts to be paid for the
maturity of the Notes are $44,888,000 in the year 2000. The Notes decreased
by $10,000 and $62,000 in 1996 and 1995, respectively, due to the right of
repayment upon the death of holders. Interest expense on the Notes totaled
$3,479,000, $3,483,000 and $3,487,000 in 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the fair value of the Notes approximated
$44,888,000 and $44,898,000, respectively.
MORTGAGE PAYABLE - The Company had two mortgages on an office building.
Prior to the merger of AMSG and the Company in December 1996, these
mortgages were a liability of the Partnership. In December 1996, the
Company repaid the outstanding balance of $9,083,000 on one of the
mortgages.
The remaining mortgage of $10,900,000 requires monthly principal payments
of $100,000 plus interest through December 1, 2003. On January 1, 2004,
the outstanding principal balance and any unpaid interest are due. The
mortgage bears interest at a fixed rate of 9.05%. Interest expense on
these mortgages totaled $282,000 in 1996.
9. RELATED PARTY TRANSACTIONS
The Company provides marketing, underwriting, actuarial and certain
administrative services for BCBSUW. In addition, BCBSUW provides health
insurance to the employees of the Company and provides office space to the
Company. These activities are reimbursed at amounts approximating cost,
which resulted in receipts to the Company of $13,315,000, $10,028,000 and
$10,964,000 in 1996, 1995 and 1994, respectively, and payments to BCBSUW
of $7,474,000, $4,368,000 and $4,102,000 in 1996, 1995 and 1994,
respectively. These amounts are included in administrative expenses.
Certain subsidiaries of the Company provide health, life and other insurance
benefits to the employees of BCBSUW. Premium revenue received from BCBSUW
totaled $4,370,000, $4,568,000 and $3,812,000 in 1996, 1995 and 1994,
respectively.
Certain officers and directors of the Company are also officers and
directors of BCBSUW.
The Company has loans and advances receivable from employees, agents and
joint venture partners of $2,639,000 at December 31, 1996.
46
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company leases office space from the two former primary shareholders of
AMSG. This agreement requires annual lease payments of $767,000 in 1997
through 1999, and $576,000 in 2000. Lease expense of $64,000 was recorded
in 1996.
Prior to December 3, 1996, the Company had a joint venture agreement with
AMSG, whereby the Company underwrote all of the small group health care
products and life, dental, drug and disability business sold by AMSG.
Amounts related to this agreement, prior to ceded reinsurance (see Note 10),
are as follows:
Eleven months
ended Years ended
November 30, December 31,
------------- ------------------
1996 1995 1994
------------- -------- --------
(In thousands)
Premium revenue $997,818 $990,077 $751,860
Medical and other benefits 800,224 777,440 500,394
Commission expenses 117,394 122,970 98,962
Administrative expenses 97,756 95,855 72,833
Premium taxes and other
assessments 20,392 18,977 14,101
10. REINSURANCE
The Company limits the maximum net loss that can arise from certain lines of
business by reinsuring (ceding) a portion of these risks with other
insurance organizations (reinsurers), principally on a quota share basis.
The ceding company is contingently liable on reinsurance ceded in the event
that the reinsurers do not meet their contractual obligations.
REINSURANCE WITH RELATED PARTIES - AMSG JOINT VENTURE - Prior to the merger
of the Company and AMSG on December 3, 1996, the Company ceded to AMSG, on a
quota share basis, approximately 50% of the premium revenue on small group
health care and life business sold by AMSG. As a result, the Company
retained 50% of the premium revenue and 50% of the profit (loss) on the
products sold by AMSG. The Company holds funds on behalf of American
Medical Security Holdings, Inc. (AMSH) equivalent to the medical and other
benefits payable and the undistributed net profit. The Company credits
investment income on the funds retained for AMSH at the Company's average
portfolio rate.
47
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. REINSURANCE (CONTINUED)
The Company reports assets and liabilities related to reinsured contracts on
a gross basis.
A summary of amounts deducted from (added to) financial statement captions
on the statements of income for reinsurance ceded to AMSG is as follows:
Eleven months
ended Years ended
November 30, December 31,
------------- -------- --------
1996 1995 1994
------------- -------- --------
(In thousands)
Premium revenue $497,941 $494,107 $374,875
Medical and other benefits 397,877 388,310 250,034
Commission expenses 58,698 61,485 49,481
Administrative expenses 47,555 47,310 35,875
Premium taxes and other
assessments 10,191 9,485 7,048
Interest and profit sharing
on joint ventures (8,669) (12,436) (6,123)
OTHER REINSURANCE - The Company also cedes insurance to other related and
unrelated insurance carriers on an excess of loss or quota share basis.
In addition, the Company assumes insurance risk from certain federal and
state insurance programs. The impact of this reinsurance activity is not
significant to the consolidated financial statements.
11. INCOME TAXES
Since July 1, 1994, the Company and most of its subsidiaries file a
consolidated federal income tax return. Certain subsidiaries of the
Company file separate federal income tax returns. The Company and its
subsidiaries file separate state franchise, income and premium tax returns
as applicable. Prior to July 1, 1994, the Company was included in the
consolidated federal income tax return of BCBSUW.
The Internal Revenue Service (IRS) has completed its examinations of the tax
returns of BCBSUW, the Company and its subsidiaries through 1992. Reserves
for federal income tax and interest have been established in an amount which
the Company believes is adequate to provide for any future settlements.
48
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED)
The Company had a net federal income tax receivable of $4,858,000 and a net
federal income tax payable of $320,000 at December 31, 1996 and 1995,
respectively. These amounts include $1,887,000 due to BCBSUW for taxes
incurred while the Company was included in BCBSUW's consolidated federal
income tax return. This amount will be settled in full upon final IRS
examination of the consolidated federal income tax returns. The Company and
its subsidiaries have state net business loss carryforwards totaling
$22,112,000 at December 31, 1996, which expire in the years 2006 through
2011. Federal and state income tax payments, net of refunds, totaled
$8,935,000, $2,472,000 and $23,573,000 in 1996, 1995 and 1994, respectively.
The components of income tax expense (benefit) are as follows:
Years Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Current:
Federal $ 5,072 $ 3,684 $13,123
State 1,932 360 1,326
------- ------- -------
7,004 4,044 14,449
Deferred:
Federal 740 (1,144) 2,207
State (898) 81 (93)
------- ------- -------
(158) (1,063) 2,114
------- ------- -------
$ 6,846 $ 2,981 $16,563
------- ------- -------
------- ------- -------
49
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED)
The differences between taxes computed at the federal statutory rate and
recorded income taxes are as follows:
Years Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Tax at federal statutory rate $ 5,967 $ 3,274 $17,264
Tax exempt interest and dividends
received deduction (522) (1,013) (957)
Small life deduction (9) -- (1,050)
State income and franchise taxes,
net of federal benefit 883 255 788
Reserve for federal tax and
interest related to prior years 80 -- (520)
Other, net 447 465 1,038
------- ------- -------
$ 6,846 $ 2,981 $16,563
------- ------- -------
------- ------- -------
The components of deferred income tax expense (benefit) are as follows:
Years Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Alternative minimum tax credit $ -- $ -- $ 2,178
Depreciation and amortization (2,844) 107 46
Net operating loss carryforwards 2,248 (2,419) 44
Other, net 438 1,249 (154)
------- ------- -------
$ (158) $(1,063) $ 2,114
------- ------- -------
------- ------- -------
50
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED)
Significant components of the Company's federal and state deferred tax
liabilities and assets are as follows:
December 31, 1996 December 31, 1995
----------------- -----------------
Federal State Federal State
------- ------- ------- -------
(In thousands)
Deferred tax liabilities:
Claims based
receivables $ (574) $ (130) $(1,055) $ (238)
Intangibles (19,137) (4,319) -- --
Pension accrual (1,835) (347) (1,303) (248)
Unrealized gains
on investments (4,637) (454) (7,998) (376)
Other - net (6,683) (534) (4,451) (653)
------- ------- ------- -------
(32,866) (5,784) (14,807) (1,515)
Deferred tax assets:
Unrealized losses
on investments 1,321 47 1,048 24
Unrealized gains on
investments
attributable to
affiliated reinsurer -- -- 1,890 --
Post-retirement benefits
other than pensions 1,294 278 1,223 264
Advance premium
discounting 2,653 228 1,336 173
Basis in minority-owned
subsidiaries 2,131 485 -- --
Deferred compensation 2,888 581 -- --
Medical and other benefits
payable discounting 2,511 74 2,009 94
Other - net 11,477 3,461 5,291 1,436
------- ------- ------- -------
24,275 5,154 12,797 1,991
Valuation allowance -- (636) -- (294)
------- ------- ------- -------
24,275 4,518 12,797 1,697
------- ------- ------- -------
Net deferred tax assets
(liabilities) $(8,591) $(1,266) $(2,010) $ 182
------- ------- ------- -------
------- ------- ------- -------
The federal deferred benefit arising from the deductibility of state
deferred tax is included as a component of other federal deferred taxes.
The net deferred tax liabilities are included in other liabilities.
51
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
LONG-TERM CONTRACT - BCBSUW has an agreement with a service bureau extending
through December 31, 1999, with an option to terminate upon one year's prior
written notice, deliverable at any time. The service bureau provides BCBSUW
and a subsidiary of the Company with the majority of the electronic data
processing services used to operate their businesses. Processing charges
are based on the volume of transactions processed. The Company recorded
expenses related to this agreement of $3,456,000, $3,425,000 and $3,177,000
in 1996, 1995 and 1994, respectively.
During 1996, BCBSUW entered into an agreement with another service bureau to
obtain electronic data processing services. The processing of services
under the agreement is expected to commence on July 1, 1998. The agreement
has a term of five years, with options to extend for two additional one-year
renewal periods.
LITIGATION - The Company is involved in various legal actions occurring in
the normal course of its business.
In April and May 1995, suits were filed against the Company, BCBSUW and
certain of the Company's officers, alleging that these parties violated
federal securities laws by issuing false and misleading statements regarding
the Company, its financial condition and operations. The suits seek class
action status and were filed on behalf of purchasers of the Company's common
stock between February 7, 1995 and April 18, 1995. These actions were
consolidated on August 14, 1995. Motions to dismiss filed on behalf of the
defendants are pending.
In the opinion of management, adequate provision has been made for losses
which may result from these actions and, accordingly, the outcome of these
proceedings is not expected to have a material adverse effect on the
consolidated financial statements.
52
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PREFERRED STOCK OF SUBSIDIARY
On January 26, 1990, a subsidiary of the Company issued $30,000,000 of
preferred stock in a private placement transaction with an institutional
investor. The preferred stock was redeemed on January 25, 1995 for
$30,000,000.
14. REDEEMABLE PREFERRED STOCK
In 1992, the Board of Directors designated 25,000 shares of the Company's
authorized but unissued preferred stock as Series A Adjustable Rate
Nonconvertible Preferred Stock to be used as the employers' matching
contribution under the 401(k) plan covering salaried and nonunion hourly
employees of the Company and BCBSUW. At the date of issue and at December
31, 1994, the fair market value per share of the Series A Preferred Stock
was approximately equal to the stated value. The shares were redeemable at
the option of the Company.
On January 3, 1995, the Company redeemed all of the outstanding shares of
Series A Preferred Stock and discontinued its use as the employer's matching
contribution to the 401(k) plan.
15. SHAREHOLDERS' EQUITY
STATUTORY FINANCIAL INFORMATION - Insurance companies are subject to
regulation by the Office of the Commissioner of Insurance of the State of
Wisconsin and certain other state insurance regulators. These regulations
require, among other matters, the filing of financial statements prepared in
accordance with statutory accounting practices prescribed or permitted for
insurance companies. The combined statutory surplus of insurance
subsidiaries at December 31, 1996 and 1995 was $268,250,000 and
$203,551,000, respectively. The combined statutory net income of insurance
subsidiaries was $11,847,000, $8,437,000 and $37,181,000 in 1996, 1995 and
1994, respectively.
State insurance regulations also require the maintenance of a minimum
compulsory surplus based on a percentage of premiums written. At December
31, 1996, the Company's insurance subsidiaries were in compliance with these
compulsory regulatory requirements.
RESTRICTIONS ON DIVIDENDS FROM SUBSIDIARIES - Dividends paid by the
insurance subsidiaries to the Company are limited by state insurance
regulations. The insurance regulator in the state of domicile may
disapprove any dividend which, together with other dividends paid by an
insurance company in the prior twelve months, exceeds the regulatory maximum
as computed for the insurance company based on its statutory surplus and net
income.
Based upon the financial statements of the Company's insurance subsidiaries
as of December 31, 1996, as filed with the insurance regulators, the
aggregate amount available for dividends in 1997 without regulatory approval
is $8,783,000.
53
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EMPLOYEE BENEFIT PLANS
PENSION BENEFITS - The Company and all of its subsidiaries, except certain
recent acquisitions, participate with BCBSUW in two multiple-employer
defined benefit pension plans. One plan covers salaried employees and one
plan covers hourly employees. The salaried plan provides benefits based on
compensation, years of service, year of birth and date of retirement. The
hourly plan provides for benefit payments of stated amounts, based on number
of hours worked and years of credited service. Since both plans were
overfunded, no contributions were made in 1996, 1995 or 1994, and a pension
credit was recorded in each year.
The Company has amended the salaried pension plan and the hourly pension
plan with respect to nonunion participants, which include expansion of the
lump-sum payment provisions and changes in the methods and formulae used for
the calculation of benefit accruals (a "cash balance" formula). The
amendments are effective January 1, 1997. The resulting reduction in the
projected benefit obligation is included in the funded status of the pension
plans at December 31, 1996 and 1995, and was also considered in the
calculation of the 1996 pension credit.
The following table summarizes the combined funding status of the pension
plans of the Company and the amounts recorded in the consolidated balance
sheets:
DECEMBER 31,
-------------------
1996 1995
-------- ---------
(In thousands)
Actuarial present value of benefit
obligations:
Vested benefits $(12,806) $(10,635)
Nonvested benefits (2,923) (1,853)
-------- ---------
Total accumulated benefit
obligations (15,729) (12,488)
Adjustment for projected benefit
obligations (52) (453)
-------- ---------
Projected benefit obligations (15,781) (12,941)
Assets, at fair market value 29,309 26,509
-------- ---------
Excess of assets over projected
benefit obligations 13,528 13,568
Unrecognized net gains (122) (633)
Unrecognized net asset (1,326) (1,600)
Unrecognized prior service cost (6,836) (7,526)
-------- ---------
Prepaid pension expense in
consolidated balance sheets $ 5,244 $ 3,809
-------- ---------
-------- ---------
54
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
The pension plans' assets are comprised primarily of common stocks, bonds
and other marketable securities.
Assumptions used in developing the projected benefit obligation are as
follows:
DECEMBER 31,
-------------------
1996 1995
-------- ---------
Discount rate 8% 8%
Rate of increase in compensation 4.75% 4.75%
Rate of return on plan assets 9% 9%
The unrecognized net asset is being amortized over the remaining estimated
service lives of participating employees at January 1, 1986: 15.4 years for
salaried employees and 16.9 years for hourly employees.
Prior to July 1, 1994, the Company and participating subsidiaries received
an allocation of pension credit based on their proportionate share of
employee compensation. Effective July 1, 1994, the pension credit for the
Company and participating subsidiaries was calculated based upon its
segregated assets and liabilities.
The components of the pension credit, which is included in administrative
expenses, are as follows:
YEARS ENDED DECEMBER 31,
-------- -------- --------
1996 1995 1994
-------- -------- --------
(In thousands)
After July 1, 1994:
Service cost - benefits
earned during the period $ 829 $ 1,117 $ 601
Interest cost on benefit
obligations 1,034 1,116 606
Actual return on plan assets (2,866) (4,136) (158)
Net amortization and deferrals (432) 1,503 (1,132)
-------- -------- --------
(1,435) (400) (83)
Prior to July 1, 1994:
Pension credit allocation for the
six months ended June 30, 1994 -- -- (588)
-------- -------- --------
Total pension credit $(1,435) $ (400) $ (671)
-------- -------- --------
-------- -------- --------
After giving effect to all administrative expense allocations between the
Company and BCBSUW, the pension credit was $1,288,000, $435,000 and $663,000
in 1996, 1995 and 1994, respectively.
55
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
POST-RETIREMENT BENEFITS - The Company and all of its subsidiaries, except
certain recent acquisitions, participate with BCBSUW in two post-retirement
welfare benefit plans; one plan covers salaried employees and one plan
covers hourly employees. Both plans provide health, life and certain other
employee benefits for retired employees and their eligible dependents. The
salaried plan also provides for dental and vision benefits. Salaried
employees become eligible for these benefits if they retire from the Company
at a minimum age of 55 years with 10 years of service. Hourly employees are
eligible if they retire at a minimum age of 60 years with 15 years of
service. Retirees are required to pay a portion of the cost of their
coverage, which varies based upon date of retirement and the retiree's
status, age and length of service at retirement. The plans are currently
unfunded.
The Company has amended its post-retirement welfare benefit plans for
nonunion employees, which limits the Company's financial contribution in
future periods. The amendment is effective January 1, 1997. The resulting
reduction in the accumulated post-retirement benefit obligation is included
in the funded status of the post-retirement welfare benefit plans at
December 31, 1996 and 1995, and was also considered in the calculation of
post-retirement benefit cost for 1996.
The following table presents the funded status of the post-retirement
welfare benefit plans, reconciled with the liability recognized in the
consolidated balance sheets:
DECEMBER 31,
------------------
1996 1995
-------- --------
Accumulated post-retirement (In thousands)
benefit obligation:
Retirees $ 247 $ 224
Fully eligible active plan
participants 248 261
Other active plan participants 1,797 1,476
-------- --------
2,292 1,961
Funded status:
Unrecognized prior service cost 1,080 1,160
Unrecognized net gains 356 392
-------- --------
Accrued liability for
post-retirement benefits other
than pensions - unfunded $ 3,728 $ 3,513
-------- --------
-------- --------
56
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
The net periodic post-retirement benefit cost is comprised of the following:
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- ---------
(In thousands)
Service cost $ 164 $ 216 $ 202
Interest cost 156 189 176
Net amortization and deferrals (90) (27) (21)
-------- -------- ---------
Net periodic post-retirement
benefit cost $ 230 $ 378 $ 357
-------- -------- ---------
-------- -------- ---------
The weighted average discount rate used in determining the accumulated post-
retirement benefit obligation was 8% in 1996 and 1995. In 1994, the health
care cost trend rate assumed was 10.8% graded down to 6% in 1998 for medical
benefits and 6% for all years for dental benefits. In 1995 and 1996, the
health care cost trend rate assumed was 9.2% for 1995 and 7.8% for 1996
graded down to 5% in 1998 and subsequent years for medical benefits and 5%
for all years for dental benefits. A one percentage point increase in the
assumed health care cost trend rate would have increased the accumulated
benefit obligation by $125,000 at December 31, 1996 and the aggregate
service and interest cost components of net periodic post-retirement benefit
cost for 1996 by $15,000.
After giving effect to all administrative expense allocations between the
Company and BCBSUW, the net periodic post-retirement benefit cost was
$224,000, $351,000 and $319,000 in 1996, 1995 and 1994, respectively.
401(k) PLANS - The Company and all of its subsidiaries, except certain
recent acquisitions, participate with BCBSUW in two 401(k) plans; one plan
covers salaried and nonunion hourly employees and one plan covers union
hourly employees. Employees are eligible to participate if they work at
least 1,000 hours per year and have been employed with the Company or BCBSUW
for at least one year. Employees may contribute a percentage of their
earnings on a pre-tax basis with up to 5% matched by a 50% employer
contribution.
Certain subsidiaries sponsor other defined contribution or 401(k) plans.
Expenses related to all of these plans, after giving effect to all
administrative expense allocations between the Company and BCBSUW, totaled
$505,000, $545,000 and $361,000 in 1996, 1995 and 1994, respectively.
57
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
PROFIT SHARING AND BONUS PROGRAMS - The Company and all of its subsidiaries,
except certain recent acquisitions, participate with BCBSUW in a Profit
Sharing Plan for substantially all employees. The plan provides additional
compensation to each employee, calculated as a percentage of the employee's
regular earnings. The profit sharing percentage is determined based upon
BCBSUW's combined net income, affiliate profitability measurements and
customer satisfaction levels. Profit sharing expense, after giving effect
to all administrative expense allocations between the Company and BCBSUW,
was $1,501,000, $810,000 and $1,968,000 in 1996, 1995 and 1994,
respectively.
The employees of AMSH are included in a contributory defined contribution
profit sharing plan covering all eligible salaried and hourly employees who
meet minimum service requirements. Contributions are determined by AMSH's
Board of Directors. There is no expense for this plan in 1996.
The Company also participates with BCBSUW in various other bonus programs
covering certain management employees. Expenses related to these programs,
after giving effect to all administrative expense allocations between the
Company and BCBSUW, totaled $926,000, $483,000 and $477,000 in 1996, 1995
and 1994, respectively.
STOCK APPRECIATION RIGHTS PLAN - In December 1991, the Board of
Directors of the Company authorized a Stock Appreciation Rights Plan
(SAR Plan) for certain employees of the Company, which became effective
on January 1, 1992. The aggregate number of stock appreciation rights
(SARs) which may be granted may not exceed 150,000.
The grantee's rights vest over a six year period after the date of the
grant. Upon exercise, grantees receive cash equal to the sum of the
appreciation in value of the Company's common stock and the value of
dividends paid between the date of the grant and the date of exercise. The
rights lapse if not exercised within twelve years of the grant date.
In January 1992, 82,500 SARs were granted at $9.67 per share. In 1995,
7,500 of these SARs were forfeited. In 1996, 7,500 of these SARs were
exercised. Accrued benefits related to the SAR Plan, after giving effect
to all administrative expense allocations between the Company and BCBSUW
represented an expense of $176,000 in 1996, a credit of $635,000 in 1995
and an expense of $506,000 in 1994.
58
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
UWS EQUITY INCENTIVE PLAN - In May 1993, the Board of Directors of the
Company authorized the UWS Equity Incentive Plan, which permits the grant of
Nonqualified Stock Options (NQSOs), Incentive Stock Options, SARs,
Restricted Stock, Performance Units and Performance Shares. No awards may
be granted on or after February 24, 2003. The total number of shares
available for grant, as defined in the UWS Equity Incentive Plan, as
amended, may not exceed 2,750,000.
NQSOs have been granted to certain employees of the Company under this
plan. The NQSOs are exercisable in whole or in part and at such times as
specified in the grant. The rights of grantees vest over various periods
up to four years after the date of the grant. The options lapse if not
exercised within various periods up to twelve years of the grant date.
DIRECTOR STOCK OPTION PLAN - In May 1995, the shareholders of the Company
approved the 1995 Director Stock Option Plan which permits the grant of
NQSOs. The total number of shares available for grant may not exceed
75,000.
NQSOs have been granted to directors of the Company under this plan, and
are exercisable in whole or in part and at such times as specified in the
grant. The rights of grantees vest over a three year period after the date
of the grant. The options lapse if not exercised within twelve years of
the grant date, or within two years of termination as a director.
59
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
Stock option activity for all plans is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
Total number of NQSOs:
Outstanding at beginning of year 394,404 188,497
Granted 1,863,259 225,519
Forfeited (13,204) (19,612)
------------ ------------
Outstanding at end of year 2,244,459 394,404
------------ ------------
------------ ------------
Exercisable at end of year 2,029,557 54,937
Available for grant at end of year 580,541 280,596
WEIGHTED AVERAGE EXERCISE PRICE OF NQSOS:
Outstanding at beginning of year $26.36 $27.94
Granted - exercise price equals market
price on grant date 24.26 25.18
Granted - exercise price is less than
market price on grant date 11.05 --
Granted - exercise price exceeds market
price on grant date 32.83 --
Forfeited 27.78 28.07
Outstanding at end of year 25.00 26.36
Exercisable at end of year 25.02 27.67
NQSOS BY EXERCISE PRICE RANGE:
Range of exercise prices $4.66 --
Weighted average exercise price $4.66 --
Weighted average remaining
contractual life 5.93 --
Exercisable at end of year 305,696 --
Weighted average exercise price of
options exercisable at end of year $4.66 --
Range of exercise prices $18.13-$26.00 $22.38-$26.00
Weighted average exercise price $22.33 $25.08
Weighted average remaining
contractual life 11.07 11.63
Exercisable at end of year 657,895 15,625
Weighted average exercise price of
options exercisable at end of year $22.25 $26.00
Range of exercise prices $28.00-$35.00 $28.00-$35.00
Weighted average exercise price $32.29 $28.55
Weighted average remaining
contractual life 5.52 10.47
Exercisable at end of year 1,065,966 39,312
Weighted average exercise price of
options exercisable at end of year $32.56 $28.33
60
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
In October 1995, the Financial Accounting Standards Board (the FASB)
issued SFAS No. 123, "Accounting for Stock-based Compensation," which
became effective for the Company in 1996. As allowed by SFAS No. 123, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options for the
reasons discussed below. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recorded.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its NQSOs under the fair value method prescribed by SFAS No.
123. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted
average assumptions for 1996 and 1995, respectively: risk-free interest
rates of 5.66% and 5.47%; dividend yields of 5.14% and 1.91%; volatility
factors of the expected market price of the Company's common stock of 0.34
and 0.34; and a weighted average expected life of the options of 3.61 and
5.12 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Since the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
61
<PAGE>
UNITED WISCONSIN SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EMPLOYEE BENEFIT PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair values of the
options are amortized to expense over the options' respective vesting
periods. As calculated using the Black-Scholes model, the weighted average,
grant-date fair value of options granted in which the exercise price equaled
the market price on the date of the grant was $7.77 per share for 1996 and
$8.27 per share for 1995. The weighted average, grant-date fair value of
options granted in which the exercise price was less than the market price
on the date of the grant was $1.29 per share for 1996. The Company's pro
forma information, as if these options had been expensed in accordance with
SFAS No. 123, is as follows:
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
------ ------
(In thousands, except per
share data)
Pro forma net income $8,862 $5,388
Pro forma earnings per common share 0.69 0.43
17. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Selected quarterly financial data for the years ended December 31, 1996 and
1995 are as follows:
QUARTER
--------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- ----------
(In thousands, except per share data)
1996:
-----
Total revenues $281,404 $280,712 $277,656 $323,539 $1,163,311
Income before
income tax
expense 839 5,061 7,051 4,098 17,049
Net income 292 3,195 4,291 2,425 10,203
Earnings per common
share (1) 0.02 0.26 0.34 0.18 0.79
1995:
-----
Total revenues $243,094 $253,195 $267,921 $274,107 $1,038,317
Income (loss)
before income
tax expense 6,557 (8,645) 9,790 1,652 9,354
Net income (loss) 4,165 (5,678) 6,296 1,590 6,373
Earnings (loss) per
common share (1) 0.33 (0.45) 0.50 0.13 0.50
(1) The sum of the four quarters does not equal the earnings (loss) per
common share for the year due to the change in the number of shares
outstanding during the year.
62
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item with respect to directors is included
under the heading "Election of Directors" in the Company's definitive Proxy
Statement, to be dated April 18, 1997 relating to the 1997 Annual Meeting of
Shareholders currently scheduled for May 28, 1997, (the "1997 Proxy Statement")
which will be filed with the Commission separately pursuant to Rule 14a-6 under
the 1934 Act and in accordance with General Instruction G(3) to Form 10-K, not
later than 120 days after the end of the Company's fiscal year, and which
section is hereby incorporated by reference. Information with respect to
executive officers of the Company appears at the end of Part I, Pages 17 and 19
of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item is included under the heading "Executive
Compensation" in the 1997 Proxy Statement, which section is hereby incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item is included under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the 1997 Proxy
Statement, which section is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is included under the heading "Certain
Transactions" in the 1997 Proxy Statement, which section is hereby incorporated
by reference.
63
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1 and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE(S) IN
FORM 10-K
REPORT
------
The following consolidated financial statements of United
Wisconsin Services, Inc. and subsidiaries are included in
Item 8:
Report of Independent Auditors ..................................... 30
Consolidated Balance Sheets at December 31, 1996 and 1995 .......... 31
Consolidated Statements of Income for the years ended December 31, . 33
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ...... 34
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended .......... 35
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements ......................... 36
The following financial statement schedules of United
Wisconsin Services, Inc..and subsidiaries are included in
Item 14(d):
Schedule II - Condensed Financial Information of Registrant..... 65
Schedule IV - Reinsurance...................................... 68
Schedule V - Valuation and Qualifying Accounts................. 69
All other schedules for which provision is made in applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
3. EXHIBITS
Reference is made to the separate Exhibit Index contained on Pages 71
through 73 hereof.
(b) REPORTS ON FORM 8-K
Current report on Form 8-K dated December 3, 1996 including under
Item 2 a description of the merger of American Medical Security
Group, Inc. with and into the Registrant effective December 3, 1996,
and including under Item 7 certain financial statements and proforma
financial information contained in Registrant's Registration
Statement on Form S-4 (Registration No. 333-10935), filed August 31,
1996 and amended on September 23, 1996.
(c) EXHIBITS
Reference is made to the separate Exhibit Index contained on Pages
71 through 73 hereof.
(d) FINANCIAL STATEMENT SCHEDULES
Reference is made to the financial statement schedules contained on
Pages 65 through 69 hereof.
64
<PAGE>
SCHEDULE II
UNITED WISCONSIN SERVICES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed balance sheets of United Wisconsin Services, Inc. (the
"Company") (parent company only) as of December 31, 1996 and 1995, and the
condensed statements of income and cash flows for the years ended December
31, 1996, 1995, and 1994 are as follows:
BALANCE SHEETS
ASSETS
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
Cash and cash equivalents $ 936 $ 8,106
Investments 9,617 89,253
Investment in and advances to affiliates 429,313 158,324
Note receivable 1,000 1,000
Other assets 7,295 11,505
---------- ----------
Total assets $ 448,161 $ 268,188
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Due to affiliates $ 71,666 $ 1,401
Payables, accrued expenses and other liabilities 17,952 9,478
Debt 44,888 44,898
---------- ----------
Total liabilities 134,506 55,777
Shareholders' equity:
Common stock 16,294 12,600
Paid-in capital 184,019 86,902
Retained earnings 107,073 103,361
Unrealized gains (losses) on investments 6,269 9,548
---------- ----------
Total shareholders' equity 313,655 212,411
---------- ----------
Total liabilities and shareholders' equity $ 448,161 $ 268,188
---------- ----------
---------- ----------
65
<PAGE>
SCHEDULE II
UNITED WISCONSIN SERVICES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Dividends from consolidated subsidiaries $ 20,682 $ 81,872 $ 2,897
Investment income 2,399 917 1,063
Other revenue (expense) 213 (1,534) 974
---------- ---------- ----------
Total revenues 23,294 81,255 4,934
Expenses:
Administrative expenses 3,443 1,506 1,296
Net amortization of purchase premiums and intangibles 862 545 186
Interest expense on debt 3,479 3,483 3,487
Interest expense with affiliate 564 -- --
---------- ---------- ----------
Total expenses 8,348 5,534 4,969
Income (loss) before income tax benefit and equity in the
undistributed net income of subsidiaries 14,946 75,721 (35)
Income tax benefit (1,795) (1,974) (1,030)
---------- ---------- ----------
Income before equity in the undistributed net income of
subsidiaries 16,741 77,695 995
Equity in the undistributed net income of subsidiaries (6,538) (71,322) 31,768
---------- ---------- ----------
Net income $ 10,203 $ 6,373 $ 32,763
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
66
<PAGE>
SCHEDULE II
UNITED WISCONSIN SERVICES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income $ 10,203 $ 6,373 $ 32,763
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in the undistributed net income of subsidiaries 6,538 71,322 (31,768)
Bond and other amortization 1,703 599 672
Deferred income tax benefit (196) (624) (360)
Changes in other operating accounts:
Due to affiliates 265 (11,033) 11,718
Payables and accrued expenses 1,612 1,842 1,126
Other - net 5,767 (979) (1,447)
---------- ---------- ----------
Net cash provided by operating activities 25,892 67,500 12,704
Investing activities:
Acquisitions of subsidiaries (195,751) (3,565) (12,786)
Purchases of available for sale investments (41,277) (121,346) (6,780)
Proceeds from sale of available for sale investments 116,715 29,029 8,158
Proceeds from maturity of available for sale investments 675 16,800 321
Investment in and advances to consolidated affiliates (75,093) (3,726) (14,615)
---------- ---------- ----------
Net cash used in investing activities (194,731) (82,808) (25,702)
Financing activities:
Capital contributions -- 716 3,842
Cash dividends paid (6,491) (6,162) (5,703)
Redeemable preferred stock issuance -- -- 637
Redemption of redeemable preferred stock -- (2,007) -
Issuances of common stock and options 98,720 16,628 26,108
Repayment of subordinated notes (10) (62) (40)
Net borrowings under line of credit agreement (550) 550 -
Proceeds from notes with affiliate 70,000 -- -
---------- ---------- ----------
Net cash provided by financing activities 161,669 9,663 24,844
---------- ---------- ----------
Cash and cash equivalents:
Increase (decrease) during year (7,170) (5,645) 11,846
Balance at beginning of year 8,106 13,751 1,905
---------- ---------- ----------
Balance at end of year $ 936 $ 8,106 $ 13,751
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
67
<PAGE>
SCHEDULE IV
UNITED WISCONSIN SERVICES, INC.
REINSURANCE
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other assumed to
amount companies companies Net amount net
------------- ------------- ------------- ------------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life insurance in force $ 11,983,631 $ 4,258,693 $ 4,351,095 $ 12,076,033 36.0%
------------- ------------- ------------- ------------- ----------
------------- ------------- ------------- ------------- ----------
Premiums:
Health and disability $ 1,061,161 $ 371,502 $ 2,094 $ 691,753 0.3%
Life 46,132 18,860 11,955 39,227 30.5%
------------- ------------- ------------- ------------- ----------
Total premiums $ 1,107,293 $ 390,362 $ 14,049 $ 730,980 1.9%
------------- ------------- ------------- ------------- ----------
------------- ------------- ------------- ------------- ----------
Year ended December 31, 1995:
Life insurance in force $ 15,485,831 $ 6,072,710 $ 5,625,751 $ 15,038,872 37.4%
------------- ------------- ------------- ------------- ----------
------------- ------------- ------------- ------------- ----------
Premiums:
Health and disability $ 1,419,413 $ 495,390 $ 779 $ 924,802 0.1%
Life 55,211 23,368 16,634 48,477 34.3%
------------- ------------- ------------- ------------- ----------
Total premiums $ 1,474,624 $ 518,758 $ 17,413 $ 973,279 1.8%
------------- ------------- ------------- ------------- ----------
------------- ------------- ------------- ------------- ----------
Year ended December 31, 1996:
Life insurance in force $ 13,785,741 $ 321,528 $ 3,401,690 $ 16,865,903 20.2%
------------- ------------- ------------- ------------- ----------
------------- ------------- ------------- ------------- ----------
Premiums:
Health and disability $ 1,537,899 $ 499,209 $ 563 $ 1,039,253 0.1%
Life 57,085 21,557 14,353 49,881 28.8%
------------- ------------- ------------- ------------- ----------
Total premiums $ 1,594,984 $ 520,766 $ 14,916 $ 1,089,134 1.4%
------------- ------------- ------------- ------------- ----------
------------- ------------- ------------- ------------- ----------
</TABLE>
68
<PAGE>
SCHEDULE V
UNITED WISCONSIN SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Net
charges
Balance (credits) Write-offs Balance
beginning to net against end of
of period income allowance period
--------- --------- ---------- -------
<S> <C> <C> <C> <C>
(In thousands)
Year ended December 31, 1994:
Allowance for possible losses on:
Premium receivables $ 212 $ 142 $ -- $ 354
Other -- -- -- --
--------- --------- ---------- -------
Total allowance $ 212 $ 142 $ -- $ 354
--------- --------- ---------- -------
--------- --------- ---------- -------
Year ended December 31, 1995:
Allowance for possible losses on:
Premium receivables $ 354 $ (94) $ -- $ 260
Other -- (3) 17 14
--------- --------- ---------- -------
Total allowance $ 354 $ (97) $ 17 $ 274
--------- --------- ---------- -------
--------- --------- ---------- -------
Year ended December 31, 1996:
Allowance for possible losses on:
Premium receivables $ 260 $ (28) $ -- $ 232
Other 14 50 (12) 52
--------- --------- ---------- -------
Total allowance $ 274 $ 22 $ (12) $ 284
--------- --------- ---------- -------
--------- --------- ---------- -------
</TABLE>
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
UNITED WISCONSIN SERVICES, INC.
By: /s/ Thomas R. Hefty
------------------------------
Thomas R. Hefty, President and
Chief Executive Officer
Date: March 31, 1997
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas R. Hefty Chairman, President and Chief March 31, 1997
- ----------------------- Executive Officer (Principal
Thomas R. Hefty Executive Officer) and Director
/s/ C. Edward Mordy Vice President and Chief March 31, 1997
- ----------------------- Financial Officer (Principal
C. Edward Mordy Financial and Accounting Officer)
/s/Richard A. Abdoo Director March 31, 1997
- -----------------------
Richard A. Abdoo
/s/Thomas A. Bausch Director March 31, 1997
- -----------------------
Thomas A. Bausch
/s/Jane T. Coleman Director March 31, 1997
- -----------------------
Jane T. Coleman
/s/James L. Forbes Director March 31, 1997
- -----------------------
James L. Forbes
/s/James C. Hickman Director March 31, 1997
- -----------------------
James C. Hickman
/s/William R. Johnson Director March 31, 1997
- -----------------------
William R. Johnson
/s/Eugene A. Menden Director March 31, 1997
- -----------------------
Eugene A. Menden
/s/Donald P. Muench Director March 31, 1997
- -----------------------
Donald P. Muench
/s/Arthur W. Nesbitt Director March 31, 1997
- -----------------------
Arthur W. Nesbitt
70
<PAGE>
UNITED WISCONSIN SERVICES, INC.
INDEX TO EXHIBITS
EXHIBIT DOCUMENT DESCRIPTION
NUMBER --------------------
------
3.1(a) Restated and Amended Articles of Incorporation of
Registrant, dated July 31, 1991(1).
3.1(b) Articles of Amendment to the Restated and Amended
Articles of Incorporation of the Registrant, dated
December 11, 1991(2).
3.1(c) Articles of Amendment to the Restated and Amended
Articles of Incorporation of the Registrant, dated
August 26, 1992(3).
3.2 Restated and Amended Bylaws of Registrant(4).
4.1 Specimen Common Stock Certificate(9).
4.2 Form of Indenture between Registrant and Firstar
Trust Company(5).
4.3 Form of Subordinated Note issued pursuant to the
above-referenced Indenture(5).
10.1 Employment Contract between American Medical Security
Holdings, Inc. and Wallace J. Hilliard
10.2 Employment Contract between American Medical Security
Holdings, Inc. and Ronald A. Weyers
10.3 Joint Venture and Shareholders Agreement among Aon
Corporation (subsequently assigned to Aon Captive
Management, Inc.), BCBSUW (subsequently assigned to
the Registrant) and United Heartland, Inc.(1). As
amended by Amendment dated October 1, 1991(5). As
subsequently amended by Amendment dated December 31,
1994(12).
10.4 Underwriting Management Agreement between United
Heartland, Inc. and Virginia Surety Company, Inc.(1).
10.5 Agreement For Electronic Data Processing Services
between BCBSUW and EDS Federal Corporation (as
amended)(1). As amended by Settlement Agreement and
Amendment No. 5, dated October 19, 1992(5).
10.6 Consolidated Federal Income Tax Agreement among
BCBSUW, UWIC, the Registrant, United Wisconsin
Proservices, Inc., Leasing Unlimited, Inc., UWLIC,
Compcare Health Services Insurance Corporation
("Compcare"), ProHealth, Inc. and Take Control,
Inc.(1) As amended by Amendment dated August 6,
1993(6). As subsequently amended by Amendment dated
May 9, 1994 (12).
10.7 Comprehensive Tax Allocation Agreement dated July 1,
1994 among BCBSUW, the Registrant and various
subsidiaries thereof(12).
10.8 Federal Income Tax Allocation Agreement between
BCBSUW, the Registrant, UWIC, UWLIC, United Wisconsin
Proservices, Inc., Compcare, Take Control, Inc.,
Meridian Resource Corporation, Valley Health Plan,
Inc. and United Wisconsin Capital Corporation for the
period commencing January 1, 1993(6). As amended by
Amendment dated May 9, 1994 (12).
10.9 UWSI/BCBSUW 401(k) Plan (formerly the United
Wisconsin Services Pre-Tax Savings Plan) effective
January 1, 1992 (the "Plan")(5). As amended by the
first amendment to the Plan effective January 1,
1993(7). As subsequently amended by the second,
third and fourth amendments to the Plan(10).*
10.10 Executive Reimbursement Group Insurance Policy(1).*
10.11 BCBSUW Salaried Employees Retirement Plan effective
January 1, 1993(5).*
10.12 1992 Stock Appreciation Rights Plan and Form of Grant
of Stock Appreciation Rights(2). As amended February
15, 1995(12).*
71
<PAGE>
EXHIBIT DOCUMENT DESCRIPTION
NUMBER --------------------
------
10.13 Purchase and Sale Agreement of Midelfort Health Plan,
Inc. between Registrant and Midelfort Clinic,
Ltd.(4).
10.14 Amended and Restated Joint Venture Agreement between
BCBSUW, Registrant, Midelfort Health Plan, Inc. and
Midelfort Clinic, Ltd.
10.15 Service Agreement between BCBSUW and Registrant,
effective January 1, 1997.
10.16 General Services Agreement between United Heartland
and BCBSUW, effective January 1, 1991(11).
10.17 Service Agreement between BCBSUW and Meridian Managed
Care, Inc. (f/k/a Take Control, Inc.), effective
January 1, 1991(11).
10.18 Service Agreement between BCBSUW and Valley Health
Plan, Inc., effective January 1, 1993(11).
10.19 Stock Purchase Agreement by and among the Registrant,
Ralph P. Cavaiani, Dianne M. Kiehl, M&I Ventures
Corporation, Gerald A. Theis, Stacia Kiehl, Adam
Kiehl and The Milwaukee Foundation Corporation dated
May 26, 1994(11).
10.20 Service Agreement between the Registrant and Community
Health Systems, LLC dated November 1, 1994(9).
10.21 Amended and Restated Joint Venture Agreement among BCBSUW,
the Registrant, UHC, U-Care, HPI and HPW dated October 31,
1994(9).
10.22 Service Agreement between the Registrant and HPI dated
November 1, 1994(9).
10.23 License Agreement between the Registrant and U-Care dated
November 1, 1994(9).
10.24 Registrant's and BCBSUW's 1996 Management Incentive Plan(4).*
10.25 1997 Management Incentive Plan.
10.26 Registrant's and BCBSUW's 1996 Profit Sharing Plan(4).*.
10.27 BCBSUW 1995-1997 Long Term Executive Incentive Plan(4).*
10.28 BCBSUW/UWS Long Term Incentive Plan 1996-1998.*
10.29 Registrant's Equity Incentive Plan(5).*
10.30 Registrant's and BCBSUW's Supplemental Benefit Restoration Plan
as Amended and Restated Effective January 1, 1994(7).*
10.31 Employment Agreement between the Company and Samuel V. Miller
dated October 30, 1995(4).*
10.32 1995 Director Stock Option Plan (3).*
10.33 1996 Profit Sharing Plan between Registrant and Unity Health Plans
Insurance Corporation(4).*
10.34 Registrant's Voluntary Deferred Compensation Plan(4)
10.35 Trust under Registrant's Voluntary Deferred Compensation Plan(4)
10.36 Registrant's Deferred Compensation Plan for Directors
10.37** UWSI/BCBSUW Salaried Pension Plan.
10.38 Joint Venture Agreement Among Registrant, BCBSUW, Compcare and
Northwoods Health Care, LLC(14).
10.39 Amendment to Purchase and Sale Agreement Between the Registrant
and Midelfort.
11. Statement regarding computation of per share earnings. (See Note 1
of Notes to Consolidated Financial Statements).
21. Subsidiaries of the Registrant.
27. Financial Data Schedule.
___________________
(1) Incorporated by reference to exhibits filed with Registrant's Form S-1
Registration Statement declared effective on October 24, 1991
(Registration Number 33-42571).
(2) Incorporated by reference to exhibits filed with Registrant's Form 8-K
filed on December 12, 1991.
(3) Incorporated by reference to exhibits filed with Registrant's Form 8-K
filed on September 2, 1992.
72
<PAGE>
(4) Incorporated by reference to exhibits filed with Registrant's Form 10-K
for the year ended December 31, 1995.
(5) Incorporated by reference to exhibits filed with Registrant's Form S-1
Registration Statement declared effective on July 13, 1993 (Registration
Number 33-59798).
(6) Incorporated by reference to exhibits filed with Registrant's Form 10-Q
for the period ended September 30, 1993.
(7) Incorporated by reference to exhibits filed with Registrant's Form 10-K
for the period ended December 31, 1993.
(8) Incorporated by reference to exhibits filed with Registrant's Form 10-Q
for the quarter ended June 30, 1996.
(9) Incorporated by reference to exhibits filed with Registrant's Form 10-Q
for the period ended September 30, 1994.
(10) Incorporated by reference to exhibits filed with Registrant's Form S-8
Registration Statement filed with the Securities and Exchange Commission
on December 30, 1994 (Registration Number 33-88110).
(11) Incorporated by reference to exhibits filed with Registrant's Form S-1
Registration Statement declared effective on June 30, 1994 (Registration
Number 33-76768).
(12) Incorporated by reference to exhibits filed with the Registrant's Form
10-K for the year ended December 31, 1994.
(13) Incorporated by reference to exhibits filed with the Registrant's Form
10-Q for the period ended June 30, 1995.
(14) Incorporated by reference to exhibits filed with the Registrant's Form
10-Q for the quarter ended June 30, 1996.
*Management contract or compensatory plan.
**To be filed by amendment.
73
<PAGE>
EMPLOYMENT AND NONCOMPETITION AGREEMENT
THIS AGREEMENT is executed as of this 3rd day of December, 1996, by and
between AMERICAN MEDICAL SECURITY HOLDINGS, INC., a Wisconsin corporation (the
"COMPANY"), and a wholly owned subsidiary of United Wisconsin Services, Inc., a
Wisconsin corporation ("UWSI"), and WALLACE J. HILLIARD, an individual
("EMPLOYEE").
RECITALS
Pursuant to that certain Agreement and Plan of Merger, dated as of July 31,
1996, among the Company, UWSI, American Medical Security Group, Inc. ("AMS"),
Ronald A. Weyers and Employee (the "Merger Agreement"), UWSI has agreed to
acquire AMS by a merger of AMS into the Company, which shall be the surviving
corporation (the "Merger"). The parties further contemplate that, following the
Merger, UWSI will transfer substantially all of the assets received in the
Merger to the Company. UWSI, the Company and AMS anticipate that the Merger
will become effective as of the date hereof.
Employee is a knowledgeable and experienced executive familiar with the
business conducted by the Company. The Company desires to employ Employee, and
Employee desires to be employed by the Company, on the terms and conditions set
forth herein. The parties also believe it is in their best interests to make
provision for certain aspects of their relationship during and after the period
in which Employee is employed by the Company.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
and covenants contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged by the Company and
Employee,
IT IS HEREBY AGREED AS FOLLOWS:
ARTICLE I
EMPLOYMENT
1.1 TERM OF EMPLOYMENT. The Company hereby employs Employee, and Employee
hereby accepts employment by the Company, for the period commencing on the date
hereof and ending on the sixth anniversary of the date hereof, subject to
earlier termination as hereinafter set forth in Article III (the "EMPLOYMENT
TERM").
1.2 POSITION AND DUTIES. Employee shall be employed in the position of
Chairman of the Board, shall have such duties as may be set forth by the
President consistent with his status and shall be subject to the authority of,
and shall report to, the Company's Board of Directors. Except as provided in
Section 2.1 below, Employee shall be available to devote Employee's entire
business time, attention and energies exclusively to the business interests of
<PAGE>
the Company while employed by the Company during the first three (3) years of
the Employment Term, except as otherwise specifically provided for herein by
reason of illness, vacation or otherwise or approved by or on behalf of the
Board of Directors. The Company shall provide such secretarial assistance and
office space to Employee as may be reasonably requested by Employee; provided,
that the Company shall only be required to provide secretarial assistance and
office space to the extent consistent with past practice.
ARTICLE II
COMPENSATION AND OTHER BENEFITS
2.1 BASE SALARY. The Company shall pay Employee an annual salary as
follows: (i) $750,000 per year during the first year; (ii) $500,000 per year
thereafter for the shorter of two years or such time as Employee is not
available to devote Employee's entire business time, attention and energies
exclusively to the business of the Company (as such determination is made by the
Board of Directors including by reason of "disability" as set forth in Section
3.1(c) hereof); and (iii) $100,000 per year thereafter for a period of three
years ("BASE SALARY"), payable in accordance with the normal payroll practices
of the Company.
2.2 COMPENSATORY STOCK OPTIONS. In addition to Base Salary and subject to
the provisions of Article III hereof, Employee has been granted, by the
Management Review Committee of UWSI an option (THE "OPTION") to purchase up to
530,000 shares of common stock, no par value per share, of UWSI ("UWSI COMMON
STOCK") at an exercise price per share equal to 125% of the average closing
price of UWSI Common Stock on the New York Stock Exchange for the ten trading
days immediately preceding the date the Merger becomes effective, all in
accordance with the United Wisconsin Services, Inc. Equity Incentive Plan and
pursuant to a stock option agreement in the form attached hereto as EXHIBIT A.
2.3 BENEFIT PLANS. The Company will establish and maintain welfare
benefit plans substantially identical to those maintained by AMS prior to the
Merger. Employee will be eligible to participate in the Company's other welfare
benefit plans as are generally applicable to all executives of the Company, in
accordance with the terms and conditions thereof. Notwithstanding anything to
the contrary contained in Section 3.2 hereof, the Company will also pay 38% of
the premium due under the Employers Health Insurance Company health policy
covering Employee until Employee's death.
2.4 EXPENSES. The Company shall reimburse Employee for all reasonable
expenses incurred in the course of the performance of Employee's duties and
responsibilities pursuant to this Agreement and consistent with the Company's
policies with respect to travel, entertainment and miscellaneous expenses, and
the Company's requirements with respect to the reporting of such expenses.
2.5 VACATION. The Company shall maintain vacation policies substantially
identical to those maintained by AMS prior to the Merger. Employee shall be
entitled to a
2
<PAGE>
maximum of eight (8) weeks of non-cumulative vacation in any
calendar year in accordance with the Company's general vacation policies.
ARTICLE III
TERMINATION
3.1 RIGHT TO TERMINATE; AUTOMATIC TERMINATION.
(a) TERMINATION WITHOUT CAUSE. Subject to Section 3.2, the Company
may terminate Employee's employment at any time and for any reason.
(b) TERMINATION FOR CAUSE. Subject to Section 3.2, the Company may
terminate Employee's employment and all of the Company's obligations under this
Agreement at any time "FOR CAUSE" (as defined below) by giving notice
to Employee stating the basis for such termination, effective immediately upon
giving such notice or at such other time thereafter as the Company may
designate. A termination For Cause is a termination evidenced by a resolution
adopted in good faith by a majority of the Board of Directors of the Company
that Employee (i) willfully failed to substantially perform his duties under
Section 1.2, above, (other than a failure resulting from Employee's incapacity
due to physical or mental illness or injury), (ii) committed acts of fraud,
embezzlement, theft or dishonesty, as determined by a final judgment or order of
a court of competent jurisdiction, (iii) committed acts which constitute a
felony as determined by a final judgment or order of a court of competent
jurisdiction and which, in a reasonable opinion of the Board of Directors of the
Company, involve moral turpitude and have caused material embarrassment to the
Company, or (iv) Employee has attempted to obtain a personal profit from any
transaction in which the Company has an interest and which constitutes a
corporate opportunity of the Company or is adverse to the interests of the
Company, unless the transaction was approved in writing by the Company's Board
of Directors after full disclosure of all details relating to such transaction;
PROVIDED, HOWEVER, that no termination of Employee's employment shall be For
Cause as set forth in (i), above, until (a) Employee shall have had at least
forty-five (45) days to cure any conduct or act alleged to provide Cause for
termination after a written notice of demand has been delivered to Employee
specifying in detail in the manner in which Employee's conduct violates this
Agreement, and (b) Employee shall have been provided an opportunity to be heard
by the Board of Directors (with the assistance of Employee's counsel if Employee
so desires). No act, or failure to act, on Employee's part, shall be considered
"willful" unless he has acted or failed to act without reasonable belief that
his action or failure to act was in the best interest of the Company.
(c) TERMINATION BY DEATH OR DISABILITY. Subject to Section 3.2,
Employee's employment and the Company's obligations under this Agreement shall
terminate automatically, effective immediately and without any notice being
necessary, upon Employee's death or a determination of disability of Employee.
For purposes of this Agreement, "DISABILITY" means the inability of Employee,
due to a physical or mental impairment, for 180 consecutive days or 210 days
during any period of 360 days to perform the duties and functions
3
<PAGE>
contemplated by this Agreement. A determination of disability shall be made
by a physician chosen by the President of the Medical Society of Brown
County, Wisconsin, and Employee shall cooperate with the efforts to make such
determination. Any such determination shall be conclusive and binding on the
parties. Any determination of total disability under this Section 3.1(c) is
not intended to alter any benefits any party may be entitled to receive under
any long-term disability insurance policy carried by either the Company or
Employee with respect to Employee, which benefits shall be governed solely by
the terms of any such insurance policy.
(d) TERMINATION BY EMPLOYEE. Notwithstanding anything to the
contrary contained herein, Employee may terminate this Agreement and his
employment hereunder upon sixty (60) days written notice to the Company.
(e) TERMINATION FOR GOOD REASON. Notwithstanding anything to the
contrary contained in this Agreement, Employee, by written notice to the Board
of Directors, shall have the right to terminate his employment for Good Reason.
(f) DEFINITION OF GOOD REASON. For purposes of this Agreement, the
term "Good Reason" shall mean the occurrence, without Employee's written consent
thereto, of any of the following:
(i) the reasonable good faith determination by an arbitrator
mutually acceptable to the Company and the Employee that there has been a
material adverse change in Employee's status, title, position or
responsibilities (including reporting responsibilities); the assignment to
Employee of any duties or responsibilities which, in Employee's reasonable
judgment, are inconsistent with his status, title, position or responsibilities
in effect immediately prior to such assignment; or any removal of Employee from
or failure to reappoint or reelect him to any position, except in connection
with the termination of his employment for Disability, Cause, as a result of his
death or by Employee other than for Good Reason;
(ii) any breach by the Company of any material provision of this
Agreement or other agreements between Employee and the Company regarding
Employee's policy-making responsibilities with the Company;
(iii) any purported termination of Employee's employment For
Cause by the Company which does not comply with the terms of Section 3.1(b) of
this Agreement;
(iv) requirement that Employee relocate his office to a location
more than 50 miles from its location on the date hereof; or
(v) the failure by the Company or any of its subsidiaries or
affiliated companies to continue to provide Employee with employee benefits at
least as favorable in the aggregate to those enjoyed by Employee as the date
hereof except to the extent any such changes are made effective for all
executives of the Company.
4
<PAGE>
3.2 RIGHTS UPON TERMINATION.
(a) SECTION 3.1(a), (c) AND (e) TERMINATIONS. If Employee's
employment is terminated pursuant to Section 3.1(a), (c) or (e) hereof, the
Company shall pay to Employee, or in the case of Employee's death, to Employee's
estate, (i) any unpaid Base Salary with respect to the period prior to the
effective date of termination, (ii) severance payments equal to the Base Salary
in effect for each year remaining in the Employment Term (prorated to account
for a partial year in the case of the year during which termination occurs),
payable in accordance with Section 2.1 hereof and the normal payroll practices
of the Company, (iii) upon payment of the exercise price, shares of UWSI Common
Stock issuable upon exercise of the Option (iv) reimbursement of expenses to
which Employee is entitled under Section 2.4 hereof and (v) to the extent
permitted by law, the Company shall continue the employee benefits which the
Employee was eligible for during the Employment Term until the sixth anniversary
of the date hereof.
(b) SECTION 3.1(b) AND (d) TERMINATIONS. If Employee's employment is
terminated pursuant to Section 3.1(b) or (d), Employee shall have no further
rights against the Company hereunder, except for the right to receive (i) any
unpaid Base Salary with respect to the period prior to the effective date of
termination and (ii) reimbursement of expenses to which Employee is entitled
under Section 2.4 hereof.
(c) Nothing contained in this Agreement shall affect the rights and
obligations of Employee under any of the Company's employee benefit plans in
effect from time to time, and such rights and obligations shall be determined
solely by reference to such employee benefit plan documents.
ARTICLE IV
CONFIDENTIALITY; NONCOMPETITION
4.1 CONFIDENTIAL INFORMATION; INTELLECTUAL PROPERTY.
(a) CONFIDENTIAL INFORMATION. Employee acknowledges that Employee
will be required to use his personal intellectual skills on behalf of the
Company and that it is reasonable and fair that the fruits of such skills should
inure to the sole benefit of the Company. Employee further acknowledges that
Employee already has and will acquire information of a confidential nature
relating to the operation, finances, business relationships and trade secrets of
the Company. During Employee's employment and for a period of two years
following termination thereof, within the geographical area in which such use,
publication or disclosure would reasonably be expected to harm the Company's
existing or potential business interests, Employee will not use (except for use
in the course of the Employee's regular authorized duties on behalf of the
Company), publish, disclose or authorize anyone else to use, publish or
disclose, without the prior written consent of the Company, any confidential
information pertaining to the Company or its affiliated entities, including,
without limitation, any
5
<PAGE>
information relating to existing or potential business, customers, trade or
industrial practices, plans, costs, processes, or technical or engineering
data; PROVIDED, HOWEVER, that following termination of Employee's employment,
Employee shall be prohibited from using, publishing, disclosing or
authorizing anyone else to use, publish or disclose, any confidential
information which constitutes a trade secret under applicable law.
Employee's obligations under this section apply to, and are intended to
prevent, the direct or indirect disclosure of confidential information to
others where such disclosure of confidential information would reasonably be
considered to be useful to Employer's competitors or to a third party to
become a competitor based in whole or in part on such disclosure of
confidential information. Employee shall not remove or retain any figures,
calculations, formulae, letters, papers, software, abstracts, summaries,
drawings, blueprints, diskettes or any other material, or copies thereof,
which contain or embody any confidential information of the Company, except
for use in the course of Employee's regular authorized duties on behalf of
the Company or with the prior written consent of the Company. The foregoing
notwithstanding, Employee has no obligation to refrain from using, publishing
or disclosing any such confidential information which is or hereafter shall
become available to the public otherwise than by use, publication or
disclosure by Employee. This prohibition also does not prohibit Employee's
use of general skills and know-how acquired during and prior to employment,
as long as such use does not involve the use, publication or disclosure of
the Company's confidential information.
(b) AGREEMENT TO TRANSFER. Employee shall without further payment,
assign, transfer and set over, and does hereby assign, transfer and set over, to
the Company, its successors and assigns, all Employee's right, title and
interest in and to all trade secrets, secret processes, inventions,
improvements, patents, patent applications, trademarks, trademark applications,
copyrights and any and all intellectual property rights which Employee may,
either solely or jointly with others, conceive, develop, make, or suggest at any
time during employment or within a one-year period after termination of
employment and which relate to the existing or potential products, processes,
work, research or other activities of the Company.
4.2 NONCOMPETITION. During Employee's employment and for a two-year
period following the termination thereof, Employee shall not, without the prior
written consent of the Company, directly or indirectly, as an employee, officer,
director, partner, consultant, owner (other than a minority shareholder interest
of not more than 1% of a company whose equity interests are publicly traded on a
nationally recognized stock exchange or over-the-counter) solicit any business
regarding services of the kinds that the Company either offered or was planning
to offer and of which Employee was aware at or before the time of Employee's
termination, from any person or entity that (a) was a customer or prospective
customer of the Company as of the date of termination and (b) was a customer
with which Employee had personal contact in regard to such services within two
years prior to said termination.
4.3 NON-SOLICITATION. For a period of two years after termination of
Employee's employment, Employee will not solicit, or assist any person or entity
to solicit, any employee, agent, supplier or other person having business
relations with the Company to terminate
6
<PAGE>
such employee's employment or terminate or curtail such supplier's or other
person's business relationship with the Company.
4.4 RETURN OF DOCUMENTS. Immediately upon termination of employment,
Employee will return to the Company, and so certify in writing to the Company,
that Employee has returned to the Company all the Company's papers, documents
and things, including information stored for use in or with computers and
software applicable to the Company's business (and all copies thereof), which
are in Employee's possession or under Employee's control, regardless whether
such papers, documents or things contain confidential information or trade
secrets.
4.5 NOTICE; DISCLOSURE. For a period of three years after the termination
of Employee's employment hereunder, Employee shall keep the Company promptly and
fully informed of any person or persons, partnerships, associations, limited
liability companies or corporations by whom Employee may be employed.
4.6 NO CONFLICTS. Employee represents and warrants that Employee has not
previously assumed any obligations inconsistent with those of this Agreement and
that employment by the Company does not conflict with any prior obligations to
third parties.
4.7 AGREEMENT ON FAIRNESS. Employee acknowledges that: (i) this
Agreement has been specifically bargained between the parties and reviewed by
Employee, (ii) Employee has had an opportunity to obtain legal counsel to review
this Agreement, and (iii) the covenants made by and duties imposed upon Employee
hereby are fair, reasonable and minimally necessary to protect the legitimate
business interests of the Company, and such covenants and duties will not place
an undue burden upon Employee's livelihood in the event of termination of
Employee's employment by the Company and the strict enforcement of the covenants
contained herein.
4.8 EQUITABLE RELIEF. Employee acknowledges that any breach of this
Agreement will cause substantial and irreparable harm to the Company for which
money damages would be an inadequate remedy. Accordingly, the Company shall in
any such event be entitled to obtain injunctive and other forms of equitable
relief to prevent such breach and to recover from Employee the Company's costs
(including without limitation reasonable attorneys' fees) incurred in connection
with enforcing this Agreement, in addition to any other rights or remedies
available at law, in equity or by statute.
ARTICLE V
GENERAL PROVISIONS
5.1 NOTICES. Any and all notices, consents, documents or communications
provided for in this Agreement shall be given in the manner, and to the persons,
specified in Section 9.01 of the Merger Agreement.
7
<PAGE>
5.2 ENTIRE AGREEMENT. This Agreement contains the entire understanding
and the full and complete agreement of the parties and supersedes and replaces
any prior understandings and agreements between the parties with respect to the
subject matter hereof and supersedes and replaces the employment agreement
between Employee and AMS.
5.3 AMENDMENT. This Agreement may be altered, amended or modified only in
a writing, signed by both of the parties hereto. Headings included in this
Agreement are for convenience only and are not intended to limit or expand the
rights of the parties hereto. References to Sections herein shall mean sections
of the text of this Agreement, unless otherwise indicated.
5.4 ASSIGNABILITY. This Agreement and the rights and duties set forth
herein may not be assigned by Employee or the Company, in whole or in part.
This Agreement shall be binding on and inure to the benefit of each party and
such party's respective heirs, legal representatives, successors and assigns.
5.5 SEVERABILITY. If any court of competent jurisdiction determines that
any provision of this Agreement is invalid or unenforceable, then such
invalidity or unenforceability shall have no effect on the other provisions
hereof, which shall remain valid, binding and enforceable and in full force and
effect, and such invalid or unenforceable provision shall be construed in a
manner so as to give the maximum valid and enforceable effect to the intent of
the parties expressed therein.
5.6 WAIVER OF BREACH. The waiver by either party of the breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either party.
5.7 GOVERNING LAW; CONSTRUCTION. This Agreement shall be governed by the
internal laws of the State of Wisconsin, without regard to any rules of
construction concerning the draftsman hereof.
5.8 ATTORNEY'S FEES. If any case of action is brought before any court to
enforce any provision of this Agreement, the Company shall reimburse Employee
for reasonable costs incurred (including reasonable attorney's fees) by Employee
if Employee prevails to any extent in any such action.
5.9 NO MITIGATION. If Employee's employment hereunder is terminated by
the Company without Cause because of Employee's Disability or by Employee for
Good Reason, Employee shall not be obligated to seek other employment or take
any other action by way of mitigation of the amounts payable to Employee
hereunder.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year written above.
COMPANY:
AMERICAN MEDICAL SECURITY
HOLDINGS, INC.
By: /s/ C. Edward Mordy
----------------------------------
C. Edward Mordy
EMPLOYEE:
/s/ Wallace J. Hilliard
--------------------------------------
Wallace J. Hilliard
IN WITNESS WHEREOF, United Wisconsin Services, Inc. has executed this
Agreement as of the day and year written above for the purpose of granting the
stock option contemplated in Section 2.2 hereof.
UNITED WISCONSIN SERVICES, INC.
By: /s/ Thomas R. Hefty
----------------------------------
Thomas R. Hefty
9
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EMPLOYMENT AND NONCOMPETITION AGREEMENT
THIS AGREEMENT is executed as of this 3rd day of December, 1996, by and
between AMERICAN MEDICAL SECURITY HOLDINGS, INC., a Wisconsin corporation (the
"COMPANY"), and a wholly owned subsidiary of United Wisconsin Services, Inc., a
Wisconsin corporation ("UWSI"), and RONALD A. WEYERS, an individual
("EMPLOYEE").
RECITALS
Pursuant to that certain Agreement and Plan of Merger, dated as of July 31,
1996, among the Company, UWSI, American Medical Security Group, Inc. ("AMS"),
Wallace J. Hilliard and Employee (the "Merger Agreement"), UWSI has agreed to
acquire AMS by a merger of AMS into the Company, which shall be the surviving
corporation (the "Merger"). The parties further contemplate that, following the
Merger, UWSI will transfer substantially all of the assets received in the
Merger to the Company. UWSI, the Company and AMS anticipate that the Merger
will become effective as of the date hereof.
Employee is a knowledgeable and experienced executive familiar with the
business conducted by the Company. The Company desires to employ Employee, and
Employee desires to be employed by the Company, on the terms and conditions set
forth herein. The parties also believe it is in their best interests to make
provision for certain aspects of their relationship during and after the period
in which Employee is employed by the Company.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
and covenants contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged by the Company and
Employee,
IT IS HEREBY AGREED AS FOLLOWS:
ARTICLE I
EMPLOYMENT
1.1 TERM OF EMPLOYMENT. The Company hereby employs Employee, and Employee
hereby accepts employment by the Company, for the period commencing on the date
hereof and ending on the sixth anniversary of the date hereof, subject to
earlier termination as hereinafter set forth in Article III (the "EMPLOYMENT
TERM").
1.2 POSITION AND DUTIES. Employee shall be employed in the position of
Vice Chairman of the Board, shall have such duties as may be set forth by the
President consistent with his status and shall be subject to the authority of,
and shall report to, the Company's Board of Directors. Except as provided in
Section 2.1 below, Employee shall be available to devote Employee's entire
business time, attention and energies exclusively to the business interests of
<PAGE>
the Company while employed by the Company during the first three (3) years of
the Employment Term, except as otherwise specifically provided for herein by
reason of illness, vacation or otherwise or approved by or on behalf of the
Board of Directors. The Company shall provide such secretarial assistance and
office space to Employee as may be reasonably requested by Employee; provided,
that the Company shall only be required to provide secretarial assistance and
office space to the extent consistent with past practice.
ARTICLE II
COMPENSATION AND OTHER BENEFITS
2.1 BASE SALARY. The Company shall pay Employee an annual salary as
follows: (i) $750,000 per year during the first year; (ii) $500,000 per year
thereafter for the shorter of two years or such time as Employee is not
available to devote Employee's entire business time, attention and energies
exclusively to the business of the Company (as such determination is made by the
Board of Directors including by reason of "disability" as set forth in Section
3.1(c) hereof); and (iii) $100,000 per year thereafter for a period of three
years ("BASE SALARY"), payable in accordance with the normal payroll practices
of the Company.
2.2 COMPENSATORY STOCK OPTIONS. In addition to Base Salary and subject to
the provisions of Article III hereof, Employee has been granted, by the
Management Review Committee of UWSI an option (THE "OPTION") to purchase up to
470,000 shares of common stock, no par value per share, of UWSI ("UWSI COMMON
STOCK") at an exercise price per share equal to 125% of the average closing
price of UWSI Common Stock on the New York Stock Exchange for the ten trading
days immediately preceding the date the Merger becomes effective, all in
accordance with the United Wisconsin Services, Inc. Equity Incentive Plan and
pursuant to a stock option agreement in the form attached hereto as EXHIBIT A.
2.3 BENEFIT PLANS. The Company will establish and maintain welfare
benefit plans substantially identical to those maintained by AMS prior to the
Merger. Employee will be eligible to participate in the Company's other welfare
benefit plans as are generally applicable to all executives of the Company, in
accordance with the terms and conditions thereof. Notwithstanding anything to
the contrary contained in Section 3.2 hereof, the Company will also pay 38% of
the premium due under the Employers Health Insurance Company health policy
covering Employee until Employee's death.
2.4 EXPENSES. The Company shall reimburse Employee for all reasonable
expenses incurred in the course of the performance of Employee's duties and
responsibilities pursuant to this Agreement and consistent with the Company's
policies with respect to travel, entertainment and miscellaneous expenses, and
the Company's requirements with respect to the reporting of such expenses.
2.5 VACATION. The Company shall maintain vacation policies substantially
identical to those maintained by AMS prior to the Merger. Employee shall be
entitled to a
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<PAGE>
maximum of eight (8) weeks of non-cumulative vacation in any calendar year in
accordance with the Company's general vacation policies.
ARTICLE III
TERMINATION
3.1 RIGHT TO TERMINATE; AUTOMATIC TERMINATION.
(a) TERMINATION WITHOUT CAUSE. Subject to Section 3.2, the Company
may terminate Employee's employment at any time and for any reason.
(b) TERMINATION FOR CAUSE. Subject to Section 3.2, the Company may
terminate Employee's employment and all of the Company's obligations under this
Agreement at any time "FOR CAUSE" (as defined below) by giving notice
to Employee stating the basis for such termination, effective immediately upon
giving such notice or at such other time thereafter as the Company may
designate. A termination For Cause is a termination evidenced by a resolution
adopted in good faith by a majority of the Board of Directors of the Company
that Employee (i) willfully failed to substantially perform his duties under
Section 1.2, above, (other than a failure resulting from Employee's incapacity
due to physical or mental illness or injury), (ii) committed acts of fraud,
embezzlement, theft or dishonesty, as determined by a final judgment or order of
a court of competent jurisdiction, (iii) committed acts which constitute a
felony as determined by a final judgment or order of a court of competent
jurisdiction and which, in a reasonable opinion of the Board of Directors of the
Company, involve moral turpitude and have caused material embarrassment to the
Company, or (iv) Employee has attempted to obtain a personal profit from any
transaction in which the Company has an interest and which constitutes a
corporate opportunity of the Company or is adverse to the interests of the
Company, unless the transaction was approved in writing by the Company's Board
of Directors after full disclosure of all details relating to such transaction;
PROVIDED, HOWEVER, that no termination of Employee's employment shall be For
Cause as set forth in (i), above, until (a) Employee shall have had at least
forty-five (45) days to cure any conduct or act alleged to provide Cause for
termination after a written notice of demand has been delivered to Employee
specifying in detail in the manner in which Employee's conduct violates this
Agreement, and (b) Employee shall have been provided an opportunity to be heard
by the Board of Directors (with the assistance of Employee's counsel if Employee
so desires). No act, or failure to act, on Employee's part, shall be considered
"willful" unless he has acted or failed to act without reasonable belief that
his action or failure to act was in the best interest of the Company.
(c) TERMINATION BY DEATH OR DISABILITY. Subject to Section 3.2,
Employee's employment and the Company's obligations under this Agreement shall
terminate automatically, effective immediately and without any notice being
necessary, upon Employee's death or a determination of disability of Employee.
For purposes of this Agreement, "DISABILITY" means the inability of Employee,
due to a physical or mental impairment, for 180 consecutive days or 210 days
during any period of 360 days to perform the duties and functions
3
<PAGE>
contemplated by this Agreement. A determination of disability shall be made
by a physician chosen by the President of the Medical Society of Brown
County, Wisconsin, and Employee shall cooperate with the efforts to make such
determination. Any such determination shall be conclusive and binding on the
parties. Any determination of total disability under this Section 3.1(c) is
not intended to alter any benefits any party may be entitled to receive under
any long-term disability insurance policy carried by either the Company or
Employee with respect to Employee, which benefits shall be governed solely by
the terms of any such insurance policy.
(d) TERMINATION BY EMPLOYEE. Notwithstanding anything to the
contrary contained herein, Employee may terminate this Agreement and his
employment hereunder upon sixty (60) days written notice to the Company.
(e) TERMINATION FOR GOOD REASON. Notwithstanding anything to the
contrary contained in this Agreement, Employee, by written notice to the Board
of Directors, shall have the right to terminate his employment for Good Reason.
(f) DEFINITION OF GOOD REASON. For purposes of this Agreement, the
term "Good Reason" shall mean the occurrence, without Employee's written consent
thereto, of any of the following:
(i) the reasonable good faith determination by an arbitrator
mutually acceptable to the Company and the Employee that there has been a
material adverse change in Employee's status, title, position or
responsibilities (including reporting responsibilities); the assignment to
Employee of any duties or responsibilities which, in Employee's reasonable
judgment, are inconsistent with his status, title, position or responsibilities
in effect immediately prior to such assignment; or any removal of Employee from
or failure to reappoint or reelect him to any position, except in connection
with the termination of his employment for Disability, Cause, as a result of his
death or by Employee other than for Good Reason;
(ii) any breach by the Company of any material provision of this
Agreement or other agreements between Employee and the Company regarding
Employee's policy-making responsibilities with the Company;
(iii) any purported termination of Employee's employment For
Cause by the Company which does not comply with the terms of Section 3.1(b) of
this Agreement;
(iv) requirement that Employee relocate his office to a location
more than 50 miles from its location on the date hereof; or
(v) the failure by the Company or any of its subsidiaries or
affiliated companies to continue to provide Employee with employee benefits at
least as favorable in the aggregate to those enjoyed by Employee as the date
hereof except to the extent any such changes are made effective for all
executives of the Company.
4
<PAGE>
3.2 RIGHTS UPON TERMINATION.
(a) SECTION 3.1(a), (c) AND (e) TERMINATIONS. If Employee's
employment is terminated pursuant to Section 3.1(a), (c) or (e) hereof, the
Company shall pay to Employee, or in the case of Employee's death, to Employee's
estate, (i) any unpaid Base Salary with respect to the period prior to the
effective date of termination, (ii) severance payments equal to the Base Salary
in effect for each year remaining in the Employment Term (prorated to account
for a partial year in the case of the year during which termination occurs),
payable in accordance with Section 2.1 hereof and the normal payroll practices
of the Company, (iii) upon payment of the exercise price, shares of UWSI Common
Stock issuable upon exercise of the Option (iv) reimbursement of expenses to
which Employee is entitled under Section 2.4 hereof and (v) to the extent
permitted by law, the Company shall continue the employee benefits which the
Employee was eligible for during the Employment Term until the sixth anniversary
of the date hereof.
(b) SECTION 3.1(b) AND (d) TERMINATIONS. If Employee's employment is
terminated pursuant to Section 3.1(b) or (d), Employee shall have no further
rights against the Company hereunder, except for the right to receive (i) any
unpaid Base Salary with respect to the period prior to the effective date of
termination and (ii) reimbursement of expenses to which Employee is entitled
under Section 2.4 hereof.
(c) Nothing contained in this Agreement shall affect the rights and
obligations of Employee under any of the Company's employee benefit plans in
effect from time to time, and such rights and obligations shall be determined
solely by reference to such employee benefit plan documents.
ARTICLE IV
CONFIDENTIALITY; NONCOMPETITION
4.1 CONFIDENTIAL INFORMATION; INTELLECTUAL PROPERTY.
(a) CONFIDENTIAL INFORMATION. Employee acknowledges that Employee
will be required to use his personal intellectual skills on behalf of the
Company and that it is reasonable and fair that the fruits of such skills should
inure to the sole benefit of the Company. Employee further acknowledges that
Employee already has and will acquire information of a confidential nature
relating to the operation, finances, business relationships and trade secrets of
the Company. During Employee's employment and for a period of two years
following termination thereof, within the geographical area in which such use,
publication or disclosure would reasonably be expected to harm the Company's
existing or potential business interests, Employee will not use (except for use
in the course of the Employee's regular authorized duties on behalf of the
Company), publish, disclose or authorize anyone else to use, publish or
disclose, without the prior written consent of the Company, any confidential
information pertaining to the Company or its affiliated entities, including,
without limitation, any
5
<PAGE>
information relating to existing or potential business, customers, trade or
industrial practices, plans, costs, processes, or technical or engineering
data; PROVIDED, HOWEVER, that following termination of Employee's employment,
Employee shall be prohibited from using, publishing, disclosing or
authorizing anyone else to use, publish or disclose, any confidential
information which constitutes a trade secret under applicable law.
Employee's obligations under this section apply to, and are intended to
prevent, the direct or indirect disclosure of confidential information to
others where such disclosure of confidential information would reasonably be
considered to be useful to Employer's competitors or to a third party to
become a competitor based in whole or in part on such disclosure of
confidential information. Employee shall not remove or retain any figures,
calculations, formulae, letters, papers, software, abstracts, summaries,
drawings, blueprints, diskettes or any other material, or copies thereof,
which contain or embody any confidential information of the Company, except
for use in the course of Employee's regular authorized duties on behalf of
the Company or with the prior written consent of the Company. The foregoing
notwithstanding, Employee has no obligation to refrain from using, publishing
or disclosing any such confidential information which is or hereafter shall
become available to the public otherwise than by use, publication or
disclosure by Employee. This prohibition also does not prohibit Employee's
use of general skills and know-how acquired during and prior to employment,
as long as such use does not involve the use, publication or disclosure of
the Company's confidential information.
(b) AGREEMENT TO TRANSFER. Employee shall without further payment,
assign, transfer and set over, and does hereby assign, transfer and set over, to
the Company, its successors and assigns, all Employee's right, title and
interest in and to all trade secrets, secret processes, inventions,
improvements, patents, patent applications, trademarks, trademark applications,
copyrights and any and all intellectual property rights which Employee may,
either solely or jointly with others, conceive, develop, make or suggest at any
time during employment or within a one-year period after termination of
employment and which relate to the existing or potential products, processes,
work, research or other activities of the Company.
4.2 NONCOMPETITION. During Employee's employment and for a two-year
period following the termination thereof, Employee shall not, without the prior
written consent of the Company, directly or indirectly, as an employee, officer,
director, partner, consultant, owner (other than a minority shareholder interest
of not more than 1% of a company whose equity interests are publicly traded on a
nationally recognized stock exchange or over-the-counter) solicit any business
regarding services of the kinds that the Company either offered or was planning
to offer and of which Employee was aware at or before the time of Employee's
termination, from any person or entity that (a) was a customer or prospective
customer of the Company as of the date of termination, and (b) was a customer
with which Employee had personal contact in regard to such services within two
years prior to said termination.
4.3 NON-SOLICITATION. For a period of two years after termination of
Employee's employment, Employee will not solicit, or assist any person or entity
to solicit, any employee, agent, supplier or other person having business
relations with the Company to terminate
6
<PAGE>
such employee's employment or terminate or curtail such supplier's or other
person's business relationship with the Company.
4.4 RETURN OF DOCUMENTS. Immediately upon termination of employment,
Employee will return to the Company, and so certify in writing to the Company,
that Employee has returned to the Company all the Company's papers, documents
and things, including information stored for use in or with computers and
software applicable to the Company's business (and all copies thereof), which
are in Employee's possession or under Employee's control, regardless whether
such papers, documents or things contain confidential information
or trade secrets.
4.5 NOTICE; DISCLOSURE. For a period of three years after the termination
of Employee's employment hereunder, Employee shall keep the Company promptly and
fully informed of any person or persons, partnerships, associations, limited
liability companies or corporations by whom Employee may be employed.
4.6 NO CONFLICTS. Employee represents and warrants that Employee has not
previously assumed any obligations inconsistent with those of this Agreement and
that employment by the Company does not conflict with any prior obligations to
third parties.
4.7 AGREEMENT ON FAIRNESS. Employee acknowledges that: (i) this
Agreement has been specifically bargained between the parties and reviewed by
Employee, (ii) Employee has had an opportunity to obtain legal counsel to review
this Agreement, and (iii) the covenants made by and duties imposed upon Employee
hereby are fair, reasonable and minimally necessary to protect the legitimate
business interests of the Company, and such covenants and duties will not place
an undue burden upon Employee's livelihood in the event of termination of
Employee's employment by the Company and the strict enforcement of the covenants
contained herein.
4.8 EQUITABLE RELIEF. Employee acknowledges that any breach of this
Agreement will cause substantial and irreparable harm to the Company for which
money damages would be an inadequate remedy. Accordingly, the Company shall in
any such event be entitled to obtain injunctive and other forms of equitable
relief to prevent such breach and to recover from Employee the Company's costs
(including without limitation reasonable attorneys' fees) incurred in connection
with enforcing this Agreement, in addition to any other rights or remedies
available at law, in equity or by statute.
ARTICLE V
GENERAL PROVISIONS
5.1 NOTICES. Any and all notices, consents, documents or communications
provided for in this Agreement shall be given in the manner, and to the persons,
specified in Section 9.01 of the Merger Agreement.
7
<PAGE>
5.2 ENTIRE AGREEMENT. This Agreement contains the entire understanding
and the full and complete agreement of the parties and supersedes and replaces
any prior understandings and agreements between the parties with respect to the
subject matter hereof and supersedes and replaces the employment agreement
between Employee and AMS.
5.3 AMENDMENT. This Agreement may be altered, amended or modified only in
a writing, signed by both of the parties hereto. Headings included in this
Agreement are for convenience only and are not intended to limit or expand the
rights of the parties hereto. References to Sections herein shall mean sections
of the text of this Agreement, unless otherwise indicated.
5.4 ASSIGNABILITY. This Agreement and the rights and duties set forth
herein may not be assigned by Employee or the Company, in whole or in part.
This Agreement shall be binding on and inure to the benefit of each party and
such party's respective heirs, legal representatives, successors and assigns.
5.5 SEVERABILITY. If any court of competent jurisdiction determines that
any provision of this Agreement is invalid or unenforceable, then such
invalidity or unenforceability shall have no effect on the other provisions
hereof, which shall remain valid, binding and enforceable and in full force and
effect, and such invalid or unenforceable provision shall be construed in a
manner so as to give the maximum valid and enforceable effect to the intent of
the parties expressed therein.
5.6 WAIVER OF BREACH. The waiver by either party of the breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either party.
5.7 GOVERNING LAW; CONSTRUCTION. This Agreement shall be governed by the
internal laws of the State of Wisconsin, without regard to any rules of
construction concerning the draftsman hereof.
5.8 ATTORNEY'S FEES. If any case of action is brought before any court to
enforce any provision of this Agreement, the Company shall reimburse Employee
for reasonable costs incurred (including reasonable attorney's fees) by Employee
if Employee prevails to any extent in any such action.
5.9 NO MITIGATION. If Employee's employment hereunder is terminated by
the Company without Cause because of Employee's Disability or by Employee for
Good Reason, Employee shall not be obligated to seek other employment or take
any other action by way of mitigation of the amounts payable to Employee
hereunder.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year written above.
COMPANY:
AMERICAN MEDICAL SECURITY
HOLDINGS, INC.
By: /s/ C. Edward Mordy
----------------------------------
C. Edward Mordy
EMPLOYEE:
/s/ Ronald A. Weyers
--------------------------------------
Ronald A. Weyers
IN WITNESS WHEREOF, United Wisconsin Services, Inc. has executed this
Agreement as of the day and year written above for the purpose of granting the
stock option contemplated in Section 2.2 hereof.
UNITED WISCONSIN SERVICES, INC.
By: /s/ Thomas R. Hefty
----------------------------------
Thomas R. Hefty, President
9
<PAGE>
AMENDED AND RESTATED
JOINT VENTURE AGREEMENT
THIS AMENDED AND RESTATED JOINT VENTURE AGREEMENT (the "Agreement")
effective as of the 1st day of January, 1997 by and among Blue Cross & Blue
Shield United of Wisconsin, a Wisconsin Chapter 613 insurance corporation
("Blue Cross"), United Wisconsin Services, Inc., a Wisconsin Chapter 180
business corporation ("UWS"), Valley Health Plan, Inc., a Wisconsin Chapter
611 insurance corporation ("VHP"), and Midelfort Clinic, Ltd., Mayo Health
System, a Wisconsin Chapter 181 business corporation (the "Clinic").
PREAMBLE
WHEREAS, Blue Cross and the Clinic entered into a Joint Venture
Agreement dated January 1, 1992 (the "1992 Agreement") for the purpose of
enhancing their respective businesses regarding managed care products which
utilize a provider network;
WHEREAS, the parties to the 1992 Agreement wish to enter into an
amended and restated agreement (the "Amended and Restated Joint Venture
Agreement), effective January 1, 1997, to address changes in product lines
and benefit design that have occurred since the inception of the joint
venture and to amend the 1992 Agreement in other respects as set forth herein;
WHEREAS, the Clinic has sold Midelfort Health Plan, Inc. ("MHP", n/k/a
VHP) to Blue Cross' affiliate, UWS, while retaining
<PAGE>
an option to repurchase, under a Purchase and Sale Agreement dated as of
January 1, 1992 ("Purchase and Sale Agreement"), amended effective January 1,
1997;
WHEREAS, the parties wish to coordinate the design and marketing of
various managed care products which utilize a provider network, including,
without limitation, Preferred Provider Organization ("PPO"), Point of Service
("POS") and Health Maintenance Organization ("HMO") products and programs,
all of which may be fully insured or self-funded;
WHEREAS, the Clinic shall participate in these products not only as the
primary provider but also in the business of designing and marketing these
products;
WHEREAS, the Underwriters shall be liable for losses incurred by the
products, but shall share with the Clinic the collective profits of the
products; and
WHEREAS, Midelfort Clinic, Ltd. has been acquired by Mayo Foundation
for Medical Education and Research and the parties have consented to the
assignment by Midelfort Clinic, Ltd. to Midelfort Clinic, Ltd., Mayo Health
System, all of its right, title and interest in, to and under the 1992
Agreement and the Amended and Restated Joint Venture Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
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1. SCOPE OF AGREEMENT
1.1 Blue Cross shall be defined herein to include all its respective
subsidiaries and affiliates except wherein UWS is referred to
specifically. The Clinic shall be defined herein to include all its
respective subsidiaries and affiliates in which the Clinic has an
ownership interest (but not its sole member).
1.2 The parties to this Agreement have entered into a series of related
contracts with one another in order to produce, market, and administer
managed care products which utilize a provider network. The
relationships between and among the parties are that of independent
contractors working together in a cooperative arrangement. It is not
the intent of the parties to create, nor should this Agreement be
construed to create, a partnership or an employment relationship between
or among the parties.
1.3 This Agreement shall not create any agency relationship between or among
the parties other than those specifically enumerated in provider
agreements and administrative services agreements entered into between
Blue Cross and VHP, as the underwriters, and the Clinic. This Agreement
creates no fiduciary relationship between or among any of the parties.
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<PAGE>
2. PRODUCTS
2.1 The parties will design and market various managed care products which
utilize a provider network, including PPO, POS and HMO, all of which may
be fully insured or self-funded. (Fully insured products are referred
to herein collectively as "Insured Products" and self-funded products
are referred to herein collectively as "Self-funded Products").
2.2 Blue Cross shall be the underwriter of the insured PPO plans and the
indemnity segment of POS plans and VHP shall be the underwriter of the
insured HMO plans (Blue Cross and VHP are in this role collectively
referred to as the "Underwriters"). On any self-funded program, Blue
Cross shall be the marketer of the PPO plans and VHP shall be the
marketer of the HMO and POS plans (Blue Cross and VHP are in this role
collectively referred to as the "Marketers").
2.3 The Clinic shall be the primary provider for all products contemplated
by this Agreement. The Clinic shall enter into provider agreements with
the Underwriters and the Marketers.
2.4 It is the intent of Blue Cross and the Clinic to cooperate in the design
and development of a Medicare Risk product and a managed care Workers'
Compensation product at such time that the parties mutually agree that
economic and market conditions are favorable.
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<PAGE>
3. GOVERNING BOARD
3.1 The cooperative arrangement contemplated by this Agreement shall be
directed through a Governing Board. Blue Cross and the Clinic shall
each select four members of the Governing Board. The Governing Board
may select a smaller executive committee to manage the joint venture on
a day-to-day basis subject to the control of the Governing Board.
3.2 With respect to both Insured Products and Self-funded Products, all
major policies and decisions regarding the Underwriter's and/or
Marketer's business plan, marketing, benefit design, public relations,
provider contracting (including capitation and fee schedule)
administrative services agreements, and medical underwriting guidelines
shall be subject to approval by the Governing Board. Notwithstanding
the foregoing, the direct Underwriters shall have ultimate authority on
Insured Products in setting rates, medical underwriting functions and
reinsurance. VHP shall arrange for reinsurance for plans it underwrites
through a competitive bid process. Selection of the reinsurer shall be
based on price and cost control services offered by the reinsurer.
Notwithstanding the foregoing, VHP's selection of a reinsurer is subject
to the prior approval of the Governing Board.
3.3 In the event the positions of Director of VHP and/or the primary Medical
Director for VHP become vacant, the
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recommended candidate for either position will require the approval of
the Governing Board.
3.4 The four members of the Governing Board selected by Blue Cross shall be
responsible for selecting, negotiating and terminating contracts with
other independent providers, who are not otherwise affiliates of the
Clinic or members of the Mayo Health System, on behalf of Blue Cross
and/or VHP as Underwriters and/or Marketers subject to the following
conditions and restrictions:
(a) The four members of the Governing Board selected by the Clinic
shall be solicited to offer comments relating to the selection of
and contracting with independent providers or their termination.
Upon receipt of comments offered by the Clinic's Governing Board
members, a majority vote solely of the four Blue Cross members of
the Governing Board shall determine which such providers are
selected, the contract terms offered and afforded them and if and
when their contracts are terminated.
(b) Notwithstanding the foregoing, if any such independent providers
are afforded contract terms which are, in whole or in particular
part, more favorable to such providers than those afforded the
Clinic under its provider agreements with the Underwriters and/or
Marketers, such more favorable terms shall
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<PAGE>
automatically and without further action of the parties be
incorporated in such agreements with the Clinic and shall remain in
place so long as such terms are afforded one or more independent
providers.
(c) In selecting independent providers, the Blue Cross members of the
Governing Board shall duly consider: the medical credentials of
such providers; whether the provider's credentials meet standards
set by the National Committee for Quality Assurance or other
accrediting agency acceptable to the Governing Board; whether there
is a need for their participation in order to provide an adequate
and appropriate level of medical services to insureds/enrollees;
whether the addition of such providers and the contract terms to be
afforded them are consistent with and will promote the provision of
managed medical care on a cost-efficient basis; and such other
factors as are reasonably deemed relevant by the Blue Cross members
of the Governing Board.
(d) Each application of an independent provider shall be duly
considered by the Blue Cross members of the Governing Board on a
timely basis and such members' decision on each such application
shall be timely communicated to the applicant.
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<PAGE>
4. SERVICE AGREEMENTS AND PAYMENT TERMS
4.1 It is acknowledged that the Clinic and Blue Cross have entered into
administrative services agreements effective January 1, 1992 with the
Underwriters and/or Marketers regarding administration of the Insured
Products and/or Self-funded Products. The Governing Board and executive
committee members shall be compensated for their services to the joint
venture through the administrative services agreements. It is
anticipated that the Clinic, through administrative services agreements,
will provide quality assurance and medical management services to the
Underwriters and/or Marketers. All administrative services agreements
entered into shall receive approval of the Governing Board.
4.2 As to Insured Products, the terms of the administrative services
agreements shall provide that the Clinic and Blue Cross shall be
compensated for their services on an Actual Cost basis such that all
administrative profit will remain with the Underwriters to be shared
through the profit sharing formula outlined in Article 5 below. "Actual
Cost" as used herein, shall be defined as direct costs and indirect cost
allocation as provided for in the administrative services agreements.
4.3 As to Self-funded Products, all other factors being equal, the Marketers
shall treat the Clinic and Blue Cross as
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<PAGE>
preferred vendors of administrative services. Terms and conditions of
such administrative services agreements shall be negotiated on an
arms-length basis. Notwithstanding the above, the Clinic and Blue Cross
shall provide such goods and/or services to the Marketers on terms no
less favorable than each one provides similar goods and services to
third parties.
4.4 VHP, as the Underwriter of the insured HMO plans, has entered into a
provider agreement with the Clinic to be the primary provider within the
network for the HMO plans. The terms of the provider agreement shall
provide for:
(a) the Clinic to be reimbursed through capitation. Effective January
1, 1997, the capitation rate shall be the rate in effect on
December 31, 1996, as shown in Attachment B, increased by five
percent (5%). At the Clinic's written request prior to July 1,
1997, the capitation rate shall be increased not less than an
additional two percent (2%) or more than an additional two and
one-half percent (2 1/2%) of the rate in effect on December 31,
1996, with the rate of change becoming effective on July 1, 1997.
Thereafter, annual increases, if any, shall be made on each January
1, with the rate of increase over the prior year's rate not to
exceed the rate of increase of the medical care component of the
Consumer Price Index ("CPI") for all
-9-
<PAGE>
urban consumers, United States City Average, during the preceding
twelve month period running from October 1 through September 30.
The Clinic shall provide written notice to VHP of any increase in
the fee schedule by December 1 of each year, any increase to become
effective on the following January 1. The capitation shall be
adjusted to reflect the following factors: age, sex, family status
(e.g., single, two individuals, family), product line and variable
office copayment. The capitation amount paid to the Clinic for
each product line shall be actuarially determined to reflect the
anticipated utilization of services. However, regardless of the
foregoing, the Clinic agrees that it shall offer to the joint
venture its Best Price for all products offered under this
Agreement within the Exclusive Area as defined in Section 6.1.
"Best Price" as used herein shall mean a price that is equal to or
lower than the price the Clinic accepts from any other
non-governmental payor with respect to insured and self-funded HMO,
PPO, and POS products.
(b) annual review of reimbursement to the Clinic to consider the impact
of new technology, which is not reflected in the CPI, and
unexpected changes in applicable community standards of practice,
upon the capitation rate with adjustments negotiated if
-10-
<PAGE>
appropriate and, if the parties cannot agree upon an appropriate
adjustment, a provision that the Governing Board shall determine
the appropriate adjustment, if any.
(c) an initial term of three years which may be renewed for an
additional three year term by mutual agreement; otherwise renewal
shall be for one year terms unless written notice of termination is
given at least 180 days prior to the end of the then current term
with a party able to terminate the Agreement at the end of the
initial term if proper notice is given; and
(d) the portion of the premium collected by VHP to be budgeted for the
hospital fund (the "Hospital Fund") to be set at thirty and
one-half percent (30 1/2%) of the premium revenue. (A description
of the manner in which the Hospital Fund is calculated is attached
hereto as Attachment A, which is incorporated herein by this
reference.) At the end of each calendar year, if the Hospital
Fund shows a deficit, each clinic affiliated with VHP (hereafter
"Option Clinic") shall be responsible for a percentage of the
deficit equal to the percentage of VHP members, on average,
serviced by that Option Clinic during such calendar year. If the
Hospital Fund shows an excess at the end of a calendar year, each
Option Clinic shall be entitled to a pro
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<PAGE>
rata share of the excess that is equal to the percentage of
membership, on average, serviced by that Option Clinic during such
calendar year compared to the total VHP membership during such
calendar year. Settlement of the Hospital Fund shall be completed
by July 1 of each calendar year for the prior year's operations.
VHP shall provide the Option Clinics with Hospital Fund status
reports on a quarterly basis. The determination of Option Clinics
to be reimbursed from the Hospital Fund, and the percentage level
of reimbursement for each Option Clinic, shall be made upon a
majority vote of the Governing Board.
4.5 As to the insured PPO and POS products, the Clinic shall be the primary
provider to these plans. The Clinic shall provide medical services to
the PPO and POS plan beneficiaries pursuant to separate provider
agreements which shall be entered into as each such plan is established.
The terms of the provider agreements shall provide for: (a) the Clinic
to be reimbursed at the Clinic's then current fee schedule less a ten
percent (10%) discount; (b) the fee schedule shall be the Clinic's 1996
fee schedule with such changes as the Clinic enacts from time to time;
however, for purposes of this Agreement, any increase in a given CPT
code shall not exceed the increase in the medical care component of the
CPI for all urban consumers, United States City
-12-
<PAGE>
Average, for the same period of time as that period of time beginning
with the month in which the 1996 fee schedule was put into effect
through the time of the proposed increase in the CPT code, except that
an increase in a given CPT code may exceed the increase in the medical
care component of the CPI if approved by the Governing Board; and (c)
with Governing Board approval, review by the Governing Board of
reimbursement to the Clinic if utilization review illustrates the
Clinic's utilization or resulting cost to be above peer norm for three
consecutive quarters, with adjustments negotiated if appropriate.
5. PROFIT SHARING
5.1 Underwriting losses shall be the liability of the Underwriters, Blue
Cross and/or VHP respectively, on the Insured Products. Notwithstanding
the above, fifty percent of the aggregate net profits (calculated as set
forth below) shall be paid to the Clinic as set forth below.
5.2 Aggregate net profits shall be the sum of the following profits and
losses determined over the entire Initial Term of this Amended and
Restated Agreement as defined in Section 7.1 herein:
(a) Net profit/loss of VHP. Such net profit/loss shall be determined
by applying the same accounting principles applied in preparing
MHP's December 31, 1991 financial statement. As clarification,
calculation of net
-13-
<PAGE>
profit/loss shall not take into account any adjustments to the
reconciled purchase price as outlined in Section 4.4 of the
Purchase and Sale Agreement, any profit sharing payments made
pursuant to this Agreement, or any provision for the payment of
taxes. As further clarification, a sample profit-sharing
calculation is attached to this Agreement and incorporated herein
as Attachment C. Notwithstanding actual administrative expenses
incurred, total administrative expenses which may be charged
against income in calculating net profit/loss of VHP shall be the
lesser of: (i) actual costs incurred by VHP; or (ii) eight and
one-half percent (8 1/2%) of the gross premiums received for that
benefit year by VHP.
(b) Net underwriting profit/loss of each insured POS plan underwritten
by Blue Cross and offered by this joint venture. Net underwriting
profit/loss shall be calculated as net earned premiums less the sum
of incurred claims and administrative expenses. Total
administrative expenses used in calculating net underwriting
profit/loss shall not exceed the actual costs incurred by the
Underwriter pursuant to the administrative services agreements
referenced in Section 4.2 of this Agreement.
-14-
<PAGE>
(c) Net profit/loss of excess loss reinsurance provided by an insurer
affiliated with Blue Cross for each insured POS plan underwritten
by Blue Cross and offered by this joint venture. Such net
profit/loss shall be calculated as reinsurance premium paid to the
reinsurer, less: (i) claims paid plus; (ii) a reserve for claims
reported but not yet paid, and claims incurred but not yet
reported; and (iii) administrative expenses or fees related to the
reinsurance policy.
5.3 Aggregate net profits/losses shall be determined over the entire Initial
Term of this Agreement as defined in Section 7.1 herein.
Notwithstanding the above, the Clinic is interested in sharing net
profits with the Underwriters on an interim basis and the Underwriters
are interested in recouping, on an interim basis, from the Clinic any
profits shared for which loss carry backs indicate an overpayment was
made. Interim profit sharing and recoupment shall be as follows:
(a) Within 120 days following the end of the first Benefit Year, UWS
shall determine the aggregate net profits or losses as described in
Section 5.2, above for that Benefit Year alone. "Benefit Year" is
defined as a calendar year beginning on January 1 and ending on
December 31 of the same year for all years falling within the
Initial Term of this Agreement. If
-15-
<PAGE>
aggregate net profits are present, UWS shall make available to the
Clinic a line of credit, within 150 days following the end of the
first Benefit Year, equal to the Clinic's fifty percent (50%) share
of the aggregate net profits. The Clinic may draw on the line of
credit. Any monies so drawn on by the Clinic shall herein be
referred to as the "Balance Drawn".
(b) Within 120 days following the end of the second Benefit Year, UWS
shall determine the aggregate net profits or losses as described in
Section 5.2 above, in the aggregate for the first two Benefit
Years, accounting for both loss carry forwards and loss carry backs.
(i) Within 150 days following the end of each such Benefit Year,
the amount of the line of credit shall be adjusted so as to
be equal to the Clinic's fifty percent (50%) share of the
aggregate net profits so calculated. A party's share of
aggregate net profits shall not include any investment
income attributable to the other party's share of aggregate
net profits.
(ii) If after such adjustment to the amount of the line of credit
the Balance Drawn by the Clinic exceeds the adjusted line of
credit ("Overdraft"), the Clinic shall repay to UWS
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<PAGE>
the amount of the Overdraft plus accruing interest.
Repayment shall be in twelve equal installments beginning on
the first of the month 150 days following the end of the
last Benefit Year. Interest on the monies owed by the
Clinic shall accrue at the prime rate, plus 100 basis
points, as determined by M & I Marshall & Ilsley Bank,
Milwaukee, Wisconsin, on the close of business on the last
business day of the month preceding when the first
installment is due. Interest shall accrue beginning on the
first of the month 150 days following the end of the last
Benefit Year. The Clinic may repay all or part of the
Overdraft at any time.
(c) Within 180 days following the end of the third Benefit Year of the
Initial Term, UWS shall determine the aggregate net profits or
losses as determined in Section 5.2 above for all Benefit Years
which comprise the Initial Term of this Agreement, accounting for
both loss carry forwards and loss carry backs.
(i) If aggregate net profits are present, UWS shall pay to the
Clinic, within 210 days following the end of the third
Benefit Year of the Initial Term, the Clinic's respective
fifty
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<PAGE>
percent (50%) share of the aggregate net profits. The
Clinic's share of such aggregate net profits shall be paid
to it by UWS first canceling the Balance Drawn by the
Clinic, up to the Clinic's share of such aggregate net
profits. If after such cancellation, aggregate net profits
remain to be paid to the Clinic by UWS, an appropriate cash
payment shall be made by UWS to the Clinic. If after such
cancellation an Overdraft remains to be paid by the Clinic
on the line of credit, the Clinic shall repay such Overdraft
as set forth in item (ii) below.
(ii) If aggregate net losses are present, the Clinic shall repay
UWS the Overdraft. Repayment shall be within 210 days
following the end of the third Benefit Year of the Initial
Term. Interest on the monies owed by the Clinic shall
accrue at the prime rate, plus 100 basis points, as
determined by M & I Marshall & Ilsley Bank, Milwaukee,
Wisconsin, on the close of business on the last business day
of the month preceding when repayment is due. Interest
shall accrue beginning on the first of the month 210 days
following the end of the
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<PAGE>
final Benefit Year of the Initial Term. The Clinic may
repay all or part of the amount owed at any time.
(d) If, after the Initial Term, this Agreement is renewed for an
additional three-year term or terms in accordance with Section 7.1,
aggregate net profits shall be shared on an interim basis as
described in (a) and (b), above, with final reconciliation
occurring following the third year of each such three-year term as
described in (c) above. If this Agreement is renewed for one or
more one-year terms, final reconciliation shall occur at the end of
each such one-year term.
6. EXCLUSIVITY
6.1 Unless otherwise agreed by the Governing Board, and subject to Section
6.2 below, no party may, during the Initial Term (as defined in Section
7.1) or any subsequent term(s) of this Amended and Restated Joint
Venture Agreement directly or indirectly offer or participate in the
offering, except through this joint venture, of any HMO, PPO, POS or
other managed care products, which utilize a provider network, either
insured, or self-funded, which has a participating provider located in
any of the following Wisconsin geographic areas: the counties of Barron,
Chippewa, Eau Claire and Dunn; and the five-digit zip code area(s)
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<PAGE>
comprising the City of Mondovi (this geographic area is hereinafter
referred to as the "Exclusive Area").
6.2 The Clinic may, without the prior approval of the Governing Board,
participate with parties other than Blue Cross, UWS and VHP in the
offering of managed care plans within the Exclusive Area only if:
(a) such managed care plans are offered only to employers having
multiple locations, one or more of which is located within the
Exclusive Area, and with employer headquarters located outside the
Exclusive Area;
6.3 During the term of this Agreement, the Clinic agrees to serve as a
provider for Blue Cross' PPO and POS plans for the following groups and
shall take such steps as are necessary to persuade Luther Hospital to
continue to serve as a provider in the same capacity:
(a) groups with operations and corporate headquarters located within
the Exclusive Area;
(b) groups with operations and/or corporate headquarters located within
Wisconsin but outside the Exclusive Area; and
(c) groups with corporate headquarters outside Wisconsin for which Blue
Cross participates with other Blue Cross
-20-
<PAGE>
and/or Blue Shield plans in the administration of the groups' Blue
Cross and/or Blue Shield labelled benefit plans.
6.4 The Clinic agrees to serve as a provider for subsidiaries or affiliates
of Blue Cross as of January 1, 1997, (not to include American Medical
Security Group, Inc.) which offer PPO networks for Insured Products and
third party administrative ("TPA") services for Self-funded Products.
However, the Clinic agrees to serve as a provider for an additional Blue
Cross affiliated TPA that may be formed after January 1, 1997. Clinic
further agrees to take such steps as are necessary to persuade Luther
Hospital to serve as a provider in the same capacity.
6.5 The Clinic may terminate its agreement to serve as a provider for the
products referenced in sections 6.3 and 6.4, above, by providing Blue
Cross or its subsidiary or affiliate, as appropriate, with ninety (90)
days prior written notice, with termination to be effective as of
January 1 of the following calendar year. In the event that the Clinic
exercises this option to terminate, the termination shall have no affect
on the parties' other rights and obligations under this Agreement, nor
shall the Clinic or Blue Cross, or their respective subsidiaries and
affiliates, have any further obligation to the other parties with
respect to the products referenced in sections 6.3 and
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<PAGE>
6.4, except that: (i) the Clinic agrees to extend continued provider
services to all groups affected by the termination until the end of each
such group's benefit year; and (ii) during the course of any such
extension, the Clinic agrees to accept the same reimbursement terms and
other Agreement terms that were in effect immediately prior to
termination.
6.6 The parties to this Agreement acknowledge and agree that the provisions
of this Article 6, relating to exclusivity, are binding on those
subsidiaries and affiliates of the Clinic existing on January 1, 1992,
and shall be binding on later acquired or established subsidiaries or
affiliates only if such entities signify in writing their intent to be
bound.
7. TERM AND TERMINATION
7.1 The initial term ("Initial Term") of this Amended and Restated Joint
Venture Agreement shall be for three years, commencing on January 1,
1997 and continuing in effect through December 31, 1999. This Agreement
may be renewed for an additional three year term, commencing on January
1, 2000, by mutual written agreement of the parties; otherwise the joint
venture shall automatically renew for one year terms unless written
notice of termination is given at least 180 days prior to the end of the
then current term. This Agreement may be terminated at the end of the
Initial Term if proper notice is given.
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<PAGE>
7.2 Notwithstanding the above, if, in accordance with the Purchase and Sale
Agreement, Clinic exercises its right to repurchase all outstanding
shares of VHP stock from UWS upon the third anniversary of this Amended
and Restated Joint Venture Agreement, or its termination, whichever is
earlier, this Agreement shall terminate unless the parties mutually
agree otherwise in writing. Additionally, in the event that a party
substantially breaches any material term or condition of this Agreement,
notice of the specific breach shall be given to the breaching party.
The breaching party shall have sixty (60) days to cure such breach. In
the event the breaching party fails to cure said breach, the
non-breaching party shall have the right to terminate this Agreement on
thirty (30) days prior written notice.
7.3 Notwithstanding the termination of this Agreement, all provider and
administrative services agreements entered into by the parties shall
continue according to the provisions contained in those provider
agreements.
8. MISCELLANEOUS
8.1 The parties agree that a high quality of service and participation in
this joint venture are to be provided by each party in their respective
duties and obligations.
8.2 In the event of a dispute between the parties relating to this
Agreement, such dispute shall be resolved by arbitration in accordance
with the rules of the American
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<PAGE>
Arbitration Association. The inability of the Governing Board to take
action with regard to a particular matter due to an impasse shall not be
treated as a dispute affording either party the right to demand
arbitration to resolve such impasse.
8.3 This Agreement supersedes all prior agreements, proposals, offers or
letters of intent, including the 1992 Agreement, relating to the subject
matter hereof. Any amendment to this Agreement must be in writing,
executed by, and delivered to, each of the parties.
8.4 In the event that a court, regulator, or administrative judge of
competent jurisdiction declares any provision of this Agreement to be
invalid or unenforceable, such declaration shall have no effect on the
validity or enforceability of the remainder of this Agreement; provided,
however, that the basic purposes of this Agreement may be achieved
through the remaining valid provisions.
8.5 The parties acknowledge that all material and information of a given
party which has or will come into the possession of another party in
connection with this Agreement consists of confidential and proprietary
data. Each party agrees to hold such material and information in
strictest confidence, not to make use thereof other than for the
performance of this Agreement, and not to release or disclose it to any
-24-
<PAGE>
third party other than for the performance of this Agreement.
8.6 Failure by any party to insist upon compliance with any term or
provision of this Agreement at any time or under any set of
circumstances will not operate to waive or modify that provision or
render it unenforceable at any other time.
8.7 This Agreement shall be construed according to the laws of the State of
Wisconsin.
8.8 All notices required or permitted by this Agreement shall be sent to the
following addresses, or to such other persons or locations indicated in
writing by the parties:
BLUE CROSS:
Penny J. Siewert, Vice President of Regional Services
N17 W24340 Riverwood Drive
Waukesha, WI 53188
UWS:
Thomas R. Hefty, President
401 West Michigan Street
Milwaukee, WI 53203
VHP:
Norman L. Keller, President
Valley Health Plan, Inc.
2270 EastRidge Center
Eau Claire, WI 54701
CLINIC:
Robert Downs, Executive Vice President
Midelfort Clinic, Ltd., Mayo Health System
1400 Bellinger Street
P. O. Box 1510
Eau Claire, WI 54702
8.9 No party may assign its rights or delegate its duties under this
Agreement without the prior written consent of the other parties. Such
approved assignment or delegation shall
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<PAGE>
inure to the benefit of the parties, their successors, and their
permitted assigns or delegates.
8.10 Each signatory hereto represents and warrants that his/her execution
of this Agreement on behalf of his/her respective party has been duly
authorized and approved by the parties' Board of Directors and/or
shareholders (if legally required).
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective representatives.
Attest: BLUE CROSS & BLUE SHIELD
UNITED OF WISCONSIN
- --------------------------
By: /s/ [illegible]
-----------------------------
Title:
--------------------------
Attest: UNITED WISCONSIN SERVICES, INC.
- --------------------------
By: /s/ [illegible]
-----------------------------
Title: President & CEO
--------------------------
Attest: VALLEY HEALTH PLAN, INC.
- --------------------------
By: /s/ Norman L. Keller
-----------------------------
Title: President
--------------------------
Attest: MIDELFORT CLINIC, LTD., MAYO
HEALTH SYSTEM
- --------------------------
By: /s/ [illegible]
-----------------------------
Title: President
--------------------------
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<PAGE>
ATTACHMENT A
VALLEY HEALTH PLAN HOSPITAL FUND
A. During each calendar year of the Amended and Restated Joint Venture
Agreement ("Agreement"), the Hospital Fund shall be set at thirty and
one-half percent (30 1/2 %) of premium revenue collected in that calendar
year with respect to the following products:
1. VHP HMO products;
2. VHP HMO Partner Plan;
3. Medicare Supplement Plan;
4. AgriHealth Plan; and
5. All products that require VHP members to select the Clinic or an
Option Clinic as a primary care provider.
B. The Hospital Fund covers inpatient care and outpatient care provided
in-network or out-of-network with an approved VHP authorization.
C. In accordance with section 4.4 (d) of the Agreement, the Hospital Fund
shall be calculated as follows:
[Insert sample Hospital Fund Calculation here.]
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<PAGE>
VALLEY HEALTH PLAN INC. Attachment B
CAPITATIONS
1997
MIDELFORT MEDICARE CARVEOUTS - OPTION 10
5% INCREASE OVER 1996
1 ON/1 OFF 1 ON/1 OFF
SINGLE 2 SINGLES REGULAR PARTNER
AGE GROUP 05/35/55 06/36/56 7/8/57/58 37/38
- -----------------------------------------------------------------------
60 - 64 55.71 110.87 258.90 190.35
65 + 55.71 110.87 258.90 190.35
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT AGRICARE/AGRIHEALTH (NO COPAY) - OPTION 10
5% INCREASE OVER 1996
ADULT CHILD
AGE GROUP 20/120 29/129
- ------------------------------------
UNDER 30 52.36 22.28
30 - 39 49.43
40 - 49 50.69
50 - 59 56.54
60 - 69 61.99
65 + 68.26
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT MEDICARE SUPPLEMENTS - OPTION 10
5% INCREASE OVER 1996
1 ON/1 OFF 1 ON/1 OFF
SINGLE SINGLE SINGLE SINGLE SINGLE
AGE GROUP 41 42 43 44 45
- ----------------------------------------------------------------------------
65 - 69 50.21
70 - 74 56.27
75 - 79 60.13
80 - 84 60.13
85 + 60.13
<PAGE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION STATE TEMP RATES - OPTION 10
5% INCREASE OVER 1996
SINGLE 2 Tier/Family
61 62 63 64
AGE GROUP MALE FEMALE MALE FEMALE
------------------ ------------------
UNDER 30 21.04 53.35 107.40 98.24
30 - 39 32.17 67.13 138.99 126.21
40 - 49 39.46 65.42 137.63 132.99
50 - 59 64.69 78.08 160.61 155.61
60 - 64 90.19 90.39 183.86 166.66
65+ 104.16 89.63 193.00 181.35
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION REGULAR PLAN (NO COPAY)- OPTION 10
STATE AND FEDERAL EMPLOYEES
5% INCREASE OVER 1996
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
71 75 72 76 74 78 73 77
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 29.83 75.99 131.33 105.28 153.21 140.10 184.25 153.38
30 - 39 45.73 95.66 143.21 138.03 198.32 180.06 216.71 199.36
40 - 49 56.14 93.23 146.38 143.52 196.37 189.74 214.88 204.40
50 - 59 92.19 111.30 201.07 180.90 229.20 222.07 247.10 236.19
60 - 64 128.60 128.90 252.58 222.01 262.44 237.85 284.97 263.59
65+ 148.57 127.81 273.52 252.09 275.47 258.84 289.06 275.66
</TABLE>
<PAGE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION PARTNERPLAN (NO COPAY)- OPTION 10
5% INCREASE OVER 1996
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
81 85 80/82 86/89 84 88 83 87
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 27.18 69.17 119.51 95.81 139.41 127.49 167.64 139.57
30 - 39 41.64 87.06 130.31 125.60 180.45 163.83 197.17 181.39
40 - 49 51.11 84.84 133.47 130.59 178.67 172.64 195.51 185.98
50 - 59 83.90 101.30 182.94 164.60 208.52 202.04 224.81 214.88
60 - 64 117.02 117.29 229.79 202.00 238.76 216.39 259.26 239.81
65+ 135.18 116.31 248.85 229.36 250.62 235.49 262.97 250.79
</TABLE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION PARTNERPLAN ($10 COPAY)- OPTION 10
5% INCREASE OVER 1996
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
181 185 180/182 186/189 184 188 183 187
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 27.18 69.17 119.51 95.81 139.41 127.49 167.64 139.57
30 - 39 41.64 87.06 130.31 125.60 180.45 163.83 197.17 181.39
40 - 49 51.11 84.84 133.47 130.59 178.67 172.64 195.51 185.98
50 - 59 83.90 101.30 182.94 164.60 208.52 202.04 224.81 214.88
60 - 64 117.02 117.29 229.79 202.00 238.76 216.39 259.26 239.81
65+ 135.18 116.31 248.85 229.36 250.62 235.49 262.97 250.79
</TABLE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION PARTNERPLAN ($15 COPAY)- OPTION 10
3.5% LESS THAN 1997 $10 COPAY
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
281 285 280/282 286/289 284 288 283 287
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 26.23 66.75 115.33 92.45 134.53 123.03 161.77 134.68
30 - 39 40.18 84.02 125.75 121.21 174.13 158.10 190.27 175.04
40 - 49 49.32 81.88 128.80 126.02 172.42 166.60 188.67 179.47
50 - 59 80.97 97.75 176.53 158.84 201.22 194.97 216.94 207.36
60 - 64 112.93 113.19 221.75 194.93 230.40 208.82 250.19 231.42
65+ 130.45 112.24 240.14 221.33 241.85 227.25 253.77 242.01
</TABLE>
<PAGE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION PARTNERPLAN ($20 COPAY)- OPTION 10
7.0% LESS THAN 1997 $10 COPAY
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
381 385 380/382 386/389 384 388 383 387
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 25.27 64.33 111.14 89.10 129.65 118.56 155.91 129.80
30 - 39 38.72 80.97 121.19 116.81 167.82 152.37 183.37 168.69
40 - 49 47.53 78.91 124.13 121.45 166.16 160.56 181.83 172.96
50 - 59 78.03 94.21 170.13 153.08 193.92 187.89 209.07 199.84
60 - 64 108.83 109.08 213.70 187.86 222.05 201.24 241.11 223.02
65+ 125.72 108.17 231.43 213.30 233.08 219.01 244.57 233.23
</TABLE>
VALLEY HEALTH PLAN INC.
CAPITATIONS
1997
MIDELFORT OPTION PARTNERPLAN ($25 COPAY)- OPTION 10
10.0% LESS THAN 1997 $10 COPY
<TABLE>
<CAPTION>
SINGLE 3 TIER/2 PARTY 2 TIER/FAMILY 3 TIER/FAMILY
---------------------- ---------------------- ---------------------- ----------------------
481 485 480/282 486/289 484 488 483 487
AGE GROUP MALE FEMALE MALE FEMALE MALE FEMALE MALE FEMALE
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDER 30 24.46 62.26 107.56 86.23 125.46 114.74 150.88 125.61
30 - 39 37.47 78.36 117.28 113.04 162.40 147.45 117.45 163.25
40 - 49 46.00 76.36 120.13 117.54 160.80 155.38 175.96 167.38
50 - 59 75.51 91.17 164.64 148.14 187.67 181.83 202.33 193.40
60 - 64 105.32 105.56 206.81 181.80 214.88 194.75 233.33 215.83
65+ 121.66 104.68 223.96 206.42 225.56 211.94 236.68 225.71
</TABLE>
<PAGE>
ATTACHMENT C
PROFIT SHARING CALCULATION
The following reference lines on Report #2: Statement of Revenues,
Expenses, and Net Worth which is filed by Valley Health Plan with the Office
of the Commissioner of Insurance as of December 31 annually.
Line 29 Income (Loss)
PLUS
Line 30 Extraordinary Item
MINUS
Line 14 Incentive Pool and Withhold Adjustments
(Only the joint venture profit sharing portion)
EQUALS
TOTAL AMOUNT
TOTAL AMOUNT
DIVIDED BY 2 EQUALS
EACH PARTNERS BEFORETAX PROFIT SHARE
<PAGE>
4 STATEMENT AS OF DECEMBER 31, 1995 OF THE VALLEY HEALTH PLAN, INC.
----------------- ------------------------
(Year Ending) (Name)
<TABLE>
<CAPTION>
REPORT #2: STATEMENT OF REVENUES, EXPENSES AND NET WORTH
- -----------------------------------------------------------------------------------------------------
Previous
Year-to-Date Calendar Year
------------------ --------------
1 2 3
Uncovered Total Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MEMBER MONTHS XXX 326,691 280,177
- ------------------------------------------------------------------------------------------------------
REVENUES:
1. Premium XXX 40,767,194 35,245,665
- ------------------------------------------------------------------------------------------------------
2. Fee-for-Service XXX 0 0
- ------------------------------------------------------------------------------------------------------
3. Title XVIII-Medicare XXX 0 0
- ------------------------------------------------------------------------------------------------------
4. Title XIX-Medicaid XXX 1,101,715 0
- ------------------------------------------------------------------------------------------------------
5. Investment XXX 592,468 520,826
- ------------------------------------------------------------------------------------------------------
6. Aggregate Write-Ins for Other Revenues XXX 0 0
- ------------------------------------------------------------------------------------------------------
7. TOTAL REVENUES (Items 1 to 6) XXX 42,761,377 35,766,311
- ------------------------------------------------------------------------------------------------------
EXPENSES:
MEDICAL AND HOSPITALS:
8. Physician Services 711,506 16,836,218 12,975,546
- ------------------------------------------------------------------------------------------------------
9. Other Professional Services 51,066 1,206,640 1,015,289
- ------------------------------------------------------------------------------------------------------
10. Outside Referrals 17,547 415,202 325,586
- ------------------------------------------------------------------------------------------------------
11. Emergency Room and Out-of-Area 26,107 617,764 623,204
- ------------------------------------------------------------------------------------------------------
12. Occupancy, Depreciation and Amortization 0 0 0
- ------------------------------------------------------------------------------------------------------
13. Inpatient and Outpatient 513,350 12,147,209 10,246,849
- ------------------------------------------------------------------------------------------------------
14. Incentive Pool and Withhold Adjustments 0 1,651,818 1,074,460
- ------------------------------------------------------------------------------------------------------
15. Aggregate Write-Ins for Other Medical
and Hospital Expenses 210,592 4,963,207 3,630,637
- ------------------------------------------------------------------------------------------------------
16. Subtotal (Items 8 to 15) 1,530,188 37,860,348 30,091,571
- ------------------------------------------------------------------------------------------------------
17. Reinsurance Expenses Net of Recoveries 0 (434,985) 105,957
- ------------------------------------------------------------------------------------------------------
LESS:
18. Copayments 0 0 0
- ------------------------------------------------------------------------------------------------------
19. COB and Subrogation 9,538 220,156 176,138
- ------------------------------------------------------------------------------------------------------
20. Subtotal (Items 18 and 19) 9,558 220,156 176,138
- ------------------------------------------------------------------------------------------------------
21. TOTAL MEDICAL AND HOSPITAL (Items 16 and 17 less 20) 1,520,630 37,199,205 30,021,390
- ------------------------------------------------------------------------------------------------------
ADMINISTRATION:
22. Compensation 0 913,022 806,760
- ------------------------------------------------------------------------------------------------------
23. Interest Expense 0 29,485 19,858
- ------------------------------------------------------------------------------------------------------
24. Occupancy, Depreciation and Amortization 0 13,730 13,730
- ------------------------------------------------------------------------------------------------------
25. Marketing 0 497,226 643,306
- ------------------------------------------------------------------------------------------------------
26. Aggregate Write-Ins for Other Administration Expenses 0 1,630,997 1,330,429
- ------------------------------------------------------------------------------------------------------
27. TOTAL ADMINISTRATION (Items 22 to 26) 0 3,084,490 2,816,063
- ------------------------------------------------------------------------------------------------------
28. TOTAL EXPENSES (Items 21 and 27) 1,520,630 40,263,665 32,837,473
- ------------------------------------------------------------------------------------------------------
29. INCOME (LOSS) (Items 7 less Item 26) XXX 2,477,712 2,926,838
- ------------------------------------------------------------------------------------------------------
30. Extraordinary Item 0 0 0
- ------------------------------------------------------------------------------------------------------
31. Provision for Federal Income Taxes and State Income Taxes 0 946,918 1,142,058
- ------------------------------------------------------------------------------------------------------
32. NET INCOME (LOSS) (Items 29, less Items 30 and 31) XXX 1,526,794 1,786,760
- ------------------------------------------------------------------------------------------------------
DETAILS OF WRITE-INS AGGREGATED AT ITEM 6 FOR OTHER REVENUES
- ------------------------------------------------------------------------------------------------------
0601 XXX
- ------------------------------------------------------------------------------------------------------
0602 XXX
- ------------------------------------------------------------------------------------------------------
0603 XXX
- ------------------------------------------------------------------------------------------------------
0604 XXX
- ------------------------------------------------------------------------------------------------------
0605 XXX
- ------------------------------------------------------------------------------------------------------
0698 Summary of remaining write-ins for Item 6
from overflow page XXX
- ------------------------------------------------------------------------------------------------------
0699 TOTALS (Items 0601 thru 0605 plus 0695) (Page 4, Item 6) XXX 0 0
- ------------------------------------------------------------------------------------------------------
DETAILS OF WRITE-INS AGGREGATED AT ITEM 15 FOR MEDICAL AND HOSPITAL EXPENSES
1501 Pharmacy Expenses 176,716 4,226,920 3,147,856
- ------------------------------------------------------------------------------------------------------
1502 Medical Equipment 31,876 754,287 482,761
- ------------------------------------------------------------------------------------------------------
1503
- ------------------------------------------------------------------------------------------------------
1504
- ------------------------------------------------------------------------------------------------------
1505
- ------------------------------------------------------------------------------------------------------
1598 Summary of remaining write-ins for Item 15
from overflow page
- ------------------------------------------------------------------------------------------------------
1599 TOTALS (Items 1501 thru 1505 plus 1598)
(Page 4, Item 15) 210,592 4,983,207 3,630,637
- ------------------------------------------------------------------------------------------------------
DETAILS OF WRITE-INS AGGREGATED AT ITEM 26 FOR OTHER ADMINISTRATIVE EXPENSES
2601 Administrative Expenses 0 1,356,997 1,163,126
- ------------------------------------------------------------------------------------------------------
2602 HIRSP Expenses 0 274,000 167,301
- ------------------------------------------------------------------------------------------------------
2603
- ------------------------------------------------------------------------------------------------------
2604
- ------------------------------------------------------------------------------------------------------
2605
- ------------------------------------------------------------------------------------------------------
2695 Summary of remaining write-ins for Items 26 from
overflow page
- ------------------------------------------------------------------------------------------------------
2699 TOTALS (Items 2601 thru 2605 plus 2696)(Page 4, Item 26) 0 1,630,997 1,330,429
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
UNITED WISCONSIN SERVICES, INC.
AND
BLUE CROSS & BLUE SHIELD
UNITED OF WISCONSIN
1997
MANAGEMENT INCENTIVE PLAN
<PAGE>
1997 MANAGEMENT INCENTIVE PLAN
PARTICIPANT:______________________ PAYOUT RANGE:____________of Base
Earnings as defined in 1997 UWSI/
BCBSUW Profit Sharing Plan.
_____% for satisfactory performance
_____% for targeted performance
_____% for outstanding performance
OBJECTIVES
1. To heighten participant awareness of financial results and to motivate
employees to strive for financial success.
2. To motivate participants to provide excellent service to our customers and
to maximize customer satisfaction results.
3. To motivate key management personnel to stretch performance to meet the
documented personal objectives which are of most importance in the
attainment of business unit/regional area and corporate goals and
objectives.
4. To maintain a competitive compensation package for highly motivated key
management employees and to increase the leverage of performance-based
compensation.
ELIGIBILITY
Employees are eligible to participate in the Management Incentive Plan (the
"Plan") based on the number of Hay evaluation points attributed to the position
they hold at the beginning of the plan year. In order to be a participant in
the 1997 Plan, the following requirements must be met:
1. The employee must be actively at work on or before the first work day of
the plan year, January 2, 1997.
2. The employee must have completed one full year of service on December 31,
1997.
1
<PAGE>
3. The employee must be continuously employed by the Corporation through the
date of payment (anticipated to be in March l998). For purposes of this
eligibility requirement, employment by one or more of the following
employers shall constitute employment by the Corporation: Blue Cross & Blue
Shield United of Wisconsin; United Wisconsin Services, Inc.; Compcare
Health Services Insurance Corporation; United Heartland, Inc.; United
Wisconsin Insurance Company; United Wisconsin Life Insurance Company;
Meridian Managed Care, Inc.; Meridian Marketing Services, Inc.; Meridian
Resource Corporation; Hometown Insurance Services, Inc.; Valley Health
Plan; and United Wisconsin Proservices, Inc.
COMPONENTS OF THE PROGRAM
The Plan has 2 components:
1. Business Unit/Regional Area Objective - 33 1/3%
2. Individual and Local Area Performance Objectives - 66 2/3%
BUSINESS UNIT/REGIONAL AREA OBJECTIVE - 33 1/3%
This Component of the Management Incentive Plan is based on the Business
Unit/Regional Area Financial Results ("Local Component") of the 1997 UWS/BCBSUW
Profit Sharing Plan. One-third of a participant's payout from the Management
Incentive Plan will be determined by his or her payout from the Local Component
of the Profit Sharing Plan according to the following schedule:
PARTICIPANT'S PAYOUT FROM
LOCAL COMPONENT OF 1997 LEVEL OF MANAGEMENT
PROFIT SHARING PLAN INCENTIVE PLAN PAYOUT
------------------------- ---------------------
Less than 3% of Base Earnings No Payout
3% of Base Earnings "Satisfactory Performance" Level
6% of Base Earnings "Targeted Performance" Level
9% of Base Earnings "Outstanding Performance" Level
Prorated payouts will be made for performance between the stated percentages of
payouts from the Local Component of the Profit Sharing Plan.
INDIVIDUAL AND LOCAL AREA PERFORMANCE OBJECTIVES - 66 2/3%
This component of the Plan is a mix of Individual and Local Area objectives
based on the participant's Local Area as well as on the participant's
functional responsibilities. The mix may be any combination of Individual
and Local Area objectives which together total 66 2/3%. Individual
performance objectives shall be specific and quantifiable and should be set
in such a manner as to stretch the participant's performance. Local Area
objectives may include such things as Local Area expense ratio targets.
Individual and Local Area Performance Objectives are to be determined and listed
beginning on Page 3 of this document.
2
<PAGE>
PAYMENT OF AWARDS
Management Incentive Plan payments will be made to eligible participants only
in years in which profit sharing is awarded. Notwithstanding the previous
sentence, the Management Review Committees of the Boards of Directors of
United Wisconsin Services, Inc. and Blue Cross & Blue Shield United of
Wisconsin (collectively the "Committee") reserve the right to selectively
award bonuses for outstanding performance.
Management Incentive Plan payments will be awarded in cash within 30 days
following approval by the Committee.
Participants who otherwise meet eligibility requirements for the plan year
but who die, become disabled, or retire before the end of the plan year, will
be eligible for a prorata bonus based on the participant's achievement of his
or her goals prior to the termination of employment and on months of
completed service during the plan year. Participants who otherwise meet
eligibility requirements for the plan year but who die, become disabled, or
retire before the payment date but after completing the full plan year of
service, will be eligible for a bonus based on the participant's achievement
of his or her goals. In the case of death, payment will be made to the
participant's estate.
Employees who otherwise terminate employment with the Corporation prior to the
payment date will not be eligible for the bonus payment.
PLAN ADMINISTRATION
The Committee maintains overall responsibility for the Management Incentive Plan
and is given complete discretion to administer the Plan and to interpret and/or
modify all terms and conditions of the Plan.
The Committee, at its discretion, reserves the right to amend, suspend, or
terminate the Management Incentive Plan, provided that no such amendment,
suspension, or termination shall reduce or impair the value of any awards after
such awards are made by the Committee at its first quarter 1998 meeting.
INDIVIDUAL AND LOCAL AREA PERFORMANCE OBJECTIVES
OBJECTIVE #1 WEIGHT %
---------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
3
<PAGE>
OBJECTIVE #2 WEIGHT %
---------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OBJECTIVE #3 WEIGHT %
---------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OBJECTIVE #4 WEIGHT %
---------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OBJECTIVE #5 WEIGHT %
---------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
OBJECTIVE #6 WEIGHT %
---------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
TOTAL WEIGHT 66 2/3%
--------
Employee Signature: Date:
--------------------------------- ----------------
Supervisor Signature: Date:
--------------------------------- ----------------
4
<PAGE>
BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN/
UNITED WISCONSIN SERVICES
LONG-TERM INCENTIVE PLAN
(1996-1998)
OBJECTIVES
To motivate executives toward the pursuit of activities which will materially
contribute to: the profitable growth of Blue Cross & Blue Shield United of
Wisconsin and United Wisconsin Services (collectively "the Company"); the
diversification of the Company's businesses; the Company's leadership in
acquiring and maintaining contracts to provide services to federal and state
governmental entities; and effective teamwork among the Company's executives and
the businesses/departments for which they are responsible. For the 1996-1998
Plan Cycle, the Plan has been designed to emphasize profitability in order to
mitigate the effect of the anticipated underwriting cycle on the Company's
financial results.
To contribute to the establishment of a competitive compensation program to
support the attraction and retention of key executives.
PERFORMANCE MEASUREMENT
Performance shall be measured over the three year period beginning January 1,
1996 and ending December 31, 1998. This period shall be called the "Plan
Cycle." Performance goals for the Plan Cycle shall be established in 1995.
Performance will be measured by the average growth in each of the Plan's
components over the Plan Cycle. Components may include Surplus, Revenue,
Underwriting Results, Government Programs Reimbursement, or such others as the
Management Review Committees deem appropriate. Extraordinary transactions as
determined by the Management Review Committees will be handled as exclusions or
adjustments in calculating the average annual increases.
Goals are set for minimum, target and maximum payouts for each component.
Minimum and maximum payouts and prorated payouts between the minimum and maximum
are determined as of the "Calculation Date" which shall be December 31, 1998.
AWARD DETERMINATION
Payout awards are based on a percentage of each participant's average salary
range midpoint during the Plan Cycle.
Each goal (minimum, target and maximum) has a specified percentage award.
Prorated awards are made for achieved results between the minimum and maximum.
PAYMENT OF AWARDS
Calculation of awards will be made following the receipt of the Company's
financial statements at the end of the Plan Cycle and after approval by the
Boards of Directors. Actual payment will be made in cash on or about April 1,
1999 (the "Payout Date").
<PAGE>
Discretionary payment may be made for participants who die, become disabled or
retire before the end of the Plan Cycle. Employees who otherwise terminate
employment with the Company prior to the Payout Date will not be eligible for
payment except as provided in the Change of Control provisions below.
PLAN ADMINISTRATION
The Management Review Committees of Blue Cross & Blue Shield United of Wisconsin
and United Wisconsin Services maintain overall responsibility for the Plan.
The Committees may, at their discretion, amend, suspend or terminate the Plan,
provided that no such amendment, suspension or termination which would reduce,
alter or impair the value of any awards can be made after the Calculation Date.
Upon the occurrence of a Change In Control the target value attainable under all
Goals shall be deemed to have been fully earned for the entire Plan Cycle as of
the effective date of the Change In Control, and shall be paid out in cash to
participants within thirty (30) days following the effective date of the Change
In Control; provided, however, that there shall not be an accelerated payout if
the effective date of the Change In Control is prior to July 1, 1996. For
purposes of this Plan, a "Change In Control" shall be defined as it is defined
in Article 2, Subsection (g) of the United Wisconsin Services, Inc. Equity
Incentive Plan dated February 1993 which definition is incorporated herein by
reference.
PARTICIPANTS
The following officers are eligible to participate in the 1996-1998 Long-Term
Incentive Plan for payment according to the schedule presented below:
Thomas R. Hefty, C. Edward Mordy, Jeffrey J. Nohl, Mary Traver, Roger
Formisano, Mark Granoff: 1/3 of the amount payable for achievement of
the Blue Cross/UWS Executive Goals.
Essie Whitelaw, Timothy P. Cullen: 2/3 of the amount payable for
achievement of the Blue Cross/UWS Executive Goals.
Thomas Liechty, Norman Keller, Michael Bernstein, Christopher Bowen:
100% of the amount payable for achievement of the Regional Goals.
Penny Siewert: 100% of the amount payable for achievement of the
Individual Products Vice President Goals.
Emil Pfenninger: 1/3 of the amount payable for achievement of the United
Heartland President Goals.
<PAGE>
BLUE CROSS/UWS EXECUTIVE GOALS
GOAL 1 - INCREASE IN BCBSUW GAAP SURPLUS
Average annual increase in BCBSUW GAAP surplus over the Plan Cycle.
Goal Payout
---- ------
Minimum 10% 10.0%
Target 14% 15.0%
Maximum 18% 25.0%
GOAL 2 - INCREASE IN COMBINED REVENUE FOR BLUE CROSS & BLUE SHIELD UNITED OF
WISCONSIN AND UNITED WISCONSIN SERVICES
Average annual increase in total combined revenue for Blue Cross & Blue Shield
United of Wisconsin and United Wisconsin Services over the Plan Cycle. The
definition of premium revenue includes all fully insured and self-insured
medical and dental business. For purposes of the Plan, business related to the
HIRSP contract, the State of Wisconsin Employees contract and similar contracts
secured during the Plan Cycle are excluded from the BCBSUW Revenue component but
are included in the Government Programs Reimbursement component.
Goal Payout
---- ------
Minimum 10% 7.0%
Target 12% 10.5%
Maximum 15% 17.5%
GOAL 3 - GOVERNMENT PROGRAMS REIMBURSEMENT
Average annual increase in Government Programs reimbursement over the Plan
Cycle. The total reimbursement from all government contracts must equal or
exceed the direct expenses associated with contract administration over the Plan
Cycle in order for the goal to be met.
Goal Payout
---- ------
Minimum 10% 3.0%
Target 15% 4.5%
Maximum 20% 7.5%
<PAGE>
REGIONAL VICE PRESIDENT GOALS
GOAL 1 - INCREASE IN BCBSUW GAAP SURPLUS
Average annual increase in BCBSUW GAAP surplus over the Plan Cycle.
Goal Payout
---- ------
Minimum 10% 7.0%
Target 14% 10.5%
Maximum 18% 17.5%
GOAL 2 - INCREASE IN MEDICAL REVENUE
Average annual increase in total medical revenue for the participant's assigned
geographic region over the Plan Cycle. The definition of medical revenue
includes all fully insured and self-insured medical and dental premiums for Blue
Cross & Blue Shield United of Wisconsin, Unity Health Plan, Valley Health Plan,
Compcare Health Services, United Wisconsin Group and any similar business
produced over the Plan Cycle. Excluded are revenues generated by American
Medical Security. For purposes of the Plan, business related to the HIRSP
contract, the State of Wisconsin Employees contract and similar contracts
secured during the Plan Cycle are excluded from the Medical Revenue component
but are included in the Government Programs Reimbursement component.
Goal Payout
---- ------
Minimum 10% 5.0%
Target 12% 7.5%
Maximum 15% 12.5%
GOAL 3 - INCREASE IN NON-MEDICAL REVENUE
Average annual increase in total non-medical revenue for the participant's
assigned geographic region over the Plan Cycle. Non-medical revenue includes,
but is not limited to, the following components:
- UWG/United Heartland products covering Life, Disability, Vision
and Worker's Compensation. All such business from all
distribution systems as reported by geographic region will count
towards attainment of this goal.
- Non-medical revenue from products other than UWG/United
Heartland, including but not limited to Managed Care, Benefits
Administration, Proservices, Benefits Consulting, TPA Services
and Recovery Services. Such business will count towards
attainment of this goal only if the business is produced by the
BCBSUW direct sales personnel as determined by the SBU President
responsible for the revenue source.
<PAGE>
- All AMS revenue is excluded from this goal.
Goal Payout
---- ------
Minimum 10% 5.0%
Target 15% 7.5%
Maximum 20% 12.5%
GOAL 4 - GOVERNMENT PROGRAMS REIMBURSEMENT
Average annual increase in Government Programs reimbursement over the Plan
Cycle. The total reimbursement from all government contracts must equal or
exceed the direct expenses associated with contract administration over the Plan
Cycle in order for the goal to be met.
Goal Payout
---- ------
Minimum 10% 3.0%
Target 15% 4.5%
Maximum 20% 7.5%
INDIVIDUAL PRODUCTS VICE PRESIDENT GOALS
GOAL 1 - INCREASE IN BCBSUW GAAP SURPLUS
Average annual increase in BCBSUW GAAP surplus over the Plan Cycle.
Goal Payout
---- ------
Minimum 10% 7.0%
Target 14% 10.5%
Maximum 18% 17.5%
GOAL 2 - INCREASE IN INDIVIDUAL PRODUCTS PREMIUM REVENUE
Average annual increase in total Individual Products premium revenue over the
Plan Cycle.
Goal Payout
---- ------
Minimum 10% 10.0%
Target 15% 15.0%
Maximum 20% 25.0%
<PAGE>
GOAL 3 - GOVERNMENT PROGRAMS REIMBURSEMENT
Average annual increase in Government Programs reimbursement over the Plan
Cycle. The total reimbursement from all government contracts must equal or
exceed the direct expenses associated with contract administration over the Plan
Cycle in order for the goal to be met. The Government Programs Reimbursement
component includes business related to the HIRSP contract, the State of
Wisconsin Employees contract, and similar contracts secured during the Plan
Cycle.
Goal Payout
---- ------
Minimum 10% 3.0%
Target 15% 4.5%
Maximum 20% 7.5%
UNITED HEARTLAND PRESIDENT GOALS
GOAL 1 - INCREASE IN UNITED HEARTLAND PREMIUM REVENUE
Average annual increase in total United Heartland premium revenue over the Plan
Cycle.
Goal Payout
---- ------
Minimum 15% 8.5%
Target 20% 12.75%
Maximum 25% 21.25%
GOAL 2 - INCREASE IN UNITED HEARTLAND PRE-TAX INCOME
Average annual increase in United Heartland pre-tax income over the Plan Cycle.
Goal Payout
---- ------
Minimum 15% 8.5%
Target 20% 12.75%
Maximum 25% 21.25%
<PAGE>
GOAL 3 - GOVERNMENT PROGRAMS REIMBURSEMENT
Average annual increase in Government Programs reimbursement over the Plan
Cycle. The total reimbursement from all government contracts must equal or
exceed the direct expenses associated with contract administration over the Plan
Cycle in order for the goal to be met. The Government Programs Reimbursement
component includes business related to the HIRSP contract, the State of
Wisconsin Employees contract, and similar contracts secured during the Plan
Cycle.
Goal Payout
---- ------
Minimum 10% 3.0%
Target 15% 4.5%
Maximum 20% 7.5%
<PAGE>
AMENDMENT TO PURCHASE AND SALE AGREEMENT
THIS AMENDMENT TO PURCHASE AND SALE AGREEMENT (the "Amendment") is made
and entered into effective as of December 31, 1996, (the "Effective Date of
the Amendment"), by and between United Wisconsin Services, Inc., a Wisconsin
business corporation ("UWS") and Midelfort Clinic, Ltd., Mayo Health System,
a Wisconsin corporation ("Clinic") (Individually, a "Party", and collectively
the "Parties").
RECITALS
A. UWS and Clinic (or its affiliate or successor) are parties to that
certain purchase and sale agreement dated January 1, 1992, (the "Agreement"),
pursuant to which Clinic sold all the outstanding shares of Midelfort Health
Plan, Inc. ("MHP").
B. UWS and Clinic (or its affiliate or successor) are also parties to
that certain joint venture agreement dated January 1, 1992, which was
superseded by an Amended and Restated Joint Venture Agreement of even date
herewith (the Amended and Restated "Joint Venture Agreement").
C. Midelfort Health Plan, Inc. (MHP) has changed its name to Valley
Health Plan, Inc. (VHP)
D. In consideration for extending the term of the Joint Venture Agreement
and amending the Joint Venture Agreement in other respects, the Parties
desire to extend the term of the Agreement and amend the Agreement in certain
respects as set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth in this Amendment, and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereby
agree as follows:
1. ASSIGNMENT. The Parties hereby acknowledge that Midelfort Clinic,
Ltd. has been acquired by Mayo Foundation for Medical Education and Research
("Mayo"), and hereby consents to the assignment by Midelfort Clinic, Ltd. to
Midelfort Clinic, Ltd., Mayo Health System, of all of its right, title and
interest in, to and under the Agreement.
2. MODIFICATION OF AGREEMENT. The Parties hereby agree that the Clinic's
option to repurchase shall be in effect for the Initial Term of the Amended
and Restated Joint Venture Agreement, and may be exercised effective as of
December 31, 1999, subject to the modifications set forth in this Amendment,
and that Section 10.1 and Section 10.4 are hereby amended to read in its
entirety as follows:
Page 1
<PAGE>
10.1 Either at the end of the Initial Term of the Joint Venture, as
defined in Section 7.1 of the Amended and Restated Joint Venture
Agreement, or termination of the Joint Venture whichever occurs
earlier, the Clinic shall have the option to repurchase one hundred
percent of the outstanding shares of VHP stock.
10.4 The Clinic shall exercise this option to repurchase by giving
written notice to Thomas R. Hefty as president of UWS at least One
Hundred and Eighty(180) days but no more than Two Hundred and Seventy
(270) days in advance of the effective date (the "Exercise Date").
The repurchase shall be effective on December 31, 1999, or the date of
termination of the Joint Venture Agreement, whichever occurs earlier.
(the "Repurchase Date").
3. ADDITIONS TO AGREEMENT. The Parties hereby add the following
provision to the Agreement.
10.5 In the event that the Clinic exercises its option to
repurchase, UWS shall, within Forty-five (45) business days after the
end of the month in which the Exercise Date occurs, provide Clinic
with the following: (i) statement of all assets held by VHP and all
liabilities of VHP as of the end of the month in which the Exercise
Date occurs and (ii) balance sheet and statements of income and
expenditures for VHP as of the end of the month in which the Exercise
Date occurs.
10.6 From the Exercise Date through the closing date of such
repurchase (the "Interim Period"), UWS shall not, in connection with
VHP, without the prior written consent of Clinic, (a) enter into any
contract or commitment with respect to VHP extending beyond the
closing date, other than sales or purchases made in the ordinary
course of its business; (b) waive any rights of any substantial value
or sell, assign or transfer any of the assets of VHP other than in the
ordinary course of business; (c) incur any obligations or liabilities
(absolute or contingent) other than current liabilities incurred and
obligations under contracts entered into in the ordinary course of
business; (d) encumbrance any assets, tangible or intangible, other
than the lien of current property taxes not due and payable; (e) sell,
assign or transfer any of the assets of VHP or cancel any debts or
claims; (f) increase the salaries or other fringe benefits made
available to the employees of VHP, institute any bonus, benefit,
profit sharing, stock option, pension, retirement plan or similar
arrangements for the benefit of the employees of VHP, or make any
changes in any such plans or arrangements presently existing; or (g)
enter into any other transactions or series of transactions other than
in the ordinary course of business.
Page 2
<PAGE>
10.7 UWS shall, within Ninety (90) business days after the
Repurchase Date, provide Clinic with the following: (i) statement of
all assets held by VHP and all liabilities of VHP as of the Repurchase
Date; and (ii) balance sheet and statements of income and expenditures
for VHP as of the current calendar year to the Repurchase Date.
10.8 UWS represents and warrants that the financial statements
provided to Clinic pursuant to Sections 10.5 and 10.7 hereof (i) will
be in accordance with the books and records of VHP which books and
records are complete and accurate in all material respects, (ii) will
present fairly and accurately in all material respects the financial
condition of VHP as of the dates of the balance sheets, (iii) present
or will present fairly and accurately in all material respects the
results of operations of VHP for the periods covered by such
statements, and (iv) have been or will be prepared in all material
respects on a basis consistent with the preparations of VHP's prior
years' financial statements.
4. REFERENCES. All references in this Amendment to the Agreement shall
mean and include, as appropriate, both the original Agreement between the
Parties, and all amendments which are in writing and have been executed by
the Parties. All references in this Amendment or the Agreement to the
Agreement to Midelfort Health Plan, Inc. shall also include reference to
Valley Health Plan, Inc.
5. CONTINUED EFFECT. Except as otherwise provided in this Agreement, but
subject to any other amendments to the Agreement which are in writing and
have been executed by the Parties, the Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed
as of the Effective Date by their respective representatives.
Attest: UNITED WISCONSIN SERVICES, INC.
/s/ John M. Drace By /s/ [illegible]
- ------------------------------ ----------------------------------
Title
-------------------------------
Attest: MIDELFORT CLINIC, LTD., MAYO
HEALTH SYSTEM
/s/ John M. Drace By /s/ [illegible]
- ------------------------------ ----------------------------------
Title
-------------------------------
Page 3
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Unity Health Plans Insurance Corp., a Wisconsin insurance corporation
Hometown Insurance Services, Inc., a Wisconsin corporation
HMO-W, Inc., a Wisconsin corporation
Valley Health Plan, Inc., a Wisconsin corporation
Compcare Health Services Insurance Corp., a Wisconsin insurance corporation
United Wisconsin Insurance Company, a Wisconsin insurance corporation
United Heartland Life Insurance Company, a Wisconsin insurance corporation
Meridian Marketing Services, Inc., a Wisconsin corporation
United Heartland, Inc., a Wisconsin corporation
United Wisconsin Proservices, Inc., a Wisconsin corporation
Meridian Resource Corporation, a Wisconsin corporation
CNR Health, Inc., a Wisconsin corporation
Meridian Managed Care, Inc., a Wisconsin corporation
American Medical Security Holdings, Inc., a Wisconsin corporation
American Medical Security, Inc., a Delaware corporation
American Medical Security Insurance Company, an Arizona corporation
American Medical Security Insurance Company of Georgia, a Georgia corporation
U & C Real Estate Partnership, a Wisconsin general partnership
United Wisconsin Life Insurance Company, a Wisconsin insurance corporation
Continental Plan Services, Inc., a Wisconsin corporation
Nurse Healthline, Inc., a Wisconsin corporation
Accountable Health Plans, Inc.,
d/b/a Accountable Health Plans of Texas, Inc., a Texas corporation
AMS Provider Partnerships, Inc., a Wisconsin corporation
AMS HMO Holdings, Inc., a Delaware corporation
Accountable Health Plan of the Carolinas, Inc., a North Carolina corporation
Atlantic Health Plans, Inc., a North Carolina corporation
Unity HMO of Illinois, Inc., an Illinois corporation
American Medical Security Health Plan, Inc.,
d/b/a American Medical Healthcare, a Florida corporation
Crescent Medical Partnerships, Inc., a Tennessee corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 (AUDITED) AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 (AUDITED) AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 394,615
<DEBT-CARRYING-VALUE> 12,823
<DEBT-MARKET-VALUE> 12,932
<EQUITIES> 59,685
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 467,123
<CASH> 51,146
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 836,120
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 51,514
<POLICY-OTHER> 240,338
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 55,788
0
0
<COMMON> 16,294
<OTHER-SE> 297,361
<TOTAL-LIABILITY-AND-EQUITY> 836,120
1,089,134
<INVESTMENT-INCOME> 30,614
<INVESTMENT-GAINS> 12,996
<OTHER-INCOME> 30,567
<BENEFITS> 897,582
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 229,238
<INCOME-PRETAX> 17,049
<INCOME-TAX> 6,846
<INCOME-CONTINUING> 10,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,203
<EPS-PRIMARY> .79
<EPS-DILUTED> .79
<RESERVE-OPEN> 182,808
<PROVISION-CURRENT> 526,776
<PROVISION-PRIOR> (13,970)
<PAYMENTS-CURRENT> (436,494)
<PAYMENTS-PRIOR> (81,347)
<RESERVE-CLOSE> 177,773
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
