-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AMXA4keMaZVfFY5Hjdfj+frO555HxViO1woTt/wEdTFF0FZLNzrqhn4pQnxQ3nnZ cmVgEaTvS7M+ufNPsAUhSQ== 0000912057-96-019012.txt : 19960829 0000912057-96-019012.hdr.sgml : 19960829 ACCESSION NUMBER: 0000912057-96-019012 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19960828 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED WISCONSIN SERVICES INC /WI CENTRAL INDEX KEY: 0000878897 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 391431799 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-10935 FILM NUMBER: 96621948 BUSINESS ADDRESS: STREET 1: 401 W MICHIGAN ST CITY: MILWAUKEE STATE: WI ZIP: 53203-2896 BUSINESS PHONE: 4142266900 S-4 1 S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1996 REGISTRATION NO. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- UNITED WISCONSIN SERVICES, INC. (Exact name of registrant as specified in its charter) WISCONSIN 6324 39-1431799 (State of incorporation) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.)
401 WEST MICHIGAN STREET MILWAUKEE, WISCONSIN 53203-2896 (414) 226-6900 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) THOMAS R. HEFTY, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER UNITED WISCONSIN SERVICES, INC. 401 WEST MICHIGAN STREET MILWAUKEE, WISCONSIN 53203-2896 (414) 226-6900 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ Copies to: Geoffrey R. Morgan Randall J. Erickson Michael Best & Friedrich Godfrey & Kahn, S.C. 100 East Wisconsin Avenue 780 North Water Street Milwaukee, Wisconsin 53202 Milwaukee, Wisconsin 53202 (414) 271-6560 (414) 273-3500
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE AND THE EFFECTIVE TIME OF THE MERGER OF AMERICAN MEDICAL SECURITY GROUP, INC. WITH AND INTO THE REGISTRANT, AS DESCRIBED HEREIN. ------------------------ If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE (1) FEE (1) Common Stock, no par value........... 4,000,000 shares N/A N/A $559
(1) Estimated in accordance with Rule 457(f)(2) of the Securities Act solely for purposes of calculating the registration fee on the basis of the book value, as of June 30, 1996, of securities of AMSG to be canceled in the Merger of AMSG into Registrant ($68,630,000) LESS the aggregate amount of cash paid by the Registrant to holders of AMSG securities ($67,010,000). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED WISCONSIN SERVICES, INC. 401 WEST MICHIGAN STREET MILWAUKEE, WISCONSIN 53203-2896 , 1996 Dear Shareholder: You are cordially invited to attend a Special Meeting of Shareholders (the "UWS Special Meeting") of United Wisconsin Services, Inc. ("UWS"), which will be held on , , 1996, at 11:00 a.m., local time, at , , Wisconsin. A notice of the UWS Special Meeting, a proxy statement and a proxy card are enclosed. All holders of UWS's outstanding shares of common stock, no par value per share ("UWS Common Stock"), as of , 1996 (the "Record Date") will be entitled to notice of and to vote at the UWS Special Meeting. At the UWS Special Meeting, you will be asked to consider and vote upon a proposal to approve the merger (the "Merger") of American Medical Security Group, Inc. ("AMSG") with and into UWS pursuant to an Agreement and Plan of Merger between AMSG, Blue Cross & Blue Shield United of Wisconsin, UWS, Wallace J. Hilliard and Ronald A. Weyers (the "Merger Agreement"). Pursuant to the Merger Agreement, the respective businesses of UWS and AMSG will be combined, and all of the outstanding shares of capital stock of AMSG (other than shares held by UWS and shares with respect to which dissenters' rights are exercised) and options to purchase AMSG capital stock will be converted into the right to receive an aggregate of 4,000,000 shares of, or options to purchase, UWS Common Stock and $67,010,000 in cash (less applicable expenses) in accordance with the Merger Agreement. You will also be asked to approve amendments to the United Wisconsin Services, Inc. Equity Incentive Plan (the "Plan Amendments"). The amendments increase the number of shares available for granting, limit the number of shares which may be granted to individual participants, change the requirements for membership on the committee which administers the plan, and permit the gifting of nonqualified options. To UWS's knowledge after reasonable inquiry, each of UWS's executive officers and directors, holding in the aggregate 49,960 shares of UWS Common Stock (approximately 0.4% of the outstanding shares of UWS Common Stock), currently intends to vote all shares of UWS Common Stock held of record or beneficially owned by such person for approval and adoption of the Merger Agreement and the Plan Amendments. You should read carefully the accompanying Notice of Special Meeting of Shareholders and the Joint Proxy Statement/Prospectus for details of the Merger and the Plan Amendments. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND HAS DETERMINED THAT THE MERGER AGREEMENT IS FAIR TO AND IN THE BEST INTERESTS OF UWS AND ITS SHAREHOLDERS AND HAS UNANIMOUSLY APPROVED THE PLAN AMENDMENTS, AND RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE PLAN AMENDMENTS. Your vote is important. Whether or not you plan to attend the UWS Special Meeting, please complete, sign and date the enclosed proxy card and return it promptly in the enclosed postage-prepaid envelope. Failure to return a properly executed proxy card or to vote at the UWS Special Meeting will have the same effect as a vote against the Merger. Your proxy may be revoked at any time before it is voted by signing and returning a later-dated proxy with respect to the same shares or by filing with the Secretary of UWS a written revocation bearing a later date. If you attend the UWS Special Meeting, you may vote in person if you wish, even though you previously have returned your proxy card. Your prompt cooperation will be greatly appreciated. Sincerely, Thomas R. Hefty CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER UNITED WISCONSIN SERVICES, INC. 401 WEST MICHIGAN STREET MILWAUKEE, WISCONSIN 53203-2896 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD , 1996 TO THE SHAREHOLDERS OF UNITED WISCONSIN SERVICES, INC. A Special Meeting of Shareholders (the "UWS Special Meeting") of United Wisconsin Services, Inc., a Wisconsin corporation ("UWS"), will be held on , 1996, at 11:00 a.m., local time, at , , Wisconsin for the following purposes: 1. To consider and vote upon a proposal to approve the merger (the "Merger") of American Medical Security Group, Inc. ("AMSG") with and into UWS pursuant to an Agreement and Plan of Merger among AMSG, Blue Cross & Blue Shield United of Wisconsin, UWS, Wallace J. Hilliard and Ronald A. Weyers (the "Merger Agreement"). Pursuant to the Merger Agreement, the respective businesses of UWS and AMSG will be combined, and all of the outstanding shares of capital stock of AMSG (other than shares held by UWS and shares with respect to which dissenters' rights are exercised) and options to purchase AMSG capital stock will be converted into the right to receive an aggregate of 4,000,000 shares of, or options to purchase, UWS Common Stock and $67,010,000 in cash (less applicable expenses) in accordance with the Merger Agreement. The Merger, including the shares of UWS Common Stock to be issued and the cash to be paid in connection with the Merger, is more completely described in the accompanying Joint Proxy Statement/Prospectus, and a copy of the Merger Agreement is attached as Appendix A thereto. 2. To consider and vote upon a proposal to amend the United Wisconsin Services, Inc. Equity Incentive Plan (the "Plan Amendments"). The Plan Amendments will increase the number of shares available for granting, limit the number of shares which may be granted to individual participants, change the requirements for membership on the committee which administers the plan, and permit the gifting of nonqualified options. Approval of the Plan Amendments is a condition to consummation of the Merger. 3. To transact such other business as may properly come before the UWS Special Meeting or any adjournment or postponement thereof. Only holders of record of UWS Common Stock at the close of business on , 1996, the record date for the UWS Special Meeting, are entitled to notice of and to vote at the UWS Special Meeting and any adjournment or postponement thereof. THE MERGER AGREEMENT, THE MERGER AND THE PLAN AMENDMENTS HAVE BEEN APPROVED AND ADOPTED BY THE BOARD OF DIRECTORS OF UWS (THE "UWS BOARD"). THE UWS BOARD HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS AND CONDITIONS OF THE PROPOSED MERGER, THE MERGER AGREEMENT AND THE PLAN AMENDMENTS AND THE UWS BOARD BELIEVES THE MERGER, THE MERGER AGREEMENT AND THE PLAN AMENDMENTS ARE FAIR TO AND IN THE BEST INTERESTS OF UWS AND ITS SHAREHOLDERS. THE UWS BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, AND FOR THE ADOPTION AND APPROVAL OF THE PLAN AMENDMENTS. Your vote is important. Whether or not you plan to attend the UWS Special Meeting, please complete, sign and date the enclosed proxy card and return it promptly in the enclosed postage-prepaid envelope. Failure to return a properly executed proxy card or to vote at the UWS Special Meeting will have the same effect as a vote against the Merger. Your proxy may be revoked at any time before it is voted by signing and returning a later-dated proxy with respect to the same shares or by filing with the Secretary of UWS a written revocation bearing a later date. If you attend the UWS Special Meeting, you may vote in person if you wish, even though you previously have returned your proxy card. Your prompt cooperation will be greatly appreciated. UNITED WISCONSIN SERVICES, INC. Thomas R. Hefty CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Milwaukee, Wisconsin , 1996 AMERICAN MEDICAL SECURITY GROUP, INC. 3100 AMS BOULEVARD GREEN BAY, WISCONSIN 54313 , 1996 Dear Stockholder: A Special Meeting of Stockholders (the "AMSG Special Meeting") of American Medical Security Group, Inc. ("AMSG") will be held on , , 1996, at , local time, at , , Wisconsin. A notice of the AMSG Special Meeting, a proxy statement and a proxy card are enclosed. All holders of AMSG outstanding shares of common stock, $1.00 par value per share ("AMSG Common Stock"), as of ________, 1996 (the "AMSG Record Date") will be entitled to notice of and to vote at the AMSG Special Meeting. At the AMSG Special Meeting, you will be asked to consider and vote upon the approval and adoption of an Agreement and Plan of Merger dated July 31, 1996 by and between AMSG, United Wisconsin Services, Inc. ("UWS"), Blue Cross & Blue Shield United of Wisconsin, Wallace J. Hilliard and Ronald A. Weyers (the "Merger Agreement"), providing for the merger (the "Merger") of AMSG with and into UWS, as described in the accompanying Joint Proxy Statement/Prospectus. Pursuant to the Merger, AMSG and UWS will combine their respective businesses and (i) each outstanding share of AMSG Common Stock, other than dissenters' shares and shares held by UWS, will be converted into the right to receive, after expenses, approximately $382 in cash and approximately 24 shares of common stock, no par value, of UWS (the "UWS Common Stock"), for each share of AMSG Common Stock, (ii) all outstanding shares of capital stock of AMSG held by UWS will be canceled, and (iii) each outstanding option to acquire AMSG Common Stock (the "AMSG Options") will be converted into an option to purchase approximately 42.4 shares of UWS Common Stock for each share of AMSG Common Stock subject to such option at an exercise price of approximately $4.67 per share. In addition, approximately $52 per share of AMSG Common Stock will be placed in escrow to indemnify UWS against possible liability for claims under the Merger Agreement. See "THE MERGER -- Escrow Agreement" for more information. For more information regarding the consideration to be received by AMSG stockholders and holders of AMSG Options in the Merger, please refer to the accompanying Joint Proxy Statement/Prospectus, under "THE MERGER -- Terms of the Merger -- Conversion of AMSG Common Stock in the Merger" and "--Conversion of AMSG Stock Options in the Merger." All of the outstanding shares of AMSG Common Stock, other than shares owned by UWS, are subject to a Voting Trust Agreement dated as of February 3, 1989, pursuant to which Ron Weyers and I, as trustees, are empowered to vote all of the shares subject thereto. We have determined, however, to vote the AMSG Common Stock in accordance with the instructions of the holders of record of the trust certificates issued under the Voting Trust Agreement. The AMSG Board of Directors has approved the Merger Agreement and the transactions contemplated thereby and has determined that the Merger is in the best interests of AMSG and its stockholders. After careful consideration, the Board of Directors recommends a vote in favor of the Merger. Ron Weyers and I have agreed to vote our shares of AMSG Common Stock in favor of the Merger and urge you to do the same. In the material accompanying this letter, you will find a Notice of Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the actions to be taken by AMSG shareholders at the AMSG Special Meeting, and a form of appointment of proxy. The Joint Proxy Statement/Prospectus more fully describes the proposed Merger and includes information about UWS and AMSG. Sincerely, Wallace J. Hilliard, PRESIDENT AND CHIEF EXECUTIVE OFFICER Green Bay, Wisconsin , 1996 AMERICAN MEDICAL SECURITY GROUP, INC. 3100 AMS BOULEVARD GREEN BAY, WISCONSIN 54313 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON , 1996 TO THE STOCKHOLDERS: A Special Meeting of Stockholders (the "AMSG Special Meeting") of American Medical Security Group, Inc., a Delaware corporation ("AMSG"), will be held on , , 1996, at , local time, at , , Wisconsin. At the AMSG Special Meeting, AMSG's stockholders will be asked to consider and vote upon a proposal to approve and adopt an Agreement and Plan of Merger dated July 31, 1996 by and between AMSG, United Wisconsin Services, Inc. ("UWS"), Blue Cross & Blue Shield United of Wisconsin, Wallace J. Hilliard and Ronald A. Weyers (the "Merger Agreement") providing for the merger (the "Merger") of AMSG with and into UWS, as described in the accompanying Joint Proxy Statement/Prospectus. Pursuant to the Merger, AMSG and UWS will combine their respective businesses and (i) each outstanding share of AMSG common stock, $1.00 par value (the "AMSG Common Stock"), other than dissenters' shares and shares held by UWS, will be converted into the right to receive, after expenses, approximately $382 in cash and approximately 24 shares of common stock, no par value per share, of UWS (the "UWS Common Stock") for each share of AMSG Common Stock, (ii) all outstanding shares of capital stock held by UWS will be canceled, and (iii) each outstanding option to acquire AMSG Common Stock (the "AMSG Options") will be converted into an option to purchase approximately 42.4 shares of UWS Common Stock for each share of AMSG Common Stock subject to such option at an exercise price of approximately $4.67 per share. In addition, approximately $52 per share of AMSG Common Stock will be placed in escrow to indemnify UWS against possible liability for claims under the Merger Agreement. See "THE MERGER -- Escrow Agreement" for more information. The consideration to be paid for the AMSG Common Stock and the options to acquire AMSG Common Stock is described in more detail in the accompanying Joint Proxy Statement/Prospectus under "THE MERGER -- Terms of the Merger Conversion of AMSG Common Stock in the Merger" and "-- Conversion of AMSG Stock Options in the Merger." The Merger is more fully described in, and the Merger Agreement is attached in its entirety to, the accompanying Joint Proxy Statement/Prospectus. Only stockholders of record at the close of business on , 1996, are entitled to notice of and to vote at the Special Meeting, or at any continuance(s) or adjournment(s) thereof. APPROVAL AND ADOPTION OF THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF SHARES REPRESENTING A MAJORITY OF THE NUMBER OF SHARES OF AMSG COMMON STOCK OUTSTANDING. The Merger Agreement and the Merger have been approved and adopted by the Board of Directors of AMSG (the "AMSG Board"). The AMSG Board has carefully reviewed and considered the terms and conditions of the proposed Merger and the Merger Agreement and the AMSG Board believes the Merger and the Merger Agreement are fair to and in the best interests of AMSG and its stockholders. THE AMSG BOARD RECOMMENDS A VOTE FOR THE ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER. AS DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS, STOCKHOLDERS OF AMSG WILL BE ENTITLED TO PAYMENT OF THE FAIR VALUE OF THOSE SHARES WHICH ARE NOT VOTED IN FAVOR OF THE MERGER AGREEMENT, IF WRITTEN NOTICE OF THE STOCKHOLDERS' INTENT TO DEMAND PAYMENT IF THE MERGER AGREEMENT AND MERGER ARE APPROVED IS DELIVERED TO AMSG BEFORE THE VOTE IS TAKEN AND THE REQUIREMENTS OF SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW ARE MET. By Order of the Board of Directors, Wallace J. Hilliard PRESIDENT AND CHIEF EXECUTIVE OFFICER Green Bay, Wisconsin , 1996 JOINT PROXY STATEMENT OF UNITED WISCONSIN SERVICES, INC. AND AMERICAN MEDICAL SECURITY GROUP, INC. ------------------------ PROSPECTUS OF UNITED WISCONSIN SERVICES, INC. ------------------------ This Joint Proxy Statement/Prospectus is being furnished to shareholders of United Wisconsin Services, Inc., a Wisconsin corporation ("UWS"), in connection with the solicitation of proxies by UWS's Board of Directors for use at the Special Meeting of Shareholders of UWS (the "UWS Special Meeting") to be held on , 1996, at , , Wisconsin, commencing at 11:00 a.m., local time, and at any adjournment or continuance thereof. This Joint Proxy Statement/Prospectus is also being furnished to stockholders of American Medical Security Group, Inc., a Delaware corporation ("AMSG"), in connection with the solicitation of proxies by the Board of Directors of AMSG for use at the Special Meeting of Stockholders of AMSG (the "AMSG Special Meeting") to be held on , 1996, at , , Wisconsin, commencing at 11:00 a.m., local time, and at any adjournment or continuance thereof. This Joint Proxy Statement/Prospectus relates to the proposed merger of AMSG with and into UWS (the "Merger"). UWS has filed a Registration Statement on Form S-4 with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), relating to 4,000,000 shares of common stock, no par value, of UWS (the "UWS Common Stock"), issuable as part of the consideration for the Merger. This Joint Proxy Statement/Prospectus constitutes the Prospectus of UWS with respect to the shares of UWS Common Stock to be issued in the Merger. All information contained in this Joint Proxy Statement/Prospectus relating to UWS has been supplied by UWS, and all information contained herein relating to AMSG has been supplied by AMSG. This Joint Proxy Statement/Prospectus is first being mailed to shareholders of UWS and AMSG on or about , 1996. THE SHARES OF UWS COMMON STOCK ISSUABLE IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ FOR A DESCRIPTION OF CERTAIN FACTORS AMSG STOCKHOLDERS SHOULD CONSIDER IN EVALUATING THE MERGER AND THE RECEIPT OF THE UWS COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS". ------------------------ The date of this Joint Proxy Statement/Prospectus is , 1996. AVAILABLE INFORMATION UWS is subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain regional offices of the Commission located at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such information can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains an internet web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants such as UWS that file electronically with the Commission. In addition, UWS Common Stock is included for quotation on the New York Stock Exchange ("NYSE") and such reports, proxy and information statements, registration statements and other information concerning UWS should be available for inspection and copying at the offices of the NYSE, 20 Broad Street, New York, New York 10005. This Joint Proxy Statement/Prospectus does not contain all the information set forth in the Registration Statement on Form S-4 (the "Registration Statement") filed by UWS with the Commission under the Securities Act, certain parts of which are omitted in accordance with the rules and regulations of the Commission. The Registration Statement and any amendments thereto, including exhibits as a part thereof, are available for inspection and copying as set forth above. AMSG is not subject to the information and reporting requirements of the Exchange Act. THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE THEREIN, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/ PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO THE SECRETARY, UNITED WISCONSIN SERVICES, INC., 401 WEST MICHIGAN STREET, MILWAUKEE, WISCONSIN 53203-2896, TELEPHONE (414) 226-6900. TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE , 1996. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS THIS JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING, BUT NOT LIMITED TO THE SECTIONS ENTITLED "RISK FACTORS," "BACKGROUND OF AND REASONS FOR THE MERGER," "THE MERGER," "AMSG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE, CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF AMSG AND UWS. 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 LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) EXPECTED COST SAVINGS FROM THE MERGER CANNOT BE FULLY REALIZED; (2) COMPETITIVE PRESSURE IN THE HEALTHCARE INDUSTRY INCREASES SIGNIFICANTLY; (3) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE BUSINESSES OF AMSG AND UWS ARE GREATER THAN EXPECTED; AND (4) GENERAL ECONOMIC CONDITONS, EITHER NATIONALLY OR IN THE STATES IN WHICH THE COMBINED COMPANY WILL BE DOING BUSINESS, ARE LESS FAVORABLE THAN EXPECTED. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE UWS's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996 previously filed with the Commission pursuant to the Exchange Act are incorporated herein by reference. All documents filed by UWS pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the date of the UWS Special Meeting shall be deemed to be incorporated by reference herein and to be a part hereof from the date any such document is filed. The information relating to UWS contained in this Joint Proxy Statement/Prospectus does not purport to be comprehensive and should be read together with the information in the documents incorporated by reference. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes hereof to the extent that a statement contained herein (or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein) modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed to constitute a part hereof except as so modified or superseded. All information appearing in this Joint Proxy Statement/Prospectus is qualified in its entirety by the information and financial statements (including notes thereto) appearing in the documents incorporated herein by reference, except to the extent set forth in the immediately preceding statement. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY UWS OR AMSG. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES OR THE SOLICITATION OF A PROXY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/ PROSPECTUS NOR THE ISSUANCE OR DELIVERY OF ANY SHARES OF UWS COMMON STOCK PURSUANT TO THE MERGER AGREEMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF UWS OR AMSG SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS JOINT PROXY STATEMENT/ PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF. TABLE OF CONTENTS
PAGE ----- SUMMARY............................................................... 1 General........................................................... 1 The Companies..................................................... 1 Meetings of Shareholders.......................................... 1 The Merger........................................................ 2 Risk Factors...................................................... 6 Selected Consolidated Financial Data of UWS....................... 7 Selected Consolidated Financial Data of AMSG...................... 8 RISK FACTORS.......................................................... 9 SELECTED HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL DATA....................................................... 11 UWS AND AMSG PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL DATA................................................................. 12 COMPARATIVE PER SHARE DATA............................................ 13 HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........................................................... 14 COMPARATIVE PER SHARE MARKET INFORMATION.............................. 26 UWS............................................................... 26 AMSG.............................................................. 26 SPECIAL MEETING OF UWS SHAREHOLDERS................................... 27 General........................................................... 27 Matters to be Considered at the UWS Special Meeting............... 27 Record Date; Shares Entitled to Vote; Vote Required............... 27 Proxies; Proxy Solicitation....................................... 28 SPECIAL MEETING OF AMSG SHAREHOLDERS.................................. 28 General........................................................... 28 Matters to be Considered at the AMSG Special Meeting.............. 29 Record Date; Shares Entitled to Vote; Vote Required............... 29 Proxies; Proxy Solicitation....................................... 29 BACKGROUND OF AND REASONS FOR THE MERGER.............................. 30 Background........................................................ 30 UWS's Reasons for the Merger...................................... 33 AMSG's Reasons for the Merger..................................... 33 Opinion of UWS Financial Advisor.................................. 34 Recommendation of UWS Board....................................... 38 Recommendation of AMSG Board...................................... 38 THE MERGER............................................................ 38 Terms of the Merger............................................... 38 Effective Time of the Merger...................................... 39 Exchange of AMSG Stock............................................ 39 Representations and Warranties.................................... 40 Business of AMSG Pending the Merger............................... 40 Covenants of AMSG and UWS......................................... 41 Voting Agreements................................................. 42 Conditions; Waivers............................................... 42 Termination; Amendment............................................ 43 Indemnification Agreements........................................ 44
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PAGE ----- Escrow Agreement.................................................. 44 Resale of UWS Common Stock Issued in the Merger; Affiliates....... 45 Registration of UWS Common Stock Issued in the Merger: Registration Rights and Stock Restriction Agreement.............. 45 Listing of UWS Common Stock on New York Stock Exchange............ 46 Certain Federal Income Tax Considerations......................... 46 Accounting Treatment.............................................. 47 Management and Operations of AMSG After the Merger................ 47 Expenses and Fees................................................. 47 RIGHTS OF DISSENTING SHAREHOLDERS..................................... 47 AMSG Stockholders................................................. 47 UWS Shareholders.................................................. 50 CONFLICTS OF INTEREST................................................. 51 BUSINESS OF UWS....................................................... 53 BUSINESS OF AMSG...................................................... 53 AMSG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................ 54 Overview.......................................................... 54 Results of Operations............................................. 54 Liquidity and Capital Resources................................... 57 Inflation......................................................... 58 Health Care Reform................................................ 59 STOCK OWNED BY AMSG MANAGEMENT AND PRINCIPAL SHAREHOLDERS............. 60 APPROVAL OF AMENDMENTS TO UNITED WISCONSIN SERVICES, INC. EQUITY INCENTIVE PLAN....................................................... 60 DESCRIPTION OF UWS CAPITAL STOCK...................................... 63 Common Stock...................................................... 63 Preferred Stock................................................... 64 Certain Charter and Bylaw Provisions.............................. 64 Certain Statutory Provisions...................................... 64 Transfer Agent and Registrar...................................... 65 COMPARATIVE RIGHTS OF AMSG STOCKHOLDERS AND UWS SHAREHOLDERS.......... 65 Comparison of Shareholder Rights.................................. 65 Takeover Statutes................................................. 67 Directors......................................................... 68 Action Without A Meeting.......................................... 69 Amendment of Corporate Charter.................................... 69 Stockholder Derivative Proceedings................................ 69 LEGAL OPINION......................................................... 70 DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS.......................... 70 EXPERTS............................................................... 70 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS -- AMERICAN MEDICAL SECURITY GROUP, INC.................................................. F-1
ii SUMMARY CERTAIN SIGNIFICANT MATTERS DISCUSSED IN THIS JOINT PROXY STATEMENT/PROSPECTUS ARE SUMMARIZED BELOW. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ALL RESPECTS BY REFERENCE TO THE MORE DETAILED INFORMATION APPEARING OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/ PROSPECTUS (INCLUDING THE APPENDICES HERETO). GENERAL This Joint Proxy Statement/Prospectus relates to the proposed merger (the "Merger") of American Medical Security Group, Inc., a Delaware corporation ("AMSG"), with and into United Wisconsin Services, Inc., a Wisconsin corporation ("UWS"). Subject to the approval of the Merger by the stockholders of AMSG at the Special Meeting of AMSG stockholders scheduled to be held on , 1996 (the "AMSG Special Meeting"), and by the shareholders of UWS at the Special Meeting of UWS shareholders scheduled to be held on , 1996 (the "UWS Special Meeting") and subject to the satisfaction or waiver of certain other conditions, the Merger will be effected pursuant to the terms of an Agreement and Plan of Merger dated as of July 31, 1996 (the "Merger Agreement") between AMSG, Blue Cross & Blue Shield United of Wisconsin ("BCBSUW"), UWS, Wallace J. Hilliard and Ronald A. Weyers, a copy of which is attached hereto as Appendix A and is incorporated herein by reference. THE COMPANIES UNITED WISCONSIN SERVICES, INC. UWS is a leading managed care company with (i) the largest health maintenance organization ("HMO") membership in Wisconsin, (ii) significant small group preferred provider ("PPO") products, and (iii) substantial operations in specialty managed care and other products, including a large dental HMO division of UWS ("Dentacare"), as well as life and disability insurance, workers' compensation insurance, mental health and other businesses. UWS has been successful in consistently growing its revenue within its existing businesses, as well as by acquisition and other strategic arrangements. UWS was formed to operate the for-profit managed care operations of Blue Cross & Blue Shield United of Wisconsin ("BCBSUW"), which will own approximately 37% of UWS's outstanding Common Stock upon completion of the Merger and after giving effect to UWS's issuance of shares therein. UWS was incorporated in Wisconsin in 1983. The mailing address of UWS's principal executive offices is 401 West Michigan Street, Milwaukee, Wisconsin 53203-2896, and its telephone number is (414) 226-6900. AMERICAN MEDICAL SECURITY GROUP, INC. AMSG, through American Medical Security, Inc. ("AMS"), a wholly owned subsidiary, develops, markets and administers managed care insurance products, specialty group insurance products and administrative services for small groups pursuant to its joint venture with UWS. American Medical Security Insurance Company, Inc. ("AMSIC"), also a wholly owned subsidiary of AMSG, assumes via reinsurance 50% of the health and life insurance products administered by AMS and underwritten by United Wisconsin Life Insurance Company ("UWLIC") and United Wisconsin Insurance Company ("UWIC"), both of which are subsidiaries of UWS. Finally, through various HMOs with which AMSG has entered into joint ventures, AMS has gained access to certain markets that otherwise would not be available. For example, AMS has used such HMOs as a tool to access large employer groups and, in certain locations, the Medicaid population. The mailing address of AMSG's principal executive offices is 3100 AMS Boulevard, Green Bay, Wisconsin 54313, and its telephone number is (414) 661-1111. MEETINGS OF SHAREHOLDERS UWS SPECIAL MEETING. The UWS Special Meeting is scheduled to be held on , 1996 at 11:00 a.m., local time, at , , Wisconsin. At the UWS Special Meeting, shareholders of UWS will consider and vote upon (i) a proposal to approve and adopt the Merger Agreement and the Merger, (ii) a proposal to amend the United Wisconsin Services, Inc. Equity Incentive Plan (the "UWS Equity Incentive Plan") to increase the number of shares available for grants, limit the number of shares which may be granted to individual participants, change the 1 requirements for membership on the committee which administers the plan, and permit the gifting of nonqualified options; and (iii) such other business as may be properly brought before the UWS Special Meeting. Only holders of record of UWS Common Stock at the close of business on , 1996 are entitled to notice of and to vote at the UWS Special Meeting. On that date, shares of UWS Common Stock were outstanding and entitled to vote. The affirmative vote of a majority of the outstanding UWS Common Stock is required for approval and adoption of the Merger Agreement and the Merger. The affirmative vote of a majority of the shares of UWS Common Stock represented at the UWS Special Meeting is required to amend the UWS Equity Incentive Plan. See "SPECIAL MEETING OF UWS SHAREHOLDERS." AMSG SPECIAL MEETING. The AMSG Special Meeting is scheduled to be held on , 1996 at 11:00 a.m., local time, at , , Wisconsin. At the AMSG Special Meeting, stockholders of AMSG will consider and vote upon a proposal to approve and adopt the Merger Agreement and the Merger. Only holders of record of AMSG common stock, par value $1.00 per share ("AMSG Common Stock"), at the close of business on , 1996, are entitled to notice of and to vote at the AMSG Special Meeting (the "AMSG Record Date"). On that date, 174,733.67 shares of AMSG Common Stock were outstanding and entitled to vote. The affirmative vote of holders of shares representing a majority of the number of shares of AMSG Common Stock outstanding is necessary to approve and adopt the Merger Agreement and the Merger. See "SPECIAL MEETING OF AMSG STOCKHOLDERS." THE MERGER GENERAL. Upon consummation of the Merger, AMSG will merge with and into UWS, and the shares of AMSG Common Stock then outstanding (other than shares as to which dissenters' rights have been properly exercised and shares held by UWS), and the options to purchase shares of AMSG Common Stock which are then outstanding under AMSG's 1993 Nonstatutory Stock Option Plan (the "AMSG Options"), will be converted as described below. EFFECTIVE TIME OF THE MERGER. Following receipt of all required approvals and satisfaction or waiver of the other conditions to the Merger, the Merger will be consummated and become effective at the time (the "Effective Time") at which the Articles of Merger to be filed pursuant to the Wisconsin Business Corporation Law (the "WBCL") are received by and accepted for filing by the Department of Financial Institutions of the State of Wisconsin and the Certificate of Merger to be filed pursuant to the Delaware General Corporatation Law ("DGCL") is received and approved for filing by the Secretary of State of Delaware or such later date and time as may be specified in such Articles of Merger and Certificate of Merger. See "THE MERGER -- Effective Time of the Merger" and "-- Conditions; Waivers." CONVERSION OF AMSG COMMON STOCK IN THE MERGER. Upon consummation of the Merger, all shares of AMSG Common Stock issued and outstanding immediately prior to the Effective Time (other than shares as to which dissenters' rights of appraisal have been properly exercised and shares held by UWS) and all shares of AMSG Common Stock issuable upon exercise of AMSG Options will, collectively, be exchanged for an aggregate of $67,010,000 in cash (less applicable expenses) and 4,000,000 shares of or options to purchase shares of UWS Common Stock (the "Aggregate Merger Consideration"). The shares of capital stock of AMSG held by UWS will be canceled concurrently with the Merger. ALLOCATION OF MERGER CONSIDERATION. At the Effective Time, each share of AMSG Common Stock (other than shares as to which dissenters' rights have been properly exercised and shares held by UWS) will be converted into the right to receive, after expenses, approximately $382 in cash and approximately 24 shares of UWS Common Stock. In addition, approximately $52 per share of AMSG 2 Common Stock (other than shares as to which dissenters' rights have been properly exercised and shares held by UWS) will be placed into an escrow account to be held and paid as described more fully in "THE MERGER -- Escrow Agreement." The closing price of UWS Common Stock was $ on , 1996. CONVERSION OF AMSG OPTIONS IN THE MERGER. Upon consummation of the Merger, each AMSG Option that is outstanding immediately prior to the Effective Time will be converted into an option to purchase approximately 42.4 shares of UWS Common Stock for each share of AMSG Common Stock subject to such option (each a "UWS Option"). The per share exercise price for a UWS Option will be approximately $4.67. At or after the Effective Time, option agreements for UWS Options will be issued pursuant to the UWS Equity Incentive Plan to holders of AMSG Options. Subject to the foregoing, such UWS Options will have terms which are substantially identical to the terms of the AMSG Options they replace (including, without limitation, expiration date and exercise provisions), except that the UWS Options will be fully vested. FRACTIONAL SHARES. No fractional shares of UWS Common Stock will be issued in the Merger. Any fractional amount resulting from the Merger will be converted into the right to receive cash, without interest, in an amount equal to the product of (a) such fraction of a share of UWS Common Stock and (b) the closing price of UWS Common Stock on the NYSE for the business day immediately preceding the Effective Time. RECOMMENDATION OF UWS BOARD OF DIRECTORS. The UWS Board of Directors (the "UWS Board") has determined the Merger to be fair to and in the best interests of UWS and its shareholders and has approved the Merger Agreement. The UWS Board unanimously recommends that UWS shareholders vote FOR the Merger and the amendment of the UWS Equity Incentive Plan. The UWS Board's recommendations are based upon a number of factors discussed in this Joint Proxy Statement/ Prospectus. See "BACKGROUND OF AND REASONS FOR THE MERGER," and "APPROVAL OF AMENDMENTS TO UWS EQUITY INCENTIVE PLAN". OPINION OF UWS FINANCIAL ADVISOR. Merrill Lynch & Co., Inc. ("Merrill Lynch") has been retained by UWS to act as its financial advisor in connection with the Merger. Merrill Lynch delivered its oral opinion to the UWS Board of Directors on July 31, 1996, which was subsequently confirmed in writing (the "Merrill Lynch Opinion"), to the effect that, as of such date and based on the procedures followed, factors considered and assumptions made by Merrill Lynch as set forth therein, the consideration to be paid to holders of capital stock of AMSG pursuant to the Merger Agreement is fair from a financial point of view to the shareholders of UWS. The full text of the Merrill Lynch Opinion, which sets forth assumptions made, matters considered and limitations on the review undertaken, is attached hereto as Appendix B. UWS shareholders are urged to read the opinion carefully and in its entirety. The Merrill Lynch Opinion is directed only to the fairness to the shareholders of UWS of the consideration to be paid to the AMSG shareholders pursuant to the Merger Agreement from a financial point of view and should not be deemed to constitute a recommendation by Merrill Lynch to UWS shareholders to vote in favor of any matter presented in this Joint Proxy Statement/Prospectus. The summary of the Merrill Lynch Opinion set forth herein is qualified in its entirety by reference to the full text of such opinion. See "BACKGROUND OF AND REASONS FOR THE MERGER -- Opinion of UWS Financial Advisor." RECOMMENDATION OF AMSG BOARD OF DIRECTORS. The AMSG Board of Directors (the "AMSG Board") has determined the Merger to be fair to and in the best interests of AMSG and its stockholders and has approved the Merger Agreement and the Merger. The AMSG Board recommends that AMSG stockholders approve the Merger Agreement and the Merger. The AMSG Board's recommendations are based upon a number of factors discussed in this Joint Proxy Statement/Prospectus. See "BACKGROUND OF AND REASONS FOR THE MERGER" and "CONFLICTS OF INTEREST." Mr. Thomas Hefty, a member of the AMSG Board and Chairman, President and Chief Executive Officer of UWS, did not participate in the deliberations of the AMSG Board concerning whether to approve the Merger Agreement. 3 VOTING AGREEMENTS. Messrs. Hilliard and Weyers, the President and Executive Vice President of AMSG, respectively, have agreed with UWS to vote 74,961.67 shares of AMSG Common Stock which they, collectively, have the power to vote and which represents approximately 43% of the issued and outstanding shares of AMSG Common Stock, for approval of the Merger and the Merger Agreement. UWS has agreed to vote its capital stock (representing 12% of the aggregate voting power with respect to AMSG Common Stock) in favor of the Merger. Approval of the Merger by the shareholders of AMSG is thus assured. In addition, BCBSUW, which owns an aggregate of 6,207,675 shares of UWS Common Stock representing 49% of all outstanding UWS Common Stock before giving effect to the Merger, has agreed with AMSG to vote all of its shares of UWS Common Stock for approval of the Merger and the Merger Agreement. See "THE MERGER -- Voting Agreements." EXCHANGE OF AMSG COMMON STOCK IN THE MERGER. As soon as practicable after the Effective Time, Firstar Trust Company, the Exchange Agent for the Merger (the "Exchange Agent"), will deliver to each holder of certificates representing shares of AMSG Common Stock (other than dissenting shares), a form of letter of transmittal and instructions for use in effecting the surrender of such certificates for conversion into shares of UWS Common Stock and cash. Upon surrender of such certificates to the Exchange Agent, together with the letter of transmittal and other required documents, each such holder will receive for each share of AMSG Common Stock represented by such certificate the number of shares of UWS Common Stock and/or the cash into which such shares of AMSG Common Stock were converted in the Merger. See "THE MERGER -- Terms of the Merger" and "-- Exchange of AMSG Stock." LISTING OF UWS COMMON STOCK ON THE NEW YORK STOCK EXCHANGE. UWS has agreed to use all reasonable efforts to cause the UWS Common Stock to be issued pursuant to the Merger Agreement and upon exercise of AMSG Options to be admitted to trading on the New York Stock Exchange ("NYSE"). See "THE MERGER -- Listing of UWS Common Stock on the New York Stock Exchange." BUSINESS OF AMSG PENDING THE MERGER. AMSG has agreed that, prior to the Effective Time or earlier termination of the Merger Agreement, except as contemplated by the Merger Agreement, it will conduct its operations according to its ordinary course of business consistent with past practice. In addition, unless UWS agrees in writing or except as otherwise permitted pursuant to the Merger Agreement, prior to the Effective Time, AMSG will not engage in any of a number of actions specified in the Merger Agreement. See "THE MERGER -- Business of AMSG Pending the Merger." MANAGEMENT AND OPERATIONS OF AMSG AFTER THE MERGER. After the Merger, AMSG will operate as one of UWS's business units, and UWS currently intends to maintain AMSG's corporate headquarters in Howard, Wisconsin. Following the Merger, AMSG will have access to resources generally available to UWS's other business units and will participate in appropriate activities with other UWS business units. Samuel V. Miller, currently the Executive Vice President of UWS, will become the President and Chief Executive Officer of AMS Holdings, Inc., a Nevada corporation and wholly owned subsidiary of UWS which has been formed by UWS to conduct the operations heretofore carried on by AMSG ("Holdings"). In addition, Messrs. Hilliard and Weyers, the President and Executive Vice President of AMSG, respectively, will serve as the Chairman and Vice Chairman of Holdings, respectively. See "THE MERGER -- Management and Operations of AMSG After the Merger", "RISK FACTORS -- Interests of Certain Persons in the Merger; Conflicts of Interest," and "INTEREST OF CERTAIN PERSONS IN THE MERGER AND RELATED MATTERS." CONDITIONS OF THE MERGER; TERMINATION. The consummation of the Merger is conditioned upon the fulfillment or waiver of certain conditions set forth in the Merger Agreement. See "THE MERGER -- Conditions; Waivers." The Merger Agreement may be terminated (i) by mutual consent of UWS and AMSG, (ii) by any of UWS, AMSG or Messrs. Hilliard or Weyers if the Merger has not been consummated by June 30, 1997, and (iii) under certain other circumstances. See "THE MERGER -- Termination; Amendment." 4 CERTAIN FEDERAL INCOME TAX CONSEQUENCES. It is expected that the Merger will constitute a reorganization for federal income tax purposes and, accordingly, that no gain or loss will be recognized by holders of AMSG Common Stock upon and to the extent of the conversion of AMSG Common Stock into UWS Common Stock in the Merger. AMSG stockholders will recognize gain upon the receipt of cash in an amount equal to the lesser of (i) the amount of cash received or (ii) the excess of the fair market value of the UWS Common Stock received in the Merger plus the cash received over the basis of the AMSG Common Stock surrendered in the exchange therefor. It is further expected that no gain or loss will be recognized by AMSG or UWS as a result of the Merger. See "THE MERGER -- Certain Federal Income Tax Considerations." Holders of AMSG Common Stock and AMSG Options are urged to consult their own tax advisors as to the specific tax consequences to them of the Merger. INDEMNITY AND ESCROW ARRANGEMENTS. Of the aggregate $67,010,000 in cash consideration payable to stockholders of AMSG in the Merger, a total of $8,000,000 will be held in escrow to secure certain indemnity agreements made in the Merger Agreement in favor of UWS. See "THE MERGER -- Indemnification Agreements" and "-- Escrow Agreement." ANTITRUST MATTERS. Transactions such as the Merger are reviewed by the Department of Justice and the Federal Trade Commission (the "FTC") to determine whether they comply with applicable antitrust laws. Under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), the Merger may not be consummated until such time as the specific waiting period requirements of the HSR Act have been satisfied. UWS, AMSG, and possibly other individual shareholders of AMSG will file notification reports, together with requests for early termination of the waiting period, with the Department of Justice and the FTC under the HSR Act. At any time prior to consummation of the Merger, the Department of Justice, the FTC or a private person or entity could seek under the antitrust laws, among other things, to enjoin the Merger. There can be no assurances that a challenge to the Merger will not be made or that, if such a challenge is made, UWS or AMSG will prevail. INSURANCE REGULATORY MATTERS. Because the Merger involves a change in control with respect to insurance companies and HMOs which are AMSG subsidiaries, the Merger may not be consummated until UWS has obtained written approvals from the Department of Insurance ("Department") or the analagous state regulatory agency in Arizona, Colorado, Florida, Georgia, Illinois, Ohio, North Carolina, and Tennessee, unless an exemption or waiver to such requirement is granted. UWS is in the process of obtaining exemptions where available and filing requisite Form A Statements Regarding the Acquisition of Control or other pertinent filings with any relevant Department to obtain such approvals. Additional department approvals will be required in connection with corporate actions scheduled to be effected by certain AMSG and UWS affiliates prior to the Merger. AMSIC intends to pay a dividend of $10,000,000 in cash plus the stock of three subsidiaries to AMSG. This dividend may not be effected until AMSIC receives the approval of the Arizona Department of Insurance. Additionally, BCBSUW may provide UWS with debt financing or financial guarantees to enable UWS to make all or a portion of the cash payments to be made in connection with the Merger. Any loan may not be effected unless approved by the Wisconsin Office of the Commissioner of Insurance ("OCI"). Accordingly, such companies are filing the necessary notices to obtain any required approvals. ACCOUNTING TREATMENT. It is expected that the Merger will be accounted for as a purchase. See "THE MERGER -- Accounting Treatment." CONFLICTS OF INTEREST. As of the AMSG Record Date, members of the AMSG Board owned directly an aggregate of 74,961.67 shares of AMSG Common Stock, representing approximately 43% of the outstanding AMSG Common Stock. As of such date, UWS held an aggregate of 20,967 shares of AMSG Common Stock, representing approximately 12% of the aggregate voting power with respect to the AMSG Common Stock; and an executive officer of UWS held options to acquire 7,113 shares of AMSG Common Stock owned by UWS. In addition, following the Merger, the principal stockholders and 5 executive officers of AMSG and an executive officer of UWS will have long-term employment arrangements and be granted new stock options by UWS. See "RISK FACTORS -- Interests of Certain Persons in the Merger; Conflicts of Interest." DISSENTERS' RIGHTS. Holders of AMSG Common Stock have the right to dissent from the proposed Merger and, subject to certain conditions, to receive payment of the "fair value" of their shares of AMSG Common Stock, as provided in Section 262 of the DGCL. A stockholder who elects to exercise his or her dissenters' rights must perfect such rights by delivering to AMSG prior to the vote at the AMSG Special Meeting written notice of his or her intent to demand payment, and not vote his or her shares in favor of the Merger Agreement, by either voting against adoption of the Merger Agreement or abstaining from voting. See "RIGHTS OF DISSENTING SHAREHOLDERS -- AMSG Stockholders." RISK FACTORS The shareholders of UWS and AMSG should consider carefully the information set forth herein under the heading "Risk Factors" which discusses, among other things, the risks associated with: the effect of future sales of the shares issued in the Merger on the market for UWS Common Stock; the interests of certain persons in the Merger and conflicts of interest; fluctuations in operating results of UWS; government regulation; and dependence on key personnel. 6 SELECTED CONSOLIDATED FINANCIAL DATA OF UWS The following selected consolidated financial data as of and for each of the five years in the period ended December 31, 1995 have been derived from UWS's consolidated financial statements, which have been audited by Ernst & Young LLP, independent auditors. The selected financial data presented as of and for the six months ended June 30, 1995 and 1996 have been derived from UWS's unaudited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements for such periods include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the consolidated financial position and results of operations for these periods. The following data should be read in conjunction with the UWS consolidated financial statements, the related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated by reference herein.
AS OF AND FOR THE SIX MONTHS ENDED AS OF AND FOR THE YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------------------------------ -------------------- 1995 1994 1993 1992 1991 1996 1995 ---------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING STATISTICS) STATEMENT OF INCOME DATA: REVENUES: Premium revenue................................ $ 973,279 $ 730,980 $ 554,135 $ 395,672 $ 306,851 $ 525,769 $ 467,912 Other revenue.................................. 24,191 15,997 7,955 6,526 3,852 14,108 12,730 Investment income.............................. 27,932 22,112 16,634 13,430 10,584 14,755 12,678 Realized investment gains...................... 12,915 1,649 3,992 3,135 2,238 7,484 2,969 ---------- --------- --------- --------- --------- --------- --------- Total revenues............................... 1,038,317 770,738 582,716 418,763 323,525 562,116 496,289 EXPENSES: Medical and other benefits..................... 815,616 556,090 428,316 311,906 249,548 437,706 396,239 Commission expenses............................ 64,451 52,850 33,917 17,559 11,910 34,931 30,890 Administrative expenses........................ 117,148 89,832 63,452 45,275 34,479 66,406 58,012 Premium taxes and other assessments............ 12,891 9,066 5,916 3,203 3,016 7,041 5,846 Interest and profit sharing on joint ventures...................................... 15,170 7,638 5,727 3,941 1,490 8,393 5,444 Interest expense on subordinated notes......... 3,483 3,487 1,560 -- -- 1,739 1,742 Dividends on preferred stock of subsidiary..... 204 2,449 2,449 2,449 2,449 -- 204 ---------- --------- --------- --------- --------- --------- --------- Total expenses............................... 1,028,963 721,412 541,337 384,333 302,892 556,216 498,377 ---------- --------- --------- --------- --------- --------- --------- Income (loss) before income tax expense (benefit) and cumulative effect of accounting change...... 9,354 49,326 41,379 34,430 20,633 5,900 (2,088) Income tax expense (benefit)..................... 2,981 16,563 14,536 8,566 7,414 2,413 (575) ---------- --------- --------- --------- --------- --------- --------- Income (loss) before cumulative effect of accounting change............................... 6,373 32,763 26,843 25,864 13,219 3,487 (1,513) Cumulative effect of accounting change........... -- -- 98 -- -- -- -- ---------- --------- --------- --------- --------- --------- --------- Net income (loss)............................ $ 6,373 $ 32,763 $ 26,941 $ 25,864 $ 13,219 $ 3,487 $ (1,513) ---------- --------- --------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- --------- Earnings (loss) per common share................. $ 0.50 $ 2.81 $ 2.43 $ 2.34 $ 1.41 $ 0.28 $ (0.13) Cash dividends per common share(1)............... $ 0.48 $ 0.48 $ 0.48 $ 0.48 $ 0.33 $ 0.24 $ 0.24 OPERATING STATISTICS: Medical loss ratio(2).......................... 85.4% 77.1% 78.5% 81.0% 83.5% 85.4% 86.2% Selling, general and administrative expense ratio(2)...................................... 15.9 16.8 15.1 12.5 12.2 16.1 15.9 BALANCE SHEET DATA: Cash and investments........................... $ 581,637 $ 455,886 $ 353,983 $ 239,920 $ 176,766 $ 507,004 $ 463,196 Total assets................................... 721,289 556,171 416,203 274,393 199,627 641,574 575,462 Medical and other benefits payable............. 245,118 162,933 114,248 51,119 38,564 236,330 188,048 Subordinated notes............................. 44,898 44,960 45,000 -- -- 44,888 44,950 Preferred stock of subsidiary.................. -- 30,000 30,000 30,000 30,000 -- -- Redeemable preferred stock..................... -- 2,007 1,370 -- -- -- -- Total shareholders' equity..................... 212,411 171,705 125,387 98,108 72,451 205,149 203,888
- ------------------------ (1) The cash dividends in 1991 were paid to BCBSUW, which was then the Company's sole shareholder. (2) Ratios are based on premium revenues and related expenses for HMO products and small group PPO products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the UWS Annual Report on Form 10-K for the year ended December 31, 1995, incorporated by reference herein. 7 SELECTED CONSOLIDATED FINANCIAL DATA OF AMSG The following selected consolidated financial data as of and for each of the five years in the period ended December 31, 1995 have been derived from AMSG's consolidated financial statements, which have been audited by Ernst & Young LLP, independent auditors. The selected financial data presented as of and for the six months ended June 30, 1995 and 1996 have been derived from AMSG's unaudited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements for such periods include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the consolidated financial position and results of operations for these periods. The following data should be read in conjunction with the AMSG consolidated financial statements, the related notes thereto, and "AMSG Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
AS OF AND FOR THE SIX MONTHS ENDED AS OF AND FOR THE YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- -------------------- 1995 1994 1993 1992 1991 1996 1995 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT OPERATING STATISTICS) CONSOLIDATED STATEMENT OF INCOME DATA: Revenue: Reinsurance assumed and premium..... $ 496,989 $ 374,875 $ 242,896 $ 82,117 $ 15,621 $ 281,513 $ 232,486 Administrative fees and commissions........................ 246,458 192,109 124,148 70,916 47,193 134,385 116,310 Other revenue....................... 7,958 4,663 4,381 10,266 7,147 6,848 4,613 Loss from unconsolidated subsidiaries....................... (2,170) (472) (300) -- -- (1,903) (655) Investment income................... 14,102 7,020 5,288 3,681 1,312 7,735 5,135 --------- --------- --------- --------- --------- --------- --------- Total revenue................... 763,337 578,195 376,413 166,980 71,273 428,578 357,889 Expenses: Medical and other benefits.......... 389,498 249,992 163,642 51,984 9,487 224,899 186,457 Expense allowance on reinsurance assumed............................ 118,996 92,405 59,821 22,077 4,392 66,261 55,898 Commission expenses................. 119,137 95,299 57,545 32,402 20,521 63,490 56,472 Administrative expenses............. 145,748 102,452 68,329 39,717 25,806 84,071 69,022 --------- --------- --------- --------- --------- --------- --------- Total expenses.................. 773,379 540,148 349,337 146,180 60,206 438,721 367,849 Income (loss) before minority interest, income taxes, and cumulative effect of accounting change............................... (10,042) 38,047 27,076 20,800 11,067 (10,143) (9,960) Minority interest in loss of subsidiary........................... 244 42 -- -- -- 88 119 --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of accounting change............................... (9,798) 38,089 27,076 20,800 11,067 (10,055) (9,841) Income tax expense (benefit).......... (1,947) 14,250 9,991 7,218 4,009 (2,628) (2,482) --------- --------- --------- --------- --------- --------- --------- Income (loss) before cumulative effect of accounting change................. (7,851) 23,839 17,085 13,582 7,058 (7,427) (7,359) Cumulative effect of accounting change............................... 1,236 -- -- -- -- -- 1,236 --------- --------- --------- --------- --------- --------- --------- Net income (loss)..................... $ (6,615) $ 23,839 $ 17,085 $ 13,582 $ 7,058 $ (7,427) $ (6,123) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating Statistics: Medical loss ratio on reinsurance assumed (1)........................ 78.4% 66.7% 67.4% 63.3% 60.7% 79.9% 80.2% Expense allowance ratio (2)......... 23.9% 24.7% 24.6% 26.9% 28.1% 23.5% 24.0% Administrative expense ratio (3).... 29.3% 27.3% 28.1% 48.4% 165.2% 29.9% 29.7% Consolidated Balance Sheet Data: Cash and investments................ $ 38,412 $ 39,960 $ 17,267 $ 20,752 $ 13,927 $ 36,071 $ 23,179 Total assets........................ 242,978 195,791 135,466 72,855 46,948 220,485 195,925 Medical and other benefits payable............................ 84,838 54,759 38,752 15,823 2,324 78,818 62,777 Long-term debt, excluding current maturities......................... 2,229 2,299 3,368 1,142 1,688 10,253 11,038 Redeemable preferred stock.......... 15,000 -- -- -- -- 15,000 -- Total shareholders' equity.......... 80,495 65,132 44,869 26,794 13,212 68,630 64,634
- ------------------------------ (1) Computed as Medical and other benefits to Reinsurance assumed and premium revenue. (2) Computed as Expense allowance on reinsurance assumed to Reinsurance assumed and premium revenue. (3) Computed as Administrative expenses to Reinsurance assumed and premium revenue. 8 RISK FACTORS The following factors should be considered carefully by the shareholders of UWS and AMSG in connection with voting on the Merger and the purchase of UWS Common Stock by AMSG stockholders as a result thereof. These factors should be considered in conjunction with the other information included or incorporated by reference in this Joint Proxy Statement/Prospectus. SHARES ELIGIBLE FOR FUTURE SALE. If the Merger is approved by the shareholders of UWS and AMSG, UWS will issue up to 4,000,000 shares of UWS Common Stock or options to acquire UWS Common Stock, in addition to UWS's payment of $67,010,000 in cash. Shares of UWS Common Stock issued to persons who are deemed to be "affiliates" for purposes of Rule 145 under the Securities Act will be subject to restrictions on transfer which will require affiliates who wish to transfer shares to either (i) comply with Rule 145(d) under the Securities Act, or (ii) register such shares pursuant to an effective registration statement under the Securities Act. Subject to the foregoing, these shares will be freely transferable following the Merger. See "THE MERGER -- Resale of UWS Common Stock Issued in the Merger; Affiliates." Future sales of a substantial number of such shares could adversely affect or cause substantial fluctuations in the market price of UWS Common Stock. ANTITRUST MATTERS. Transactions such as the Merger are reviewed by the Department of Justice and the FTC to determine whether they comply with applicable antitrust laws. Under the provisions of the HSR Act, the Merger may not be consummated until such time as the specific waiting period requirements of the HSR Act have been satisfied. UWS, AMSG, and possibly other individual stockholders of AMSG will simultaneously file notification reports, together with requests for early termination of the waiting period, with the Department of Justice and the FTC under the HSR Act. At any time prior to consummation of the Merger, the Department of Justice, the FTC or a private person or entity could seek under the antitrust laws, among other things, to enjoin the Merger. There can be no assurances that a challenge to the Merger will not be made or that, if such a challenge is made, that UWS or AMSG will prevail. INSURANCE REGULATORY MATTERS. Because the Merger involves a change in control with respect to insurance companies and HMOs which are AMSG subsidiaries, the Merger may not be consummated until UWS has obtained written approvals from the Department of Insurance ("Department") or the analagous state regulatory agency in Arizona, Colorado, Florida, Georgia, Illinois, Ohio, North Carolina, and Tennessee, unless an exemption or waiver to such requirement is granted. UWS is in the process of obtaining exemptions where available and filing requisite Form A Statements Regarding the Acquisition of Control or other pertinent filings with any relevant Department to obtain such approvals. Additional Department approvals will be required in connection with corporate actions scheduled to be effected by certain AMSG and UWS affiliates prior to the Merger. AMSIC intends to pay a dividend of $10,000,000 in cash plus the stock of three subsidiaries to AMSG. This dividend may not be effected until AMSIC receives the approval of the Arizona Department of Insurance. Additionally, BCBSUW may provide UWS funding for some or all of the cash consideration to be paid in the Merger in the form of a loan or financial guarantees. Any loan may not be effected unless approved by the OCI. Accordingly, such companies are filing the necessary notices to obtain any required approvals. BCBSUW OWNERSHIP AND FINANCING; POTENTIAL CONFLICTS OF INTEREST. Upon completion of the Merger, BCBSUW will own approximately 37% of the total outstanding UWS Common Stock. Such ownership limits the ability of a third party to acquire control of UWS and, therefore, could adversely affect the market price of the UWS Common Stock in certain circumstances. UWS and BCBSUW have entered into a service agreement (the "Service Agreement") with respect to the provision of certain services, including sales and marketing, computerized data processing, legal, investment, actuarial and other management services. Under the Service Agreement, the company receiving a service pays the company providing the service an amount which UWS and BCBSUW believe approximates cost. UWS has entered into reinsurance agreements with BCBSUW in the past, and may do so in the future, 9 on terms that are believed to be reasonable at the time but that may not in retrospect be beneficial to UWS. Pursuant to Wisconsin statutory and regulatory requirements, such reinsurance agreements and the Service Agreement are required to be filed with the OCI for its review to determine whether the "transaction at the time it is entered into is reasonable and fair to the interests of the insurer," as required by Wisconsin statutes. In addition, BCBSUW's sales force markets and sells some of UWS's products. Also, certain of UWS's products may compete with managed health care products offered by BCBSUW in Wisconsin. If BCBSUW were to discontinue providing or receiving services, negotiate for material changes to the Service Agreement or stop marketing and selling certain of UWS's products, UWS's business and operations could be adversely affected. Several of UWS's executive officers devote portions of their time to the operations of BCBSUW. Furthermore, eight of the ten directors of UWS also are directors of BCBSUW. INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST. In considering the respective recommendations of the UWS Board and the AMSG Board with respect to the Merger and the recommendation of the UWS Board with respect to approval of the amendments to the UWS Equity Incentive Plan, the respective shareholders of UWS and AMSG should be aware that certain members of the AMSG Board and AMSG management and certain members of the management of UWS have certain interests respecting the Merger separate from their interests as holders of AMSG Common Stock and AMSG Options and as holders of UWS Common Stock and UWS Options, respectively. See "CONFLICTS OF INTEREST." FLUCTUATION OF OPERATING RESULTS. A variety of factors may cause period-to-period fluctuations in the operating results of UWS following the Merger. Such factors include, but are not limited to, competitive pricing pressures, revenue and expenses related to new products or revisions to existing products, delays in regulatory approvals and changes in distribution channels or product mix, changes in legislation or industry cost reform, increased fees charged by health care providers or increased utilization of medical services by UWS. Singularly or in combination, these factors can adversely affect UWS's operating results and financial condition. MERGER-RELATED COMPENSATION EXPENSE. Mr. Samuel V. Miller, an executive officer of UWS, has options to purchase from UWS 7,113 shares of AMSG Common Stock at an exercise price of $703 per share. At the Effective Time of the Merger, UWS will convert Mr. Miller's options into options to purchase 301,567 shares of UWS Common Stock at an exercise price of $16.54 per share. As a result of this conversion, UWS will record a compensation expense, before taxes, of $2,137,000 or $0.13 per share of UWS Common Stock outstanding after the Merger. INCREASING HEALTH CARE COSTS AND THE HEALTH CARE INDUSTRY. UWS's profitability depends in large part on its ability to predict and manage effectively health care costs. According to a compilation of industry and U.S. Government agency statistics, from 1986 through 1993, national health care costs increased at an average annual rate of 9.6%, while the average annual rate of increase in the consumer price index during this period was 3.2%. The aging of the population and other demographic characteristics and advances in medical technology continue to contribute to rising health care costs. Government-imposed limitations on Medicare and Medicaid reimbursements also have caused the private sector to bear a greater share of increasing health care costs. Changes in health care practices, inflation, new technologies, major epidemics, natural disasters and numerous other factors affecting the delivery and cost of health care are beyond any company's control and may limit UWS's ability to predict and control health care costs and claims. Competitive price pressures in the group health insurance industry, which generally result from the entry and exit of health care companies in the marketplace, historically have resulted in pricing and profitability cycles. The extent to which recent structural changes in the managed health care and health insurance industry have altered cyclical patterns is uncertain. There can be no assurance that cyclical patterns will not adversely affect UWS in the near future. HEALTH CARE REFORM LAWS. In recent years, many states, including certain of the principal states in which UWS and AMS conduct business, have enacted or are considering various health care reform 10 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-Kassenbaum 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. ONGOING GOVERNMENT REGULATION. UWS is subject to extensive regulation in Wisconsin and the other states in which it does business. Such regulation governs, among other things, the amount of dividends and other distributions that can be paid by certain of UWS's subsidiaries without prior approval or notification, the granting and revoking of licenses to transact business, trade practices, premium rate regulation, underwriting standards, policy forms, claims payment, licensing of agents and brokers, the amount and type of investments that UWLIC may hold, minimum reserve and surplus requirements, risk-based capital requirements and compelled participation in, and assessments in connection with, risk-sharing pools and guaranty funds. Such regulation is primarily intended to protect policyholders rather than investors. Statutory capital and surplus requirements vary based upon the types of risks underwritten and the nature of the provider contracts. The premiums written by certain HMOs and insurance companies are limited by the amount of their statutory capital and surplus. Statutory capital and surplus requirements for workers' compensation coverage are greater than those for UWS's other businesses. In addition, risk-based capital formulas, which are currently in effect or may be adopted, affect statutory capital and surplus requirements. In order to maintain its recent rate of growth in premium revenue, to underwrite workers' compensation coverage and to continue to meet risk-based capital requirements, UWIC and/or UWLIC may have to obtain additional statutory capital or utilize reinsurance agreements to cede a greater percentage of premium revenue. Should additional resources be necessary, UWS may be required to obtain additional financing. There can be no assurance such financing could be obtained upon terms acceptable to UWS. DEPENDENCE ON KEY PERSONNEL. The future success of both UWS and AMSG is dependent on a number of key management and technical employees. Competition for highly skilled people with extensive experience in the health care industry is intense. Both companies will be dependent on the continued services and management experience of their executive officers. If such executive officers were to leave, the operating results of the combined companies could be adversely affected. The future success of both companies will also be dependent on their ability to continue to attract key managerial and technical personnel. SELECTED HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL DATA The following selected historical consolidated financial information of UWS and AMSG has been derived from their respective historical consolidated financial statements, and should be read in conjunction with such financial statements and the notes thereto. UWS's consolidated financial statements are incorporated by reference in this Joint Proxy Statement/Prospectus. AMSG's consolidated financial statements are included elsewhere in this Joint Proxy Statement/Prospectus. The selected historical and pro forma unaudited condensed consolidated financial information, which gives effect to the Merger as if it had been consummated on January 1, 1995 for income statement data, and on June 30, 1996 for balance sheet data is derived from the pro forma unaudited condensed consolidated financial statements included elsewhere in this Joint Proxy Statement/Prospectus and should be read in conjunction with such statements and the notes thereto. Adjustments to arrive at the pro forma consolidated amounts are based on the purchase method of accounting, including estimates of the approximate fair values of the assets and liabilities of AMSG. 11 The pro forma unaudited condensed consolidated financial statements are not necessarily indicative of the consolidated results of operations or the financial position that would have been reported had the Merger occurred on the dates indicated, and should not be construed as representative of future operations. Furthermore, no effect has been given in the selected historical and pro forma consolidated income statement data for operating and synergistic benefits that may be realized through the combination of the entities. See "HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS." UWS AND AMSG PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL DATA
FOR THE YEAR ENDED AS OF AND FOR THE SIX DECEMBER 31, 1995 MONTHS ENDED JUNE 30, 1996 ----------------------------------- ----------------------------------- HISTORICAL PRO HISTORICAL PRO ---------------------- FORMA(2) ---------------------- FORMA(2) UWS AMSG(1) CONSOLIDATED UWS AMSG(1) CONSOLIDATED --------- ----------- ----------- --------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues: Premium revenue................ $ 973,279 $ 496,989 $1,468,264 $ 525,769 $ 281,513 $ 806,258 Other revenue.................. 24,191 252,246 56,115 14,108 139,330 30,878 Investment income.............. 27,932 14,486 29,068 14,755 7,735 13,951 Realized investment gains...... 12,915 -- 12,915 7,484 -- 7,484 --------- ----------- ----------- --------- ----------- ----------- Total revenues............... 1,038,317 763,721 1,566,362 562,116 428,578 858,571 Expenses: Medical and other benefits..... 815,616 389,498 1,201,385 437,706 224,899 658,337 Commission expenses............ 64,451 61,486 122,103 34,931 33,004 65,416 Administrative expenses........ 116,470 312,923 210,784 66,090 175,005 122,730 Premium taxes and other assessments................... 12,891 9,537 22,428 7,041 5,725 12,766 Interest and profit sharing on joint ventures................ 15,170 -- 2,734 8,393 -- 1,578 Interest expense on long term debt.......................... 3,483 -- 9,562 1,739 -- 4,999 Amortization of goodwill and other intangibles............. 678 -- 8,648 316 -- 4,301 Dividends on preferred stock of subsidiary.................... 204 -- 204 -- -- -- --------- ----------- ----------- --------- ----------- ----------- Total expenses............... 1,028,963 773,444 1,577,848 556,216 438,633 870,127 --------- ----------- ----------- --------- ----------- ----------- Income (loss) before income tax expense (benefit) and cumulative effect of accounting change..... 9,354 (9,723) (11,486) 5,900 (10,055) (11,556) Income tax expense (benefit)..... 2,981 (1,872) 8 2,413 (2,628) (1,409) --------- ----------- ----------- --------- ----------- ----------- Income (loss) before cumulative effect of accounting change..... 6,373 (7,851) (11,494) 3,487 (7,427) (10,147) Cumulative effect of accounting change.......................... -- 1,236 -- -- -- -- --------- ----------- ----------- --------- ----------- ----------- Net income (loss)................ $ 6,373 $ (6,615) $ (11,494) $ 3,487 $ (7,427) $ (10,147) --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- Earnings (loss) per common share........................... $ 0.50 $ (37.86) $ (0.70) $ 0.28 $ (42.50) $ (0.61) Weighted average common shares... 12,550,601 174,734 16,550,601 12,599,715 174,734 16,599,715 BALANCE SHEET DATA: Cash and investments........... $ 507,004 $ 27,169 $ 525,264 Total assets................... 641,574 220,485 838,728 Medical and other benefits payable....................... 236,330 78,818 233,685 Long term debt................. 44,888 -- 135,971 Redeemable preferred stock..... -- 15,000 -- Total shareholders' equity..... 205,149 68,630 305,294
- ------------------------------ (1) Certain reclassifications have been made to the AMSG consolidated financial data to conform to UWS's presentation. (2) Adjustments necessary to arrive at the pro forma consolidated financial data are described in the Notes to Historical and Pro Forma Unaudited Condensed Consolidated Financial Statements. 12 COMPARATIVE PER SHARE DATA The following table presents comparative per share data for UWS on a historical basis and consolidated per share data on an unaudited pro forma basis. The pro forma data gives effect to the Merger on a purchase basis. The aggregate consideration payable by UWS is based on an assumed UWS Common Stock price of $23.625, which was the closing price of UWS Common Stock on July 31, 1996. See "THE MERGER -- Terms of the Merger -- Conversion of AMSG Common Stock in the Merger." This data should be read in conjunction with the selected historical financial information, the pro forma unaudited condensed consolidated financial statements and the separate historical financial statements of UWS and AMSG and the notes thereto incorporated by reference or included elsewhere in this Joint Proxy Statement/Prospectus. The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of the actual consolidated results of operations or the financial position that would have been reported had the Merger occurred on the date indicated, and should not be construed as representative of future operations.
AS OF AND FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 --------------- ----------- (UNAUDITED) Historical -- UWS: Net income per share......................................... $ 0.50 $ 0.28 Tangible book value per share................................ $ 15.76 Historical -- AMSG Net income (loss) per share.................................. $ (37.86) $ (42.50) Tangible book value per share................................ $ 376.88 Pro Forma -- Consolidated: Net income (loss) per UWS share.............................. $ (0.70) $ (0.61) Tangible book value per UWS share............................ $ 10.84
13 HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following historical and pro forma unaudited condensed consolidated financial statements of UWS and its subsidiaries as of June 30, 1996 and for the year ended December 31, 1995 and the six months ended June 30, 1996 illustrate the effect of the Merger on such financial statements, as though the Merger had occurred on June 30, 1996 in the pro forma unaudited condensed consolidated balance sheet and as of January 1, 1995 in the pro forma unaudited condensed consolidated statements of income. Adjustments to arrive at the pro forma consolidated amounts are based on the purchase method of accounting, including estimates of the approximate fair values of the assets and liabilities of AMSG. The pro forma adjustments and the assumptions on which they are based are described in the accompanying Notes to Historical and Pro Forma Unaudited Condensed Consolidated Financial Statements. The pro forma unaudited condensed consolidated financial statements are not necessarily indicative of the consolidated results of operations or the consolidated financial position which would have been reported had the Merger occurred on the dates indicated or which may be reported in the future. Furthermore, no effect has been given in the historical and pro forma unaudited condensed consolidated statements of income for operating and synergistic benefits that may be realized through the combination of the entities. The historical and pro forma unaudited condensed consolidated financial statements should be read in conjunction with the historical consolidated financial statements of AMSG included herein and the historical consolidated financial statements of UWS incorporated herein by reference. 14 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS) ASSETS
PRO FORMA UWS AMSG PRO FORMA NOTE CONDENSED HISTORICAL HISTORICAL ADJUSTMENTS REF. CONSOLIDATED ----------- ----------- ------------ ----- ------------ Investments: Bonds available for sale, at market............... $ 414,924 $ 8,450 $ -- $ 423,374 Bonds held to maturity, at amortized cost......... 10,635 1,880 -- 12,515 ----------- ----------- ------------ ------------ Total bonds..................................... 425,559 10,330 -- 435,889 Stocks, at market................................. 64,787 -- -- 64,787 ----------- ----------- ------------ ------------ Total investments............................... 490,346 10,330 -- 500,676 Cash and cash equivalents........................... 16,658 16,839 (8,909) 2 24,588 Receivables: Due from affiliates............................... 1,169 -- (741) 428 Other receivables................................. 76,591 14,441 (6,308) 84,724 ----------- ----------- ------------ ------------ Total receivables............................... 77,760 14,441 (7,049) 85,152 Funds held by affiliated reinsurers................. -- 129,349 (125,686) 3 3,663 Land, building and equipment -- net................. 9,879 24,062 32,180 4 66,121 Goodwill and other intangibles...................... 6,535 2,776 116,120 5 125,431 Other assets........................................ 40,396 22,688 (29,987) 6 33,097 ----------- ----------- ------------ ------------ Total assets.................................... $ 641,574 $ 220,485 $ (23,331) $ 838,728 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Medical and other benefits payable................ $ 236,330 $ 78,818 $ (81,463) 3 $ 233,685 Advance premiums.................................. 46,599 12,122 (10,987) 47,734 Due to affiliates................................. 31,734 -- (9,764) 21,970 Funds held on behalf of affiliated reinsurers..... 28,344 -- (28,344) 3 -- Long term debt.................................... 44,888 -- 91,083 7 135,971 Other liabilities................................. 48,530 60,915 (15,371) 8 94,074 ----------- ----------- ------------ ------------ Total liabilities............................... 436,425 151,855 (54,846) 533,434 Shareholders' equity: Common stock...................................... 12,600 175 3,825 16,600 Redeemable preferred stock........................ -- 15,000 (15,000) 9 -- Paid-in capital................................... 86,902 3,816 92,720 183,438 Retained earnings................................. 103,824 50,030 (50,030) 103,824 Unrealized gains (losses) on investments.......... 1,823 (391) -- 1,432 ----------- ----------- ------------ ------------ Total shareholders' equity...................... 205,149 68,630 31,515 10 305,294 ----------- ----------- ------------ ------------ Total liabilities and shareholders' equity.... $ 641,574 $ 220,485 $ (23,331) $ 838,728 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------
See accompanying notes. 15 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA UWS AMSG PRO FORMA NOTE CONDENSED HISTORICAL HISTORICAL ADJUSTMENTS REF. CONSOLIDATED ------------- ----------- ------------ ----- ------------- Revenues: Premium revenue................................. $ 973,279 $ 496,989 $ (2,004) 11 $ 1,468,264 Other revenue................................... 24,191 252,246 (220,322) 12 56,115 Investment income............................... 27,932 14,486 (13,350) 13 29,068 Realized investment gains....................... 12,915 -- -- 12,915 ------------- ----------- ------------ ------------- Total revenues................................ 1,038,317 763,721 (235,676) 1,566,362 Expenses: Medical and other benefits...................... 815,616 389,498 (3,729) 14 1,201,385 Commission expenses............................. 64,451 61,486 (3,834) 15 122,103 Administrative expenses......................... 116,470 312,923 (218,609) 16 210,784 Premium taxes and other assessments............. 12,891 9,537 -- 22,428 Interest and profit sharing on joint ventures... 15,170 -- (12,436) 13 2,734 Interest expense on long term debt.............. 3,483 -- 6,079 17 9,562 Amortization of goodwill and other intangibles.................................... 678 -- 7,970 18 8,648 Dividends on preferred stock of subsidiary...... 204 -- -- 204 ------------- ----------- ------------ ------------- Total expenses................................ 1,028,963 773,444 (224,559) 1,577,848 ------------- ----------- ------------ ------------- Income (loss) before income tax expense and cumulative effect of accounting change........... 9,354 (9,723) (11,117) (11,486) Income tax expense (benefit)...................... 2,981 (1,872) (1,101) 19 8 ------------- ----------- ------------ ------------- Income (loss) before cumulative effect of accounting change................................ 6,373 (7,851) (10,016) (11,494) Cumulative effect of accounting change............ -- 1,236 (1,236) 20 -- ------------- ----------- ------------ ------------- Net income (loss)............................... $ 6,373 $ (6,615) $ (11,252) $ 11,494 ------------- ----------- ------------ ------------- ------------- ----------- ------------ ------------- Earnings (loss) per common share.................. $ 0.50 21 $ (0.70) ------------- ------------- ------------- -------------
See accompanying notes. 16 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA UWS AMSG PRO FORMA NOTE CONDENSED HISTORICAL HISTORICAL ADJUSTMENTS REF. CONSOLIDATED ----------- ----------- ------------ ----- ------------ Revenues: Premium revenue................................... $ 525,769 $ 281,513 $ (1,024) 11 $ 806,258 Other revenue..................................... 14,108 139,330 (122,560) 12 30,878 Investment income................................. 14,755 7,735 (8,539) 13 13,951 Realized investment gains......................... 7,484 -- -- 7,484 ----------- ----------- ------------ ------------ Total revenues.................................. 562,116 428,578 (132,123) 858,571 Expenses: Medical and other benefits........................ 437,706 224,899 (4,268) 14 658,337 Commission expenses............................... 34,931 33,004 (2,519) 15 65,416 Administrative expenses........................... 66,090 175,005 (118,365) 16 122,730 Premium taxes and other assessments............... 7,041 5,725 -- 12,766 Interest and profit sharing on joint ventures..... 8,393 -- (6,815) 13 1,578 Interest expense on long term debt................ 1,739 -- 3,260 17 4,999 Amortization of goodwill and other intangibles.... 316 -- 3,985 18 4,301 ----------- ----------- ------------ ------------ Total expenses.................................. 556,216 438,633 (124,722) 870,127 ----------- ----------- ------------ ------------ Income (loss) before income tax expense (benefit)... 5,900 (10,055) (7,401) (11,556) Income tax expense (benefit)........................ 2,413 (2,628) (1,194) 19 (1,409) ----------- ----------- ------------ ------------ Net income (loss)................................... $ 3,487 $ (7,427) $ (6,207) $ (10,147) ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------ Earnings (loss) per common share.................... $ 0.28 21 $ (0.61) ----------- ------------ ----------- ------------
See accompanying notes. 17 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES NOTES TO HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL The pro forma unaudited condensed consolidated balance sheet reflects the Merger as though it occurred on June 30, 1996. The pro forma unaudited condensed consolidated statements of income reflect the Merger as though it occurred on January 1, 1995. The Merger will be accounted for as a purchase transaction. Certain reclassifications have been made to the AMSG historical consolidated financial statements to conform to UWS's presentation. No effect has been given in the pro forma unaudited condensed consolidated statements of income for operating and synergistic benefits that may be realized through the combination of the entities. UWS currently owns 12% of the common stock of AMSG, and through reinsurance agreements with AMSIC, UWS retains 50% of the health and life business sold by AMS on the books of UWIC and UWLIC, insurance subsidiaries of UWS. Under the terms of the Merger Agreement, UWS will purchase the remaining 88% of AMSG's common stock for approximately $67.0 million in cash and 4,000,000 newly issued shares of UWS common stock. Upon completion of the transaction, UWS will record 100% of the health and life business sold by AMSG. 2. CASH AND CASH EQUIVALENTS Pro forma adjustments to cash and cash equivalents consist of the following:
(IN 000'S) --------- Proceeds from long-term debt (see Note 7)................................ $ 70,000 Proceeds from exercise of AMSG options (see Note 10)..................... 1,425 Cash paid to shareholders of AMSG........................................ (67,010) Expenses related to the Merger........................................... (3,426) Repayment of AMSG bank debt.............................................. (10,000) Cash of U&C Real Estate Partnership (see Note 4)......................... 102 --------- $ (8,909) --------- ---------
3. FUNDS HELD BY AFFILIATED REINSURERS AMSG records an asset for funds held by affiliated reinsurers, which predominantly represents balances held by subsidiaries of UWS. The corresponding UWS balances are recorded primarily as medical and other benefits payable and funds held on behalf of affiliated reinsurers. The pro forma adjustments to eliminate these intercompany balances are as follows:
(IN 000'S) --------- UWS Liabilities: Medical and other benefits payable.................................... $ (81,463) Funds held on behalf of affiliated reinsurers......................... (28,344) Other adjustments, net................................................ (15,879) --------- $(125,686) --------- --------- AMSG Assets: Funds held by affiliated reinsurers................................... $(125,686) --------- ---------
4. LAND, BUILDING AND EQUIPMENT -- NET Subsidiaries of UWS and AMSG are equal partners in U&C Real Estate Partnership, which owns the office building occupied by the employees of AMSG and AMS. Each partner's 50% ownership in 18 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES NOTES TO HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LAND, BUILDING AND EQUIPMENT -- NET (CONTINUED) this partnership investment, net of outstanding mortgages, is recorded in other assets on each partner's respective historical balance sheet. Upon Merger, the partnership will be wholly owned by the combined entity and consolidated. The pro forma adjustments replace each partner's recorded investment balance with the actual assets and liabilities (see Notes 2, 6 and 7) of the partnership, including the book value of the land and building of $32,180,000. 5. GOODWILL AND OTHER INTANGIBLES Pro forma adjustments for purchase price in excess of net assets acquired, resulting from the Merger, consist of the following:
(IN 000'S) --------- Purchase Price: Cash................................................................... $ 67,010 Market value of newly issued shares of UWS common stock................ 94,500 Grant of UWS options (see Note 10)..................................... 4,220 Expenses of Merger..................................................... 4,000 --------- 169,730 Net Assets Acquired: Common equity of AMSG.................................................. 53,630 Less cost basis of 12% of AMSG previously owned by UWS................. (1,445) Cash from exercise of AMSG options (see Note 10)....................... 1,425 --------- 53,610 --------- Purchase price in excess of net assets acquired.......................... $ 116,120 --------- ---------
Management has completed a preliminary analysis of the purchase price paid in excess of the net assets acquired, which identified the following intangible assets:
(IN 000'S) --------- Identified Intangibles: Distribution system.................................................... $ 25,000 Tradename/mark......................................................... 24,000 Software............................................................... 8,300 Unidentified Intangibles: Goodwill resulting from the Merger..................................... 61,596 Elimination of goodwill previously recorded by AMSG.................... (2,776) --------- $ 116,120 --------- ---------
In addition, management's preliminary analysis indicates that the amounts reflected on AMSG's historical consolidated balance sheet as tangible assets and liabilities approximate the fair values of such assets and liabilities, and accordingly, such assets have not been adjusted in the accompanying pro forma financial statements. 19 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES NOTES TO HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. OTHER ASSETS Pro forma adjustments to other assets consist of the following:
(IN 000'S) --------- Consolidation of partner investments in U&C Real Estate Partnership, net of other balances recorded (see Note 4)................................. $ (11,043) AMSG preferred stock (see Note 9)........................................ (15,000) Other adjustments........................................................ (3,944) --------- $ (29,987) --------- ---------
7. LONG-TERM DEBT Pro forma adjustments to long-term debt consist of borrowings to finance the Merger as follows:
(IN 000'S) ----------- New debt: Cash paid to shareholders of AMSG.......................................................... $ 67,010 Partial funding of expenses related to the Merger.......................................... 2,990 Recording of mortgage payable related to U&C Real Estate Partnership (see Note 4)............ 21,083 ----------- $ 91,083 ----------- -----------
8. OTHER LIABILITIES Pro forma adjustments to other liabilities consist of the following:
(IN 000'S) --------- Repayment of AMSG bank debt.............................................. $ (10,000) Other adjustments........................................................ (5,371) --------- $ (15,371) --------- ---------
9. REDEEMABLE PREFERRED STOCK UWLIC, a subsidiary of UWS, owns $15,000,000 of AMSG preferred stock, which is eliminated by the pro forma adjustments (see Note 10). 20 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES NOTES TO HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SHAREHOLDERS' EQUITY Pro forma adjustments to shareholders' equity consist of the following:
REDEEMABLE UNREALIZED COMMON PREFERRED PAID-IN RETAINED GAINS STOCK STOCK CAPITAL EARNINGS (LOSSES) TOTAL ----------- ----------- --------- --------- ----------- --------- (IN 000'S) Common stock issued..... $ 4,000 $ -- $ 90,500 $ -- $ -- $ 94,500 Elimination of preferred stock.................. -- (15,000) -- -- -- (15,000) Exercise of AMSG options................ -- -- 1,425 -- -- 1,425 Grant of UWS options.... -- -- 4,220 -- -- 4,220 To record unrealized losses of AMSG......... -- -- 391 -- (391) -- Elimination of equity accounts of AMSG....... (175) -- (3,816) (50,030) 391 (53,630) ----------- ----------- --------- --------- ----------- --------- $ 3,825 $ (15,000) $ 92,720 $ (50,030) $ -- $ 31,515 ----------- ----------- --------- --------- ----------- --------- ----------- ----------- --------- --------- ----------- ---------
The pro forma adjustments assume all outstanding AMSG common stock options are redeemed for cash in connection with the Merger. The pro forma adjustments also include an adjustment to record the value of UWS common stock options issued to the principal shareholders of AMSG in connection with the Merger, which is recorded as part of the purchase price with a corresponding increase in paid in capital. An executive officer of UWS has 7,113 options to purchase AMSG common shares at an option price of $703, which will be converted in connection with the Merger into 301,567 options to purchase UWS common shares at an option price of $16.54. Upon conversion, UWS will record compensation expense of $2,137,000. In accordance with Regulation S-X regarding the preparation of pro forma financial information, this nonrecurring charge has not been included in the pro forma unaudited condensed consolidated statements of income. 11. PREMIUM REVENUE Pro forma adjustments to premium revenue consist of the following:
YEAR ENDED SIX MONTHS DECEMBER ENDED 31, JUNE 30, 1995 1996 ----------- ----------- (IN 000'S) Elimination of intercompany insurance premiums for AMSG employees.................................................... $ (855) $ (480) Elimination of intercompany billing fees...................... (1,149) (544) ----------- ----------- $ (2,004) $ (1,024) ----------- ----------- ----------- -----------
21 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES NOTES TO HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. OTHER REVENUE Pro forma adjustments to other revenue consist of the following:
SIX MONTHS YEAR ENDED ENDED DECEMBER JUNE 30, 31, 1995 1996 ----------- --------- (IN 000'S) Elimination of intercompany third-party administration and commission revenues recorded by AMS (see Note 16)........... $ 217,011 $ 118,429 Elimination of intercompany revenue recorded by other subsidiaries of AMSG........................................ 3,311 4,131 ----------- --------- $ 220,322 $ 122,560 ----------- --------- ----------- ---------
13. INVESTMENT INCOME Pro forma adjustments to investment income consist of the following:
SIX MONTHS YEAR ENDED ENDED DECEMBER JUNE 30, 31, 1995 1996 ----------- ----------- (IN 000'S) Elimination of interest and profit sharing on joint ventures..................................................... $ (12,436) $ (6,815) Elimination of investment income recorded by partners in U&C Real Estate Partnership (see Note 4)......................... (591) (325) Elimination of dividend income recorded by UWLIC on AMSG preferred stock (see Note 9)................................. (234) (441) Elimination of investment income (computed based on historical rates of return) on investment of cash used to repay AMSG's bank debt and to finance certain expenses of the Merger...... (89) (958) ----------- ----------- $ (13,350) $ (8,539) ----------- ----------- ----------- -----------
UWS holds funds on behalf of AMSIC, and credits investment income to AMSIC on the funds held balance at UWS's average portfolio rate. The pro forma adjustments eliminate the investment income recorded by AMSIC and the related expense recorded by UWS as interest and profit sharing on joint ventures. 14. MEDICAL AND OTHER BENEFITS Pro forma adjustments to medical and other benefits consist of the following:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------ ----------- (IN 000'S) Elimination of intercompany claims expenses related to insurance for AMS employees................................................................... $ (419) $ (137) Elimination of intercompany claims expenses recorded by UWS for managed care services provided by AMSG's subsidiaries.................................... (3,310) (4,131) ------------ ----------- $ (3,729) $ (4,268) ------------ ----------- ------------ -----------
22 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES NOTES TO HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. COMMISSION EXPENSES Pro forma adjustments to commission expenses consist of the following:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------ ----------- (IN 000'S) Reclassification of expenses of AMS from commission expenses to administrative expenses..................................................... $ (3,834) $ (2,519) ------------ ----------- ------------ -----------
16. ADMINISTRATIVE EXPENSES Pro forma adjustments to administrative expenses consist of the following:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------ ------------ (IN 000'S) Elimination of intercompany administrative expenses recorded by AMS (see Note 12)................................................................... $ (217,011) $ (118,429) Reclassification of cumulative effect of accounting change (see Note 20).... (1,901) -- Other adjustments, net...................................................... 303 64 ------------ ------------ $ (218,609) $ (118,365) ------------ ------------ ------------ ------------
17. INTEREST EXPENSE ON LONG-TERM DEBT Pro forma adjustments to interest expense on long-term debt consist of the following:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------- ----------- (IN 000'S) Interest expense on long-term debt (see Note 7).............................. $ 4,725 $ 2,363 Recording of interest expense on mortgage payable related to U&C Real Estate Partnership (see Note 4).................................................... 1,354 897 ------------- ----------- $ 6,079 $ 3,260 ------------- ----------- ------------- -----------
The interest rate on the long-term debt incurred to finance the Merger is expected to be a floating rate based upon the London Interbank market plus 1.25%, which, based upon current rates, would be approximately 6.75%. Each 0.25% increase or decrease in the floating rate would change annual pro forma consolidated net income by $114,000 and pro forma earnings per common share by $0.01 per annum. 23 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES NOTES TO HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Pro forma adjustments to amortization of goodwill and other intangibles consist of the following:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------ ----------- (IN 000'S) Amortization of goodwill and other intangibles resulting from the Merger............................................................. $ 7,970 $ 3,985 ------------ ----------- ------------ -----------
Goodwill and other intangibles resulting from the Merger (see Note 5) are amortized on a straight-line basis over lives ranging from 5 to 40 years. The weighted average life of goodwill and other intangibles resulting from the Merger is 31 years. 19. INCOME TAX EXPENSE (BENEFIT) Pro forma adjustments to income tax expense (benefit) consist of the following:
YEAR ENDED SIX MONTHS DECEMBER ENDED JUNE 31, 30, 1995 1996 ----------- ----------- (IN 000'S) Reclassification of cumulative effect of accounting change (see Note 20)................................................ $ 665 $ -- Tax expense (benefit) related to pro forma adjustments, net... (1,766) (1,194) ----------- ----------- $ (1,101) $ (1,194) ----------- ----------- ----------- -----------
20. CUMULATIVE EFFECT OF ACCOUNTING CHANGES The pro forma adjustments include the reclassification of a benefit recorded by AMSG in 1995 for the cumulative effect of accounting changes as follows:
(IN 000'S) --------- Administrative expenses...................................................................... $ (1,901) Income tax expense (benefit)................................................................. 665 --------- $ (1,236) --------- ---------
See Note 2 to Notes to Consolidated Financial Statements of AMSG and subsidiaries for a discussion of the accounting change. The impact of the accounting change is deemed immaterial to require separate disclosure in the Pro Forma Condensed Consolidated Statements of Income. 21. EARNINGS (LOSS) PER COMMON SHARE Pro forma earnings (loss) per common share is based upon the weighted average number of common shares outstanding during the respective periods, including the 4,000,000 common shares issued in connection with the Merger. Since the pro forma condensed consolidated financial statements reflect a net loss for the year ended December 31, 1995 and the six months ended June 30, 1996, common stock equivalents are not considered in the pro forma calculation of earnings (loss) per share since they would be anti-dilutive. 24 UNITED WISCONSIN SERVICES, INC. AND SUBSIDIARIES NOTES TO HISTORICAL AND PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21. EARNINGS (LOSS) PER COMMON SHARE (CONTINUED) The weighted average number of common shares used in the computation of pro forma earnings (loss) per common share is as follows:
SIX MONTHS YEAR ENDED ENDED JUNE DECEMBER 31, 30, 1995 1996 ------------- ------------- Weighted average shares prior to Merger................................... 12,550,601 12,599,715 Shares issued in connection with the Merger............................... 4,000,000 4,000,000 ------------- ------------- 16,550,601 16,599,715 ------------- ------------- ------------- -------------
Net income (loss) included in the computation of pro forma earnings (loss) per common share is summarized as follows:
YEAR ENDED SIX MONTHS DECEMBER ENDED JUNE 31, 30, 1995 1996 ----------- ----------- (IN 000'S) Historical net income of UWS.................................. $ 6,373 $ 3,487 Historical net loss of AMSG................................... (6,615) (7,427) Pro forma adjustments: Amortization of goodwill and other intangibles (Note 18).... (7,970) (3,985) Interest expense on new long-term debt (Note 17)............ (4,725) (2,363) Elimination of dividend income recorded by UWLIC on AMSG preferred stock (see Note 9)............................... (234) (441) Elimination of investment income on investment of cash used to repay AMSG's bank debt and to finance certain expenses of the Merger (see Note 13)................................ (89) (958) Elimination of interest expense on repaid AMSG bank debt.... -- 346 Tax benefit related to proforma adjustments, net (Note 19)........................................................ 1,766 1,194 ----------- ----------- Pro forma consolidated net loss............................... (11,494) (10,147) Less discount on redeemable preferred stock of UWS............ (113) -- ----------- ----------- Pro forma consolidated net loss allocable to common stock..... $ (11,607) $ (10,147) ----------- ----------- ----------- ----------- Pro forma net loss per common share........................... $ (0.70) $ (0.61) ----------- ----------- ----------- -----------
25 COMPARATIVE PER SHARE MARKET INFORMATION UWS The UWS Common Stock commenced trading on the NYSE under the symbol "UWZ" in June 1994. Prior to that time, the UWS Common Stock was quoted on the Nasdaq National Market (NASDAQ) under the symbol "UWSI." The following table sets forth the per share high and low sale prices for the UWS Common Stock as reported on the NYSE and NASDAQ, as applicable, for the periods indicated.
HIGH LOW --------- --------- FISCAL 1993 First Quarter........................................................................ $ 37.00 $ 26.50 Second Quarter....................................................................... 29.75 20.75 Third Quarter........................................................................ 31.75 22.50 Fourth Quarter....................................................................... 31.25 27.25 FISCAL 1994 First Quarter........................................................................ $ 35.75 $ 29.25 Second Quarter....................................................................... 34.50 28.00 Third Quarter........................................................................ 37.25 27.38 Fourth Quarter....................................................................... 39.75 31.50 FISCAL 1995 First Quarter........................................................................ $ 44.38 $ 30.75 Second Quarter....................................................................... 40.88 18.63 Third Quarter........................................................................ 24.50 18.50 Fourth Quarter....................................................................... 26.50 20.50 FISCAL 1996 First Quarter........................................................................ $ 23.88 $ 19.63 Second Quarter....................................................................... 26.00 19.38 Third Quarter (through )......................................................
On June 25, 1996, the last full trading day prior to announcement of the execution of the letter of intent pertaining to the proposed Merger and related matters, the reported New York Stock Exchange closing price per share of UWS Common Stock was $21.875. On July 31, 1996, the date on which execution of the definitive Merger Agreement was publicly announced by UWS, the reported NYSE closing price per share of UWS Common Stock was $23.625. On , 1996, the most recent available date prior to printing this Joint Proxy Statement/Prospectus, the reported New York Stock Exchange closing price per share of UWS Common Stock was $ . On that date, there were approximately beneficial holders of UWS Common Stock. UWS shareholders and AMSG shareholders are urged to obtain current market quotations. Since the first quarter of 1992, UWS has paid a quarterly dividend of $.12 per share, when adjusted for the three-for-two stock split occurring on September 9, 1992. In conjunction with the initial public offering of UWS Common Stock, BCBSUW agreed to return to UWS via a capital contribution cash dividends, less applicable taxes and expenses, received on or before March 31, 1995. The continuation of dividends at the historical level is subject to the discretion of the UWS Board and will depend upon UWS's operating results, financial condition, and capital requirements, general business conditions, legal restrictions on the payment of dividends and other factors the UWS Board deems relevant. AMSG There is no public market for shares of AMSG Common Stock. No dividends have been paid on the AMSG Common Stock since its inception in June 1988, and AMSG has no current plans to pay any 26 dividends on the AMSG Common Stock in the future. UWS is the only holder of record of AMSG Common Stock other than the trustees under the Voting Trust Agreement (as defined below). As of , 1996, there were 42 owners of AMSG Common Stock under the Voting Trust Agreement. SPECIAL MEETING OF UWS SHAREHOLDERS GENERAL This Joint Proxy Statement/Prospectus is being furnished to holders of UWS Common Stock in connection with the solicitation of proxies by the UWS Board for use at the UWS Special Meeting to be held on , , 1996, at , , Wisconsin, commencing at 11:00 a.m., local time, and at any adjournments or continuances thereof. This Joint Proxy Statement/Prospectus and the accompanying form of proxy are first being mailed to shareholders of UWS on or about , 1996. MATTERS TO BE CONSIDERED AT THE UWS SPECIAL MEETING At the UWS Special Meeting, shareholders of record of UWS as of the close of business on , 1996, will consider and vote upon (i) approval and adoption of the Merger Agreement; (ii) an amendment to the UWS Equity Incentive Plan to (a) increase from 600,000 to 2,750,000 the number of shares of UWS Common Stock to be issued thereunder (including approximately 1,775,000 shares to be issued in connection with the Merger and approximately 508,000 available for future grants); (b) limit the number of shares which may be granted to individual participants in a three year period; (c) change the requirements for membership on the Committee which administers the Plan to comply with changes to Securities Exchange Act Rule 16b-3 (relating to short swing profits) and Treas. Reg. 1.162-27 (relating to compensation in excess of $1,000,000); (d) permit the gifting of stock options to an employee's spouse, children or grandchildren (or trusts for their benefit); and (iii) such other business as may properly be brought before the UWS Special Meeting. Holders of UWS Common Stock will not be entitled to dissenters' rights as a result of the Merger. See "RIGHTS OF DISSENTING SHAREHOLDERS -- UWS Shareholders." THE UWS BOARD UNANIMOUSLY HAS APPROVED THE MERGER AGREEMENT AND THE MERGER AND RECOMMENDS THAT UWS SHAREHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND "FOR" APPROVAL AND ADOPTION OF THE AMENDMENTS TO THE UWS EQUITY INCENTIVE PLAN. SEE "BACKGROUND OF AND REASONS FOR THE MERGER" AND "APPROVAL OF AMENDMENTS TO UWS EQUITY INCENTIVE PLAN." As of the date of this Joint Proxy Statement/Prospectus, the UWS Board does not know of any other matters to be presented for action by the shareholders at the UWS Special Meeting. UWS's Bylaws require that notice with respect to matters to be presented for action by the shareholders at a special meeting be received by UWS not earlier than , 1996 and not later than , 1996. If any other matters not now known are properly brought before the meeting, the persons named in the accompanying proxy will vote such proxy in accordance with the determination of a majority of the UWS Board. RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED The close of business on , 1996 (the "UWS Record Date") has been fixed as the record date for determining the holders of UWS Common Stock who are entitled to notice of and to vote at the UWS Special Meeting. As of the UWS Record Date, there were approximately beneficial holders of the shares of UWS Common Stock then outstanding and entitled to vote. The holders of record on the UWS Record Date of UWS Common Stock are entitled to one vote per share of UWS Common Stock. The presence in person or by proxy of the holders of shares representing a majority of the voting power of the UWS Common Stock entitled to vote is necessary to constitute a quorum for the transaction of business at the UWS Special Meeting. The affirmative vote of the holders of a majority of the outstanding shares of UWS Common Stock is required for adoption of the Merger Agreement. The affirmative vote of a majority of the total votes cast on the proposal is required to amend the UWS Equity Incentive Plan. 27 BCBSUW, which owns 6,207,075 shares of UWS Common Stock representing 49% of all outstanding UWS Common Stock before giving effect to the Merger, has agreed to vote all of its shares of UWS Common Stock for approval of the Merger and the Merger Agreement. Abstention from voting and broker nonvotes will have the same effect as voting against the adoption of the Merger Agreement since they represent one less vote for such approval. Abstentions will also have the effect of a vote against the Plan Amendments, but broker nonvotes will have no effect on the voting. PROXIES; PROXY SOLICITATION Shares of UWS Common Stock represented by properly executed proxies received at or prior to the UWS Special Meeting that have not been revoked will be voted at the UWS Special Meeting in accordance with the instructions contained therein. Shares of UWS Common Stock represented by properly executed proxies for which no instruction is given will be voted "FOR" adoption of the Merger Agreement and "FOR" approval of the amendment to the UWS Equity Incentive Plan. UWS shareholders are requested to complete, sign, date and return promptly the enclosed proxy card in the postage-prepaid envelope provided for this purpose to ensure that their shares are voted. A shareholder may revoke a proxy at any time before its exercise by submitting a later-dated proxy with respect to the same shares, by delivering written notice of revocation to the Secretary of UWS or by attending the UWS Special Meeting and voting in person. Mere attendance at the UWS Special Meeting will not in and of itself revoke a proxy. If the UWS Special Meeting is continued or adjourned for any reason, at any subsequent reconvening of the UWS Special Meeting all proxies will be voted in the same manner as such proxies would have been voted at the original convening of the UWS Special Meeting (except for any proxies that have theretofore effectively been revoked or withdrawn), notwithstanding that they may have been effectively voted on the same or any other matter at a previous meeting. UWS will bear the cost of soliciting proxies from its shareholders. In addition to solicitation by mail, directors, officers and employees of UWS may solicit proxies by telephone, telegram or otherwise. Such directors, officers and employees will not be additionally compensated for such solicitation, but may be reimbursed for out-of-pocket expenses incurred in connection therewith. Brokerage firms, fiduciaries and other custodians who forward soliciting material to the beneficial owners of UWS Common Stock held of record by them will be reimbursed for their reasonable expenses incurred in forwarding such material. SPECIAL MEETING OF AMSG SHAREHOLDERS GENERAL This Joint Proxy Statement/Prospectus is being furnished to holders of AMSG Common Stock in connection with the solicitation of proxies by the AMSG Board of Directors for use at the Special Meeting of AMSG shareholders to be held on , 1996, at , , Wisconsin, commencing at 11:00 a.m., local time, and at any adjournments or continuances thereof. This Joint Proxy Statement/Prospectus and the accompanying form of proxy is first being mailed to stockholders of AMSG on or about , 1996. With the exception of the 20,967 (approximately 12%) shares of AMSG Common Stock owned by UWS, all of the issued and outstanding shares of AMSG Common Stock are subject to the Voting Trust Agreement. Wallace J. Hilliard ("Hilliard"), as trustee under the Voting Trust Agreement, is empowered to vote substantially all of the shares subject thereto and Ronald A. Weyers ("Weyers"), as successor trustee under the Voting Trust Agreement, is entitled to vote the remaining shares (Hilliard and Weyers are collectively referred to as the "Trustees"). Under the terms of the Voting Trust Agreement, the Trustees have the full and unqualified right and power to vote all shares subject to the Voting Trust Agreement at all meetings of stockholders for any purpose, including the right to vote such shares at a stockholders' meeting called to approve the Merger. However, the Voting Trust Agreement grants the Trustees the right to call a meeting of the holders of record of the trust 28 certificates issued under the Voting Trust Agreement (the "Certificate Holders") to ascertain the views of such holders with respect to such issues as the Trustees may, in their discretion, determine. At each such meeting, every Certificate Holder is entitled to one vote for each share of capital stock represented by trust certificates standing in his name. The Trustees have determined to vote the AMSG Common Stock subject to the Voting Trust Agreement in accordance with the instructions of the Certificate Holders. Accordingly, at the AMSG Special Meeting, the Trustees intend to hold a meeting of the Certificate Holders for the purpose of obtaining the Certificate Holders' approval of the Merger. MATTERS TO BE CONSIDERED AT THE AMSG SPECIAL MEETING At the AMSG Special Meeting, stockholders of record of AMSG as of the close of business on , 1996 will consider and vote upon a proposal to approve and adopt the Merger Agreement and the Merger. Holders of AMSG Common Stock will be entitled to dissenters' rights as a result of the Merger. See "RIGHTS OF DISSENTING SHAREHOLDERS--AMSG Stockholders." THE AMSG BOARD HAS APPROVED THE MERGER AGREEMENT AND THE MERGER AND RECOMMENDS THAT AMSG STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. See "BACKGROUND OF AND REASONS FOR THE MERGER" and "CONFLICTS OF INTEREST." RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED The close of business on , 1996 (the "AMSG Record Date") has been fixed as the record date for determining the holders of AMSG Common Stock who are entitled to notice of and to vote at the AMSG Special Meeting. As of the AMSG Record Date, there were 174,733.67 shares of AMSG Common Stock outstanding and entitled to vote. The holders of record of shares of AMSG Common Stock on the AMSG Record Date are entitled to one vote per share of AMSG Common Stock. The presence in person or by proxy of the holders of shares representing a majority of the AMSG Common Stock entitled to vote is necessary to constitute a quorum for the transaction of business at the AMSG Special Meeting. The affirmative vote of holders of shares representing a majority of the number of shares of AMSG Common Stock outstanding is necessary to approve and adopt the Merger Agreement and Merger. Abstentions from voting will have the practical effect of voting against the approval and adoption of the Merger Agreement and the Merger since they represent one less vote for adoption of such proposals. Messrs. Hilliard and Weyers have agreed to vote 74,961.67 shares of AMSG Common Stock which they, collectively, have the power to vote and which represents approximately 43% of the issued and outstanding shares of AMSG Common Stock for approval of the Merger and the Merger Agreement. In addition, UWS intends to vote its 20,967 shares of AMSG Common Stock representing approximately 12% of the outstanding AMSG Common Stock, for approval of the Merger and the Merger Agreement. Accordingly, approval of the Merger and the Merger Agreement at the AMSG Special Meeting is assured. PROXIES; PROXY SOLICITATION Shares of AMSG Common Stock represented by properly executed proxies received at or prior to the AMSG Special Meeting that have not been revoked will be voted at the AMSG Special Meeting in accordance with the instructions contained therein. Shares of AMSG Common Stock represented by properly executed proxies for which no instruction is given will be voted "FOR" approval and adoption of the Merger Agreement and the Merger. AMSG stockholders are requested to complete, sign, date and return promptly the enclosed form of proxy in the postage-prepaid envelope provided for this purpose to ensure that their shares are voted. A stockholder may revoke a proxy by submitting at any time prior to the vote on the Merger Agreement and the Merger a written notice of revocation to the Secretary of AMSG or by attending the AMSG Special Meeting and voting in person. Mere attendance at the AMSG Special Meeting will not in and of itself revoke a proxy. 29 If the AMSG Special Meeting is continued or adjourned for any reason, at any subsequent reconvening of the AMSG Special Meeting all proxies will be voted in the same manner as such proxies would have been voted at the original convening of the AMSG Special Meeting (except for any proxies that have theretofore effectively been revoked or withdrawn), notwithstanding that they may have been effectively voted on the same or any other matter at a previous meeting. AMSG will bear the cost of soliciting proxies from its stockholders. In addition to solicitation by mail, directors, officers and employees of AMSG may solicit proxies by telephone, telegram or otherwise. Such directors, officers and employees of AMSG will not be additionally compensated for such solicitation, but may be reimbursed for out-of-pocket expenses incurred in connection therewith. BACKGROUND OF AND REASONS FOR THE MERGER BACKGROUND In October 1988, UWS entered into a joint venture agreement with AMSG (the "Joint Venture Agreement") for the purpose of offering small group PPO products primarily to employers with 100 or fewer employees. Pursuant to the Joint Venture Agreement, UWS obtained a 10.3% equity interest in AMSG for which it invested $500,000. Subsequent purchases of AMSG Common Stock for an aggregate amount of $940,000 raised UWS's ownership of AMSG Common Stock to approximately 12%. The initial term of the Joint Venture Agreement continued until December 31, 1993 and was subsequently amended to extend until December 31, 1996, subject to annual renewal for subsequent one-year terms upon mutual agreement of the parties. As described in more detail under "BUSINESS OF AMSG" herein, AMS is a third party administrator which sells small group health care products and life and other employee benefit products. The business sold by AMS is underwritten by UWIC and UWLIC which reinsure a portion of the business sold by AMS with AMSIC. Through these reinsurance agreements, the net underwriting results of this business are divided equally between UWLIC and AMSIC. UWLIC oversees underwriting and pricing decisions, and AMS is responsible for sales, premium collection, administration and claims payment. AMS must first receive UWS's consent if AMS wants to sell a product line that is not underwritten by UWIC or UWLIC. The Joint Venture Agreement includes a buyout provision (the "Buyout Option") exercisable on December 31, 1996, whereby UWS could acquire the 88% of the equity interests in AMSG that it does not already own at a formula price equal to the sum of: (a) Five percent (5%) of premiums earned by AMS in 1996 allocable to the AMSG Common Stock not owned by UWS; (b) the book value of AMSG as of December 31, 1996 allocable to the AMSG Common Stock not owned by UWS; and (c) the aggregate after-tax earnings of AMSG for each of the calendar years 1993-1996 allocable to the AMSG Common Stock not owned by UWS. For purposes of arriving at the above formula price, the following items are excluded: (i) any premium equivalents earned by AMS for self-funded accounts; (ii) any and all AMS accounts for which claims processing is subcontracted to a third party; (iii) any and all accounts which were assumed by UWIC and UWLIC on or after January 1, 1989 and which AMS administers; and (iv) premiums earned by AMS shall not include any billing fee charged by AMS on any premium billing. Further, the formula price is not affected by, among other things, Messrs. Hilliard and Weyers' purchase of the Regency Center Office and/or the lease of the ground upon which such building sits. Messrs. Hilliard and Weyers are employed in the capacities of President and Executive Vice President, respectively, of AMSG pursuant to employment contracts dated August 1, 1991 (the "AMSG Employment Contracts"). The terms of the AMSG Employment Contracts continue until either party provides three years' prior written notice of termination (regardless of exercise of the 30 Buyout Option); provided, however, they may not be otherwise terminated except by AMSG for good cause. The Employment Agreements have non-competition clauses during the terms thereof and, in the event of termination, for a period of five years thereafter. As previously discussed, all of the stockholders of AMSG, except UWS, have entered into a Voting Trust Agreement whereby Mr. Hilliard, as trustee, and Mr. Weyers, as successor trustee, are given absolute authority to vote and sell each stockholder's stock in AMSG on his or her behalf. The Voting Trust Agreement gives Mr. Hilliard and Mr. Weyers effective control over AMSG. All of the stockholders of AMSG, except UWS, have also entered into an agreement (the "AMSG Shareholder Agreement"), which restricts the transfer of shares of AMSG Common Stock unless the stockholder desiring to transfer shares first offers the same for sale first to UWS, then to AMSG, and then to the other stockholders. The AMSG Shareholder Agreement contains provisions similar to those contained in the Joint Venture Agreement regarding UWS's right of first refusal to meet any good faith offer to purchase all or substantially all of AMSG's property or assets, and/or any segment of its business, or to purchase all or substantially all of the issued and outstanding capital stock of AMSG. The AMSG Shareholder Agreement also contains a similar provision to the Buyout Option in the Joint Venture Agreement regarding UWS's buyout right, exercisable beginning on December 31, 1996, whereby UWS can acquire all of the issued and outstanding shares of stock of AMSG at the formula price described above. From 1988 through 1994, profits recorded by UWS from the joint venture increased consistently, and in 1994 represented approximately 71% of UWS's net income for that year. Because the joint venture has historically had such a significant impact on UWS's operations, UWS management has regularly considered ways to enhance shareholder value with respect to the joint venture and, if UWS decided to exercise the Buyout Option or negotiate an alternative transaction with respect to AMSG, to ensure that the change in ownership would proceed smoothly and with minimum disruption to AMSG's operations. In assessing whether to exercise the Buyout Option, UWS recognized that there were several aspects of simply exercising the Buyout Option that could be less desirable than alternative methods of continuing UWS's interest in AMSG, both for UWS and for the AMSG stockholders. First, the Buyout Option does not provide for the issuance of UWS Common Stock as consideration. Having all or a portion of the consideration consisting of UWS Common Stock could provide UWS with additional flexibility for financing the Buyout Option, and also would allow the AMSG stockholders to defer recognition of some or all of their gain for federal and state income tax purposes. Second, although the AMSG Employment Contracts would remain in effect, exercise of the Buyout Option would not necessarily ensure the continued commitment or involvement of Messrs. Hilliard and Weyers. Third, the Buyout Option made no provisions for any other aspects of the transition, including continued employment of the other AMSG executives or representations, warranties and indemnity agreements in favor of UWS in connection with its purchase of AMSG. Accordingly, UWS consistently has believed that an arrangement addressing these and other issues would ensure a smooth transition and enhance the value of UWS's interest in AMSG in the event UWS chose to exercise the Buyout Option. In early 1994, UWS and Merrill Lynch began to investigate alternative structures to an all cash buyout at the end of 1996. In early 1994, UWS initiated discussions with Messrs. Hilliard and Weyers, both individually and in their capacities as voting trustees under the Voting Trust Agreement, and proposed a transaction in which UWS and the AMSG stockholders would contribute AMSG Common Stock owned by them to a newly formed holding company in a tax-free exchange for holding company common stock. UWS also considered the possibility of contributing other assets to the holding company, including UWLIC, so that the holding company would be an independent corporation embracing all aspects of the AMSG business. Discussions regarding that transaction continued for several weeks, but the parties ultimately were unable to agree on the relative percentages of holding company stock that each would receive and discussions were abandoned in early summer 1994. 31 In early 1995, UWS with the assistance of Merrill Lynch began to investigate the possibility of separating UWS's interest in the joint venture from the rest of its operations. UWS then retained Merrill Lynch to advise UWS with respect to alternatives to enhance shareholder value, including a possible separation of UWS's interest in AMSG. Management of UWS believed that both the complex nature of UWS's interest in AMSG and the fact that the nature of the AMSG business and UWS's other businesses were substantially different caused some confusion in the marketplace with respect to valuation of UWS. Management asked Merrill Lynch to consider, among other things, whether separating the AMSG business would permit the market to make a more accurate assessment of each line of business and allow investors a choice of more narrowly focused investments. After considering a number of alternatives, UWS and Merrill Lynch concluded that a favorable structure for accomplishing a separation would be a tax-free spinoff to UWS shareholders (the "Spinoff") of a newly formed subsidiary into which UWS's businesses, other than those relating primarily to the joint venture, would be contributed. UWS considered two types of Spinoffs: (1) negotiating with Hilliard and Weyers for an early exercise of the Buyout Option, upon completion of which all of the outstanding AMSG Common Stock (and therefore 100% of the equity interests in AMSG) would be included in the company retaining the AMSG-related operations; and (2) having such company own UWS's AMSG-related operations and the Buyout Option, which would then be exercised in accordance with its terms. In connection with the Spinoff, in September 1995 UWS prepared and submitted a private letter ruling request to the Internal Revenue Service (the "IRS") regarding the tax-free nature of the Spinoff, and in January 1996, the IRS issued a private letter ruling to the effect that the Spinoff would be tax-free to UWS shareholders. Although UWS received the requested private letter ruling in early 1996, it still had not negotiated any alternative to the Buyout Option and, in the opinion of UWS and Merrill Lynch, the depressed earnings reported by AMSG throughout 1995 and the continued depressed performance during the first quarter of 1996 did not then support creating a publicly traded company whose assets consisted only of UWS's AMSG-related operations and the Buyout Option. By April 1996, UWS recognized that a certain degree of uncertainty existed both at AMSG and in the marketplace given the Buyout Option's December 31, 1996 exercise date and the fact that UWS had not announced its intentions with respect to the Buyout Option. On April 26, 1996, the Executive Committee of the UWS Board met to discuss the AMSG situation. Merrill Lynch attended that meeting and reviewed for the Committee the strategic alternatives that had been evaluated and recommended that UWS exercise the Buyout Option. At the conclusion of the meeting, the UWS Board unanimously approved giving AMSG notice of UWS's intent to exercise the Buyout Option. Accordingly, in late April 1996, UWS gave AMSG formal notice of its intent to exercise the Buyout Option and deferred any plans for a Spinoff. Following the delivery of that notice, UWS again began discussions with Messrs. Hilliard and Weyers regarding a possible early exercise of the Buyout Option which, by its terms, would not become effective until December 31, 1996. In particular, UWS recognized that a number of factors favored a negotiated and early completion of the transaction. In particular, a number of insurance-related regulatory approvals would be required before UWS could assume control of AMSG. Further, a negotiated transaction in which Messrs. Hilliard and Weyers had defined roles and which provided for a transition process to which all parties were committed would result in minimum disruption to AMSG's business and a negotiated transaction would allow UWS to gain effective control of AMSG sooner, permitting UWS to facilitate changes it deems necessary to restore AMSG to profitability. Additionally, UWS believed that a negotiated transaction would provide a framework for due diligence concerning AMSG's and UWS's receipt of representations, warranties and indemnities concerning AMSG. Consequently, UWS and Messrs. Hilliard and Weyers began further discussions for a transaction that could accomplish the above objectives and, on June 25, 1996, executed a letter of intent relating to the Merger. Subsequent to execution of the letter of intent, the parties began negotiations of the Merger Agreement consistent with the terms of the letter of intent. The UWS Board met on 32 July 31, 1996 to consider the Merger Agreement. At that meeting, Merrill Lynch delivered its fairness opinion concerning the terms of the Merger, after which the UWS Board unanimously approved the Merger Agreement. Following the UWS Board meeting on July 31, 1996, the Merger Agreement was executed by all parties. UWS'S REASONS FOR THE MERGER In addition to the mutual reasons for the Merger stated above, UWS's Board of Directors believes the following strategic factors will also contribute to the success of the combined Merger: In the course of its deliberations in arriving at its unanimous decision to approve the Merger, the UWS Board reviewed and considered with UWS's management a number of other factors relevant to the Merger. The factors the Board considered included, but were not limited to, (a) information concerning UWS's and AMSG's respective businesses, historical financial performance, operations, services and marketing approaches; (b) their strategic direction and future opportunities; (c) an analysis of the respective future contributions to revenue, operating profits and net profits of AMSG; (d) compatibility of the management and corporate cultures of UWS and AMSG; (e) premiums to market and multiples paid in other comparable merger and acquisition transactions; (f) the structure and content of the proposed Merger Agreement; (g) a financial presentation by Merrill Lynch, including the opinion of Merrill Lynch that the consideration to be paid to the holders of capital stock of AMSG pursuant to the Merger Agreement was fair from a financial point of view to the shareholders of UWS; (h) available alternatives to the Merger; and (i) reports from management, financial and legal advisors as to the results of their due diligence investigation of AMSG. For a discussion of many of the foregoing matters, see "Opinion of UWS Financial Advisor" below. The UWS Board also considered a variety of potentially negative factors in its deliberations concerning the Merger, including (a) the potentially dilutive effect of issuing UWS Common Stock in the Merger; (b) the expenses to be incurred in connection with the Merger and the effect of such expenses on the results of operations in the quarter the Merger is consummated; (c) the dependence of AMSG on the continued participation of key management personnel; and (d) other risks described under "RISK FACTORS" above. In view of the wide variety of factors considered, both positive and negative, the UWS Board did not find it practical to, and did not, quantify or otherwise assign relative weights to the specific factors considered, but did determine that the anticipated benefits of the Merger outweighed the potentially negative factors considered. AMSG'S REASONS FOR THE MERGER As described above, on April 29, 1996, AMSG received notice of UWS's intention to exercise the Buyout Option on December 31, 1996. The price to be paid by UWS under the Buyout Option is based on a formula which cannot be determined until financial results for 1996 are available, which would not be until sometime in 1997. In addition, the formula price could be impacted, possibly materially, by extraordinary events occurring before December 31, 1996. The Joint Venture Agreement and related agreements have very few specific provisions regarding the conduct of AMSG's business during the period after notice of exercise of the Buyout Option has been given and prior to the closing of the Buyout Option (the "Interim Period"). For example, there are no transition provisions, there is no framework for obtaining regulatory approvals, and there are no specific guidelines on what extraordinary actions AMSG can and cannot take during the Interim Period. AMSG management considered what actions could be taken under the Joint Venture Agreement and applicable law to maximize the formula purchase price under the Buyout Option during the Interim Period. The actions considered included, among others, transactions to realize the fair market value of certain AMSG assets which AMSG management believed had a fair market value significantly in excess of the value at which those assets were carried on the books and records of AMSG for financial accounting purposes. There was, however, a significant amount of uncertainty as to AMSG's ability to successfully complete any such transactions prior to December 31, 1996. Absent any such extraordinary transactions occurring prior to December 31, 1996, AMSG management estimated in early May 1996 that the formula price under the Buyout Option would result in an aggregate purchase price of between $125 million and $170 million (which would be between approximately $770 and $1,056 per share of AMSG Common Stock). 33 The foregoing estimate was based on AMSG management's projections for 1996, and the actual price under the formula could be higher or lower depending upon AMSG's actual financial results for 1996. Furthermore, AMSG management was concerned about the possible detrimental effect on AMSG's business, employees, agents and customers from the delay between the exercise of the Buyout Option and the closing of the Buyout Option and the lack of a specified transition process during such period. Due to (i) the uncertainties inherent in the Buyout Option formula, (ii) the uncertainties as to whether, and to what extent, AMSG could engage in extraordinary transactions during the Interim Period in order to maximize the formula price, (iii) the possible detrimental effect on AMSG, its business, employees, agents and customers of proceeding with the Buyout Option without a negotiated transition process, and (iv) the possibility of obtaining a more favorable tax treatment and continuing equity interest in the AMSG business for AMSG shareholders in a negotiated transaction, AMSG management entered into negotiations with UWS in order to value the AMSG Common Stock outside of the formula price, to obtain more favorable tax treatment for AMSG shareholders, and to allow AMSG shareholders to have a continuing equity interest in the AMSG business. The result of such negotiations is the Merger Agreement and Merger contemplated thereby. OPINION OF UWS FINANCIAL ADVISOR THE COMPLETE TEXT OF THE OPINION DATED , 1996 (THE "MERRILL LYNCH OPINION") IS ATTACHED HERETO AS APPENDIX B AND THE SUMMARY OF THE OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. SHAREHOLDERS OF UWS ARE URGED TO READ SUCH OPINION CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED, THE ASSUMPTIONS MADE AND SCOPE OF THE REVIEW UNDERTAKEN BY, AS WELL AS LIMITATIONS ON THE REVIEW UNDERTAKEN BY, MERRILL LYNCH IN RENDERING ITS OPINION. UWS BELIEVES THAT ALL MATERIAL ELEMENTS OF THE MERRILL LYNCH OPINION ARE SUMMARIZED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. UWS has retained Merrill Lynch to act as its financial advisor in connection with the Merger. Merrill Lynch delivered its oral opinion to UWS's Board of Directors on July 31, 1996, which opinion was subsequently confirmed in writing (the "Merrill Lynch Opinion"), to the effect that, as of such date, the proposed consideration to be paid by UWS pursuant to the Merger, taken as a whole, was fair, from a financial point of view, to the shareholders of UWS. The full text of the Merrill Lynch Opinion, which sets forth assumptions made, matters considered and limits on the review undertaken by Merrill Lynch, is attached hereto as Appendix B and is incorporated herein by reference. UWS shareholders are urged to read this opinion in its entirety. The summary set forth in this Proxy Statement/Prospectus of the Merrill Lynch Opinion is qualified in its entirety by reference to the full text of such opinion. The Merrill Lynch Opinion is directed to the UWS Board of Directors and does not constitute a recommendation to any shareholder as to how such shareholder should vote at the UWS Special Meeting. The proposed consideration to be paid by UWS pursuant to the Merger was determined through negotiations between UWS and AMSG. In arriving at the Merrill Lynch Opinion, Merrill Lynch, among other things, (i) reviewed AMSG's Annual Reports and related financial information for the five fiscal years ended December 1995 and AMSG's related unaudited financial information for the monthly periods ending June 1996; (ii) reviewed UWS's Annual Reports, Forms 10-K and related financial information for the five fiscal years ended December 1995, and UWS's Form 10-Q and the related unaudited financial information for the quarterly period ending March 31, 1996; (iii) reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets and prospects of AMSG and UWS, furnished to Merrill Lynch by UWS and AMSG; (iv) conducted discussions with members of senior management of AMSG and UWS concerning AMSG's and UWS's businesses and prospects; (v) compared the results of operations of UWS and AMSG with those of certain companies which Merrill Lynch deemed to be reasonably similar to UWS and AMSG, respectively; (vi) reviewed the historical market prices and trading activity for the UWS Common Stock; (vii) compared the proposed financial terms of the Merger with the financial terms of certain other mergers and acquisitions which 34 Merrill Lynch deemed to be relevant; (viii) considered the pro forma effect of the Merger on UWS's capitalization ratios and earnings, cash flow and book value per share; (ix) considered the terms of the Joint Venture Agreement, and the AMSG Stock Restriction Agreement; (x) reviewed the Merger Agreement; and (xi) reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as Merrill Lynch deemed necessary, including its assessment of general economic, market and monetary conditions. In preparing the Merrill Lynch Opinion, Merrill Lynch relied on the accuracy and completeness of all information supplied or otherwise made available to it by AMSG and UWS, and Merrill Lynch has not independently verified such information or undertaken an independent appraisal of the assets of AMSG or UWS. With respect to the financial forecasts furnished by AMSG and UWS, Merrill Lynch assumed that they were reasonably prepared and reflected the best currently available estimates and judgment of AMSG's or UWS's management as to the expected future financial performance of AMSG or UWS, as the case may be. The forecasts of AMSG's future financial performance were based on a pro forma combination of the respective financial interests of AMSG and UWS in the existing joint venture, and there can be no assurance that such forecasts will accurately reflect AMSG's actual future financial performance. Merrill Lynch's opinion necessarily is based on economic, monetary and market conditions prevailing, and other circumstances and conditions existing on , 1996. In connection with rendering the Merrill Lynch Opinion to the UWS Board, Merrill Lynch performed a variety of financial analyses, which are summarized below. Merrill Lynch believes that its analyses must be considered as a whole and that selecting portions of such analyses and the factors considered therein, without considering all factors and analyses, could create an incomplete view of the analyses and the processes underlying the Merrill Lynch Opinion. The preparation of a fairness opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analysis or summary description. In its analyses, Merrill Lynch took into account its assessment of general economic, market, and financial conditions and its experience in similar transactions, as well as its experience in securities valuation and its knowledge of the healthcare and insurance industry generally. In performing its analyses, Merrill Lynch made numerous assumptions with respect to industry performance, general business and economic conditions, and other matters, many of which are beyond the control of UWS or AMSG. With respect to the analyses of selected comparable acquisition transactions and comparable public healthcare and insurance companies summarized below, no public company or transaction utilized as a comparison is identical to UWS or AMSG or the Merger, and such analyses necessarily involve complex considerations and judgments concerning the differences in financial and operating characteristics of the companies and transactions, and other factors that could affect the companies concerned. Any estimates contained in Merrill Lynch's analyses are not necessarily indicative of future results or values, which may be significantly more or less favorable than such estimates. Estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities actually may be sold. None of the analyses performed by Merrill Lynch was assigned a greater significance by Merrill Lynch than any other. The following is a summary of the analyses performed by Merrill Lynch in connection with its presentation to the UWS Board of Directors on July 31, 1996 and the delivery of the Merrill Lynch Opinion: DISCOUNTED CASH FLOW ANALYSES. Merrill Lynch performed a discounted cash flow analysis of AMSG based upon estimates of projected financial performance prepared by UWS for the fiscal years 1997 through 2001. Utilizing these projections, Merrill Lynch calculated a range of values based upon the discounted net present value of AMSG's five-year stream of projected levered after-tax free cash flow and its projected fiscal year 2001 terminal value. In performing this analysis, Merrill Lynch utilized discount rates reflecting a weighted average cost of capital ranging from 12.0% to 14.0% and terminal value multiples of calendar year 2001 net income ranging from 11.0x to 13.0x. Merrill Lynch calculated a range of present values for 88% of AMSG, representing the portion of the outstanding 35 common stock of AMSG not held by UWS (the "Acquired Stock"), after subtracting $160.0 million, representing UWS's best estimate of the amount of the net capital it uses to underwrite policies marketed by the joint venture (the "Capital Contribution Estimate"), under each of the following four scenarios: (i) the first scenario (referred to herein as the "Base Case," which reflected UWS's most reasonable expectation of AMSG's future financial performance and which assumed significantly lower revenue growth rates than AMSG has experienced in the past and a return to modest net underwriting gain ratios from the current net underwriting losses), exclusive of the possible cost savings expected to result from the Merger, resulted in an estimated range of present values of $330 million to $455 million; (ii) the second scenario, which represented the Base Case including management's estimates of possible cost savings expected to result from the Merger, resulted in an estimated range of present values of $450 million to $600 million; (iii) the third scenario (referred to herein as the "Downside Case," which reflected UWS's most conservative expectation of AMSG's future financial performance and which assumed significantly lower revenue growth rates than AMSG has experienced in the past and a return to very modest net underwriting gain ratios from the current net underwriting losses), exclusive of possible cost savings expected to result from the Merger, resulted in an estimated range of present values of $65 million to $135 million; and (iv) the fourth scenario, which represented the Downside Case including management's estimates of possible cost savings expected to result from the Merger, resulted in an estimated range of present values of $185 million to $280 million. ANALYSIS OF SELECTED COMPARABLE ACQUISITION TRANSACTIONS. Merrill Lynch reviewed certain publicly available information regarding eleven selected business combinations involving healthcare and insurance companies announced since February 28, 1987 (collectively, the "Comparable Transactions"). The Comparable Transactions, in reverse chronological order of public announcement, and listed as Seller/Buyer, were: Mass Mutual/Wellpoint; Emphesys/Humana; Mid-South Insurance Co./ Trigon Blue Cross Blue Shield; Provident Life & Accident/Healthsource; Travelers-Managed Care/ Metropolitan Life Insurance; GroupAmerica Insurance Co./Veritus; Home Life Financial Assurance/ Community Mutual Insurance; Colonial Life and Accident/UNUM Corp.; Equicor-Equitable HCA/ CIGNA,; American General -- Group L&H/Associated Insurance Co.; John Alden Life/Merrill Lynch Cap. -- GECC. Merrill Lynch compared the prices paid in the Comparable Transactions in terms of the transaction value (defined as offer value, plus preferred equity at liquidation value, short-term debt, long-term debt and minority interests, minus cash and marketable securities and exercisable option proceeds) as a multiple of, among other things, forward net income and book value. An analysis of the multiples for the Comparable Transactions, as adjusted to exclude certain results that Merrill Lynch considered anomalous, yielded a range of multiples of transaction value to forward net income of 9.8x to 14.7x (with a mean of 12.6x and a median of 13.4x) and of transaction value to book value of 1.7x to 2.2x (with a mean of 1.9x and a median of 1.8x). Merrill Lynch then applied multiples of transaction value to forward net income ranging from 10.0x to 13.0x to AMSG's projected forward net income, based on the Base Case exclusive of the possible cost savings expected to result from the Merger, to yield a value range for the Acquired Stock, after subtracting the Capital Contribution Estimate, from $185 million to $300 million, and multiples of transaction value to book value ranging from 1.8x to 2.0x to AMSG's projected book value to yield a value range of $200 million to $240 million. COMPARABLE PUBLIC HEALTHCARE AND INSURANCE COMPANY ANALYSIS. Merrill Lynch compared certain publicly available financial and operating data and projected financial performance of selected healthcare and insurance companies with similar financial and operating data and projected finincial performance of AMSG based upon estimates provided by AMSG management. Merrill Lynch compared AMSG to nine insurance companies deemed by Merrill Lynch to be reasonably similar to AMSG, AFLAC, American Travellers, Capitol American, John Alden, Penncorp Financial, Protective Life, United Insurance Co., UNUM and Washington National (the "Comparable Companies"). Merrill Lynch compared the market values (defined as the product of primary shares outstanding and market price) of the Comparable Companies as a multiple of, among other things, 1997 estimated 36 net income. An analysis of the multiples for the Comparable Companies, as adjusted to exclude certain results that Merrill Lynch considered anomalous, yielded a range of multiples of market value to 1997 estimated net income of 7.4x to 11.7x (with a mean of 9.7x and a median of 9.9x). Merrill Lynch than applied multiples of market value to 1997 estimated net income ranging from 9.0x to 11.0x to AMSG's 1997 estimated net income, based on the Base Case exclusive of the possible cost savings expected to result from the Merger, to yield a value range for the Acquired Stock, after subtracting the Capital Contribution Estimate, of $160 million to $225 million. PRO FORMA ANALYSIS. Merrill Lynch analyzed certain pro forma effects resulting from the Merger on the earnings per share ("EPS") of UWS. In conducting its analysis, Merrill Lynch relied upon financial forecasts provided by UWS and AMSG for the years 1997 through 2000. Based upon such financial forecasts, and assuming that the joint venture with AMSG would have been extended past its December 31, 1996 expiration date, Merrill Lynch calculated that the Merger would have a dilutive effect on the fully diluted EPS of UWS Common Stock for the years 1997 through 2000. Taking into account management's estimated cost savings expected to result from the Merger, Merrill Lynch calculated that the Merger would have an accretive effect on the fully diluted EPS of UWS Common Stock for the years 1997 through 2000. Merrill Lynch also calculated UWS's pro forma debt to capitalization ratio and multiple of earnings before interest and taxes ("EBIT") to total interest resulting from the Merger. Based upon the financial forecasts provided by UWS and AMSG, and assuming that the joint venture with AMSG would have been extended past its December 31, 1996 expiration date without taking into account possible cost savings expected to result from the Merger, Merrill Lynch calculated that UWS's pro forma debt to capitalization ratio would be 22.4%, 19.5%, 16.7% and 14.3% for the years 1997 through 2000, respectively, and UWS's pro forma multiple of EBIT to total interest would be 8.0x, 12.8x, 15.7x and 18.1x for the years 1997 through 2000, respectively. OPTION PURCHASE PRICE RANGE. Merrill Lynch calculated a range of purchase prices for the Acquired Stock which UWS would have been required to pay upon the exercise of the Buyout Option. In performing this analysis, Merrill Lynch utilized a range of estimates of projected AMSG 1996 net income determined by management. Based on management projections of AMSG 1996 net income ranging from a loss of $10.0 million to a gain of $10.0 million, Merrill Lynch calculated a range of purchase prices payable upon exercise of the option of $117.0 million to $152.2 million. Merrill Lynch also noted that the proposed consideration to be paid by UWS pursuant to the Merger may exceed the potential price UWS would pay if it attempted to exercise its option on December 31, 1996 under the terms of the Joint Venture Agreement. In arriving at the Merrill Lynch Opinion, Merrill Lynch took into account management's belief that the Merger would permit UWS to accrue a number of benefits: to gain effective operational control over AMSG significantly sooner than it would if it simply exercised the option, permitting UWS to facilitate changes it deemed necessary to restore profitability more quickly; to use UWS common stock as partial consideration in order to ensure orderly financing and preserve UWS's balance sheet strength; and to facilitate a clear, orderly transition of AMSG's business, avoiding any potential management or customer disruption that may have resulted from an option exercise. Merrill Lynch is an internationally recognized investment banking firm and is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions and for other purposes. UWS selected Merrill Lynch as a financial advisor in connection with the Merger because of its reputation and because Merrill Lynch has substantial experience in transactions similar to the Merger. Merrill Lynch has from time to time provided various investment banking and other financial advisory services to UWS, and has received customary fees for the rendering of such services. In the 37 ordinary course of its business, Merrill Lynch and its affiliates may actively trade UWS Common Stock for its or their own accounts and for the accounts of its customers and, accordingly, may at any time hold a long or short position in UWS Common Stock. UWS and Merrill Lynch have entered into a letter agreement, dated July 31, 1996, relating to the services to be provided by Merrill Lynch in connection with the Merger. UWS has agreed to pay Merrill Lynch fees as follows: (i) a cash fee of $500,000, which was payable upon the earlier of the entering into the Merger Agreement or the delivery of the Merrill Lynch Opinion, and (ii) an additional cash fee of $1,000,000, payable upon the completion of the Merger, for a total fee of $1,500,000. In such letter, UWS also agreed to reimburse Merrill Lynch for its reasonable and necessary out-of-pocket expenses, not to exceed $150,000 without UWS's prior consent, and to indemnify Merrill Lynch against certain liabilities related to or arising out of any transaction contemplated by the letter agreement. RECOMMENDATION OF UWS BOARD The UWS Board unanimously has determined the Merger to be fair to and in the best interests of UWS and its shareholders and has approved the Merger and the Merger Agreement. The UWS Board recommends that UWS shareholders vote FOR the Merger and the amendment of the UWS Equity Incentive Plan. The UWS Board's recommendations are based upon a number of factors discussed in this Joint Proxy Statement/Prospectus. RECOMMENDATION OF AMSG BOARD The AMSG Board has determined the Merger to be fair to and in the best interests of AMSG and its stockholders and has approved the Merger Agreement and the Merger. The AMSG Board therefore recommends that AMSG stockholders approve the Merger Agreement and the Merger. Mr. Thomas R. Hefty did not participate in the AMSG Board's deliberation as to whether to approve the Merger Agreement. See "CONFLICTS OF INTEREST." THE MERGER THE DESCRIPTION OF THE MERGER AGREEMENT SET FORTH BELOW DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND INCORPORATED BY REFERENCE HEREIN. TERMS OF THE MERGER THE MERGER. Subject to the terms and conditions of the Merger Agreement and the Plan of Merger between UWS and AMSG attached as Exhibit A to the Merger Agreement (the "Plan of Merger"), AMSG will merge with and into UWS at the Effective Time. At the Effective Time, the separate corporate existence of AMSG will cease, and UWS will be the surviving corporation (the "Surviving Corporation"). ARTICLES OF INCORPORATION AND BYLAWS. The Plan of Merger provides that the Articles of Incorporation of UWS as in effect immediately prior to the Effective Time will become the Articles of Incorporation of the Surviving Corporation and that the Bylaws of UWS as in effect immediately prior to the Effective Time will become the Bylaws of the Surviving Corporation. DIRECTORS AND OFFICERS. The directors of UWS at the Effective Time will continue as the directors of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal. The officers of UWS at the Effective Time will continue as the officers of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal. See "THE MERGER -- Management and Operations of AMSG After the Merger." CONVERSION OF AMSG COMMON STOCK IN THE MERGER. At the Effective Time, each share of AMSG Common Stock which is issued and outstanding immediately prior to the Effective Time (other than shares as to which dissenters' rights have been properly exercised and shares held by UWS) will be converted into the right to receive, after expenses, approximately 24 shares of UWS Common Stock 38 and approximately $382 in cash, without interest. In addition, approximately $52 per share of AMSG Common Stock will be placed in an escrow account to be held and paid as described more fully in "-- Escrow Agreement." Shares of AMSG Common Stock held by UWS will be canceled. CONVERSION OF AMSG STOCK OPTIONS IN THE MERGER. Upon consummation of the Merger, each AMSG Option that is outstanding immediately prior to the Effective Time will be converted into an option to purchase approximately 42.4 shares of UWS Common Stock for each share of AMSG Common Stock subject to such option at a per share exercise price of approximately $4.67 (the "UWS Options"). At or after the Effective Time, option agreements for UWS Options will be issued pursuant to UWS's Equity Incentive Plan to holders to AMSG Options. Subject to the foregoing, the UWS Options will have terms which are substantially identical to the terms of the AMSG Options they replace. In addition, Samuel V. Miller was granted, pursuant to his employment agreement with UWS, an option by UWS (including tandem stock appreciation rights) to purchase 7,113 shares of AMSG Common Stock from UWS at an exercise price of $703 per share. It is contemplated that, concurrently with the Merger, Mr. Miller will convert the option into an option to acquire a comparable amount of UWS Common Stock at an exercise price of $ per share. GRANT OF NEW UWS STOCK OPTIONS. Upon the consummation of the Merger additional options will be granted to Messrs. Hilliard, Weyers and Miller. Messrs. Hilliard and Weyers will each be granted options to acquire 500,000 shares of UWS Common Stock at an exercise price of 125% of the mean closing price of the UWS Common Stock for the ten trading days immediately prior to the Effective Date of the Merger, and exercisable for a period of five years. Pursuant to his employment agreement with UWS, Mr. Miller will receive an additional option to purchase $4,000,000 worth of UWS Common Stock (valued at the average trading price for UWS Common Stock on the ten trading days following the Effective Time) on the consummation of the Merger, exercisable for a period of twelve years. ADJUSTMENTS. The number of shares of UWS Common Stock (i) to be received by AMSG Shareholders in the Merger and (ii) issuable upon exercise of the AMSG Options shall be adjusted for any stock split, stock dividend, recapitalization or similar event affecting UWS Common Stock prior to the Effective Time. FRACTIONAL SHARES. No fractional shares of UWS Common Stock will be issued in the Merger. In lieu of the issuance or recognition of fractional shares of UWS Common Stock, each fractional share resulting from the Merger shall be converted into a right to receive cash, without interest, in an amount equal to the product of (A) such fraction of a share of UWS Common Stock, and (B) the closing price of UWS Common Stock on the NYSE for the business day immediately preceding the Effective Time. EFFECTIVE TIME OF THE MERGER Promptly following receipt of all required governmental approvals and satisfaction or waiver of the other conditions to the Merger, the Merger will be consummated and become effective at the time (the "Effective Time") at which (i) the Articles of Merger to be filed pursuant to the WBCL have been accepted for filing by the Department of Financial Institutions of the State of Wisconsin, and (ii) the Certificate of Merger to be filed pursuant to the DGCL has been accepted for filing by the Secretary of State of the State of Delaware. See "-- Conditions; Waivers." EXCHANGE OF AMSG STOCK As soon as practicable after the Effective Time, (i) the Exchange Agent will deliver to each holder of certificates representing shares of AMSG Common Stock (other than dissenting shares and shares held by UWS), a form letter of transmittal and instruction for use in effecting the surrender of such certificates for conversion into shares of UWS Common Stock and (ii) UWS will make available, and the holders of AMSG Common Stock (other than dissenting shares and shares held by UWS) will be entitled to receive, upon surrender to the Exchange Agent of one or more certificates representing 39 shares of AMSG Common Stock for cancellation and such other documents reasonably requested by the Exchange Agent, certificates representing the number of shares of UWS Common Stock and the amount of cash, without interest, into which such holder's AMSG Common Stock is converted in the Merger. REPRESENTATIONS AND WARRANTIES The Merger Agreement contains various representations and warranties of the parties thereto. The Merger Agreement includes representations and warranties by AMSG as to: (i) the corporate organization and qualification of AMSG and certain entities in which AMSG holds a majority interest on a fully-diluted basis (the "Subsidiaries"); (ii) the capitalization of AMSG and the Subsidiaries; (iii) the authority of AMSG to enter into the Merger Agreement and the Merger Agreement's noncontravention of any agreement, law or charter or bylaw provision and the absence, except as disclosed, of the need for governmental or third-party consents to the Merger; (iv) the accuracy of AMSG's and its insurance Subsidiaries' financial statements; (v) AMSG's and its Subsidiaries' accounts receivable; (vi) the absence of certain changes and events in the business of AMSG and its Subsidiaries since June 25, 1996; (vii) pending and threatened litigation; (viii) the compliance of AMSG and its Subsidiaries with all laws, regulations and rules applicable to such entities; (ix) the accuracy of AMSG's tax returns; (x) title to assets owned by AMSG; (xi) the contracts and commitments entered into by AMSG and its Subsidiaries; (xii) the status of employee relations between AMSG and its employees; (xiii) the terms, existence, operations, liabilities and compliance with applicable laws of AMSG's employee benefit plans and certain other matters relating to the Employee Retirement Income Security Act of 1974, as amended, and the employee relations of AMSG and its Subsidiaries in general; (xiv) ownership and rights to use intellectual property and noninfringement on the intellectual property rights of others; (xv) AMSG's and its Subsidiaries' compliance with environmental laws and the absence of any notices with respect to environmental matters; (xvi) the absence of undisclosed and contingent liabilities; (xvii) AMSG's and its Subsidiaries' insurance policies; (xviii) transactions between AMSG or any Subsidiary and certain related persons; (xvix) the accuracy of information supplied by AMSG for inclusion in this Joint Proxy Statement/Prospectus; and (xx) brokers, finders and financial advisors employed by AMSG. The Merger Agreement also includes representations and warranties by UWS as to: (i) the corporate organization and qualification of UWS; (ii) the capitalization of UWS; (iii) the authority of UWS to enter into the Merger Agreement and the Merger Agreement's noncontravention of any agreement, law or charter or bylaw provision and the absence of the need for governmental or third-party consents to the Merger; (iv) the accuracy of information supplied by UWS for inclusion in this Joint Proxy Statement/Prospectus; (v) brokers, finders and financial advisors employed by UWS; and (vi) the accuracy and completeness of UWS's disclosures under the Exchange Act. BUSINESS OF AMSG PENDING THE MERGER AMSG has agreed that prior to the Effective Time, except as contemplated by the Merger Agreement, AMSG and its Subsidiaries will conduct their operations according to the ordinary and usual course of business consistent with past and current practice and use their reasonable best efforts to maintain and preserve their business organization, prospects, employees and advantageous business relationships and not, without the prior written consent of the President of UWS, take any action or permit to occur any event as follows: (i) in a single transaction or a series of related transactions, sell (including by sale-leaseback), lease, license, pledge, dispose of or encumber any assets which individually or in the aggregate, have a fair market value in excess of $50,000; (ii) incur or become contingently liable with respect to any indebtedness for borrowed money or guaranty any such indebtedness, where the aggregate amount of indebtedness so incurred or guaranteed exceeded $10,000 or redeem, purchase, acquire or offer to purchase or acquire any long-term debt; 40 (iii) acquire or agree to acquire by merging with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business entity, in a transaction or series of related transactions; (iv) change any of its accounting practices or procedures; (v) amend or propose to amend its charter or bylaws; or split, combine or reclassify its outstanding capital stock, or declare, set aside or pay any dividend or distribution in respect of any capital stock; (vi) enter into, amend or become obligated under any employment, severance, bonus, profit sharing or other employee benefit arrangement; (vii) issue, purchase or redeem any shares of capital stock of AMSG or any Subsidiary (including any security convertible or exchangeable into capital stock) other than: the issuance of shares of AMSG Common Stock upon exercise of AMSG Options outstanding on, and in accordance with their terms as of, June 25, 1996, or issue, grant or otherwise create any portion or right to acquire any such capital stock; (viii) prepay any material expenses, indebtedness or other obligations; (ix) enter into or amend any contract, agreement or commitment, or engage in any transaction, in each case which is material to AMSG and which is not in the usual and ordinary course of business; (x) enter into any contract, agreement or commitment or engage in any transaction (other than transactions pursuant to agreements in existence on June 25, 1996 which on such date had been previously disclosed in writing to UWS) with any affiliate of Wallace J. Hilliard, Ronald A. Weyers or any officer of AMSG or any Subsidiary; (xi) settle any material claim (including without limitations, any tax claim), action or lawsuit involving AMSG or any of its Subsidiaries pending as of or arising on or after June 25, 1996, or amend any tax return in any respect; (xii) release, waive or terminate any material obligation of any third party to AMSG or any Subsidiary; (xiii) solicit or encourage any inquiries or proposals regarding, or offers for, or enter into or continue any discussions with, or provide any information to, any third party concerning any sale or transfer of AMSG or any of its assets or enter into or consummate any agreement or understanding providing for a sale or transfer of AMSG or any of its assets, other than by the Merger Agreement; or (xiv) agree, whether or not in writing, to take any of the actions described in clauses (i)-(xiii) above. COVENANTS OF AMSG AND UWS The Merger Agreement contains various covenants of AMSG and UWS, including those covenants hereinafter described. AMSG has agreed: (i) to allow UWS and its representatives and advisers full and complete access during business hours to all properties, books, contracts, commitments, records, documents and facilities of AMSG; (ii) to comply fully with the requirements of applicable state securities laws, the Securities Act, and the rules and regulations of the Commission under such laws applicable to the offering and sale of UWS Common Stock in connection with the Merger and the solicitation of proxies hereunder; (iii) to call a special meeting of its shareholders for the purpose of considering and voting upon the approval and adoption of the Merger Agreement; (iv) to take all actions necessary to obtain regulatory approvals, including various state Departments of Insurance and the FTC; and (v) along with Messrs. Hilliard and Weyers, to use its reasonable best efforts to 41 cause: (A) AMSIC to transfer to AMSG all of the issued and outstanding capital stock of American Medical Security Insurance Company of Georgia ("AMSIC -- Georgia") and American Medical Security Insurance Company of Ohio ("AMSIC -- Ohio") and Personal Physician Care, Inc.; (B) AMSIC to transfer to AMSG a dividend of $10 million; (C) AMSG to pay in full the $10,000,000 Note of AMSG in favor of Bank One, Green Bay dated February 1, 1996; and (D) AMSG to consent to the substitution of UWLIC for UWIC as a partner in U&C Real Estate Partnership. UWS has agreed: (i) to make available to executive officers of AMSG the officers and certain advisors of UWS to discuss such aspects of UWS as may be reasonably requested by AMSG; (ii) to comply fully with the requirements of applicable state securities laws, the Securities Act, and the rules and regulations of the Commission under such laws applicable to the offering and sale of UWS Common Stock in connection with the Merger and the solicitation of proxies hereunder; (iii) to register the shares of UWS Common Stock issuable upon the exercise of UWS Options on Form S-8 under the Securities Act; (iv) to call a special meeting of its shareholders for the purpose of considering and voting upon the approval and adoption of the Merger Agreement and the increase in the number of shares of UWS Common Stock issuable pursuant to the UWS Equity Incentive Plan to cover the UWS Options; and (v) to take all actions necessary to obtain regulatory approvals, including various state Departments of Insurance and the FTC. VOTING AGREEMENTS Messrs. Hilliard and Weyers have agreed with UWS to vote 74,961.67 shares of AMSG Common Stock which they, collectively, have the power to vote and which represents approximately 43% of the issued and outstanding shares of AMSG Common Stock for the approval of the Merger and the Merger Agreement. UWS has agreed to vote its shares of AMSG Common Stock (representing 12% of the aggregate voting power with respect to AMSG capital stock) in favor of the Merger. In addition, BCBSUW, which owns an aggregate of 6,207,075 shares of UWS Common Stock representing 49% of all outstanding UWS Common Stock, has agreed to vote all of its shares of UWS Common Stock for approval of the Merger and the Merger Agreement. CONDITIONS; WAIVERS CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The respective obligations of AMSG and UWS to effect the Merger are subject to the satisfaction or waiver of certain conditions (the "Mutual Conditions"), including the following: (i) all applicable waiting periods under the HSR Act shall have expired; (ii) the Registration Statement of which this Joint Proxy Statement/Prospectus is a part shall have been declared effective and shall not be subject to a stop order or any threatened stop order by the Commission; (iii) the Merger Agreement shall have been approved and adopted by the requisite vote of the holders of the outstanding shares of AMSG Common Stock; (iv) the Merger Agreement and the increase in the shares of UWS Common Stock issuable pursuant to the UWS Equity Incentive Plan to cover the UWS Options shall each have been approved by the requisite vote of the holders of UWS Common Stock; (v) the shares of UWS Common Stock to be issued in the Merger Agreement and upon exercise of the UWS Options shall have been approved for listing on the NYSE subject to notice of issuance; (vi) there shall be no action or proceeding initiated by any governmental agency or any third party pending which seeks to restrain, prohibit or invalidate any material transaction contemplated by the Merger Agreement or the Merger or to recover substantial damages or other substantial relief with respect thereto and no injunction or restraining order shall have been issued by any court restraining, prohibiting or invalidating any such material transaction; and (vii) the Merger Agreement, and all aspects of the transactions contemplated thereby, shall have received all appropriate and necessary insurance regulatory consents and approvals. CONDITIONS TO THE OBLIGATIONS OF UWS. The obligation of UWS to effect the Merger is subject to the satisfaction or waiver of certain additional conditions ("UWS Conditions"), including the following: (i) the representations and warranties of AMSG and Messrs. Hilliard and Weyers contained in the Merger Agreement shall be true and correct as of the Effective Time as though made on and as of the Effective Time, except for such matters as would not have a material adverse effect on AMSG and its 42 Subsidiaries, taken as a whole; (ii) AMSG and Messrs. Hilliard and Weyers shall have performed all obligations required to be performed by it or them under the Merger Agreement prior to the Effective Time; (iii) AMSG shall have obtained any and all consents or waivers from other parties to loan agreements or other contracts material to its business for the lawful consummation of the Merger, and AMSG and UWS shall have obtained any and all permits, authorizations, consents or approvals of state securities commissions and of any other public body or authority required for the lawful consummation of the Merger; (iv) certain "affiliates" of AMSG shall have delivered to UWS a written agreement with respect to such affiliates' compliance with Rule 145(d) under the Securities Act; (v) UWS shall have received certain interim financial statements from AMSG; (vi) Godfrey & Kahn, S.C., counsel for AMSG, shall have furnished to UWS its opinion, in form and substance satisfactory to UWS; (vii) UWS shall have received from Michael Best & Friedrich an opinion, in form and substance reasonably satisfactory to UWS, to the effect that, on the basis of the facts, representations and assumptions set forth in such opinion, and based on the Internal Revenue Code of 1986, as ameded (the "Code") and the regulations and interpretations thereunder as of the date of such opinion, the Merger will for federal income tax purposes constitute a reorganization within the meaning of Section 368 of the Code; (viii) UWS shall have received a certificate signed by the President of AMSG to the effect that holders representing no more than five percent (5%) of AMSG Common Stock have filed with AMSG written objections to the Merger pursuant to Section 267 of the DGCL; (ix) Hilliard and Weyers, respectively, shall have executed employment agreements with Holdings and AMSG shall have terminated (at no additional expense to AMSG) the current AMSG Employment Agreements between AMSG and Hilliard and Weyers, respectively; (x) the substitution of UWS Options for AMSG Options shall be approved by the AMSG Board and the UWS Board and the shareholders of UWS shall have approved the amendment to the UWS Equity Incentive Plan contemplated herein; (xi) Merrill Lynch shall have confirmed or redelivered the Merrill Lynch Opinion on the date on which proxy materials are first mailed to UWS Shareholders for the special meeting of shareholders; and (xii) the stockholders of AMSG shall have deposited $8,000,000 into the trust account established pursuant to, and Hilliard, as agent, shall have executed, the Escrow Agreement (as hereinafter defined). CONDITIONS TO THE OBLIGATIONS OF AMSG. The obligation of AMSG to effect the Merger is subject to the satisfaction or waiver of certain additional conditions (the "AMSG Conditions"), including the following: (i) the representations and warranties of UWS in the Merger Agreement shall be true and correct as of the Effective Time, except as otherwise contemplated by this Agreement or approved by AMSG; (ii) UWS shall have performed all obligations required to be performed by it under the Merger Agreement prior to the Effective Time; (iii) UWS shall have obtained any and all material permits, authorizations, consents or approvals of state securities commissions and of any other public body or authority required for the lawful consummation of the Merger; (iv) Michael Best & Friedrich, counsel for UWS, shall have furnished its opinion to AMSG as of the Effective Time, in form and substance reasonably satisfactory to AMSG; (v) AMSG shall have received from Godfrey & Kahn, S.C., an opinion, in form and substance reasonably satisfactory to AMSG, to the effect that, on the basis of the facts, representations and assumptions set forth in such opinion, and based on the Code and the regulations and interpretations thereunder as of the date of such opinion, that the Merger will for federal income tax purposes constitute a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and with respect to certain other tax matters; and (vi) UWS shall have executed and delivered the Registration Rights and Stock Restriction Agreement (as defined in the Merger Agreement and discussed below). TERMINATION; AMENDMENT The Merger Agreement may be terminated at any time prior to the Effective Time, before or after approval of AMSG and UWS shareholders: (i) by mutual consent of the UWS and AMSG; (ii) by any of UWS, AMSG, Messrs. Hilliard or Weyers if the Merger has not been consummated by June 30, 1997; (iii) by UWS in the event that any Mutual Condition or any UWS Condition fails to occur prior to the 43 Closing (as defined in the Merger Agreement); or (iv) by AMSG in the event that any Mutual Condition or any AMSG Condition fails to occur prior to the Closing (as defined in the Merger Agreement). In the event the Merger Agreement is so terminated: (i) all obligations and rights of the parties to the Merger Agreement shall cease and the parties shall have all of the rights and obligations which existed immediately prior to the execution of the Merger Agreement, including UWS's rights with respect to the Buyout Option; and (ii) such termination shall be without any liability or further obligation of any party to another and the obligations and agreements in the Merger Agreement shall terminate and have no further effect except for liabilities and obligations based on any intentional failure to perform or comply with any covenant or agreement in the Merger Agreement or for any intentional misrepresentation or material breach of any warranty in the Merger Agreement (and such termination shall not constitute a waiver of any claim with respect thereto). Subject to applicable law, the Merger Agreement may be amended, modified or supplemented only by written agreement of the parties thereto duly authorized by the respective Board of Directors of UWS or AMSG at any time prior to the Effective Time; provided, however, that, after the approval and adoption of the Merger by the stockholders of AMSG, no such amendment, modification or supplement shall change the amount or the form of the consideration to be delivered to the holders of AMSG Common Stock or AMSG Options as contemplated by the Merger. INDEMNIFICATION AGREEMENTS Subject to certain limitations contained in the Merger Agreement, the holders of AMSG Common Stock shall indemnify, defend and hold UWS and its subsidiaries, directors, officers, employees, agents and shareholders harmless from and against any damages, liability, loss, cost or deficiency (net of any tax benefits, insurance proceeds or similar benefits), arising out of, resulting from or relating to any inaccuracy in or breach of a representation or warranty of AMSG or any shareholder of AMSG pursuant to the Merger Agreement or any failure of AMSG or Messrs. Hilliard or Weyers to duly perform or observe any term, provision, covenant or agreement to be performed or observed by them pursuant to the Merger Agreement and certain other claims described in the Merger Agreement. The liability of AMSG shareholders under this indemnity provision in the Merger Agreement shall in no event exceed $8,000,000, the amount deposited in escrow for such purpose. ESCROW AGREEMENT The Merger Agreement provides that $8,000,000 of the purchase price for the AMSG Common Stock or approximately $52 per share of AMSG Common Stock (other than shares as to which dissenters' rights have been properly exercised and shares held by UWS) will be deposited in escrow as security for the payment of the AMSG shareholders' obligations to indemnify UWS for breaches of certain representations, warranties, covenants and other agreements contained in the Merger Agreement. The $8,000,000 will be delivered to the Escrow Agent pursuant to that certain Escrow Agreement ("Escrow Agreement") by and among UWS, Wallace J. Hilliard (the "Agent") and Bank One, Green Bay, NA, as escrow agent (the "Escrow Agent"). The Escrow Agent is authorized to pay indemnification claims in accordance with the procedures for claims outlined in the Merger Agreement up to a maximum of $8,000,000. Nine months from the date of the Merger (if the Effective Time is on or prior to December 31, 1996) or on June 30, 1997 (if the Effective Time of the Merger is after December 31, 1996), the Escrow Agent is authorized to disburse the balance of the escrowed funds to the Agent (the "Partial Distribution") LESS an amount equal to (i) $1,000,000 PLUS (ii) the aggregate of all indemnification claims which have been asserted but are unresolved as of the disbursement date. Upon the expiration of three years from the Effective Date of the Merger, the escrow will terminate and the remaining escrowed funds will be disbursed to the Agent, less an amount equal to the aggregate of all claims which have been asserted prior to the termination date and which remain unresolved (including any unresolved claims described in clause (ii) above), such funds to be retained in escrow only until the claims are resolved. The Agent, in turn, will then disburse such remaining funds to the previous holders of AMSG Common Stock entitled thereto. 44 RESALE OF UWS COMMON STOCK ISSUED IN THE MERGER; AFFILIATES The UWS Common Stock to be issued to AMSG shareholders in connection with the Merger will be freely transferable under the Securities Act, except for UWS Common Stock issued to any person deemed to be an affiliate of AMSG for purposes of Rule 145 under the Securities Act at the Effective Time (the "Affiliates"). Affiliates may not sell their UWS Common Stock acquired in connection with the Merger except pursuant to an effective registration statement under the Securities Act covering such shares, or in compliance with Rule 145 promulgated under the Securities Act or another applicable exemption from the registration requirements of the Securities Act. AMSG has delivered a disclosure statement to UWS identifying all persons who may be deemed to be Affiliates. Each Affiliate listed in that disclosure statement has agreed (i) not to sell, exchange, transfer or otherwise dispose of any shares of UWS Common Stock which such Affiliate may acquire in connection with the Merger or any securities which may be paid as a dividend or otherwise distributed thereon or with respect thereto or issued or delivered in exchange or substitution therefor (collectively, the "Restricted Securities"), or any option, right or other interest with respect to any Restricted Securities, unless such sale, exchange, transfer or disposition is effected in conformity with the terms of Rule 145(d) or pursuant to an effective registration statement under the Securities Act (provided that such Affiliate may make bona fide gifts or other dispositions without consideration so long as the recipients thereof agree not to sell, exchange, transfer or otherwise dispose of the UWS Common Stock except as provided herein); and (ii) that such Affiliate has no present plan or intent, and as of the Effective Date of the Merger shall have no present plan or intent, to engage in a sale, exchange, transfer, distribution (including a distribution by a partnership to its partners, a corporation to its shareholders, or a trust to its beneficiaries), redemption, pledge or reduction in any way of such Affiliate's risk of ownership, by short sale or otherwise, or other disposition, directly or indirectly with respect to any of the UWS Common Stock to be received by the Affiliate in the Merger. REGISTRATION OF UWS COMMON STOCK ISSUED IN THE MERGER: REGISTRATION RIGHTS AND STOCK RESTRICTION AGREEMENT REGISTRATION RIGHTS. UWS and Wallace J. Hilliard and Ronald A. Weyers (Messrs. Hilliard and Weyers being collectively, the "Holders") will each enter into a Registration Rights and Stock Restriction Agreement (the "Registration Agreement") pursuant to which the Holders will obtain rights to cause UWS to register their UWS Common Stock received in the Merger under the Securities Act as follows: (i) the Holders are entitled to make up to two requests that UWS register at least 50% of the then outstanding UWS Common Stock held by the Holders, which UWS is obligated to use its best efforts to do unless (a) the request comes during the period 45 days prior to the estimated date of filing and 180 days following the effective date of UWS's own registration of UWS Common Stock pertaining to an underwritten public offering; (b) UWS has already effected two such registrations pursuant to the Holders' requests; (c) the filing of a registration statement could jeopardize or delay a material transaction contemplated by UWS or would require the disclosure of material information that UWS needs to preserve as confidential; or (d) UWS is unable to comply with the requirements of the Commission; and (ii) the Holders are entitled to make up to two requests that UWS include the Holders' UWS Common Stock in the UWS Common Stock otherwise being registered upon being notified by UWS that UWS is registering UWS Common Stock in connection with a public offering for cash on a form that would also permit the registration of the Holders' stock (which notice UWS is obligated to give). These registration rights expire upon the earlier of five years from the date of the Registration Agreement or upon the date on which the Holders in the aggregate own less than three percent of the outstanding UWS Common Stock. 45 STANDSTILL AND VOTING AGREEMENTS. Pursuant to the Registration Agreement, the Holders will each agree that, for a period of ten years following consummation of the Merger, they will not acquire, offer or propose to acquire (i) any UWS securities (other than pursuant to options in their new Employment Agreements, as defined below) with the power to vote for the election of directors of UWS (the "Voting Securities") or (ii) any rights or options to acquire any Voting Securities, if such acquisitions would require regulatory approval, application or notification other than as required by the Exchange Act. In addition, the Holders will each agree that, for a period of three years following consummation of the Merger, they will not (i) make or participate in any solicitation of proxies (within the meaning of Rule 14a-1 of the Exchange Act) or initiate any shareholder proposals with respect to UWS; (ii) make any proposals with respect to a merger or other business combination, sale or transfer of assets, liquidation or other extraordinary corporate transaction of UWS; or (iii) form, join or participate in a group (within the meaning of Section 13(d)(3) of the Exchange Act) with respect to UWS securities or seek to exercise control or influence over management, the UWS Board, or policies of UWS other than in connection with their employment with UWS or its subsidiaries. Finally, the Holders will each agree that, for a period of ten years following consummation of the Merger, they will vote their UWS Common Stock in accordance with BCBSUW directions on matters relating to or affecting the Blue Cross Blue Shield Association market conditions or rules and regulations. LISTING OF UWS COMMON STOCK ON NEW YORK STOCK EXCHANGE In the Merger Agreement, UWS has agreed to use all reasonable efforts to (i) register under the Securities Act the shares of UWS Common Stock that are to be issued pursuant to the Merger Agreement and upon exercise of UWS Options granted to employees of AMSG and (ii) cause such shares of UWS Common Stock to be listed on the NYSE. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes the material federal income tax considerations of the Merger that are generally applicable to holders of AMSG Common Stock. This section reflects the tax opinion of Godfrey & Kahn, S.C., Milwaukee, Wisconsin delivered to AMSG in connection with the Merger, which opinion is filed as an exhibit to the Registration Statement of which this Joint Proxy Statement/Prospectus is a part (the "Tax Opinion"). Holders of AMSG Common Stock are urged to read the Tax Opinion and to recognize the assumptions and limitations set forth therein. The following summary of the material federal income tax consequences of the Merger to stockholders of AMSG is subject to such assumptions and limitations and is qualified in its entirety by the matters specifically addressed in the Tax Opinion. The Merger will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code such that no taxable gain or loss will be recognized by a holder of AMSG Common Stock except with respect to cash paid to such holder pursuant to the Merger. The gain to be recognized by a holder of AMSG Common Stock will be the lesser of (i) the amount of cash received and (ii) the excess of the fair market value of the UWS Common Stock received in the Merger plus the cash received in the Merger over the basis of the AMSG Common Stock surrendered in exchange therefor. The basis of the UWS Common Stock to be received by a holder of AMSG Common Stock will be the same as his or her basis in the AMSG Common Stock surrendered in exchange therefor, decreased by the cash received by the holder and increased by the gain recognized on the exchange. The holding period of the shares of UWS Common Stock to be received by a holder of AMSG Common Stock will include the period during which such stockholder held the AMSG Common Stock surrendered in exchange therefor, provided the surrendered AMSG Common Stock was held by such stockholder as a capital asset on the date of the Merger. The receipt of cash pursuant to the exercise of dissenters' rights will be a taxable transaction. A holder of AMSG Common Stock who exercises dissenters' rights and consequently receives cash for his or her shares of AMSG Common Stock will be treated as receiving the cash in redemption of such 46 shares. Such a dissenting stockholder ordinarily will recognize gain or loss equal to the difference between the amount of cash received and such stockholder's basis in the shares, and such gain or loss generally will be a capital gain or loss if the shares are held as a capital asset. THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A DECISION WHETHER TO VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. THE DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES THAT MAY BE RELEVANT TO A PARTICULAR AMSG SHAREHOLDER SUBJECT TO SPECIAL TREATMENT UNDER CERTAIN FEDERAL INCOME TAX LAWS, SUCH AS DEALERS IN SECURITIES OR A TAX-EXEMPT ENTITY, NOR DOES IT ADDRESS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCALITY OR FOREIGN JURISDICTION. THE DISCUSSION IS BASED UPON THE CODE, TREASURY REGULATIONS THEREUNDER AND ADMINISTRATIVE RULINGS AND PRACTICE AND COURT DECISIONS AS OF THE DATE HEREOF, ALL OF THE FOREGOING ARE SUBJECT TO CHANGE (WHICH CHANGE COULD BE RETROACTIVE) AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. AMSG SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER TO THEM. ACCOUNTING TREATMENT It is expected that the Merger will be treated as a purchase for accounting and financial reporting purposes. See "-- Conditions; Waivers" above. MANAGEMENT AND OPERATIONS OF AMSG AFTER THE MERGER After the Merger, the articles of incorporation and bylaws of UWS will continue in effect. AMSG as an entity will cease to exist, and the business of AMSG will be carried on through Holdings. Following the Merger, the AMSG business will operate as one of UWS's business units, and UWS currently intends to maintain AMSG's corporate headquarters in Howard, Wisconsin. After the Merger, the AMSG business will have access to resources generally available to UWS's other business units, will participate in appropriate activities with other UWS business units and will operate under the direction and guidance of UWS's senior management and the UWS and Holdings Boards of Directors. The Holdings Board of Directors will initially consist of Wallace J. Hilliard, Ronald A. Weyers, Samuel V. Miller, Thomas R. Hefty and an independent director, Eugene A. Menden. Holdings will serve as the parent for existing subsidiaries and affiliates of AMSG with the exception of AMSIC -- Ohio which will be retained as a first tier subsidiary of UWS. Concurrent with the Merger, an existing subsidiary of UWS, United Wisconsin Capital Corporation, will be contributed to Holdings and will serve as a holding company for AMSG's interest in HMO ventures. Effective January 1, 1997, UWS will contribute UWLIC to Holdings as a wholly-owned subsidiary. EXPENSES AND FEES UWS will pay all its own expenses in connection with the Merger. The stockholders of AMSG will pay all their own expenses and the expenses of AMSG in the Merger except for accounting fees. RIGHTS OF DISSENTING SHAREHOLDERS AMSG STOCKHOLDERS If the Merger is consummated, stockholders of AMSG are entitled to appraisal rights under Section 262 of the DGCL, provided that they comply with the conditions established by Section 262. SECTION 262 OF THE DGCL IS REPRINTED IN ITS ENTIRETY AS APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 262 OF THE DGCL ATTACHED AS APPENDIX C. 47 THIS DISCUSSION AND APPENDIX C SHOULD BE REVIEWED CAREFULLY BY ANY STOCKHOLDER WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, AS FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS. A record holder of AMSG Common Stock who makes the demand described below with respect to such AMSG Common Stock, who continuously is the record holder of such AMSG Common Stock through the Effective Time, who otherwise complies with the statutory requirements of Section 262 and who neither votes in favor of the approval and adoption of the Merger Agreement nor consents thereto in writing will be entitled to receive from AMSG the fair value of such holder's AMSG Common Stock as determined in an appraisal proceeding conducted by the Delaware Court of Chancery (the "Delaware Court"). Except as set forth herein, stockholders of AMSG will not be entitled to appraisal rights in connection with the Merger. Under Section 262, if a merger is to be submitted for approval at a meeting of stockholders, as is the case for the AMSG Special Meeting, not less than 20 days prior to the meeting, a constituent corporation must notify each of the holders of its stock for which appraisal rights are available that such appraisal rights are available and include in each such notice a copy of Section 262. This Joint Proxy Statement/Prospectus constitutes such notice to the record holders of AMSG Common Stock. Holders of AMSG Common Stock who desire to exercise appraisal rights must not vote in favor of approval and adoption of the Merger Agreement and must deliver a separate written demand for appraisal to AMSG BEFORE the vote by the stockholders of AMSG on the Merger Agreement. A stockholder who signs and returns a proxy without expressly directing by checking the applicable boxes on the reverse side of the proxy card enclosed herewith that his or her AMSG Common Stock be voted against the proposal or that an abstention be registered with respect to his or her AMSG Common Stock in connection with the proposal will have thereby effectively waived his or her appraisal rights because, in the absence of express contrary instructions, such AMSG Common Stock will be voted in favor of the proposal. Accordingly, a stockholder who desires to perfect appraisal rights must either (i) refrain from executing and returning the enclosed proxy card and from voting in person in favor of the proposal to approve the Merger Agreement or (ii) check either the "Against" or the "Abstain" box next to the proposal on such card or attend the AMSG Special Meeting and either affirmatively vote in person against the proposal or abstain from voting thereon. A demand for appraisal must be executed by or on behalf of the stockholder of record and must reasonably inform AMSG of the identity of the stockholder of record and that such record stockholder intends thereby to demand appraisal of AMSG Common Stock. A person, such as a Certificate Holder, who has a beneficial interest in AMSG Common Stock that is held of record in the name of another person, such as a broker, fiduciary or other nominee, or in the case of the Certificate Holders, the Trustees, must act promptly to cause the record holder to follow the steps summarized herein properly and in a timely manner to perfect whatever appraisal rights are available. If the AMSG Common Stock is owned of record by a person other than the beneficial owner, including a broker, fiduciary (such as a trustee, guardian or custodian) or other nominee, such demand must be executed by or for the record owner. If the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for the stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, such person is acting as agent for the record owner. A record owner, such as a broker, fiduciary or other nominee, who holds AMSG Common Stock as a nominee for others, may exercise appraisal rights with respect to the AMSG Common Stock held for all or less than all beneficial owners of shares as to which such person is the record owner. In such case, the written demand must set forth the number of shares of AMSG Common Stock covered by such demand. Where the number of shares of AMSG Common Stock is not expressly stated, the demand will be presumed to cover all shares outstanding in the name of such record owner. 48 A stockholder who elects to exercise appraisal rights should mail or deliver his or her written demand to American Medical Security Group, Inc., 3100 AMS Boulevard, Green Bay, Wisconsin, 54313, Attention: Timothy J. Dolata, Corporate Secretary. The written demand for appraisal should specify the stockholder's name and mailing address, the number of shares of AMSG Common Stock owned, and that the stockholder is thereby demanding appraisal of his or her AMSG Common Stock. A proxy or vote against the approval and adoption of the Merger Agreement will not by itself constitute such a demand. Within ten days after the Effective Time, the Surviving Corporation must provide notice of the Effective Time to all stockholders who have complied with Section 262. Within 120 days after the Effective Time, either the Surviving Corporation or any stockholder who has complied with the required conditions of Section 262 may file a petition in the Delaware Court, with a copy served on the Surviving Corporation in the case of a petition filed by a stockholder, demanding a determination of the fair value of the AMSG Common Stock of all dissenting stockholders. There is no present intent on the part of the Surviving Corporation to file an appraisal petition and stockholders seeking to exercise appraisal rights should not assume that the Surviving Corporation will file such a petition or that the Surviving Corporation will initiate any petitions with respect to the fair value of such AMSG Common Stock. Accordingly, stockholders who desire to have their AMSG Common Stock appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262. Within 120 days after the Effective Time, any stockholder who has theretofore complied with the applicable provisions of Section 262 will be entitled, upon written request, to receive from the Surviving Corporation a statement setting forth the aggregate number of shares of AMSG Common Stock not voted in favor of the approval and adoption of the Merger Agreement and with respect to which demands for appraisal were received by AMSG and the number of holders of such AMSG Common Stock. Such statement must be mailed within 10 days after the written request therefor has been received by the Surviving Corporation. If a petition for an appraisal is timely filed, at the hearing on such petition the Delaware Court will determine which stockholders are entitled to appraisal rights. The Delaware Court may require the stockholders who have demanded an appraisal for their AMSG Common Stock and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; if any stockholder fails to comply with such direction, the Delaware Court may dismiss the proceedings as to such stockholder. Where proceedings are not dismissed, the Delaware Court will appraise the AMSG Common Stock owned by such stockholders, determining the fair value of such AMSG Common Stock exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining fair value, under current case law, the Delaware Court is required to take into account all relevant factors. In WEINBERGER V. UOP INC., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered, and that "fair price obviously requires consideration of all relevant factors involving the value of a company". The Delaware Supreme Court stated that in making this determination of fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts which would be ascertained as of the date of the merger which throw light on future prospects of the merged corporation. In WEINBERGER, the Delaware Supreme Court stated that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered". Section 262, however, provides that fair value is to be "exclusive of any element of value arising from the accomplishment or expectation of the merger". 49 Holders of AMSG Common Stock considering seeking appraisal should recognize that the fair value of their AMSG Common Stock determined under Section 262 could be more than, the same as or less than the consideration they are entitled to receive pursuant to the Merger Agreement if they do not seek appraisal of their AMSG Common Stock. The cost of the appraisal proceeding may be determined by the Delaware Court and charged against the parties as the Delaware Court deems equitable in the circumstances. Upon application of a dissenting stockholder of AMSG, the Delaware Court may order that all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including without limitation, reasonable attorneys' fees and the fees and expenses of experts, be charged pro rata against the value of all AMSG Common Stock entitled to appraisal. Any holder of AMSG Common Stock who has duly demanded appraisal in compliance with Section 262 will not, after the Effective Time, be entitled to vote for any purpose any AMSG Common Stock subject to such demand or to receive payment of dividends or other distributions on such AMSG Common Stock, except for dividends or distributions payable to stockholders of record at a date prior to the Effective Time. At any time within 60 days after the Effective Time, any stockholder electing to demand an appraisal of his AMSG Common Stock under Section 262 of the DGCL will have the right to withdraw such demand for appraisal and to accept the terms offered in the Merger; after this period, the stockholder may withdraw such demand for appraisal only with the consent of the Surviving Corporation. If no petition for appraisal is filed with the Delaware Court within 120 days after the Effective Time, stockholders' rights to appraisal will cease, and all holders of AMSG Common Stock will be entitled to receive the consideration offered pursuant to the Merger Agreement. Inasmuch as the Surviving Corporation has no obligation and no present intention to file such a petition, any holder of AMSG Common Stock who desires such a petition to be filed is advised to file it on a timely basis. Any stockholder may withdraw such stockholder's demand for appraisal and accept the consideration contemplated by the Merger Agreement, except that (i) any such attempt to withdraw made more than 60 days after the Effective Time will require written approval of the Surviving Corporation and (ii) no appraisal proceeding in the Delaware Court will be dismissed as to any stockholder without the approval of the Delaware Court, and such approval may be conditioned upon such terms as the Delaware Court deems just. The Merger Agreement provides that it may be terminated by UWS in the event that holders of more than 5% of the total number of shares of AMSG Common Stock outstanding exercise dissenters' rights. UWS SHAREHOLDERS Under the WBCL, shareholders of UWS are not entitled to dissenters' rights in connection with the Merger. 50 CONFLICTS OF INTEREST GENERAL. In considering the respective recommendations of the UWS Board and the AMSG Board with respect to the Merger and the recommendation of the UWS Board with respect to approval of the amendments to the UWS Equity Incentive Plan, the respective shareholders of UWS and AMSG should be aware that certain members of the AMSG Board and certain members of the management of UWS have certain interests respecting the Merger separate from their interests as holders of AMSG Common Stock and AMSG Options and as holders of UWS Common Stock and UWS Options, respectively, including those referred to in "-- New Employment Arrangements," "-- Additional Options to Purchase UWS Stock", "-- Future Management of AMSG" and "INTERESTS OF CERTAIN PERSONS IN THE MERGER AND RELATED MATTERS." FUTURE MANAGEMENT OF AMSG. Following the Merger, UWS will contribute substantially all the current subsidiaries and other assets of AMSG to Holdings or a subsidiary of Holdings. Following the Merger, Samuel V. Miller will serve as President and Chief Executive Officer of Holdings; Wallace J. Hilliard will serve as Chairman of Holdings for a period of three years; Ronald A. Weyers will serve as the Vice Chairman of Holdings for a period of three years. Holdings' headquarters will be at the current headquarters of AMSG in Howard, Wisconsin. Holdings will be run as a separate and semi-autonomous unit of UWS, subject to oversight by UWS and the ultimate control of UWS and the UWS Board. NEW EMPLOYMENT ARRANGEMENTS. Each of Wallace J. Hilliard, the President of AMSG, and Ronald A. Weyers, the Executive Vice President of AMSG (individually, an "Employee" and collectively, the "Employees"), will terminate his existing AMSG Employment Agreement and enter into an Employment Agreement (the "New Employment Agreements") with Holdings, to serve as the Chairman and Vice Chairman of the Board of Holdings, respectively. The New Employment Agreements will have substantially the same terms and provisions. The New Employment Agreements will provide for employment of a period of up to six years and provide that each Employee be paid (a) $750,000 in the first year, (b) $500,000 for the shorter of the two years thereafter or until such time as such Employee is no longer willing or able to devote his services to Holdings on a full-time basis, and (c) $100,000 for a period of three years thereafter. Under the New Employment Agreements, each Employee will be granted options to purchase up to 500,000 shares of UWS Common Stock at an exercise price of 125% of the mean closing price of UWS Common Stock for the ten days prior to the Effective Date of the Merger, and exercisable for a period of five years. The New Employment Agreements will provide each Employee with fringe benefits substantially similar to those provided to such Employees by AMSG prior to the Merger and as are generally available to all executives of Holdings. In addition, Holdings will pay 38% of each Employee's health insurance for life. In exchange, each Employee will agree not to compete with Holdings during the term of the New Employment Agreement and for a period of three years thereafter, and will agree to maintain the confidentiality of certain proprietary and confidential information as long as such information remains unavailable to the public. In addition, upon becoming the President and Chief Executive Officer of Holdings, Samuel V. Miller will terminate his existing employment agreement with UWS and enter into a new employment agreement with UWS or Holdings. ADDITIONAL OPTIONS TO PURCHASE UWS STOCK. Messrs. Hilliard and Weyers will be granted options to acquire 500,000 shares of UWS Common Stock each, at an exercise price of 125% of the mean closing price of UWS Common Stock for the ten days prior to the Effective Date of the Merger and exercisable at any time during the period of five years thereafter. See "THE MERGER -- Grant of New UWS Stock Options." In addition, Samuel V. Miller now holds an option (including tandem stock appreciation rights) to purchase 7,113 shares of AMSG Common Stock at an exercise price of $703 per share. Concurrently with the Merger, Mr. Miller will convert such option into an option to acquire UWS Common Stock, as described under "THE MERGER -- Conversion of AMSG Stock Options in the Merger." Mr. Miller was previously granted an option to purchase 198,019 shares of UWS Com- 51 mon Stock at an exercise price of $25.25 per share, exercisable at any time prior to December 6, 2007. Mr. Miller will receive, pursuant to his employment contract, an additional option to purchase $4,000,000 worth of UWS Common Stock on the consummation of the Merger, exercisable for a period of twelve years at an exercise price equal to the mean closing price of UWS Common Stock for the ten days immediately following the Effective Date of the Merger. CERTAIN MATTERS PERTAINING TO BCBSUW. UWS and BCBSUW have entered into a service agreement (the "Service Agreement") with respect to the provision of certain services, including sales and marketing, computerized data processing, legal, investment, actuarial and other management services. Under the Service Agreement, the company receiving a service pays the company providing the service an amount which UWS and BCBSUW believe approximates cost. UWS has entered into reinsurance agreements with BCBSUW in the past, and may do so in the future, on terms that are believed to be reasonable at the time but that may not in retrospect be beneficial to UWS. Pursuant to Wisconsin statutory and regulatory requirements, such reinsurance agreements and the Service Agreement are required to be filed with the OCI for its review to determine whether the "transaction at the time it is entered into is reasonable and fair to the interests of the insurer." In addition, BCBSUW's sales force markets and sells some of UWS's products. Also, certain of UWS's products may compete with managed health care products offered by BCBSUW in Wisconsin. If BCBSUW were to discontinue providing or receiving services, negotiate for material changes to the Service Agreement or stop marketing and selling certain of UWS's products, UWS's business and operations could be adversely affected. Several of UWS's executive officers devote portions of their time to the operations of BCBSUW. Futhermore, nine of the eleven directors of UWS also are directors of BCBSUW. 52 BUSINESS OF UWS UWS is a leading managed care company with (i) the largest HMO membership in Wisconsin, (ii) significant small group PPO products, and (iii) substantial operations in specialty managed care and other products, including Dentacare, as well as life and disability, workers' compensation, mental health and other businesses. UWS has been successful in consistently growing its revenue and profits within its existing businesses, as well as by acquisition and other strategic arrangements. UWS was formed to operate the for-profit managed care operations of BCBSUW, which will own approximately 37% of UWS's outstanding Common Stock upon completion of the Merger and after giving effect to UWS's issuance of shares therein. UWS was incorporated in Wisconsin in 1983. UWS's HMO products are offered by its wholly owned subsidiaries, Compcare Health Services Insurance Corporation ("Compcare"), Valley Health Plan, Inc. ("Valley") and Unity Health Plans Insurance Corporation ("Unity"). Compcare, which serves primarily southeastern Wisconsin, including Milwaukee, was formed in 1971 and is Wisconsin's oldest and second largest HMO. Valley was acquired by UWS in 1992 and provides managed care services in western Wisconsin. Unity has a combined membership of approximately 80,000 individuals located primarily in southwestern and central Wisconsin. UWS's HMOs provided comprehensive medical and hospital coverage to approximately 261,000 members and constitute the largest overall HMO membership in Wisconsin. A significant portion of HMO medical services is provided through capitated provider contracts, whereby an established fee is paid monthly to the provider for each member who selects that provider, as well as other risk sharing arrangements with providers. UWS offers low cost small group PPO products primarily to employers with 100 or fewer employees through its existing joint venture with AMSG. Currently, 70% of premium revenue attributable to the AMSG PPO business is concentrated in ten states. Contractual relationships with various independent PPOs accounted for 85% of the medical benefits paid by AMSG during 1995. These PPOs are able to provide for the delivery of health care services at lower costs than traditional health insurance primarily because of favorable provider arrangements. In addition, AMSG controls the utilization of health care with its staff of managed care nurses. AMSG's two principals each have approximately 33 years of experience in the design, pricing, underwriting, marketing and administration of affordable small group health care products. UWS offers a broad range of specialty managed care and other products. Dentacare is the largest dental HMO in Wisconsin and, as of June 30, 1996, provided comprehensive prepaid dental coverage to approximately 199,000 members. UWS's managed care workers' compensation activities are performed by United Heartland, Inc. ("United Heartland"), UWS also offers life, short and long-term disability and vision products. In addition, UWS operates prescription drug management and managed care consulting businesses. In 1994, UWS acquired a majority interest in CNR Health, Inc. ("CNR"), which manages employers' mental health and provides employee assistance benefits for employees with mental, behavioral or substance abuse concerns. BUSINESS OF AMSG AMSG, a Delaware corporation, was formed in June 1988 and is headquartered in Green Bay, Wisconsin. AMSG is a holding company for a number of insurance and insurance-related businesses, including (i) AMS, a wholly-owned third party insurance administrator, (ii) AMSIC, a wholly-owned insurance company which reinsures health and life insurance administered by AMS, and (iii) several partially- or wholly-owned HMOs and related businesses. AMS, AMSG's principal operating subsidiary, develops, markets and administers managed care insurance products, specialty group insurance products and administrative services for small groups through its joint venture with UWS. Since it began operations in 1988, AMS has grown to become one of the largest administrators of group health benefits, providing services for over 469,000 employees in 32 states and the District of Columbia as of June 30, 1996. AMS's strategy has been to maximize membership growth and profitability by offering an innovative portfolio of employee benefits products 53 and services specifically designed to meet the diverse needs of small employers. Emphasizing choice and flexibility, AMSG has utilized state of the art information systems and an independent agent distribution system to achieve a low cost administration position while providing widespread access to its market. AMSIC, in turn, reinsures 50% of the health and life insurance products administered by AMS and underwritten by UWLIC and UWIC, both of which are subsidiaries of UWS. Finally, through various HMOs with which AMSG has entered into joint ventures, AMSG has gained access to certain markets that otherwise would not be available. For example, AMSG has used such HMOs as a tool to access large employer groups and, in certain locations, the Medicaid population. AMSG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW AMSG is a leader in the healthcare industry due to its innovative products and customer-focused service. AMSG has three major sources of revenue: (i) reinsurance of health and life insurance policies through AMSIC and its subsidiaries AMSIC -- Georgia and AMSIC -- Ohio; (ii) third-party administrator operations through AMS; and (iii) various other sources, including HMOs in which AMSG has invested. AMSG is a joint venture partner with UWS in the marketing and administration of low cost health and life insurance primarily to employer groups of 50 or fewer employees. Under this joint venture, AMSIC assumes via reinsurance 50 percent of the health and life business administered by AMS and underwritten by UWS subsidiaries UWIC and UWLIC. These three sources of revenue represent the following percentages of AMSG's total revenues, excluding investment income, for the periods noted:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 1995 1994 1993 1996 1995 --------- --------- --------- --------- --------- Reinsurance assumed.............................. 66.3% 65.6% 65.4% 66.9% 65.9% Administrative fees and commissions.............. 32.9 33.6 33.5 31.9 33.0 Loss from unconsolidated subsidiaries and other........................................... 0.8 0.8 1.1 1.2 1.1 --------- --------- --------- --------- --------- Total............................................ 100.0% 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
AMSG's revenues are derived primarily from reinsurance assumed by AMSIC, while health and life benefits constitute the majority of the expenses. Profitability is directly affected by many factors including premium rate adequacy, estimates of medical benefits, health care utilization, effective administration of benefit payments, operating efficiency, investment returns and federal and state laws and regulations. RESULTS OF OPERATIONS TOTAL REVENUES Total revenues for the six months ended June 30, 1996 increased 19.8% to $428.6 million from $357.9 million over the same period in 1995. This increase was due primarily to a 15.0% increase in the number of licensed agents to 44,534 on June 30, 1996 from 38,718 agents on June 30, 1995. The increase in the agent force lead to an increase in sales of policies. See "Life and Health Premiums" below for further discussion. Total revenues in 1995 increased 32.0% to $763.3 million from $578.2 million in 1994. Total revenues increased 53.6% in 1994 from $376.4 million in 1993. As was the case for the six months ended June 30, 1996, the increases can also be attributed to an increase in the agent force. At the end of 1995, AMS had 42,420 licensed agents, compared with 33,530 and 26,018 at the end of 1994 and 54 1993, respectively. In addition, AMSG expanded the number of states in which it markets its products to reach 32 states and the District of Columbia in 1995, compared with 30 states in 1994 and 27 states in 1993. LIFE AND HEALTH PREMIUMS. Life and health premiums for the six months ended June 30, 1996 increased 21.1% to $281.5 million from $232.5 million for the same period in 1995. The increase was due primarily to growth in the average number of total medical contracts, from 430,727 at June 30, 1995, to 475,661 at June 30, 1996, a 10.4% increase. Average insured medical premium per contract for the six months ended June 30, 1996 increased 3.7% from $210 to $218 compared with the same period in the prior year. Life and health premiums in 1995 increased 32.6% to $497.0 million from $374.9 million in 1994, which followed a 54.3% increase over 1993's life and health premiums of $242.9 million. The average number of total medical contracts increased 28.3% in 1995 to 452,630 from 352,922 in 1994. The average number of total medical contracts during 1994 increased 53.7% from 229,554 in 1993. The average insured medical premium per contract remained relatively steady with an increase of less than 1.0% from 1993 to 1995. In general, premium rate increases were offset by customers shifting to products with lower benefit levels and contract growth in lower cost geographic areas, thus resulting in a steady amount of premium per contract. AMSG began implementing more significant rate increases on renewals of its insured medical products in the third quarter of 1995. For policies sold with effective dates of September 1995 through August 1996, increases have averaged approximately 21%. The rate increases take into consideration variations in group size, geographic area, duration, plan design and family size. These rate increases take effect as groups renew, and a portion of the business renews each month. As such, it takes nearly a full year from the effective date of the renewals to fully reflect the impact of the rate increases in premium revenues. Therefore, premium revenue per contract is expected to increase during 1996 as these rate increases continue to cycle through existing customers on their respective renewal dates and as new groups are sold at higher rates. The impact of these rate increases will be moderated to the extent the insured selects a different level of benefits, deductibles, or co-payments. ADMINISTRATIVE FEES AND COMMISSIONS. Administrative fees and commissions include the revenues earned by AMS' third party administration of the policies written through the UWS joint venture plus reimbursement of the commissions paid by AMS related to such premium. The administrative fee received by AMS from UWS was 9.5% of premium revenue in 1996, 1995, 1994 and was 10% in 1993. Administrative fees are also received from self-funded groups and HMOs on a per employee, per month basis. The average commission received approximated 12.5% of premiums written in each of the periods. The administrative fees and commissions for the six months ended June 30, 1996 increased 15.5% to $134.4 million from $116.3 million for the same period in 1995. The administrative fees and commissions in 1995 increased 28.3% to $246.5 million from $192.1 million in 1994. Administrative fees and commissions in 1994 increased 54.7% from $124.1 million in 1993. These increases were due primarily to increased premiums administered by AMS through the UWS joint venture. OTHER REVENUE. Other revenues from products and services for the six months ended June 30, 1996 increased 48.5% to $6.8 million from $4.6 million for the same period in 1995. This increase can be attributed to the start up of a new subsidiary, Nurse Healthline, Inc. ("Nurse Healthline"), a 24 hour toll free service which provides policy holders with telephone access to medical information. This service began in late 1995. Other revenue from products and services in 1995 increased 70.7% to $8.0 million from $4.7 million in 1994. Other revenue in 1994 increased 6.4% from $4.4 million in 1993. AMS Provider Partnerships, Inc., a preferred provider organization development company founded in January 1995, accounted for $3.2 million of the increase in 1995. 55 LOSS FROM UNCONSOLIDATED SUBSIDIARIES. Since 1994, AMSG has started or purchased several HMOs, of which one is consolidated. The losses from unconsolidated subsidiaries have increased to $1.9 million for the six months ended June 30, 1996 from $0.7 million for the same period in 1995. Losses for the years ended December 31, 1995, 1994 and 1993 were $2.2 million, $0.5 million and $0.3 million, respectively. These losses can be attributed to the increased number of start-up operations. Management anticipates that it will take between 24 and 36 months after operations begin for these subsidiaries to reach break-even. INVESTMENT INCOME. In connection with the UWS joint venture, UWS holds funds on behalf of AMSIC. Investment income to AMSIC is based on the average return of the UWIC and UWLIC portfolios including realized investment gains. Investment gains are realized in the normal investment process in response to market opportunities. In addition, during 1995, gains were realized as appreciated equity securities were sold in the process of rebalancing the portfolio to its targeted equity exposure. Realized gains in the UWS portfolio pass through to AMSIC as investment income. Investment income for the six months ended June 30, 1996 increased 50.6% to $7.7 million from $5.1 million for the six months ended June, 30, 1995. This increase was due to an increase in realized gains along with an increased level of invested assets as a result of growth in premiums assumed from UWIC and UWLIC. Average funds held per the reinsurance agreement at June 30, 1996 increased $15.4 million to $133.1 million from $117.7 million at June 30, 1995. Average annual investment yields, including realized gains, were 10.2% and 7.4% for the six months ended June 30, 1996 and 1995, respectively. Investment income in 1995 increased 100.9% to $14.1 million from $7.0 million in 1994. Investment income in 1994 increased 32.8% from $5.3 million in 1993. Average funds held per the reinsurance agreement in 1995 increased $22.3 million to $121.9 million from $99.6 million in 1994. Average funds held per the reinsurance agreement in 1994 increased $35.7 million from $63.9 million in 1993. Average annual investment yields, including realized gains, were 10.2%, 6.1% and 7.4% for 1995, 1994 and 1993, respectively. TOTAL EXPENSES LOSS RATIO ON LIFE AND HEALTH BENEFITS. Loss Ratio is calculated as life and health benefits reflected as a percentage of premium revenues. The Loss Ratio on life and health benefits for the six months ended June 30, 1996 was 79.9%, compared with 80.2% for the six months ended June 30, 1995. The Loss Ratio for 1995 was 78.4%, compared with 66.7% in 1994 and 67.4% in 1993. The products sold by AMSG are sensitive to changes in health care costs and were adversely affected by the recent increase in the rate of health care inflation, compared with a relatively moderate rate of inflation in prior periods. The increase in the 1995 ratio 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, AMSG estimated that its liability for unpaid insured medical claims at December 31, 1994 had developed a pretax deficiency of approximately $5.4 million. This deficiency was charged to operations during 1995 when it became known. Since the second quarter of 1995, the rate of change in health care costs for AMSG's insured medical products has remained fairly flat at approximately 10%. This stability in the rate of inflation has allowed AMSG 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. AMSG's health 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 health business, including (i) selective price increases, (ii) modification of the design of certain PPO products to adjust to the changed market conditions, inflation patterns and utilization trends, (iii) a revision of underwriting practices to improve risk identification, (iv) review and modification of provider contracting arrangements, including direct contracting with providers to better control health care costs, and (v) review and modification of claims processing practices and procedures. 56 EXPENSE ALLOWANCE ON REINSURANCE ASSUMED. The expense allowance on reinsurance assumed (expense allowance) includes commissions, administrative fees, premium taxes and assessments related to the reinsurance assumed through the UWS joint venture agreement. See "Life and Health Premiums" above. The expense allowance for the six months ended June 30, 1996 increased 18.5% to $66.3 million from $55.9 million for the same period in the prior year. In 1995 the expense allowance increased 28.8% to $119.0 million from $92.4 million in 1994. The increase in 1994 was 54.5% from $59.8 million in 1993. These increases were due primarily to increased premium administered through the UWS joint venture agreement. COMMISSION EXPENSE. AMSG's products are sold through independent agents who are compensated through commissions. Commissions are reflected on the Consolidated Statements of Income both as commission revenue by AMS, the third-party administrator, as well as an offsetting expense since AMSG is responsible for the payment of commissions to the respective agents. Since 1993, the average commission paid has approximated 12.5% of premium administered through the joint venture agreement with UWS. See "Administrative Fees and Commissions". Commission expenses for the six months ended June 30, 1996 increased 12.4% to $63.5 million from $56.5 million. Commission expense in 1995 increased 25.0% to $119.1 million from $95.3 million in 1994. Commission expense in 1994 increased 65.6% from $57.5 million in 1993. These increases were due primarily to increased premium administered through this UWS joint venture. ADMINISTRATIVE EXPENSES. Administrative expenses, as a percentage of life and health premium revenues, have remained relatively constant during the periods as AMSG has added to its workforce and physical facility to support anticipated future growth. INCOME TAXES. AMSG's tax rate varies from the federal statutory rate, due primarily to certain expenses which are not deductible for tax purposes. CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Effective January 1, 1995, AMSG changed its method of accounting for printed and promotional materials by recording such materials as inventory and expensing the materials as they are used in order to better match the expenses to the period benefited. Prior to January 1, 1995, all purchases of such materials were immediately expensed. The effect of the accounting change was an increase in net income for the first six months of 1995 of $1.2 million, net of taxes of $0.7 million. LIQUIDITY AND CAPITAL RESOURCES AMSG's sources of cash flow consist primarily of premium revenue received, administrative fees 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. AMSG's investment policies, along with UWS's, are designed to maximize yield, preserve principal and provide liquidity to meet anticipated payment obligations. Historically, AMSG has generated positive cash flow from operations. For the six months ended June 30, 1996, however, net cash provided by (used in) operating activities amounted to a use of $1.3 million, compared with a use of $15.9 million for the same period in the prior year. The improvement in the use of cash in 1996 was due primarily to a reduction in funds held on behalf of AMSIC by UWS. Net cash provided by operating activities amounted to $2.7 million in 1995, compared with $33.5 million in 1994 and $5.2 million in 1993. The decrease in cash flow from operations in 1995 was due primarily to the reduced level of net income in 1995. The increase in cash flow from operations in 1994 as compared to 1993 was a result of increased net income in 1994 along with reduced increases in funds held by UWS and other assets which represent uses of cash. 57 In conjunction with the UWS joint venture, UWS holds funds to support policy reserves and AMSIC's undistributed net profits and UWS credits investment income to AMSIC on the funds held balance at UWIC and UWLIC's average portfolio rates. At June 30, 1996 and 1995, UWS held $118.5 million and $122.8 million, respectively. Of these funds, $30.3 million and $57.5 million were accessible as of June 30, 1996 and 1995, respectively, upon request without prior approval of UWS. UWS held $143.7 million and $124.5 million of funds on behalf of AMSIC at December 31, 1995 and 1994, respectively. Of these funds, $60.3 million and $57.8 million were accessible as of December 31, 1995 and 1994, respectively, upon request without prior approval of UWS. UWS's investment portfolio, which includes these funds, consists primarily of investment grade bonds and has a limited exposure to equity securities. At June 30, 1996 and 1995, 86.8% and 85.3%, respectively, of UWS's total investment portfolio was invested in bonds. At December 31, 1995 and 1994, 86.8% and 88.2%, respectively, of UWS's total investment portfolio was invested in bonds. The bond portfolio had an average quality rating of AA- and AA at December 31, 1995 and 1994, respectively, 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 balance sheet at market value. AMSG has no investments in mortgage loans, non-publicly traded securities (except for common stock of subsidiaries), real estate held for investment or financial derivatives. In February of 1996, AMSG borrowed $10.0 million from a bank. The proceeds were used to retire $2.2 million of bank debt as well as fund operations. At June 30, 1996, AMSG was not in compliance with certain covenants relating to required levels of net income and net worth as defined by the agreement. AMSG anticipates that it will repay the bank loan in connection with the Merger. In April of 1995, AMSG borrowed $10.0 million from UWLIC. In August of 1995, AMSG borrowed an additional $5.0 million from UWLIC. On September 29, 1995, the $15.0 million debt was converted to $15.0 million of preferred stock in AMSG. The proceeds from these transactions were used by AMSG for investment and development of HMO subsidiaries, general corporate needs, as well as additional capital equipment purchases relating to the expansion of the corporate office. Management believes that in order to be a long term survivor in the health care industry it needs to become more involved in managed care. As a result of this strategic decision, AMSG has invested in several HMOs with partners from the regions in which the HMOs are located. During the period of January 1, 1994 through June 30, 1996, AMSG has made investments in common stock and loans to various HMOs of $16.1 million. These funds were used by the HMOs to provide and maintain minimal levels of statutory capital and surplus as well as for working capital to fund day to day operations. The National Association of Insurance Commissioners ("NAIC") has adopted risk-based capital guidelines for life and health insurers. These guidelines currently apply only to AMSG's insurance company subsidiaries. Those subsidiaries exceed the NAIC risk-based capital guidelines. The NAIC is also developing risk-based capital guidelines for health organizations, which would apply to other AMSG subsidiaries. In addition, the various state departments of insurance and other state regulators have the authority to establish capital and surplus requirements for individual companies and may propose stricter capital and surplus requirements. AMSG believes that internal funds and short term borrowings from its joint venture partner (UWS) will be sufficient to finance planned growth for the foreseeable future. In the event AMSG seeks additional financing to facilitate long-term growth, it believes that such financing could be obtained through other bank borrowings as market conditions may permit or dictate. INFLATION Health care costs have been rising and are expected to continue to rise at a rate that exceeds the consumer price index. AMSG's cost control measures and premium rate increases are designed to reduce the adverse effect of medical cost inflation on operations. In addition, AMSG utilizes its ability 58 to apply appropriate underwriting criteria in selecting groups and individuals to control the utilization of health care services. However, there can be no assurance that AMSG'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 AMSG 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. Florida, which accounted for approximately 18% of AMSG's reinsurance assumed in 1995, has recently enacted a package of such reforms, which include underwriting and rate restrictions as well as the creation of purchasing alliances. To date, AMSG has made appropriate adjustments to maintain a competitive position in Florida, and AMSG does not believe that there has been a significant adverse impact on the marketability and profitability of the Florida business. Adoption of such reform measures by a substantial number of additional states, particularly measures mandating purchasing pools, could significantly increase competition in the health care industry. Enactment by Congress of HR 3103, the Kennedy-Kassenbaum bill, will result in changes in all of the states where AMSG does business. It may require changes in rating and plan design to adjust for the small group guarantee-issue, group-to-individual portability, and pre-existing condition limitation features. The renewability, portability and health condition rating restrictions apply to fully insured and self-funded plans. The bill will require many states to rewrite their laws to conform to the new federal guidelines. Management views this bill positively as it will result in greater state-by-state consistency. Overall, the bill will require AMSG to conduct a thorough review of its filings, plan designs and pricing methods in every state where it does business. This will be a long-term process, and its completion relies heavily on the actions of the states and the federal regulations implementing the bill, which are yet to be issued. 59 STOCK OWNED BY AMSG MANAGEMENT AND PRINCIPAL SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of shares of AMSG Common Stock as of , 1996 by (i) directors and executive officers of AMSG, (ii) directors and executive officers of AMSG as a group, and (iii) persons who are known to AMSG to beneficially own more than 5% of AMSG Common Stock.
NAME AND ADDRESS NUMBER OF SHARES PERCENT - --------------------------------------------------------------- ------------------ ------------ Wallace J. Hilliard............................................ 53,344.33(2),(4) 30.5% Ronald A. Weyers............................................... 21,617.33(3),(4) 12.4 Thomas R. Hefty (1)............................................ -- -- All directors and executive officers as a group (3 individuals).................................................. 74,961.67 42.9(4) United Wisconsin Services, Inc. (1) 401 West Michigan Street Milwaukee, Wisconsin 53203.................................... 20,967 12.0
- ------------------------ (1) Mr. Hefty is Chairman of the Board, President and Chief Executive Officer of UWS. (2) The number of shares set forth in the above table with respect to Mr. Hilliard represents shares of AMSG Common Stock owned by Mr. Hilliard personally. Excluded from such number are 18,322.33 shares of AMSG Common Stock held in family trusts and 15,000 shares of AMSG Common Stock owned by Mr. Hilliard's adult children or trusts for their benefit with respect to which Mr. Hilliard disclaims beneficial ownership. (3) The number of shares set forth in the above table with respect to Mr. Weyers represents shares of AMSG Common Stock owned by Mr. Weyers personally. Excluded from such number are 17,618.67 shares of AMSG Common Stock held in family trusts and limited partnerships and 764 shares of AMSG Common Stock owned by Mr. Weyers' wife with respect to which Mr. Weyers disclaims beneficial ownership. (4) Excluded from the number of shares set forth opposite Messrs. Hilliard and Weyers' names is an aggregate of 78,805 shares of AMSG Common Stock held under the Voting Trust Agreement with respect to which Messrs. Hilliard and Weyers have shared voting and dispositive power. APPROVAL OF AMENDMENTS TO UNITED WISCONSIN SERVICES, INC. EQUITY INCENTIVE PLAN The UWS Board has approved, subject to shareholder approval, amendments to the UWS Equity Incentive Plan (the "Plan") to: (a) increase from 600,000 to 2,750,000 the number of shares of UWS Common Stock to be issued thereunder; (b) limit the number of shares which may be granted to individual participants in a three year period; (c) change the requirements for the Committee which administers the Plan to comply with changes to Exchange Act Rule 16b-3 (relating to short swing profits) and Treas. Reg. 1.162-27 (relating to compensation in excess of $1,000,000); and (d) permit the gifting of stock options to an employee's spouse, children or grandchildren (or trusts for their benefit). The increase in the number of shares from 600,000 to 2,750,000 is necessary to permit the following transactions in connection with the Merger: (a) the substitution of UWS Options for AMSG Options now held by AMS employees; (b) the issuance of options to purchase 1,000,000 shares of UWS Common Stock granted to Messrs. Hilliard & Weyers; and (c) the conversion of existing options to purchase 7,113 shares of AMSG Common Stock into options to purchase UWS Common Stock and the issuance of options to purchase an additional $4,000,000 worth of UWS Common Stock granted to Mr. Samuel Miller. Currently, options with respect to 467,000 shares have been issued pursuant to the Plan. The options to purchase UWS Common Stock to be issued to Hilliard, Weyers and to the other AMS 60 employees in substitution for their existing AMSG Options will result in the issuance of approximately 1,305,000 additional options. Approximately 508,000 options would be available for future grants under the Plan. The following nonqualified options will be issued following the Merger if the amendments to the UWS Equity Incentive Plan are approved by Shareholders. NEW PLAN BENEFITS
UWS OPTIONS CURRENTLY OUTSTANDING VALUE OF UNEXERCISED, IN ADDITIONAL UWS ----------------- THE MONEY OPTIONS AT OPTIONS ISSUED EXERCISABLE/ --------------------------- IN CONNECTION NAME AND PRINCIPAL POSITION UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE WITH MERGER - ---------------------------------------------------------- ----------------- --------------------------- -------------- Thomas R. Hefty N/A Chairman of the Board, President & Chief Executive Officer Roger Formisano N/A Executive Vice President & Chief Operating Officer; President of Compcare Health Services Insurance Corporation and Meridian Resources Corporation Devon W. Barrix N/A Vice President and President of Unity Health Plans Insurance Corporation C. Edward Mordy N/A Vice President and Chief Financial Officer Mark H. Granoff N/A Vice President and President of United Wisconsin Insurance Company and United Wisconsin Life Insurance Company Total Executive Group (1) (1) (1) Shares Reserved for Future Grant (1) (1) (1)
- ------------------------ (1) The number of additional shares issued to the Total Executive Group and the Shares Reserved for Future Grant cannot be determined as the number is based on the Fair Market Value of UWS Stock at the time of the Merger. Additional Options will be issued to other Messrs. Hilliard, Weyers and Miller (See "CONFLICT OF INTEREST -- Additional Options to Purchase UWS Stock") and to certain executives of AMSG in substitution for existing AMSG Options (See "THE MERGER -- Conversion of AMSG Common Stock Options in Merger"). The dollar value of the proposed option awards in the table above will be equal to the difference between the Fair Market Value of the Common Stock underlying the Options and the exercise price. As the exercise price has not been fixed for the Options issued in connection with the Merger at this time, the dollar value of the Options cannot be determined. Shareholder approval of the authorization for the additional options is required by the terms of the Plan. Shareholder approval of the authorization for the additional options is a condition to the consummation of the Merger. The Plan will also be amended to limit the number of shares which may be granted to individual participants during a three year period. This amendment has been made to allow options issued 61 pursuant to the Plan to be considered performance based compensation within the meaning of Treas. Reg. 1.162-27. Performance based compensation is not subject to the $1,000,000 limit on compensation which is deductible contained in Code Section 162(m). Under the amendment the maximum number of shares with respect to which grants may be made is 100,000 in any three year period, except that grants with respect to 850,000 shares may be made in the three year period ended March 31, 1997. The 850,000 share limit for the period ended March 31, 1997 was intended to permit the issuance of options as provided in Mr. Miller's employment agreement. The change in the committee which administers the Plan is intended to permit options issued pursuant to the Plan to continue to be exempt from the short swing profit recapture rules of Section 16 of the Exchange Act and to be considered performance based compensation which would not be subject to the limit on deductible compensation contained in Code Section 162(m). The change permitting the gifting of nonstatutory options is made to allow the employees to take advantage of certain estate planning opportunities. Recent IRS private letter rulings have clarified the tax treatment of gifted options and recent changes in Exchange Act Rule 16b-3 have permitted the gifting of options. The following is a summary of the basic terms and provisions of the Plan. The Plan permits the grant to full-time employees ("Participants") of Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights ("SARs"), Restricted Stock, Performance Units and Performance Shares (all as defined in the Plan). The purpose of the Plan is to promote the success and enhance the value of UWS by linking the personal interests of the Participants with an incentive for outstanding performance. The Plan further is intended to provide flexibility to UWS in its ability to motivate, attract and retain the services of Participants upon whose judgment, interest and special effort the successful conduct of its operation is dependent. The Plan is administered by the Management Review Committee (the "Committee") of the Board of Directors. The Committee is authorized to determine the size and types of awards under the Plan, the Participants to whom they will be granted, the terms and conditions of such awards, including the date or dates on which awards become exercisable either in whole or in part, their expiration date and other matters in their discretion. The term of any Incentive Stock Option or Nonqualified Stock Option granted pursuant to the Plan shall not exceed ten or twelve years, respectively (five years in the case of a 10% shareholder granted Incentive Stock Options), and the option price per share therefor shall not be less than the fair market value of the Common Stock on the date the option is granted (110% of the fair market value in the case of a 10% shareholder granted Incentive Stock Options). Options are not exercisable in any event prior to six months following the date of grant. SARs shall have a grant price at least equal to 100% of the fair market value of the Common Stock if granted independently of any stock option, or equal to the option price of the related stock option if granted in connection with a stock option. The term of an SAR granted pursuant to the Plan shall not exceed twelve years. SARs are not exercisable in any event prior to six months following the date of grant. Restricted Stock may be granted to participants in such amounts as the Committee shall determine subject to the terms and provisions of the Plan. Restricted Stock generally may not be sold or otherwise transferred for a certain period (based on the passage of time, the achievement of performance goals or the occurrence of other events as determined by the Committee). During that period, however, Participants may exercise full voting rights and shall be entitled to receive all dividends and other distributions with respect to shares of Restricted Stock. Restricted Stock shall not vest in any event prior to six months following the date of grant. 62 The number and/or value of Performance Units or Performance Shares that will be paid to Participants shall be based on the extent to which performance goals, as determined by the Committee, have been met. The performance goals must be determined over a period of at least six months. At the time of grant, each Performance Unit must have an initial value established by the Committee and each Performance Share shall have an initial value equal to the fair market value of the Common Stock on the date of grant. As of August 15, 1996, nonqualified stock options with respect to approximately 467,000 shares have been issued pursuant to the Plan. Awards shall immediately vest and/or be exercisable upon the occurrence of death, disability or retirement, or a Change in Control (as defined in the Plan). Subject to the terms of the Plan, awards may be exercised within three months after termination of employment for any reason except death, disability or retirement (but any awards held by a Participant dismissed for cause will immediately expire), within one year after the date of death (by the Participant's personal representative, legatees or heirs) if employed by UWS at such date, within one year after a Participant's employment with UWS is terminated by disability, and within three years after a Participant retires (as defined in UWS's "tax qualified pension plan"). The Committee may permit a Participant to defer such Participant's receipt of the payment of cash or the delivery of shares of Common Stock that would otherwise be due. The Committee may terminate, amend or modify the Plan with the approval of the UWS Board. Any termination, amendment or modification, however, which materially (i) increases the total number of shares of UWS Common Stock which may be issued under the Plan; (ii) modifies the eligibility requirements to add a class of person ("Insiders") subject to Section 16 of the Exchange Act (iii) increases the benefits accruing to Insiders under the Plan, must be approved by the shareholders of UWS. An optionee will not be deemed to have received taxable income upon the grant or exercise of any Incentive Stock Option, provided that such shares of Common Stock are held for at least one year after the date of exercise and two years after the date of grant. No gain or loss will be recognized by UWS as a result of the grant or exercise of Incentive Stock Options. An optionee will be deemed to receive ordinary income upon exercise of Nonqualified Stock Options in an amount equal to the amount by which the fair market value of the Common Stock on the exercise date exceeds the exercise price. The amount of any ordinary income deemed to be received by an optionee due to a premature disposition of the shares of Common Stock acquired upon the exercise of an Incentive Stock Option or upon the exercise of a Nonqualified Stock Option will be a deductible expense for tax purposes for UWS. THE UWS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL. The proposal must be approved by the affirmative vote of holders of a majority of the shares of UWS Common Stock represented at the UWS Special Meeting. Abstentions and broker non-votes are treated as "no" votes in determining whether the proposal is approved. The proxies will be voted for or against the proposal, or as an abstention, in accordance with the instructions specified on the proxy form. If no instructions are given, proxies will be voted for approval of the amendment to the UWS Equity Incentive Plan. DESCRIPTION OF UWS CAPITAL STOCK UWS's authorized capital stock consists of 50,000,000 shares of its Common Stock, no par value per share, and 500,000 shares of UWS Preferred Stock, no par value per share. COMMON STOCK Subject to Section 180.1150(2) of the WBCL (described below under "-- Certain Statutory Provisions"), holders of UWS Common Stock are entitled to one vote for each share of UWS Common Stock held by them on all matters properly presented to shareholders. Holders of UWS Common Stock are not entitled to cumulative voting rights. Subject to the prior rights of the holders of any shares of Preferred Stock that are outstanding, the UWS Board of Directors may in its discretion declare and pay dividends on the UWS Common Stock out of earnings or assets of UWS legally available for the payment therefor. Subject to the prior rights of the holders of any shares of Preferred Stock that are 63 outstanding, in the event UWS is liquidated, any amounts remaining after the discharge of outstanding indebtedness will be paid pro rata to the holders of UWS Common Stock. Holders of UWS Common Stock are not entitled to any preemptive, subscription or conversion rights. The outstanding shares of UWS Common Stock are, and the UWS Common Stock to be issued in the Merger will be, legally issued, fully paid and nonassessable, except for certain statutory liabilities which may be imposed by Section 180.0622 as judicially interpreted of the WBCL for unpaid employee wages. PREFERRED STOCK The UWS Board of Directors is authorized to issue from time to time, without shareholder authorization, in one or more designated series, shares of Preferred Stock with such dividend, redemption, conversion and exchange provisions as are provided in the particular series. No dividends or other distributions are payable on the UWS Common Stock unless dividends are paid in full on the Preferred Stock and all sinking fund obligations for the Preferred Stock, if any, are fully funded. In the event of a liquidation or dissolution of UWS, the outstanding shares of Preferred Stock would have priority over the UWS Common Stock to receive the amount specified in each particular series out of the remaining assets of UWS. CERTAIN CHARTER AND BYLAW PROVISIONS Article II of UWS's Bylaws provides procedures by which shareholders may raise matters at annual meetings and may call special meetings. These provisions also establish the procedure for fixing a record date for special meetings called by shareholders. The affirmative vote of either (i) holders of a majority of the voting power of shares entitled to vote in the election of directors or (ii) a majority of the directors then in office is required to amend, repeal or adopt any provision inconsistent with the foregoing Bylaw provisions. Under UWS's Restated and Amended Articles of Incorporation, the UWS Board of Directors is divided into three classes as nearly equal in number as possible. One class is elected each year for a three-year term. In addition, a director may be removed from office only by the affirmative vote of at least 80% of the outstanding shares entitled to vote for the election of such director, and any vacancy so created may be filled by the affirmative vote of at least 80% of such shares. The staggered board provisions and the provision regarding the 80% vote required for removal of a director may only be amended by the affirmative vote of shareholders possessing at least 75% of the outstanding shares entitled to vote. CERTAIN STATUTORY PROVISIONS Section 180.1150(2) of the WBCL provides that the voting power of shares of an "issuing public corporation," such as UWS, which are held by any persons holding in excess of 20% of the voting power of the issuing public corporation's shares, shall be limited to such 20% of the voting power plus 10% of the voting power of such excess shares. This statutory voting restriction is not applicable to shares acquired directly from UWS, shares as to which the shareholders of UWS vote to restore the full power and under certain other circumstances more fully described in Section 180.1150(3). This statutory voting restriction is not applicable to the shares of UWS Common Stock held by BCBSUW as of the date of this Joint Proxy Statement/Prospectus. Sections 180.1130 to 180.1134 of the WBCL provide that certain business combinations not meeting specified adequacy-of-price standards must be approved by the vote of at least 80% of the votes entitled to be cast by shareholders and by two-thirds of the votes entitled to be cast by shareholders other than a significant shareholder who is a party to the transaction. The term "business combination" is defined to include, subject to certain exceptions, a merger or consolidation of an issuing public corporation, such as UWS (or any subsidiary thereof), with, or the sale or other disposition of substantially all assets of the issuing public corporation to, any significant shareholder or affiliate thereof. "Significant shareholder" is defined generally to include a person that is the beneficial owner of 10% or more of the voting power of the shares of the issuing public corporation. Sections 180.1140 to 180.1145 of the WBCL provide that a "resident domestic corporation," such as UWS, may not engage in a "business combination" with an "interested stockholder" (a person beneficially owning 10% or more of the aggregate voting power of the stock of such corporation) for 64 three years after the date (the "stock acquisition date") the interested stockholder acquired his or her 10% or greater interest, unless the business combination (or the acquisition of the 10% or greater interest) was approved before the stock acquisition date by such corporation's board of directors. After the three-year period, a business combination that was not so approved may be consummated only if it is approved by a majority of the outstanding voting shares not held by the interested stockholder or is made at a specified formula price intended to provide a fair price for the shares held by noninterested stockholders. These provisions are not applicable to the shares of Common Stock held by BCBSUW as of the date of this Joint Proxy Statement/Prospectus because the Board of Directors of BCBSUW approved the Merger at a meeting on July 31, 1996. Because UWS is an insurance holding company and various of its subsidiaries are Wisconsin insurance companies, the Wisconsin Statutes and administrative rules regulate, among other things, certain transactions in UWS Common Stock. The Wisconsin Statutes provide that the acquisition of 10% or more of the voting securities of the company creates a rebuttable presumption that "control" of UWS's insurance company subsidiaries is being acquired in the transaction, unless the OCI, upon application, determines otherwise. Thus, any person attempting to acquire "control" of UWS must, prior to such acquisition, file a registration statement and other documents with the OCI and obtain the OCI's prior approval of such acquisition. These statutory and administrative restrictions may have the effect of discouraging or making it more difficult for a person to acquire a substantial equity interest in UWS and may otherwise restrict the market for the purchase or sale of a significant number of the shares of UWS Common Stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Firstar Trust Company, Milwaukee, Wisconsin. COMPARATIVE RIGHTS OF AMSG STOCKHOLDERS AND UWS SHAREHOLDERS COMPARISON OF SHAREHOLDER RIGHTS AMSG is incorporated under the laws of the State of Delaware, and UWS is incorporated under the laws of the State of Wisconsin. Stockholders of AMSG whose rights are governed by AMSG's Certificate of Incorporation and Bylaws and by the DGCL, will, on consummation of the Merger, become shareholders of UWS. Their rights as UWS shareholders will then be governed by UWS's Restated and Amended Articles of Incorporation and Bylaws and by the WBCL. The following is a summary of the material differences between the rights of stockholders of AMSG and the rights of shareholders of UWS. This summary is not intended to be relied upon as an exhaustive list or detailed description of the provisions discussed and is qualified entirely by the DGCL, the WBCL, AMSG's Certificate of Incorporation and Bylaws and UWS's Restated and Amended Articles of Incorporation and Bylaws. CAPITAL STOCK. The Certificate of Incorporation of AMSG authorizes the Board of Directors of AMSG to issue up to 600,000 shares of common stock, $1.00 par value, and 15,000 shares of Series A Preferred Stock, $1.00 par value (the "AMSG Preferred"). As of July 31, 1996, 174,733.67 shares of AMSG Common Stock were outstanding and 15,000 shares of AMSG Preferred were outstanding. The Board of Directors may establish the relative rights and preferences of preferred stock issued in the future without stockholder action and issue such stock in series. AMSG common stockholders have no preemptive rights. The outstanding shares of AMSG Common Stock are fully paid and nonassessable. AMSG common stockholders are entitled to one vote for each share held on each matter submitted to a vote of the holders of AMSG Common Stock. Cumulative voting for the election of directors is not permitted. Subject to the preferential dividend rights of any issued and outstanding AMSG Preferred, AMSG's common stockholders are entitled to receive dividends as and when declared by the Board of Directors of AMSG. Under Delaware law, AMSG may declare and pay dividends out of surplus or, if there is not surplus, out of net profits for the fiscal year 65 in which the dividend is declared and/or the preceding year. No dividends may be declared, however, if the capital of AMSG has been diminished by depreciation, losses or otherwise to an amount less than the aggregate amount of capital represented by any issued and outstanding capital stock having a preference on distribution. If AMSG were liquidated, the holders of AMSG Common Stock would be entitled to receive, pro rata, all assets available for distribution to them after full satisfaction of AMSG's liabilities and any payment applicable to any AMSG Preferred then outstanding. The Restated and Amended Articles of Incorporation of UWS authorize the Board of Directors of UWS to issue up to 50,000,000 shares of UWS Common Stock, no par value, and up to 500,000 shares of preferred stock, no par value. The Board of Directors may establish the relative rights and preferences of preferred stock issued in the future without shareholder action and issue such stock in series. As of July 31, 1996, 12,599,715 shares of UWS Common Stock were outstanding. No shares of UWS preferred stock were outstanding as of such date. APPRAISAL RIGHTS AND DISSENTERS' RIGHTS. Under the DGCL, stockholders of a corporation who dissent from a merger or consolidation of the corporation in the manner provided by Delaware law are entitled to receive payment of the fair value of their stock, as determined by the Delaware Court of Chancery. However, such right is not available to stockholders (i) whose shares are listed on a national securities exchange, quoted on The Nasdaq Stock Market or held of record by more than 2,000 stockholders, or (ii) where the vote of such stockholders of the corporation surviving or resulting from the merger or consolidation was not required for approval thereof, unless the stockholders are required to accept in the merger or consolidation anything except certain types of stock (including UWS Common Stock) or cash in lieu of fractional shares of such stock. AMSG Common Stock is not listed on a national securities exchange, quoted on The Nasdaq Stock Market or held of record by more than 2,000 stockholders. Delaware law does not provide appraisal rights to stockholders who dissent from the sale of all or substantially all of the corporation's assets unless the corporation's certificate of incorporation provides otherwise. AMSG's Certificate of Incorporation does not provide for appraisal rights in the context of a sale of all or substantially all of AMSG's assets. Under the WBCL, a shareholder of a corporation is generally entitled to receive payment of the fair value of such shareholder's stock if such shareholder dissents from a proposed merger or share exchange or a sale or exchange of all or substantially all of the property and assets of the corporation. However, dissenter's rights are not available to holders of shares, such as shares of UWS Common Stock, which are registered on a national securities exchange or quoted on The Nasdaq Stock Market on the record date fixed to determine shareholders entitled to notice of the meeting at which shareholders are to vote on the proposed corporation action. UWS Common Stock is listed on the NYSE. ASSESSABILITY; POTENTIAL LIABILITY FOR WAGES. UWS Common Stock is subject to possible assessment in certain circumstances. Section 180.0622(2)(b) of the WBCL provides that shareholders of Wisconsin corporations are personally liable to an amount equal to the par value of shares owned by them (and to the consideration for which shares without par value were issued) for debts owing to employees of the corporation for services performed for such corporation, but not exceeding six months' service in any one case. The liability imposed by the predecessor to this statute was interpreted in a trial court decision to extend to the original issue price for shares, rather than the stated par value. Although affirmed by the Wisconsin Supreme Court, the case offers no precedential value due to the fact that the decision was affirmed by an equally divided court. UWSG Common Stock is not otherwise subject to call or assessment. Shares of stock of Delaware corporations are nonassessable under the DGCL. The DGCL does not impose personal liability on holders of AMSG Common Stock for debts owing to employees or otherwise. 66 TAKEOVER STATUTES Wisconsin law regulates a broad range of "business combinations" between a Wisconsin corporation and an "interested stockholder." Wisconsin law defines a "business combination" as including a merger or a share exchange, sale of assets, issuance of stock or rights to purchase stock and certain related party transactions. An "interested stockholder" is defined as a person who beneficially owns, directly and indirectly, 10% of the outstanding voting stock of a corporation or who is an affiliate or associate of the corporation and beneficially owned 10% of the voting stock within the last three years. In certain cases, Wisconsin law prohibits a corporation from engaging in a business combination with an interested stockholder for a period of three years following the date on which the person became an interested stockholder, unless (i) the board of directors approved the business combination or the acquisition of the stock prior to the acquisition date, (ii) the business combination is approved by a majority of the outstanding voting stock not owned by the interested stockholder, (iii) the consideration to be received by stockholders meets certain requirements of the statute with respect to form and amount or (iv) the business combination is of a type specifically excluded from the coverage of the statute. Section 180.1150 of the WBCL provides that in particular circumstances the voting of shares of a Wisconsin "issuing public corporation" (a Wisconsin corporation which has at least 100 Wisconsin resident stockholders, 500 or more stockholders of record and total assets exceeding $1 million) held by any person in excess of 20% of the voting power is limited to 10% of the full voting power of such excess shares. Full voting power may be restored under Section 180.1150 if a majority of the voting power of shares represented at a meeting, including those held by the party seeking restoration, are voted in favor of such restoration. In addition, the WBCL sets forth certain fair price provisions which govern mergers and share exchanges with, or sales of substantially all a Wisconsin issuing public corporation's assets to, a 10% shareholder, mandating that any such transaction meet one or two requirements. The first requirement is that the transaction be approved by 80% of all shareholders and two-thirds of "disinterested" shareholders, which generally exclude the 10% shareholder. The second requirement is the payment of a statutory fair price, which is intended to insure that shareholders in the second step merger, share exchange or asset sale receive at least what shareholders received in the first step. Further, the WBCL requires shareholder approval for certain transactions in the context of a tender offer or similar action for in excess of 5% of a Wisconsin corporation's stock. Shareholder approval is required for the acquisition of more than 5% of the corporation's stock at a price above market value, unless the corporation makes an equal offer to acquire all shares. Shareholder approval is also required for the sale or option of assets which amount to at least 10% of the market value of the corporation, but this requirement does not apply if the corporation meets certain minimum outside director standards. DGCL Section 203 (the "Delaware Business Combination Statute") applies to certain business combinations involving a Delaware corporation and certain of its stockholders. The Delaware Business Combination Statute prevents an "interested stockholder" (defined generally as a person with 15% or more of the corporation's outstanding voting stock) from engaging in a "business combination" (defined to include a variety of transactions, including the sale of assets, mergers and almost any related party transaction) with a Delaware corporation for three years following the date such person became an interested stockholder, unless (i) before such person became an interested stockholder, the board of directors of the corporation approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination, (ii) upon consummation of the transaction which resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the corporation and by certain employee stock ownership plans), or (iii) following the transaction in which such person became an interested stockholder, the business combination is approved by the board of 67 directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of two-thirds of the outstanding voting stock of the corporation not owned by the interested stockholder. A corporation may elect in its certificate of incorporation not to be governed by Section 203, and the restrictions imposed on interested stockholders under Section 203 do not apply under certain limited circumstances set forth therein, including certain business combinations proposed by an interested stockholder following the announcement or notification of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the corporation's directors. Section 203 provides that, during such three-year period, the corporation may not merge or consolidate with an interested stockholder or any affiliate or associate thereof, and also may not engage in certain other transactions with an interested stockholder or any affiliate or associate thereof, including, without limitation, (i) any merger or consolidation of the corporation or a direct or indirect majority-owned subsidiary of the corporation with (A) the interested stockholder, or (B) with any other corporation if the merger or consolidation is caused by the interested stockholder and as a result of such merger or consolidation the above limitations of Section 203 are not applicable to the surviving corporation; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (except proportionately as a stockholder of the corporation) to or with the interested stockholder of assets having an aggregate market value equal to 10% or more of the aggregate market value of all assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of a corporation; (iii) any transaction which results in the issuance or transfer by the corporation or by any majority owned subsidiary thereof of any stock of the corporation or such subsidiary to the interested stockholder, except, among other things, pursuant to a transaction which effects a pro rata distribution to all stockholders of the corporation; (iv) any transaction involving the corporation or any majority owned subsidiary thereof which has the effect of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the corporation or any such subsidiary which is owned by the interested stockholder (except, among other things, as a result of immaterial changes due to fractional share adjustments); or (v) any receipt by the interested stockholder of the benefit (except proportionately as a stockholder of such corporation) of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. The Merger is not a "business combination" as defined in Section 203 and therefore, Section 203 is not applicable to the transactions contemplated by the Merger Agreement. DIRECTORS The Board of Directors of AMSG consists of a single class of directors, each of whom serves a term of one year. Holders of AMSG Common Stock elect all of the directors at each annual meeting of AMSG's stockholders. Any director may be removed either for or without cause at any time by the affirmative vote of the holders of a majority of stockholders called for that purpose. The Board of Directors of UWS is divided into three classes as nearly equal in number as possible, with the directors in each class serving staggered three-year terms. At each annual meeting of UWS's shareholders, the successors to the class of directors whose term expires at the time of such meeting are elected by a majority of the votes cast, assuming a quorum is present. A director of UWS may be removed, with or without cause, only by the affirmative vote of not less than 80% of the then issued and outstanding shares taken at a special meeting of shareholders called for that purpose. LIABILITY OF DIRECTORS; INDEMNIFICATION. AMSG has provided in its Certificate of Incorporation that it will indemnify its directors and officers pursuant to the terms as set forth in Article Eleven of such Certificate. Under Article Eleven of AMSG's Certificate of Incorporation, such indemnification would apply if the indemnified individual is or was a director or officer and the individual acted in good faith, reasonably believed his or her conduct was in AMSG's best interests (or not opposed to AMSG's best interests) and, in the case of any criminal proceeding, the individual had no reasonable cause to 68 believe the individual's conduct was unlawful. However, AMSG will not indemnify a director or officer in connection with a proceeding by or in the right of the corporation in which the director or officer was adjudged liable to AMSG for negligence or misconduct in the performance of his duty to the corporation unless a court of competent jurisdiction determines that such person is entitled to indemnification despite the adjudication of liability. Under UWS's bylaws and the WBCL, UWS indemnifies its directors and officers against liability incurred by the director or officer in a proceeding to which the indemnified person was a party because he or she is a director or officer, unless liability was incurred because a director or officer breached or failed to perform a duty that he or she owes to the corporation and the breach or failure constitutes a willful failure to deal fairly with the corporation or its shareholders in connection with a matter in which the director or officer has a material conflict of interest, a violation of criminal law (unless the director or officer had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful), a transaction from which the director or officer derived an improper personal benefit or willful misconduct. In addition, under the WBCL, a director of UWS is not liable to the corporation, its shareholders or any person asserting rights on behalf of the corporation or its shareholders for liabilities arising from a breach of, or failure to perform, any duty resulting solely from his or her status as a director, unless the person asserting liability proves that the breach or failure to perform constitutes any of the circumstances under which indemnification would not be provided. ACTION WITHOUT A MEETING Under the DGCL and AMSG's Bylaws, any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if a consent in writing, setting forth the action taken, is signed by holders of not less than the minimum number of shares necessary to authorize or approve such action. Under the WBCL, such action without a meeting is allowed only if the consent is signed by all of the shareholders entitled to vote with respect to the subject matter. AMENDMENT OF CORPORATE CHARTER Under the WBCL, the Board of Directors can establish conditions for the amendment of the Articles of Incorporation (e.g., super-majority vote, no more than a given percentage dissent, etc.). The WBCL provides that certain significant amendments to articles of incorporation, but not all amendments, must be approved by the shareholders in addition to approval by the Board of Directors. The vote of shareholders needed to approve an amendment depends in part on the voting groups entitled to vote separately on the amendment. Generally, the WBCL provides that, if a quorum exists, action on a matter other than the election of directors is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the articles of incorporation or the WBCL require a greater number of affirmative votes. UWS's Restated and Amended Articles of Incorporation require the affirmative vote of not less than 75% of the outstanding shares entitled to vote for directors to amend provisions of the Restated and Amended Articles relating to the Board of Directors. Delaware law requires the vote of a simple majority of the outstanding voting stock of a corporation, and the vote of a simple majority of the outstanding stock of each class entitled to vote as a class, to amend the certificate of incorporation, in addition to approval by the corporation's board of directors. STOCKHOLDER DERIVATIVE PROCEEDINGS Under Delaware law and the WBCL, before a stockholder may bring an action by or on behalf of the corporation (a "derivative action"), a stockholder must make a demand on the corporation's Board of Directors to remedy the situation about which the stockholder complains. Under Delaware law, the demand requirement may be excused if the stockholder can show that such demand would be futile because the alleged wrongdoers comprised or controlled a majority of the Board of Directors. Under the WBCL, the futility exception to the demand requirement has been eliminated. Therefore, a stockholder bringing a derivative action on behalf of a Wisconsin corporation will be required in all instances to make a demand on the corporation's Board of Directors. 69 LEGAL OPINION The legality of the UWS Common Stock to be issued in connection with the Merger is being passed upon for UWS by Michael Best & Friedrich, Milwaukee, Wisconsin. AMSG will receive the opinion of Godfrey & Kahn, S.C. substantially to the effect that the Merger will qualify as a "reorganization" under Section 368(a) of the Code. See "THE MERGER -- Certain Federal Income Tax Considerations." DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS Any shareholder proposal intended for inclusion in the proxy statement and form of proxy relating to UWS's 1997 annual meeting of shareholders must be received by UWS not later than March 31, 1997, pursuant to the proxy soliciting regulations of the Commission. Nothing in this paragraph shall be deemed to require UWS to include in its proxy statement and form of proxy for such meeting any shareholder proposal which does not meet the requirements of the Commission in effect at the time. EXPERTS The consolidated financial statements of UWS appearing in the United Wisconsin Services, Inc. Annual Report on Form 10-K for the year ended December 31, 1995, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance on such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of AMSG at December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, appearing in this Joint Proxy Statement/ Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 70 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN MEDICAL SECURITY GROUP, INC.
Report of Independent Auditors........................................................ F-2 Consolidated Balance Sheets at December 31, 1995 and 1994 and June 30, 1996 (Unaudited).......................................................................... F-3 Consolidated Statements of Income for the years ended December 31, 1995, 1994, 1993 and the six months ended June 30, 1996 and 1995 (Unaudited).......................... F-5 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994, 1993 and the six months ended June 30, 1996 (Unaudited)........................ F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, 1993 and the six months ended June 30, 1996 and 1995 (Unaudited)..................... F-7 Notes to Consolidated Financial Statements............................................ F-8
F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors American Medical Security Group, Inc. We have audited the accompanying consolidated balance sheets of American Medical Security Group, Inc. (the Company) as of December 31, 1995, and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Medical Security Group, Inc. at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company made certain accounting changes in 1995 and 1994. ERNST & YOUNG LLP Milwaukee, Wisconsin April 5, 1996 F-2 AMERICAN MEDICAL SECURITY GROUP, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------------ JUNE 30 1995 1994 1996 ----------- ----------- ----------- (UNAUDITED) (IN THOUSANDS) ASSETS Investments: Bonds available for sale, at fair value................................. $ 8,464 $ 4,086 $ 8,450 Bonds held to maturity, at amortized cost............................... 1,880 1,880 1,880 Other invested assets................................................... 5,433 3,940 6,404 Investments in unconsolidated affiliates................................ 3,706 1,792 2,498 ----------- ----------- ----------- 19,483 11,698 19,232 Cash and cash equivalents................................................. 18,929 28,262 16,839 Property and equipment: Furniture and equipment................................................. 12,621 8,335 14,706 Computer equipment and software......................................... 32,576 21,822 36,030 Leasehold improvements.................................................. 1,836 1,547 1,876 Less allowance for depreciation......................................... (22,156) (12,447) (28,550 ) ----------- ----------- ----------- 24,877 19,257 24,062 Deferred income taxes..................................................... 1,892 4,514 5,296 Receivables and other assets: Funds held by insurance companies....................................... 144,390 110,263 129,349 Advance to affiliates................................................... 12,000 12,000 -- Premiums................................................................ 4,353 1,700 3,468 Interest................................................................ 565 413 238 Related party receivables............................................... 6,035 5,293 9,290 Commission advances..................................................... 2,347 1,586 1,941 Income tax receivable................................................... 1,205 -- 2,768 Prepaid expenses and other.............................................. 6,902 805 8,002 ----------- ----------- ----------- 177,797 132,060 155,056 ----------- ----------- ----------- Total assets........................................................ $ 242,978 $ 195,791 $ 220,485 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes. F-3 AMERICAN MEDICAL SECURITY GROUP, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31 ------------------------ JUNE 30 1995 1994 1996 ----------- ----------- ----------- (UNAUDITED) (IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY Health insurance claim reserves........................................... $ 82,223 $ 53,292 $ 75,662 Life claim reserves....................................................... 2,615 1,467 3,156 Unearned premium reserves................................................. 11,106 9,670 12,122 Notes payable............................................................. 2,229 3,693 11,936 Other liabilities: Premiums payable........................................................ 28,985 39,147 13,553 Self-funded deposits.................................................... 11,279 4,337 10,460 Accounts payable........................................................ 2,188 2,065 4,781 Commissions payable..................................................... 5,065 2,598 4,561 Deferred administrative fees............................................ 6,580 5,280 6,880 Employee compensation, payroll taxes and amounts withheld............... 6,695 4,920 7,090 Income taxes payable.................................................... -- 666 -- Other................................................................... 3,287 3,069 1,489 Minority interest in subsidiary......................................... 231 455 165 ----------- ----------- ----------- Total liabilities..................................................... 162,483 130,659 151,855 Commitments and contingencies (Note 13) Shareholders' equity: Common stock, par value $1 per share: Authorized shares -- 600,000 Issued and outstanding shares -- 174,584 in 1994 and 174,734 in 1995 and 1996 (unaudited)................................................. 175 175 175 Preferred stock, par value $1 per share and $1,000 stated value per share: Authorized shares -- 15,000 Issued and outstanding shares -- 15,000............................... 15,000 -- 15,000 Additional paid-in capital.............................................. 3,816 3,786 3,816 Retained earnings....................................................... 57,898 64,747 50,030 Unrealized gain (loss) on debt securities............................... 3,606 (3,576) (391 ) ----------- ----------- ----------- Total shareholders' equity............................................ 80,495 65,132 68,630 ----------- ----------- ----------- Total liabilities and shareholders' equity.......................... $ 242,978 $ 195,791 $ 220,485 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes. F-4 AMERICAN MEDICAL SECURITY GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 ------------------------------------- ------------------------ 1995 1994 1993 1996 1995 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (IN THOUSANDS) Revenue: Life and health premiums...................... $ 496,989 $ 374,875 $ 242,896 $ 281,513 $ 232,486 Administrative fees and commissions........... 246,458 192,109 124,148 134,385 116,310 Investment income............................. 14,102 7,020 5,288 7,735 5,135 Loss from unconsolidated subsidiaries......... (2,170) (472) (300) (1,903) (655) Other......................................... 7,958 4,663 4,381 6,848 4,613 ----------- ----------- ----------- ----------- ----------- Total revenue............................... 763,337 578,195 376,413 428,578 357,889 Expenses: Life and health benefits...................... 389,498 249,992 163,642 224,899 186,457 Expense allowance on reinsurance assumed...... 118,996 92,405 59,821 66,261 55,898 Commissions................................... 119,137 95,299 57,545 63,490 56,472 Administrative expenses....................... 145,748 102,452 68,329 84,071 69,022 ----------- ----------- ----------- ----------- ----------- Total expenses.............................. 773,379 540,148 349,337 438,721 367,849 ----------- ----------- ----------- ----------- ----------- Income (loss) before minority interest, income taxes and cumulative effect of change in accounting principle........................... (10,042) 38,047 27,076 (10,143) (9,960) Minority interest in net loss of subsidiary..... 244 42 -- 88 119 ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes and cumulative effect of change in accounting principle....... (9,798) 38,089 27,076 (10,055) (9,841) Income taxes (benefit).......................... (1,947) 14,250 9,991 (2,628) (2,482) ----------- ----------- ----------- ----------- ----------- Income (loss) before cumulative effect of change in accounting principle........................ (7,851) 23,839 17,085 (7,427) (7,359) Cumulative effect of change in accounting principle, net of tax.......................... 1,236 -- -- -- 1,236 ----------- ----------- ----------- ----------- ----------- Net income (loss)......................... $ (6,615) $ 23,839 $ 17,085 $ (7,427) $ (6,123) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes. F-5 AMERICAN MEDICAL SECURITY GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNREALIZED ADDITIONAL GAIN (LOSS) TOTAL COMMON PREFERRED PAID-IN RETAINED ON DEBT SHAREHOLDERS' STOCK STOCK CAPITAL EARNINGS SECURITIES EQUITY ----------- --------- ----------- --------- ----------- ------------- (IN THOUSANDS) Balance at January 1, 1993......................... $ 170 $ -- $ 2,801 $ 23,823 $ -- $ 26,794 Net income....................................... -- -- -- 17,085 -- 17,085 Common stock issued.............................. 5 -- 985 -- -- 990 ----- --------- ----------- --------- ----------- ------------- Balance at December 31, 1993....................... 175 -- 3,786 40,908 -- 44,869 Net income....................................... -- -- -- 23,839 -- 23,839 Adjustment for change in accounting method, net of deferred taxes............................... -- -- -- -- 1,305 1,305 Unrealized depreciation on available-for-sale securities, net of deferred taxes............... -- -- -- -- (4,881) (4,881) ----- --------- ----------- --------- ----------- ------------- Balance at December 31, 1994....................... 175 -- 3,786 64,747 (3,576) 65,132 Preferred stock issued........................... -- 15,000 -- -- -- 15,000 Exercised stock options.......................... -- -- 30 -- -- 30 Dividends paid on preferred stock................ (234) (234) Net loss......................................... -- -- -- (6,615) -- (6,615) Unrealized appreciation on available-for-sale securities, net of deferred taxes............... -- -- -- -- 7,182 7,182 ----- --------- ----------- --------- ----------- ------------- Balance at December 31, 1995....................... 175 15,000 3,816 57,898 3,606 80,495 (UNAUDITED) Dividends paid on preferred stock................ -- -- -- (441) -- (441) Net loss......................................... -- -- -- (7,427) -- (7,427) Unrealized depreciation on available-for-sale securities, net of deferred taxes............... -- -- -- -- (3,997) (3,997) ----- --------- ----------- --------- ----------- ------------- Balance at June 30, 1996........................... $ 175 $ 15,000 $ 3,816 $ 50,030 $ (391) $ 68,630 ----- --------- ----------- --------- ----------- ------------- ----- --------- ----------- --------- ----------- -------------
See accompanying notes. F-6 AMERICAN MEDICAL SECURITY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31 JUNE 30 ------------------------------- -------------------- 1995 1994 1993 1996 1995 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES Net income (loss)........................................... $ (6,615) $ 23,839 $ 17,085 $ (7,427) $ (6,123) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for depreciation and amortization............. 10,450 7,369 3,660 6,588 4,524 Gain on sale of property and equipment.................. (8) (234) 228 -- (13) Equity in loss of unconsolidated affiliates............. 2,170 472 300 1,903 813 Deferred income taxes (benefit)......................... (1,245) 675 (933) (1,254) (303) Contribution of common stock to profit sharing plan..... -- -- 990 -- -- Changes in operating accounts: Receivables and other assets.......................... (34,882) (37,915) (55,334) 18,696 (6,425) Unearned premium reserves............................. 1,436 2,699 4,548 2,386 (374) Insurance claim reserves.............................. 30,079 15,851 23,535 (4,995) 8,017 Other liabilities..................................... 1,313 20,746 11,134 (17,199) (16,054) --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities......... 2,698 33,502 5,213 (1,302) (15,938) INVESTING ACTIVITIES Purchase of other invested assets........................... (1,493) (465) (2,250) (12) (422) Purchase of investment securities........................... (5,025) (1,706) (3,481) (196) (3,418) Maturity of investment securities........................... 950 100 551 43 375 Investments in subsidiaries................................. (4,084) (3,514) -- (4,307) (2,467) Proceeds from sale of property and equipment................ 770 1,900 238 12 778 Purchase of property and equipment.......................... (16,480) (10,945) (11,559) (5,594) (9,835) --------- --------- --------- --------- --------- Net cash used in investing activities....................... (25,362) (14,630) (16,501) (10,054) (14,989) FINANCING ACTIVITIES Payments on notes payable................................... (16,465) (1,220) (556) (2,229) (1,443) Proceeds from issuance of notes payable..................... 15,000 -- 3,500 11,936 10,484 Exercised stock options..................................... 30 -- -- -- 30 Issuance of preferred stock................................. 15,000 -- -- -- -- Dividends paid on preferred stock........................... (234) -- -- (441) (158) Principal payments on capital lease obligations............. -- -- (22) -- -- --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities......... 13,331 (1,220) 2,922 9,266 8,913 --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ (9,333) 17,652 (8,366) (2,090) (22,014) Cash and cash equivalents at beginning of year.............. 28,262 10,610 18,976 18,929 28,262 --------- --------- --------- --------- --------- Cash and cash equivalents at end of year.................... $ 18,929 $ 28,262 $ 10,610 $ 16,839 $ 6,248 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes. F-7 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. ACCOUNTING POLICIES ORGANIZATION American Medical Security Group, Inc. (AMSG) is a holding company for various subsidiaries involved primarily in the health insurance industry. Third party administrator (TPA) operations market and administer primarily group life and health insurance in 32 states. Insurance operations consist of insurance business primarily assumed from a group of affiliated insurance companies. These insurance risks are administered by AMSG's TPA subsidiaries. Other consolidated and unconsolidated subsidiaries are involved in managed care activities, such as health maintenance organizations and preferred provider organizations. The consolidated financial statements include the accounts of AMSG and its subsidiaries: - American Medical Security, Inc. (AMS), a third-party administrator - American Medical Security Insurance Company (AMSIC), a life insurance company - American Medical Security Company of Ohio (AMSICO), a subsidiary of AMSIC - American Medical Security Insurance Company of Georgia (AMSICGA), a subsidiary of AMSIC - Accountable Health Plans of Texas (AHP), a preferred provider organization - American Medical Security Provider Partnerships (PPI), a preferred provider organization development company, formed January 1, 1995 - Continental Plan Services, Inc. (CPSI), a third party administrator - Unity HMO of Illinois (Unity), a 90% owned health maintenance organization Effective January 1, 1995, American Medical Security, Inc. changed its name to AMSG Inc. and contributed all assets, except for its investments in subsidiaries to American Medical Security, Inc., a newly formed subsidiary of AMSG. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP). Significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INVESTMENTS Debt securities (bonds) that AMSG has both the positive intent and ability to hold to maturity are classified as held to maturity and stated at amortized cost. Debt securities not classified as held to maturity are classified as available for sale and stated at fair value. Unrealized holding gains and losses on securities classified as available for sale are stated as a separate component of shareholders' equity, net of applicable deferred taxes. Amortization and accretion on bonds are calculated using an effective interest method. Realized gains and losses on disposals of investments are determined by specific identification of investments sold. Other invested assets represent an investment in a real estate partnership (see Note 9), which is valued at AMSG's share of net equity in the partnership. Investment in unconsolidated subsidiaries are carried under the equity method at AMSG's proportionate share of ownership in the subsidiary. F-8 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. FUNDS HELD BY INSURANCE COMPANIES Funds held by insurance companies represent amounts on deposit with insurers related to reinsurance agreements. See Note 6 for further discussion. INSURANCE CLAIM RESERVES Insurance claim reserves represent the liabilities arising from life and health benefits provided under the respective policies. These reserves include claims in process of adjudication and unreported claims. This liability represents management's best estimate of the ultimate net cost of all reported and unreported claims which are not paid at year end. The estimates are continually reviewed and, as adjustments to these reserves become necessary, such adjustments are reflected in current operations. PREMIUMS, ADMINISTRATIVE FEES AND COMMISSIONS Life and health premiums are recognized as revenue over the periods for which insurance protection is provided. Administrative fees are recognized as income as administrative services are provided. Commissions revenue and commissions expense are recognized on the effective dates of the related policies. INCOME TAXES Deferred income taxes are provided for temporary differences between the carrying value of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. The differences relate primarily to unrealized gains and losses on available for sale investments, tax basis discounting of loss reserves, capitalization of deferred acquisition costs for tax purposes and the deferral of certain administration fees for financial statement purposes. CASH AND CASH EQUIVALENTS The Company considers short-term investments with remaining maturities of three months or less at the date of acquisition to be cash equivalents. RECLASSIFICATIONS Certain 1994 and 1993 financial statement amounts have been reclassified to conform with the 1995 presentation. 2. CHANGE IN ACCOUNTING METHOD During 1995, AMSG changed the method of accounting for printed and promotional materials by recording such materials as inventory and expensing the materials as they are used in order to better match the expenses to the periods benefited. Prior to January 1, 1995, all purchases of such materials were immediately expensed. The effect of the change in accounting was an increase to 1995 net income of $1,236,000, net of taxes of $665,000. Effective January 1, 1994, AMSG adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Debt securities (bonds) that AMSG has both the positive intent and ability to hold to maturity are stated at amortized cost. Debt securities that AMSG does not have the positive intent and ability to hold to maturity and all marketable equity securities are classified as available for sale and stated at market value. Unrealized holding gains and losses on securities classified as available for sale are stated as a separate component of shareholders' equity. Prior to January 1, 1994, investments in bonds were stated at amortized F-9 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. CHANGE IN ACCOUNTING METHOD (CONTINUED) cost. The effect of adopting SFAS No. 115 on January 1, 1994, was to increase shareholders' equity by $1,305,000, resulting from unrealized gains on bonds available for sale and funds held by insurance companies of $2,007,000, net of deferred taxes of $702,000. See Note 6 for discussion of funds held balances. 3. INVESTMENTS The amortized cost and fair values of bonds are summarized as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ----------- ----------- --------- (IN THOUSANDS) At December 31, 1995: Available for sale -- U.S. Treasury securities $ 8,318 $ 152 $ 6 $ 8,464 ----------- ----- ----- --------- ----------- ----- ----- --------- Held to maturity -- U.S. Treasury securities $ 1,880 $ 18 $ -- $ 1,898 ----------- ----- ----- --------- ----------- ----- ----- --------- At December 31, 1994: Available for sale -- U.S. Treasury securities $ 4,260 $ -- $ 174 $ 4,086 ----------- ----- ----- --------- ----------- ----- ----- --------- Held to maturity -- U.S. Treasury securities $ 1,880 $ -- $ 33 $ 1,847 ----------- ----- ----- --------- ----------- ----- ----- ---------
The amortized cost and estimated fair values of bonds at December 31, 1995, by contractual maturity are shown below:
AMORTIZED FAIR COST VALUE ----------- --------- (IN THOUSANDS) Bonds available for sale: Due in one year or less............................................... $ 1,223 $ 1,234 Due after one through five years...................................... 6,251 6,370 Due after five through ten years...................................... 844 860 ----------- --------- $ 8,318 $ 8,464 ----------- --------- ----------- --------- Bonds held to maturity: Due in one year or less............................................... $ 600 $ 605 Due in one through five years......................................... 1,280 1,293 ----------- --------- $ 1,880 $ 1,898 ----------- --------- ----------- ---------
No bond sales occurred during 1995 or 1994. Proceeds from sales of bonds during 1993 were $77,000. Gross losses of $45 were realized on these bond sales. Fair values represent quoted market prices for securities traded in the public marketplace. The fair values of AMSG's other financial instruments approximates their carrying value. At December 31, 1994, AMSG's funds held balance was decreased by $5,328,000 and shareholders' equity decreased by $3,463,000, net of deferred taxes of $1,865,000 related to AMSG's share of net unrealized losses on available-for-sale investments backing the funds held balance. At December 31, F-10 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) 1995, AMSG's funds held balance was increased by $5,401,000 and shareholders' equity increased by $3,511,000, net of deferred taxes of $1,890,000 related to AMSG's share of net unrealized gains on available-for-sale investments backing the funds held balance. Net investment income is comprised of the following:
1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Bonds........................................................ $ 422 $ 166 $ 125 Cash equivalents............................................. 880 532 290 Funds held................................................... 12,436 6,123 4,728 Other investments............................................ 297 193 164 Notes receivable............................................. 422 263 103 --------- --------- --------- 14,457 7,277 5,410 Investment expenses.......................................... (355) (257) (122) --------- --------- --------- Investment income............................................ $ 14,102 $ 7,020 $ 5,288 --------- --------- --------- --------- --------- ---------
Unrealized gains (losses) is comprised of the following at December 31:
1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Bonds available for sale: Gross unrealized gains..................................... $ 152 $ -- $ -- Gross unrealized losses.................................... (6) (174) -- Funds held................................................... 5,401 (5,328) -- Deferred income taxes........................................ (1,941) 1,926 -- --------- --------- --------- Net unrealized gains (losses)................................ $ 3,606 $ (3,576) $ -- --------- --------- --------- --------- --------- ---------
4. SHAREHOLDERS' EQUITY On September 29, 1995, AMSG issued preferred stock to United Wisconsin Life Insurance Company (UWLIC). Holders of the preferred stock have preferential rights in regard to dividends and payment upon liquidation. There are no voting rights associated with the stock, with the exception of the occurrence of certain events, as outlined in the stock agreement. The stock is redeemable at the discretion of AMSG, or at the occurrence of certain events as defined by the stock agreement. Preferred stock dividends are cumulative and paid on a quarterly basis. During the first five years the stock is outstanding, the dividend rate will be adjusted quarterly equal to 2.5% below Bank One Milwaukee's reference rate on the last day of the previous quarter. After five years, the dividend rate will be adjusted to 125% of the applicable treasury rate. At December 31, 1995, consolidated retained earnings included $2,942,000 of undistributed losses of AMSG's 50% or less owned investees accounted for using the equity method. F-11 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INSURANCE CLAIM RESERVES Activity in the liability for health insurance claim reserves is summarized below:
1995 1994 1993 ----------- ----------- ----------- (IN THOUSANDS) Balance at January 1................................... $ 53,292 $ 37,757 $ 15,179 Plus -- Incurred related to: Current year....................................... 376,337 250,691 162,801 Prior year......................................... 5,395 (5,478) (2,743) ----------- ----------- ----------- Total incurred................................... 381,732 245,213 160,058 Less -- Paid related to: Current year....................................... 294,441 197,399 125,044 Prior year......................................... 58,687 32,279 12,436 ----------- ----------- ----------- Total paid....................................... 353,128 229,678 137,480 ----------- ----------- ----------- Balance at December 31................................. $ 81,896 $ 53,292 $ 37,757 ----------- ----------- ----------- ----------- ----------- -----------
Liabilities for health insurance claim reserves are based upon actuarial projections applied to historical claim data. As a result of significant growth in AMSG's health insurance business, AMSG has experienced variability in the ultimate settlement of health insurance claim reserves. Actuarial projections of health insurance claim reserves are continually reviewed and adjusted as necessary as experience develops and new information becomes available. 6. REINSURANCE AMSG administers a block of group life and health insurance business for UWLIC and United Wisconsin Insurance Company (UWIC) through an administrative services agreement. The agreement includes maintaining membership records, claim processing and payment, coordination of benefits and billing/cash collection processing, underwriting and marketing. In 1995, 1994 and 1993, AMSG earned administrative fees and commissions of $216,946,000, $170,287,000 and $109,311,000, respectively under the agreement. UWIC and UWLIC ceded 50% of their respective life and health insurance risk to AMSIC, a subsidiary of AMSG, through reinsurance agreements. During 1992 UWIC ceded 30 percent of its insurance risk to AMSIC. The reinsurance agreement contained a profit-sharing provision which required the underwriting gains or losses on the underlying business to be allocated 50 percent to AMSIC. A contingent commission of $1,760,000 was recorded in 1993 in conjunction with this reinsurance agreement. UWIC and UWLIC generally hold funds on behalf of AMSIC equivalent to the claim reserves, the accumulated net underwriting profits and accumulated investment earnings. UWIC and UWLIC pay interest to AMSIC on the funds held balance at their average portfolio yields. F-12 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. REINSURANCE (CONTINUED) A summary of financial balances which represent amounts assumed by AMSIC as a result of the reinsurance agreements with UWIC and UWLIC is as follows:
DECEMBER 31 ------------------------ 1995 1994 ----------- ----------- (IN THOUSANDS) Funds held by insurance companies...................... $ 142,328 $ 110,263 Unearned premium reserves.............................. 9,736 9,670 Health insurance claim reserves........................ 80,636 53,292 Life claim reserves.................................... 2,229 1,467 YEARS ENDED DECEMBER 31 ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (IN THOUSANDS) Life and health premiums............................... $ 494,107 $ 374,875 $ 242,896 Investment income...................................... 12,436 6,123 4,728 Life and health benefits............................... 386,900 250,034 163,642 Expense allowance on reinsurance assumed: Commissions.......................................... $ 61,485 $ 49,481 $ 30,369 Administrative fees.................................. 46,987 35,663 24,287 Premium taxes........................................ 8,671 6,632 4,431 Miscellaneous fees................................... 1,139 629 734 ----------- ----------- ----------- Total expense allowance on reinsurance assumed..... $ 118,282 $ 92,405 $ 59,821 ----------- ----------- ----------- ----------- ----------- -----------
7. STATUTORY REPORTING AMSG's life insurance subsidiaries and Unity report to their respective state departments of insurance in conformity with statutory reporting practices. The recorded and minimum surplus of these subsidiaries, in accordance with statutory reporting practices, were as follows at December 31, 1995:
MINIMUM STATUTORY STATUTORY SURPLUS SURPLUS --------- ----------- (IN THOUSANDS) Statutory surplus at December 31: AMSIC.................................................... $ 61,332 $ 500 AMSICO................................................... 3,489 2,500 AMSICGA.................................................. 4,230 3,000 Unity.................................................... 1,716 1,500
Net income (loss) for these subsidiaries, in accordance with statutory reporting practices, was as follows:
1995 1994 1993 --------- --------- --------- (IN THOUSANDS) AMSIC...................................................... $ 247 $ 24,171 $ 15,443 AMSICO..................................................... 123 126 159 AMSICGA.................................................... 194 (39) (74) Unity...................................................... (1,512) (215) --
F-13 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. STATUTORY REPORTING (CONTINUED) The payment of dividends by AMSG's life insurance subsidiaries and Unity is limited and generally cannot be made except from earned profits and, in certain circumstances, without the prior approval of the respective state departments of insurance. 8. INCOME TAXES AMSG and its eligible non-life insurance subsidiaries file a consolidated federal income tax return. Under a written tax sharing agreement, AMSG collects from or refunds to the subsidiaries the amount of taxes or benefits determined as if AMSG and subsidiaries filed separate returns. AMSG's recorded income taxes before cumulative effect of change in accounting principle varies from income taxes computed at the federal statutory rate as follows:
1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Tax (benefit) at federal statutory rate................................ $ (3,429) $ 13,331 $ 9,477 Nondeductible expenses................................................. 1,014 884 137 State income and franchise taxes, net of federal benefit............... 90 195 136 Goodwill amortization.................................................. 6 -- -- Unconsolidated life insurance company income........................... 95 -- -- Small life company deduction........................................... (48) -- -- Other.................................................................. 325 (160) 241 --------- --------- --------- Income taxes (benefit) before cumulative effect of change in accounting principle............................................................. $ (1,947) $ 14,250 $ 9,991 --------- --------- --------- --------- --------- ---------
Components of the provision for income taxes are as follows:
1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Current: Federal............................................................ $ (174) $ 14,630 $ 10,714 State.............................................................. 138 300 210 --------- --------- --------- (36) 14,930 10,924 Deferred (benefit)................................................... (1,246) (680) (933) --------- --------- --------- $ (1,282) $ 14,250 $ 9,991 --------- --------- --------- --------- --------- ---------
F-14 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) Significant components of the deferred tax liabilities and assets as of December 31 are as follows:
1995 1994 --------- --------- (IN THOUSANDS) Deferred tax assets: Deferred administrative fees..................................................... $ 2,303 $ 1,848 Tax-basis reserve adjustment..................................................... 944 730 Tax-basis unearned premium reserve adjustment.................................... 566 352 Tax-basis deferred acquisition costs............................................. 318 184 Accrued compensation............................................................. 503 233 Losses from unconsolidated subsidiaries.......................................... 907 270 Unrealized investment losses..................................................... -- 1,926 Start-up and organization costs.................................................. 319 -- Other -- net..................................................................... 715 76 --------- --------- Deferred tax assets............................................................ 6,575 5,619 Valuation allowance................................................................ (907) (270) --------- --------- Deferred tax assets, net of valuation allowance.................................... 5,668 5,349 Deferred tax liabilities: Unrealized investment gains...................................................... 1,941 -- Capitalized supply inventory..................................................... 668 -- Tax over book depreciation....................................................... 372 728 Other -- net..................................................................... 795 107 --------- --------- Deferred tax liabilities....................................................... 3,776 835 --------- --------- Net deferred tax assets............................................................ $ 1,892 $ 4,514 --------- --------- --------- ---------
The nature of AMSG's deferred tax assets and liabilities are such that the reversal pattern for those temporary differences should generally result in realization of the deferred assets. AMSG establishes a valuation allowance for any portion of the deferred tax asset that management believes may not be realized. AMSG established a valuation allowance in 1995 and 1994 relating to undistributed losses from investments in unconsolidated affiliates. AMSG paid federal income taxes of $1,766,000, $14,768,000 and $10,198,000 in 1995, 1994 and 1993, respectively. 9. LEASES AMSG leases office space and certain equipment under operating leases. Future minimum lease payments by year and in aggregate under noncancelable operating leases consisted of the following at December 31, 1995 (in thousands): 1996.............................................. $ 5,234 1997.............................................. 5,110 1998.............................................. 5,019 1999.............................................. 4,938 2000.............................................. 4,734 Thereafter........................................ 19,717 --------- Total minimum lease payments...................... $ 44,752 --------- ---------
F-15 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. LEASES (CONTINUED) Operating lease rent totaled $3,867,000, $2,997,000 and $2,287,000 during 1995, 1994 and 1993, respectively. AMSG leases office space from U&C Real Estate Partnership (U&C) under an agreement which expires September 30, 2005. U&C is jointly owned by AMSIC and UWIC. Under this agreement, monthly lease payments for 1995 were $159,000 per month from January to July and $344,000 per month from August to December. Under the terms of the agreement, AMSG paid $2,833,000, $1,908,000 and $517,000 during 1995, 1994 and 1993, respectively. AMSG leases office space under an agreement with certain officers and shareholders which expires September 30, 2000, with an option to renew the lease for an additional five years. This agreement requires annual lease payments of $768,000. Additionally, all sublease rental revenue, property taxes and operating expenses are the responsibility of AMSG. AMSG received sublease revenue of $406,000, $422,000 and $426,000 in 1995, 1994 and 1993, respectively. Under the terms of this lease, AMSG must pay a penalty of $1,800,000 to the bank if the lease is not renewed in 2000. Future minimum rental income on noncancelable subleases, by year and in aggregate, consists of the following at December 31, 1995 (in thousands): 1996................................................. $ 374 1997................................................. 191 1998................................................. 198 1999................................................. 204 --------- Total minimum rental income.......................... $ 967 --------- ---------
10. NOTES PAYABLE Notes payable consist of the following:
1995 1994 --------- --------- (IN THOUSANDS) Note payable, Bank One -- Green Bay, .5% in excess of prime, adjusted monthly, payable in monthly installments of $53,735, including principal and interest, with final payment made in October 1995................................................ $ -- $ 528 Note payable, Bank One -- Green Bay, prime, adjusted monthly, payable in monthly installments of $71,995, including principal and interest, with final payment due February 1996..................................................................... 2,229 2,865 Other notes payable................................................................ -- 300 --------- --------- $ 2,229 $ 3,693 --------- --------- --------- ---------
Interest paid on debt and lease obligations during 1995, 1994 and 1993 was $247,000, $293,000 and $91,000 respectively. The notes payable are secured by AMSG's assets and personal guarantees of certain officers and shareholders. AMSG has a line of credit from a bank of $750,000 available at December 31, 1995 and 1994. The unused portion was $15,000 and $350,000 at December 31, 1995 and 1994, respectively. F-16 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFIT PLANS The employees of AMSG 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 AMSG's Board of Directors and amounted to $1,675,000, $2,490,000 and $1,899,000 for 1995, 1994 and 1993, respectively. AMSG has a Nonqualified Stock Option Plan covering certain key employees as defined by the Board of Directors. The plan expires on December 1, 1996, except as to options then outstanding. A maximum of 10,000 shares of common stock may be issued under the plan. Options to purchase 8,000 shares of common stock at an exercise price of $198.00 per share were granted in 1993. The grantee's rights vest ratably over four years and expire 10 years after the date of grant. Options for 150 shares were exercised in 1995. During 1995, 650 outstanding options lapsed. No options were exercised in 1994 or 1993. 12. RELATED PARTY TRANSACTIONS United Wisconsin Services, Inc. (UWS), a subsidiary of Blue Cross & Blue Shield United of Wisconsin (BCBSUW), owns 11.9% of the outstanding common stock of AMSG. UWS is the parent company of UWLIC and UWIC. AMSG has employment contracts with the two primary founders of AMSG. Under the terms of the contracts, either party may terminate the contract upon three years prior written notice. As of December 31, 1995, notice of termination of the contract had not been given by either party. AMSG has advanced UWIC $12,000,000 of accumulated premium deposits, in order to take advantage of higher portfolio interest rates earned on the UWIC investment portfolio. UWIC pays interest to AMSIC on the advance at its average portfolio yield. AMSG has interests in several unconsolidated health maintenance organizations (HMO's). In addition to capital investments in these organizations, AMSG recognized its share of the organizations' income (loss) for the year and recorded receivables due from these organizations. In addition, administrative fees paid to AMS, the TPA, were recognized as revenue. During 1995, these related party transactions were, in aggregate: capital investments of $4,084,000, AMSG's share of net losses of $2,170,000, receivables due to AMSG of $1,204,000 as of December 31 and administrative fees to AMS of $19,000. The majority of these receivables are long term, bear interest at the prime rate plus one percent, and are secured by a general business security agreement. AMSG has advanced money to several sales managers and key home office employees. Receivables amounted to $2,590,000 at December 31, 1995. 13. COMMITMENTS AND CONTINGENCIES AMSG and its subsidiaries are involved in various legal actions occurring in the normal course of business. In the opinion of management, adequate provisions have 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. During 1993, U&C entered into a mortgage on an office building located in the Village of Howard, Wisconsin, which is occupied by AMSG under a lease with an initial term of twelve years. Another mortgage was entered into during 1995 to finance additions made to the home office building. The partners have each signed a guarantee for 50% of the principal of the phase 1 and phase 2 mortgages, with balances of $5,041,000 and $6,050,000, respectively at December 31, 1995. AMSG's investment in U&C is included in other invested assets on the consolidated balance sheets. F-17 AMERICAN MEDICAL SECURITY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) AMSG and its two primary founders are parties to a joint venture agreement with UWS, UWLIC and UWIC which continues until December 31, 1996, subject to annual renewal for subsequent one year terms upon mutual agreement of the parties. The joint venture may not be terminated by either party without cause. UWS has the option, exercisable on December 31, 1996, to purchase all the outstanding capital stock of AMSG at a price based on AMSG's premium revenue, book value and after tax earnings. AMSG guarantees a line of credit of $1,460,000 for an unrelated corporation as of December 31, 1995. The amount drawn under the line of credit was $1,365,000 at December 31, 1995. 14. SUBSEQUENT EVENTS On January 2, 1996, AMSIC acquired a 20% ownership interest in Personal Physicians Care, Inc. (PPC), a health maintenance organization, for $3,500,000. The purchase agreement specifies that AMSIC agrees to purchase an additional 1% of PPC's outstanding shares of stock in 1997. The purchase of the additional shares is at the option of PPC and is determined by a formula defined in the purchase agreement. On February 1, 1996, AMSG secured a loan for $10,000,000 through Bank One, with an interest rate at prime, adjusted monthly. Payments are interest only the first year. Subsequent to securing the loan, AMSG was not in compliance with certain covenants relating to required levels of net income and net worth as defined by the agreement. F-18 APPENDIX A AGREEMENT AND PLAN OF MERGER BETWEEN UNITED WISCONSIN SERVICES, INC., BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN AMERICAN MEDICAL SECURITY GROUP, INC., WALLACE J. HILLIARD AND RONALD A. WEYERS TABLE OF CONTENTS
PAGE --------- ARTICLE I................................................................................................... A-2 The Merger.............................................................................................. A-2 1.01 THE MERGER........................................................................... A-2 1.02 CLOSING.............................................................................. A-2 ARTICLE II.................................................................................................. A-2 Representations and Warranties of the Company and the Principal Shareholders............................ A-2 2.01 ORGANIZATION AND AUTHORITY........................................................... A-2 2.02 SUBSIDIARIES AND AFFILIATES.......................................................... A-2 2.03 CAPITALIZATION OF THE COMPANY........................................................ A-3 2.04 AUTHORIZATION........................................................................ A-3 2.05 FINANCIAL STATEMENTS................................................................. A-4 2.06 INSURANCE COMPANY FINANCIAL STATEMENTS............................................... A-4 2.07 RECEIVABLES.......................................................................... A-5 2.08 ABSENCE OF CERTAIN CHANGES........................................................... A-5 2.09 LITIGATION AND OTHER PROCEEDINGS..................................................... A-6 2.10 COMPLIANCE WITH LAWS................................................................. A-6 2.11 TAXES................................................................................ A-6 2.12 TITLE TO PROPERTIES.................................................................. A-7 2.13 CONTRACTS AND COMMITMENTS............................................................ A-7 2.14 EMPLOYEE RELATIONS................................................................... A-7 2.15 EMPLOYEE BENEFIT PLANS............................................................... A-8 2.16 INTELLECTUAL PROPERTY................................................................ A-8 2.17 ENVIRONMENTAL MATTERS................................................................ A-9 2.18 CONTINGENT OR UNDISCLOSED LIABILITIES................................................ A-9 2.19 INSURANCE............................................................................ A-9 2.20 RELATED PARTY TRANSACTIONS........................................................... A-9 2.21 REGISTRATION STATEMENT, ETC.......................................................... A-10 2.22 BROKERS AND FINDERS.................................................................. A-10 2.23 DISCLOSURE........................................................................... A-10 ARTICLE III................................................................................................. A-10 Representations and Warranties of UWSI.................................................................. A-10 3.01 ORGANIZATION AND AUTHORITY........................................................... A-10 3.02 CAPITALIZATION....................................................................... A-10 3.03 AUTHORIZATION........................................................................ A-11 3.04 REGISTRATION STATEMENT, ETC.......................................................... A-11 3.05 BROKERS AND FINDERS.................................................................. A-11 3.06 DISCLOSURE........................................................................... A-11 3.07 SEC REPORTS.......................................................................... A-12 ARTICLE IV.................................................................................................. A-12 Conduct of Business Prior to the Effective Time......................................................... A-12 4.01 CONDUCT OF THE COMPANY'S BUSINESS PRIOR TO THE EFFECTIVE TIME........................ A-12 ARTICLE V................................................................................................... A-12 Additional Agreements................................................................................... A-12 5.01 ACCESS AND INFORMATION............................................................... A-12 5.02 REGISTRATION STATEMENT AND PROXY STATEMENT........................................... A-12 5.03 COMPANY SHAREHOLDERS' APPROVAL....................................................... A-13 5.04 UWSI SHAREHOLDERS APPROVAL........................................................... A-13 5.05 MISCELLANEOUS AGREEMENTS AND CONSENTS................................................ A-13 5.06 INTERIM FINANCIAL STATEMENTS......................................................... A-14
A-i 5.07 INSURANCE REGULATORY APPROVALS....................................................... A-14 5.08 HART-SCOTT-RODINO COMPLIANCE......................................................... A-14 5.09 CERTAIN NOTIFICATIONS................................................................ A-14 5.10 VOTING AGREEMENT..................................................................... A-14 5.11 BEST EFFORTS......................................................................... A-14 5.12 PRESS RELEASES....................................................................... A-14 5.13 EXPENSES............................................................................. A-14 5.14 CERTAIN AGREEMENTS................................................................... A-15 5.15 UWSI CAPITALIZATION.................................................................. A-15 ARTICLE VI.................................................................................................. A-15 Conditions.............................................................................................. A-15 6.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO CONSUMMATE THE MERGER...................... A-15 6.02 CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS TO CONSUMMATE THE MERGER.......................................................................... A-16 6.03 CONDITIONS TO OBLIGATIONS OF UWSI TO CONSUMMATE THE MERGER........................... A-17 ARTICLE VII................................................................................................. A-18 Termination, Amendment.................................................................................. A-18 7.01 TERMINATION.......................................................................... A-18 7.02 AMENDMENT............................................................................ A-18 ARTICLE VIII................................................................................................ A-18 Indemnification......................................................................................... A-18 8.01 INDEMNIFICATION BY SHAREHOLDERS...................................................... A-18 8.02 LIMITATIONS.......................................................................... A-19 8.03 PROCEDURE............................................................................ A-19 8.04 INDEMNIFICATION BY UWSI.............................................................. A-20 8.05 PROCEDURE............................................................................ A-20 ARTICLE IX.................................................................................................. A-21 General Provisions...................................................................................... A-21 9.01 NOTICES.............................................................................. A-21 9.02 MISCELLANEOUS........................................................................ A-22 9.03 WAIVER: REMEDIES..................................................................... A-22 9.04 SEVERABILITY......................................................................... A-23 9.05 GOVERNING LAW........................................................................ A-23 9.06 "KNOWLEDGE".......................................................................... A-23 9.07 ARBITRATION.......................................................................... A-23
EXHIBITS Exhibit A Plan of Merger Exhibit B Registration Rights and Stock Restriction Agreement Exhibit C Agreements of Affiliates Exhibit D Escrow Agreement
A-ii AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into this 31st day of July, 1996 by and among UNITED WISCONSIN SERVICES, INC., a Wisconsin corporation ("UWSI"), AMERICAN MEDICAL SECURITY GROUP, INC., a Delaware corporation (the "Company"), BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN ("BCBSUW"), and WALLACE J. HILLIARD ("Hilliard"), individually and as trustee under the Voting Trust Agreement hereinafter defined, and RONALD A. WEYERS ("Weyers"), individually and as successor trustee under the Voting Trust Agreement (Hilliard, individually, and Weyers, individually, are referred to collectively as the "Principal Shareholders"). RECITALS: WHEREAS, all of the shareholders of the Company are parties to that certain Voting Trust Agreement, dated as of February 3, 1989 (the "Voting Trust Agreement"), pursuant to which Voting Trust Agreement Hilliard has been appointed Trustee and to which Weyers has been appointed successor Trustee; WHEREAS, the Principal Shareholders own, in the aggregate, approximately 43 percent of the outstanding shares of capital stock of the Company; WHEREAS, the parties hereto are party to that certain Joint Venture Agreement, effective October 1, 1988, as amended (the "Joint Venture Agreement") and to that certain Stock Restriction Agreement, dated February 3, 1989 (the "Stock Restriction Agreement"); WHEREAS, on April 29, 1996, UWSI gave notice of intent to exercise the option under Paragraphs 5.4 and 5.5 of Article V of the Joint Venture Agreement and Paragraph 3 of Article III of the Stock Restriction Agreement; WHEREAS, the parties hereto desire to amend and restructure the exercise of such option in accordance with the terms hereof. WHEREAS, the respective Boards of Directors of UWSI and the Company have approved the transactions provided for by this Agreement, pursuant to which the Company is to be merged into UWSI in accordance with the applicable provisions of the Delaware General Corporation Law (the "DGCL") and the Wisconsin Business Corporation Law (the "WBCL"), which merger is intended to qualify as a reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, in exchange for all of the issued and outstanding shares of common stock, $1.00 par value per share, of the Company (the "Company Common Stock") and in settlement of all of the outstanding options to acquire shares of Company Common Stock (the "Options"), UWSI has agreed to pay to the holders of the Company Common Stock (other than UWSI) and the Options, in the aggregate and in such proportions as may be determined by the holders thereof (other than UWSI), (i) 4,000,000 shares of common stock, no par value per share, of UWSI ("UWSI Common Stock"), as adjusted as set forth in the Plan of Merger attached hereto as Exhibit A (the "Plan of Merger"), and (ii) $67,010,000, less expenses attributable to the Shareholders as provided herein, each subject to the provisions of this Agreement and the Plan of Merger, all upon the terms and conditions hereinafter set forth; A-1 NOW, THEREFORE, in order to consummate the transactions set forth above and in consideration of the mutual covenants, agreements, representations and warranties herein contained, the parties agree as follows: ARTICLE I THE MERGER 1.01 THE MERGER. Subject to the terms and conditions of this Agreement and the Plan of Merger: the Company shall be merged with and into UWSI (the "Merger") in accordance with Section 252 of the DGCL and Section 180.1101 of the WBCL; the separate corporate existence of the Company shall cease; and UWSI shall be the surviving corporation . The Plan of Merger sets forth (i) the terms of the Merger and the mode of carrying the same into effect, (ii) the manner of converting the outstanding shares of Company Common Stock (other than Company Common Stock held by UWSI) into a combination of shares of UWSI Common Stock and cash, and (iii) the manner of converting the outstanding Options into options to acquire shares of UWSI Common Stock. The Merger shall be consummated following the Closing provided for in Section 1.02 hereof when properly executed Articles of Merger are executed and filed with the Secretary of State of Delaware in accordance with the DGCL and the Department of Financial Institutions of the State of Wisconsin in accordance with the WBCL and when the Plan of Merger is received and accepted as filed by the Delaware Secretary of State and the Department of Financial Institutions of the State of Wisconsin (the "Effective Time"). 1.02 CLOSING. The closing of the transactions contemplated by this Agreement (the "Closing") and the Plan of Merger shall take place at the offices of Michael Best & Friedrich, 100 East Wisconsin Avenue, Milwaukee, Wisconsin, immediately following the meeting of UWSI's shareholders referred to in Section 5.04 or at such other time and place as UWSI and the Company shall agree. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS The Company and the Principal Shareholders (on behalf of all the Shareholders of the Company, other than UWSI) hereby make the following representations and warranties to UWSI. The "Disclosure Schedule" shall mean the disclosure schedule relating to each section of this Article II which has previously been delivered to UWSI. Disclosure of any information in any one section or schedule of the Disclosure Schedule shall be deemed to be disclosure in any other section or schedule thereof. 2.01 ORGANIZATION AND AUTHORITY. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with all requisite corporate power and corporate authority to own, lease and operate its properties and to carry on its business as now being conducted, is qualified in the jurisdictions set forth on the Disclosure Schedule, and is not otherwise required to be qualified in any other jurisdiction, except where the failure to do so would not have a Material Adverse Effect. For purposes of this Agreement unless otherwise specified, "Material Adverse Effect" shall mean a material adverse effect on the Company and its subsidiaries, taken as a whole. Copies of the articles or certificate of incorporation and by-laws of each of the Company and each Controlled Subsidiary and Noncontrolled Subsidiary (as such terms are hereinafter defined) that have been heretofore delivered and/or made available to UWSI are complete and correct as of the date hereof. 2.02 SUBSIDIARIES AND AFFILIATES. Except as set forth on the Disclosure Schedule, the corporations, partnerships or other entities in which the Company has a greater than 50 percent equity interest (the "Controlled Subsidiaries") and the corporations, partnerships or other entities in which the Company's equity interest is not a controlling interest (the "Noncontrolled Subsidiaries") are set forth on the Disclosure Schedule. The Company is, directly or indirectly, the record and beneficial owner of the percentage of the outstanding shares of capital stock of each of the Controlled and A-2 Noncontrolled Subsidiaries shown on the Disclosure Schedule and the capitalization of each such subsidiary is set forth on the Disclosure Schedule. Except as set forth on the Disclosure Schedule, no equity securities of any of the Controlled Subsidiaries are, or may become, required to be issued by reason of any options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of capital stock of any Controlled Subsidiaries, and there are no contracts, commitments, understandings or arrangements by which any Controlled Subsidiary is bound to issue additional shares of its capital stock, or options, warrants, or rights to purchase or acquire any additional shares of its capital stock. Except as set forth on the Disclosure Schedule, all of such equity interests are owned by the Company free and clear of any claim, lien, encumbrance or agreement with respect thereto. 2.03 CAPITALIZATION OF THE COMPANY. The authorized capital stock of the Company consists of (a) 600,000 shares of common stock, $1.00 par value per share, of which 174,733 2/3 shares of Company Common Stock are issued and outstanding as of the date of this Agreement, and (b) 15,000 shares of Series A Preferred Stock, $1.00 par value, with a stated value of $1,000 per share, of which 15,000 shares are issued and outstanding as of the date of this Agreement. The Disclosure Schedule sets forth a list of all of the holders of Company Common Stock and the number of shares owned by each such holder. All of the outstanding shares of Company Common Stock have been issued pursuant to and in accordance with valid exemptions from registration under the Securities Act of 1933, as amended and the rules and regulations promulgated thereunder (collectively the "1933 Act"), and any applicable state securities laws and rules and regulations under such laws. All of the outstanding shares of Company Common Stock are duly authorized, validly issued, fully paid and nonassessable, with no liability attaching to the ownership thereof except as provided in Section 180.0622 of the WBCL and judicial interpretations thereof, and all such shares are free of pre-emptive rights. The Disclosure Schedule sets forth a list of all Options, the number of shares acquirable upon exercise of the Options, the exercise price, the expiration date and the beneficial owner of each such Option. Except as set forth on the Disclosure Schedule, there are no other shares of capital stock or other equity securities (or debt securities with any voting rights or convertible into securities with any voting rights) of the Company or any Controlled Subsidiary outstanding and no other outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of capital stock of the Company or any Controlled Subsidiary. 2.04 AUTHORIZATION. The Company has full corporate power and corporate authority to enter into this Agreement and the Plan of Merger and to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Plan of Merger and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Company's Board of Directors and, except for the approval of the Plan of Merger by its shareholders, no other corporate proceedings on the part of the Company or any Controlled Subsidiary are necessary to authorize this Agreement, the Plan of Merger and the transactions contemplated hereby and thereby. This Agreement and the Plan of Merger have each been duly executed and delivered by the Company. This Agreement and the Plan of Merger are, and subject to approval by the shareholders of the Company will be, the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms except to the extent limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general equitable principles. This Agreement has been duly executed and delivered by the Principal Shareholders and is the legal, valid and binding obligation of the Principal Shareholders enforceable against each of the Principal Shareholders in accordance with its terms except to the extent limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general equitable principles. Except as set forth on the Disclosure Schedule, neither the execution and delivery of this Agreement nor the Plan of Merger by the Company, nor the execution and delivery of this Agreement by the Principal Shareholders, nor the consummation of the transactions contemplated hereby and thereby, nor compliance by the Company or the Principal Shareholders with any of the provisions hereof or thereof will (i) violate, conflict with, or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a A-3 default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration, or result in the creation of any lien, security interest, charge or encumbrance upon, except for Permitted Encumbrances (as hereinafter defined), any of the properties or assets of the Company or any Controlled Subsidiary, under any of the terms, conditions or provisions of (x) their respective certificates of incorporation or by-laws, or (y) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company, any Controlled Subsidiary or any of the Principal Shareholders is a party, or by which any property or assets of the foregoing may be subject, or (ii) violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any Controlled Subsidiary or any of the Principal Shareholders or any of their respective properties or assets, except where such a violation, breach, default, termination or lien of any of the foregoing would not have a Material Adverse Effect. Other than in connection with or in compliance with the provisions of the DGCL, the 1933 Act, the securities laws of the various states, Section 7A of the Clayton Act and the rules and regulations thereunder (the "Hart-Scott-Rodino Act"), no notice or report to, filing with, or authorization, consent or approval of, any public body or authority (other than the insurance regulatory authorities listed on the Disclosure Schedule) is necessary for the execution, delivery and performance by the Company or any Controlled Subsidiary and the Principal Shareholders of this Agreement or the Plan of Merger. 2.05 FINANCIAL STATEMENTS. Attached on the Disclosure Schedule are (i) the audited consolidated financial statements (including balance sheet and statements of stockholders' equity, income and cash flow) of the Company for its fiscal years ended December 31, 1993 through December 31, 1995, including in each case the related footnotes thereto, together with the applicable reports of the Company's independent auditors Ernst & Young LLP, and (ii) the unaudited consolidated financial statements (including balance sheet and statement of income) as of June 30, 1996 (collectively, the "Financial Statements") (the balance sheet as of June 30, 1996 being herein referred to as the "Company Balance Sheet"). The Company's books and records of accounts accurately reflect all of the assets, liabilities, transactions and results of operations of the Company, except where any inaccuracy would not have a Material Adverse Effect, and the Financial Statements have been prepared based upon and in conformity therewith. The Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") maintained and applied on a consistent basis throughout the indicated periods, and fairly present the financial condition and results of operation of the Company at the dates and for the relevant periods indicated in accordance with GAAP. True and correct copies of all written reports submitted to the Company or the Principal Shareholders by the Company's auditors since January 1, 1994 relating to the findings of audits or examination of the books and records of the Company or any Controlled Subsidiary have been delivered to UWSI. 2.06 INSURANCE COMPANY FINANCIAL STATEMENTS. Except as set forth on the Disclosure Schedule, each Controlled Subsidiary that is an insurance company or a health maintenance organization has delivered to UWSI complete and correct copies of the Annual Statements for the years ended December 31, 1995, 1994 and 1993, and the Quarterly Statement for the quarter ended March 31, 1996, together with all Exhibits and Schedules thereto (the "Statements"); provided, however, that any such Controlled Subsidiary was licensed to operate as an insurance company or health maintenance organization during said fiscal years ("Insurers"). The Statements have been prepared in accordance with Statutory Accounting Practices throughout the periods involved and in accordance with the books and records of said Insurers, except as expressly set forth or disclosed in the notes, Exhibits or Schedules thereto. The Statements fairly and accurately present the assets, liabilities and capital and surplus of said Insurers as of the respective dates thereof in accordance with Statutory Accounting Practices consistently applied, and do not omit to state or reflect any material fact concerning said Insurers required to be stated or reflected therein or necessary to make the statements made therein not misleading in light of the circumstances under which made. As used in this Agreement, "Statutory Accounting Practices" means the accounting procedures and methods prescribed or permitted by the National Association of Insurance Commissioners as modified by the Department of Insurance for the state of domicile of each Insurer. A-4 (a) Except as disclosed on the Disclosure Schedule, as of March 31, 1996, no Insurer had any material liability, whether accrued, absolute, fixed, contingent or otherwise, of a nature required to be reflected on the balance sheet of said Insurer prepared in accordance with Statutory Accounting Practices, which liability is not fully and correctly reflected or reserved against in the balance sheet forming a part of the Insurers Statements for the quarter ended March 31, 1996. Except as set forth on the Disclosure Schedule, since March 31, 1996, no Insurer has incurred any liabilities or obligations (absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise) except liabilities incurred in the ordinary course of business consistent with past practice. (b) Each Insurer's reserves met, as of December 31, 1995 and April 1, 1996, and will meet as of the Closing Date, the requirements of the state of domicile and were and will be at least as great as the minimum aggregate amount required by each state in which each Insurer was and will be licensed to do direct business. 2.07 RECEIVABLES. Except as set forth on the Disclosure Schedule, all accounts, notes and other receivables of the Company, whether reflected in the Financial Statements or otherwise, represent sales in the ordinary course of business. 2.08 ABSENCE OF CERTAIN CHANGES. (a) Since June 25, 1996 through the date of this Agreement, the Company has conducted its business only in the ordinary course thereof and has not experienced any changes in its condition (financial or otherwise), assets, liabilities, business, prospects or operations which individually or in the aggregate had or could have a material adverse effect. For purposes of this Section 2.08 only, an item shall be deemed "material" if the dollar amount or value associated with such item exceeds $25,000. Without limiting the generality of the foregoing sentence, since June 25, 1996, neither the Company nor any Controlled Subsidiary has, except as set forth on the Disclosure Schedule: (i) in a single transaction or a series of related transactions, sold (including by sale-leaseback), leased, licensed, pledged, disposed of or encumbered any assets which individually or in the aggregate, have a fair market value in excess of $50,000; (ii) incurred or became contingently liable with respect to any indebtedness for borrowed money or guaranteed any such indebtedness, where the aggregate amount of indebtedness so incurred or guaranteed exceeded $10,000 or redeemed, purchased, acquired or offered to purchase or acquire any long-term debt; (iii) acquired or agreed to acquire by merging with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business entity, in a transaction or series of related transactions; (iv) changed any of its accounting practices or procedures; (v) amended or proposed to amend its charter or bylaws; or split, combined or reclassified its outstanding capital stock, or declared, set aside or paid any dividend or distribution in respect of any capital stock; (vi) entered into, amended or became obligated under any employment, severance, bonus, profit sharing or other employee benefit arrangement; (vii) issued, purchased or redeemed any shares of capital stock of the Company or any Controlled Subsidiary (including any security convertible or exchangeable into capital stock) other than: the issuance of shares of Company Common Stock upon exercise of options outstanding on, and in accordance with their terms as of, June 25, 1996, or issued, granted or otherwise created any portion or right to acquire any such capital stock; (viii) prepaid any material expenses, indebtedness or other obligations; A-5 (ix) entered into or amended any contract, agreement or commitment, or engaged in any transaction, in each case which was material to the Company and which was not in the usual and ordinary course of business; (x) entered into any contract, agreement or commitment or engaged in any transaction (other than transactions pursuant to agreements in existence on June 25, 1996 which on such date had been previously disclosed in writing to UWSI) with any affiliate of Hilliard, Weyers or any officer of the Company or any Controlled Subsidiary; (xi) settled any material claim (including without limitations, any tax claim), action or lawsuit involving the Company or any of its Controlled Subsidiaries pending as of or arising on or after June 25, 1996, or amended any tax return in any respect; (xii) released, waived or terminated any material obligation of any third party to the Company or any Controlled Subsidiary; (xiii) solicited or encouraged any inquiries or proposals regarding, or offers for, or entered into or continued any discussions with, or provided any information to, any third party concerning any sale or transfer of the Company or any of its assets or entered into or consummated any agreement or understanding providing for a sale or transfer of the Company or any of its assets, other than as contemplated herein; or (xiv) agreed, whether or not in writing, to take any of the actions described in clauses (i)-(xiii) above. 2.09 LITIGATION AND OTHER PROCEEDINGS. Except as set forth on the Disclosure Schedule, none of the Company, any Controlled Subsidiary or either Principal Shareholder is currently a party to any pending or, to the Company's and each Principal Shareholder's knowledge, threatened, claim (other than benefit claims in the ordinary course of business), action, suit, investigation or proceeding or is a party to any order, judgment or decree relating to or affecting the Company, any Controlled Subsidiary or, with respect to the Principal Shareholders, relating to or affecting their shares of Company Common Stock or their positions with the Company. Except as set forth on the Disclosure Schedule, since January 1, 1993, neither the Company nor any Controlled Subsidiary has been a party to any such claim, action, suit, investigation or proceeding. Except as described on the Disclosure Schedule, there is no outstanding order, decree or stipulation issued by any federal, state or local authority to which the Company or any Controlled Subsidiary is a party or subject and which has or is reasonably likely to have a Material Adverse Effect. 2.10 COMPLIANCE WITH LAWS. Except as set forth on the Disclosure Schedule, to the knowledge of the Company and each Principal Shareholder, the Company and each Controlled Subsidiary is conducting its business in compliance with all applicable laws and regulations in each jurisdiction in which it conducts business, including any insurance or insurance-related laws, regulations or rules, except where a failure to comply would not have a Material Adverse Effect. The Disclosure Schedule lists all licenses, registrations and permits, and applications with respect to the business and operations of each of the Company and the Controlled Subsidiaries. Except as set forth on the Disclosure Schedule, to the knowledge of the Company and each Principal Shareholder, the Company and each of the Controlled Subsidiaries currently has all governmental approvals, consents, licenses, registrations, and permits necessary to carry on its business as presently conducted (collectively, "Licenses"), except where the failure to have any such License would not have a Material Adverse Effect, and neither the Company nor any Principal Shareholder has received notice of violation of any laws or notice of any proposed regulations or changes in the requirement of such approvals, consents, licenses, registrations, or permits which notice has not previously been disclosed to UWSI in writing. 2.11 TAXES. To the knowledge of the Company and each Principal Shareholder, and except as set forth in the Disclosure Schedule: (i) the Company has duly filed all material reports and returns and extensions ("Tax Returns") required to be filed by it relating to all taxes imposed by any jurisdiction ("Taxes"); (ii) all material liabilities for Taxes which are due from the Company with A-6 respect to periods ending on or before the Closing Date for which a statute of limitations has not barred the assessment of deficiencies have been paid or provision therefor has been made on the Company Balance Sheet; and (iii) the Tax Returns reflect all Taxes due and payable with respect to the periods covered thereby and there are no other tax liabilities, deficiencies, interest or penalties payable or asserted with respect to such periods. Except as set forth on the Disclosure Schedule, there are no actions, suits, proceedings, investigations or claims pending with respect to tax matters. Except as set forth on the Disclosure Schedule, there are no pending audits by any federal, state, local or foreign taxing authority of any payment, return or report made or filed by the Company. 2.12 TITLE TO PROPERTIES. (a) Except as set forth on the Disclosure Schedule, the Company has good and marketable title to all of the properties and assets recorded on the Company Balance Sheet free and clear of all mortgages, liens, pledges, charges or encumbrances of any nature whatsoever, except for (i) such properties and assets as may have been sold in the ordinary course of business since the date of the Company Balance Sheet, or (ii) Permitted Encumbrances. As used herein "Permitted Encumbrances" means municipal and zoning ordinances, recorded easements, covenants and restrictions provided the same do not prohibit or materially interfere with the present use, or materially affect the present value, of the real property owned by the Company or any Controlled Subsidiary. All properties and assets owned and currently used by the Company in the Company's business are in good condition and repair, normal wear and tear excepted. Surveys of all real property owned by the Company, true and correct copies of which have been furnished to UWSI, are listed on the Disclosure Schedule. (b) The Disclosure Schedule sets forth: (i) a true and complete list of all real property leases of the Company and all personal property leases to which the Company is a party as lessee as of the date hereof involving an annual lease payment of more than $20,000, including an identification of the parties, the property, the term of the lease and the rent or lease payments thereunder; and (ii) a true and complete list of all real property owned by the Company as of the date hereof, including an identification of the property, the record owner and the principal structures on it. 2.13 CONTRACTS AND COMMITMENTS. Except as set forth on the Disclosure Schedule, neither the Company nor any Controlled Subsidiary has any written or oral contract, commitment, or other agreement or arrangement, including any note, loan agreement, guarantee or other evidence of indebtedness of the Company, which involves an annual aggregate consideration with a value in excess of $100,000 (excluding any agreements with insureds or plan sponsors), or any contracts, commitments, or other agreements or arrangements with any Related Party individually in excess of $60,000. All of such contracts, commitments, or other agreements or arrangements to which the Company or any Controlled Subsidiary is a party or by which any of its assets or properties are bound or affected are in full force and effect and no event or condition has occurred or exists or has been threatened in writing by any of the other parties thereto to have occurred or exist, which constitutes or with lapse of time or giving of notice would constitute a default or basis for acceleration under any such contract, commitment, arrangement or other agreement. Except as set forth on the Disclosure Schedule, neither the Company nor any Controlled Subsidiary has given any revocable or irrevocable power of attorney to any person, firm or corporation for any purpose whatsoever. Set forth on the Disclosure Schedule are written descriptions of all such contracts, commitments, agreements or arrangements that are oral. The Company is not bound by any covenant not to compete or otherwise restricted by any agreement to which it is a party from carrying on or engaging in any business anywhere in the world. 2.14 EMPLOYEE RELATIONS. Neither the Company nor any Controlled Subsidiary is a party to any collective bargaining agreement covering or relating to any of its employees and has not recognized, is not required to recognize and during the past five years has not received a demand for recognition by any collective bargaining representative or experienced any strikes or work stoppages or slowdowns. Each of the Company and its Controlled Subsidiaries is in compliance with all applicable laws, rules and regulations relating to employment or employment practices, including A-7 those relating to wages, hours, collective bargaining and the withholding and payment of taxes and contributions, and the Company is in compliance with the Occupational Safety and Health Act and applicable Federal Civil Rights laws except where the failure to so comply would not have a Material Adverse Effect. 2.15 EMPLOYEE BENEFIT PLANS. (a) Listed in the Disclosure Schedule are all written employment agreements presently in effect between the Company and its employees, all collective bargaining agreements between Company and its employees, and all benefit plans in effect for employees of the Company, including with-out limitation all bonus, pension and retirement, deferred compensation, vacation, and severance pay plans. (b) The Company is in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to so comply would not have a Material Adverse Effect on the Company. There is no labor strike, dispute, slowdown, representation campaign or work stoppage actually pending with respect to the Company's employees. (c) Since June 25, 1996, there has not been (i) any increase in the rate or terms of compensation payable by the Company to, or any increase in the rate or terms of any bonus, insurance, pension, or other employee benefit plan on behalf of, its officers, except increases occurring in the ordinary course of business in accordance with its customary practices (which shall include normal period performance reviews and related compensation and benefit increases), or (ii) any general or uniform increase in the compensation or benefits of employees of the Company. (d) There are no "employee pension benefit plans" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), subject to Title IV of ERISA, in which the Company's employees are participants. Each employee pension benefit plan listed on the Disclosure Schedule is in compliance in all material respects with the applicable provisions of the Code and ERISA, including the fiduciary and prohibited transaction rules and funding requirements. Except as required by law, the Company has made no commitment to provide retiree health coverage to any employee. The consummation of the transactions contemplated by this Agreement will not trigger any severance payments. (e) Except as set forth on the Disclosure Schedule, there are no pending claims, lawsuits or arbitrations which have been asserted or instituted against the Company with respect to any laws respecting employment and employment practices of the Company. (f) The Company is not a party to any collective bargaining agreement and no such contract is being negotiated with the Company. No representation question exists or has been raised respecting the employees of the Company, nor are there any campaigns being conducted to solicit cards from the employees of the Company to authorize representation by any labor organization. (g) The Company has (i) timely filed with the United States Department of Labor and the Internal Revenue Service, all reports required to be filed by it (including, without limitation, all Forms 5500), and (ii) attached to the Disclosure Schedule all determination letters from the Internal Revenue Service which are currently applicable to any benefit plan of the Company. 2.16 INTELLECTUAL PROPERTY. The Disclosure Schedule sets forth a correct and complete list of all letters patent, patent applications, trade names, trademarks, service marks, trademark registrations and applications, copyrights and copyright registrations and applications, both domestic and foreign, presently owned, possessed, used or held by the Company or any Controlled Subsidiary (the "Intellectual Property") which are material to the conduct of the business of the Company and the Controlled Subsidiaries taken as a whole. To the Company's and each Principal Shareholder's knowledge, the Company and each Controlled Subsidiary owns the entire right, title and interest in and to all Intellectual Property. The Disclosure Schedule sets forth a correct and complete list of all licenses A-8 granted to the Company and each Controlled Subsidiary by others which are material to the conduct of the business of the Company and each Controlled Subsidiary as now conducted, taken as a whole and to others by the Company or any Controlled Subsidiary. Except as set forth on the Disclosure Schedule, neither the conduct of the Company's or any Controlled Subsidiary's business nor any of the products it sells or services it provides infringes upon the rights of any other person and, the conduct of any other person's business or any of the products it sells or services it provides does not infringe upon any of the Company's or any Controlled Subsidiary's rights. Neither the Company nor any Controlled Subsidiary has any liability for or has given any indemnification for patent, trademark or copyright infringement as to any products used or sold by it or with respect to services rendered by it. The Intellectual Property constitutes all of the intellectual property that is used in or necessary for the conduct of the Company's or any Controlled Subsidiary's business, as presently conducted. Except as set forth on the Disclosure Schedule, neither the Company nor any Controlled Subsidiary has licensed any third party to use any of the Intellectual Property. 2.17 ENVIRONMENTAL MATTERS. There are no actions pending or, to the Company's and Principal Shareholders' knowledge, threatened, and no conditions which could give rise to such an action against the Company which assert or allege (a) the Company, any Controlled Subsidiary or U&C Real Estate Partnership or their respective businesses has violated or any of their respective owned real property is in violation of any environmental laws or is in default with respect to any order, writ, judgment, variance, award or decree applicable to the Company, any Controlled Subsidiary or U&C Real Estate Partnership of any governmental authority relating to environmental laws (an "Environmental Law"); (b) the Company, any Controlled Subsidiary or U&C Real Estate Partnership is required to clean up or take any investigation, remedial or other response action under any Environmental Law; or (c) the Company, any Controlled Subsidiary or U&C Real Estate Partnership is required to contribute to the cost of any past, present or future cleanup or remedial or other response action which arises under any Environmental Law. 2.18 CONTINGENT OR UNDISCLOSED LIABILITIES. Except as set forth on the Disclosure Schedule, neither the Company nor any Controlled Subsidiary has any debts, liabilities or obligations due or to become due (which debts, liabilities or obligations are not the subject of any other representation or warranty made in this Article II), and there are no claims or causes of action that may be asserted against the Company or any Controlled Subsidiary by any governmental authority or third party (which claims or causes of action are not the subject of any other representation or warranty made in this Article II) which arise with respect to or relate to any period or periods on or prior to the date hereof, regardless of whether such obligations, liabilities or claims are known or unknown, absolute, accrued, contingent or otherwise, except as and to the extent set forth on the Company Balance Sheet, except for liabilities incurred since June 25, 1996 in the ordinary course of business consistent with past practice or except to the extent that any such liability would not have a Material Adverse Effect. 2.19 INSURANCE. The Company has in full force and effect the policies of insurance listed in the amounts described on the Disclosure Schedule, and all premiums due thereon have been paid. The Company does not have any interest in any other insurance policy. 2.20 RELATED PARTY TRANSACTIONS. Except as described on the Disclosure Schedule attached hereto, the Company and each Controlled Subsidiary: (a) has not had any financial transactions or arrangements (other than payment of regular salary to Related Parties who are employees) with an annual aggregate amount in excess of $10,000 with any Related Party since June 25, 1996, and (b) except as contemplated hereby has not and will not have any present or future binding obligation to enter into any transaction or arrangement with any Related Party. For purposes hereof, the term "Related Party", shall mean: (i) any five percent or greater shareholder of the Company (other than UWSI) (ii) any officer or director of the Company or any Controlled Subsidiary, (iii) any spouse, in-law or descendant of any Related Party, and (iv) any person who, directly or indirectly, controls the Company. For purposes of this definition, "person" shall mean an individual, partnership, corporation, trust, unincorporated organization or other entity; and "control," as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of A-9 the management and policies of such person, whether through the ownership of voting securities, by contract or otherwise. Except as described on the Disclosure Schedule, to the knowledge of the Company and Principal Shareholders, no Related Party owns, directly or indirectly, or is a director, member, officer or employee of, or consultant to, any business organization which is a competitor, or supplier, having business dealings with the Company or any Controlled Subsidiary, nor does any Related Party own any material assets or properties which are used in the Company's or any Controlled Subsidiary's business. 2.21 REGISTRATION STATEMENT, ETC. None of the information to be supplied by the Company or the Principal Shareholders insofar as such information relates to the Company or the Principal Shareholders and such information is furnished in writing by or on behalf of the Company or the Principal Shareholders expressly for use in (i) a Registration Statement to be filed with the Securities and Exchange Commission (the "Commission") by UWSI for the purpose of registering the shares of UWSI Common Stock to be exchanged for shares of the Company Common Stock pursuant to the provisions of the Plan of Merger (the "Registration Statement"), (ii) the proxy statement to be mailed to the shareholders of the Company and UWSI (the "Proxy Statement") in connection with the meeting of shareholders to be called to consider and vote upon the Merger, and (iii) any other documents to be filed with the Commission in connection with the transactions contemplated hereby, at the respective times such documents are filed with the Commission and, in the case of the Registration Statement, when it becomes effective, and with respect to the Proxy Statement, when mailed, shall be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not misleading. In the case of the Proxy Statement or any amendment thereof, none of such information at the time of the meeting of shareholders referred to in Section 5.03 hereof shall be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for such meeting. 2.22 BROKERS AND FINDERS. Except as set forth in the Disclosure Schedule, neither the Company or any of its officers, directors or employees nor the Principal Shareholders has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders' fees, and no broker or finder has acted directly or indirectly for the Company or the Principal Shareholders in connection with this Agreement, the Plan of Merger or the transactions contemplated hereby and thereby. 2.23 DISCLOSURE. No representation, warranty or other statement by the Company or any of the Principal Shareholders herein or in the Disclosure Schedules hereto, or in any other document entered into in connection with this Agreement, contains or will contain an untrue statement of material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES OF UWSI UWSI represents and warrants to the Company and the Shareholders that: 3.01 ORGANIZATION AND AUTHORITY. UWSI is a corporation validly existing and in good standing under the laws of Wisconsin, with all requisite corporate power and corporate authority to own its property and to carry on its business as now being conducted. 3.02 CAPITALIZATION. The authorized capital stock of UWSI consists of (a) 50,000,000 shares of common stock, no par value per share, of which 12,599,715 shares are issued and outstanding, and (b) 500,000 shares of preferred stock, no par value per share, of which no shares are issued and are outstanding. The UWSI Common Stock to be issued in the Merger will be validly issued, fully paid and nonassessable subject to Section 180.0622(2)(b) of the WBCL and judicial interpretations thereof. All A-10 of the outstanding shares of UWSI Common Stock have been issued pursuant to and in accordance with the 1933 Act and applicable state securities laws and rules and regulations under such laws, or valid exemptions therefrom. 3.03 AUTHORIZATION. UWSI has full power and authority to enter into this Agreement and the Plan of Merger and to carry out its obligations hereunder and thereunder. The transactions contemplated hereby and thereby have been duly authorized by its Board of Directors, and no other corporate proceedings on the part of UWSI are necessary to authorize this Agreement, the Plan of Merger and the transactions contemplated hereby and thereby, except for the approval of UWSI shareholders. Subject to the approval of UWSI's shareholders, this Agreement and the Plan of Merger are valid and binding obligations of UWSI, enforceable against it in accordance with their terms, except insofar as enforcement may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors rights generally and by principles of equity. Neither the execution and delivery of this Agreement nor the Plan of Merger by UWSI nor the consummation of the transactions contemplated hereby and thereby, nor compliance with any of the provisions hereof or thereof will (i) violate, conflict with, or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration, under any of the terms, conditions or provisions of (x) its articles of incorporation or by-laws, or (y) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which UWSI is a party, or by which any property or assets of the foregoing may be subject, or (ii) violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to UWSI or any of its properties or assets, except where such violations would not materially impair the ability of UWSI to consummate the transactions contemplated herein. Other than in connection with or in compliance with the provisions of the DGCL, the WBCL, the 1933 Act, the securities laws of the various states, the insurance laws of various states and the Hart-Scott-Rodino Act, no notice to, filing with, or authorization, consent or approval of, any public body or authority is necessary for the consummation by UWSI of the transactions contemplated by this Agreement and the Plan of Merger. 3.04 REGISTRATION STATEMENT, ETC. None of the information to be supplied by UWSI insofar as such information relates to UWSI for inclusion in (i) the Registration Statement, (ii) the Proxy Statement, or (iii) any other document to be filed with the Commission in connection with the transactions contemplated hereby, at the respective times such are filed with the Commission and, in the case of the Registration Statement, when it becomes effective, and in the case of the Proxy Statement, when mailed, shall be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not misleading. In the case of the Proxy Statement or any amendment thereof or supplement thereto, none of such information supplied by UWSI at the time of the meeting of shareholders referred to in Section 5.03 hereof shall be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for such meeting. All documents filed by UWSI with the Commission in connection with the Merger will comply in all material respects with the provisions of applicable federal and state securities laws. 3.05 BROKERS AND FINDERS. Other than fees payable to Merrill Lynch & Co., neither UWSI nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commission or finders' fees, and no broker or finder has acted directly or indirectly for UWSI in connection with this Agreement or the Plan of Merger or the transactions contemplated hereby and thereby. 3.06 DISCLOSURE. No representation, warranty or other statement by UWSI herein or in any other document made in connection with this Agreement, contains or will contain an untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein misleading. A-11 3.07 SEC REPORTS. Each report filed by UWSI under the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder (collectively, the "1934 Act") since June 30, 1995 did not, on the date of such report contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All financial statements included in the reports referred to in the preceding sentence were prepared in accordance with GAAP except as noted therein, and fairly present the information purported to be shown therein (subject only to normal, recurring adjustments in the case of any unaudited statements, none of which is material). ARTICLE IV CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME 4.01 CONDUCT OF THE COMPANY'S BUSINESS PRIOR TO THE EFFECTIVE TIME. During the period from the date of this Agreement to the Effective Time, the Company and the Controlled Subsidiaries shall conduct their respective operations according to the ordinary and usual course of business consistent with past and current practices and use their reasonable best efforts to maintain and preserve their business organization, prospects, employees and advantageous business relationships and shall not, without the prior written consent of the President of UWSI, take any action or permit to occur any event set forth in Section 2.08. ARTICLE V ADDITIONAL AGREEMENTS 5.01 ACCESS AND INFORMATION. (a) Prior to the Effective Time, the Company shall on reasonable notice to the Company allow UWSI, and its accountants, counsel and other representatives and advisers full and complete access during reasonable business hours to all properties, books, contracts, commitments, records, documents and facilities of the Company, the Company shall furnish promptly to UWSI all other information concerning the business, properties and personnel of the Company and the Controlled Subsidiaries as UWSI may reasonably request, and the Company will make the officers, employees, agents, independent accountants and actuaries of the Company and Controlled Subsidiaries available to discuss such aspects of the Company and the Controlled Subsidiaries as may be reasonably requested by UWSI. (b) UWSI shall make available to executive officers of the Company, its accountants, counsel and the executive officers of UWSI to discuss such aspects of UWSI as may be reasonably requested by the Company. (c) Each of the Company and UWSI acknowledge that the access provided for in this Section 5.01 is provided for the sole reason of allowing each of UWSI and the Company to complete the due diligence necessary to allow their respective Boards of Directors to make informed decisions regarding approval of this Agreement and the preparation of the Registration Statement and Proxy Statement. Each of the Company and UWSI acknowledges the securities laws applicable to the use of material non-public information it may obtain pursuant to this Section 5.01, and each of the Company and UWSI shall inform its respective directors, officers, employees, and agents of such securities laws. 5.02 REGISTRATION STATEMENT AND PROXY STATEMENT. As soon as reasonably practicable after the date hereof, UWSI shall prepare the Proxy Statement and UWSI shall prepare and file with the Commission and diligently pursue to effectiveness the Registration Statement, of which the Proxy Statement shall be a part. In connection with the foregoing, (a) UWSI and the Company will comply fully with the requirements of applicable state securities laws, the 1933 Act, and the rules and regulations of the Commission under such laws applicable to the offering and sale of UWSI Common Stock in connection with the Merger and the solicitation of proxies for the meeting of the shareholders of the Company described below and (b) the Company shall furnish to UWSI such information relating to the Company and its affiliates and the transactions contemplated by this Agreement and the Plan A-12 of Merger and such further and supplemental information as may be necessary or as may be reasonably requested by UWSI to ensure that the statements regarding the parties hereto and their affiliates and such transactions contained in the Proxy Statement will not on the effective date of the Registration Statement or the date of such meeting of the shareholders of the Company or UWSI or at the Effective Time include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. UWSI shall also take any action required to be taken under any applicable state securities laws in connection with the issuance of the shares of UWSI Common Stock to be issued as set forth in the Plan of Merger, and the Company shall furnish all information concerning the Company and the holders of the Company Common Stock and other assistance as UWSI may reasonably request in connection with any such action. Following the Effective Time, UWSI will register the shares of UWSI Common Stock underlying the Options on Form S-8. 5.03 COMPANY SHAREHOLDERS' APPROVAL. The Company shall call a special meeting of its shareholders to be held no later than 20 days following effectiveness of the Registration Statement for the purpose of considering and voting upon the approval and adoption of the Plan of Merger. The Company shall comply fully with the applicable provisions of the DGCL relating to the call and holding of such meeting of its shareholders. 5.04 UWSI SHAREHOLDERS APPROVAL. UWSI shall call a special meeting of its shareholders to be held no later than 35 days following effectiveness of the Registration Statement for the purpose of considering and voting upon (i) the approval and adoption of the Plan of Merger and (ii) the increase in the number of shares of UWSI Common Stock issuable pursuant to the UWSI Equity Incentive Plan to cover the options on UWSI Common Stock being granted pursuant to the Employment Agreements referred to in Section 6.03(i). UWSI shall comply fully with the applicable provisions of the WBCL and the 1934 Act in connection with such shareholder approval. 5.05 MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the terms and conditions herein provided, each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the Plan of Merger, including, without limitation, using reasonable efforts to satisfy the conditions contained in Article VI hereof. The Company and UWSI will use their best efforts to obtain consents of all third parties and governmental bodies necessary or, in the reasonable opinion of UWSI, desirable for the consummation of the transactions contemplated by this Agreement and the Plan of Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement and the Plan of Merger, the proper officers and/or directors of the Company or UWSI, as the case may be, shall take all such necessary action. Prior to the Effective Time, each Principal Shareholder shall (i) own, of record and beneficially, all right, title and interest to the shares of Company Common Stock owned by him as of the date hereof, free and clear of all security interests, liens, claims, pledges, escrows, options, warrants, rights of purchase, equities, charges, encumbrances, proxies, voting trusts and restrictions on voting rights whatsoever, and (ii) not enter into any contract, agreement, understanding or restriction of any kind relating to any shares of Company Common Stock. Subject to the provisions of Section 5.05, or without UWSI's prior written consent, during the period from the date of this Agreement to the Effective Time, or such earlier termination of the Agreement pursuant to Article VII hereof, the Principal Shareholders shall not and the Company shall not and shall cause its directors, officers, agents and employees not to solicit, authorize the solicitation of or enter into any discussion (or continue any discussion) with any third party (including the provision of any information to a third party regarding the Company) concerning any offer or possible offer from any such third party (i) to purchase any Company Common Stock, any option or warrant to purchase Company Common Stock, or any securities convertible into Company Common Stock or any other security of the Company, (ii) to purchase, lease or otherwise acquire all or a substantial portion of the assets of the Company or (iii) to merge, consolidate or otherwise combine with the Company. A-13 5.06 INTERIM FINANCIAL STATEMENTS. During the period prior to the Effective Time, the Company shall deliver to UWSI monthly an unaudited balance sheet and income statement as of the end of such month (the "Interim Financial Statements"). The Interim Financial Statements shall be correct and complete and shall fairly present the financial condition, stockholders' equity, and results of operations of the Company as of the respective dates, and the Interim Financial Statements shall be prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved. 5.07 INSURANCE REGULATORY APPROVALS. As soon as practicable in conjunction with the execution and delivery of this Agreement, UWSI will file with the Department of Insurance of each state listed on the Disclosure Schedule, a Form A or similar document seeking approval of the Merger, and UWSI and the Company each hereby agrees that it will in good faith take, or cause to be taken, all actions and do, or cause to be done, all things necessary, proper or advisable to obtain the necessary consents, authorizations, orders, approvals and clearances of governmental authorities, including, without limitation, approval of the Departments of Insurance listed on the Disclosure Schedule. 5.08 HART-SCOTT-RODINO COMPLIANCE. UWSI, the Company and any other party required by law shall as soon as practicable file Notification and Report Forms under the Hart-Scott-Rodino Act with the Federal Trade Commission ("FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division") and shall use reasonable efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation. UWSI, the Company and any other parties required by law, will take all such action as may be necessary under any laws applicable to or necessary for, and will file and, if appropriate, use their reasonable efforts to have declared effective or approved, all documents and notifications with such governmental or regulatory bodies which they deem necessary or appropriate for the consummation of the Merger and the transactions contemplated hereby, and each party shall give the other information reasonably requested by such other party pertaining to it and its subsidiaries and affiliates reasonably necessary to enable such other party to take such actions. 5.09 CERTAIN NOTIFICATIONS. At all times until the Effective Time, each party shall promptly notify the other in writing of the occurrence of any event which will or may result in the failure to satisfy any of the conditions specified in Article VI hereof. 5.10 VOTING AGREEMENT. The Principal Shareholders shall vote their shares of Company Common Stock and BCBSUW shall vote its shares in UWSI in favor of the Plan of Merger. 5.11 BEST EFFORTS. Each of UWSI, the Company and the Principal Shareholders agree to use its or his best efforts to take all necessary actions to cause the Merger to be consummated. 5.12 PRESS RELEASES. The parties agree that, except as otherwise provided by law, no press release or other public announcement with respect to this Agreement or the transactions contemplated hereby shall be made without the prior consultation and approval of all parties hereto. 5.13 EXPENSES. UWSI shall be responsible for its expenses incurred in connection with this Agreement and the transactions contemplated hereby. The Company shall be responsible for $150,000 of the fees and expenses of Godfrey & Kahn, S.C. incurred in connection with the transactions contemplated by this Agreement on behalf of the Company. The Shareholders shall be responsible for the remaining expenses of Godfrey & Kahn, S.C. since June 1, 1996, and all fees and expenses of any financial advisors engaged by the Company, any Controlled Subsidiary or the Principal Shareholders incurred in connection with this Agreement and the transaction contemplated hereby. Any Shareholders required by law to make filings under the Hart-Scott-Rodino Act as acquiring persons (as defined thereunder) shall be responsible for the expenses of any filing fees therefor. The Company shall be responsible for any remaining expenses incurred by the Company or the Principal Shareholders in the normal course of completing the transactions contemplated hereby. A-14 5.14 CERTAIN AGREEMENTS. The Company and the Principal Shareholders shall use their reasonable best efforts to cause: (i) American Medical Security Insurance Company ("AMSIC") to transfer to the Company all of the issued and outstanding capital stock of American Medical Security Insurance Company of Georgia, American Medical Security Insurance Company of Ohio and Personal Physicians Care, Inc.; (ii) AMSIC to transfer to the Company a dividend of $10 million; (iii) the Company to pay in full that Note of the Company in favor of Bank One, Green Bay dated February 1, 1996; and (iv) the Company to consent to the substitution of United Wisconsin Life Insurance Company for United Wisconsin Insurance Company as a partner in U&C Real Estate Partnership. 5.15 UWSI CAPITALIZATION. The number of shares of UWSI Common Stock (i) to be received by the Shareholders in the Merger (ii) issuable upon exercise of the Options shall be adjusted for any stock split, stock dividend, recapitalization or similar event affecting UWSI Common Stock prior to the Effective Time. ARTICLE VI CONDITIONS 6.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO CONSUMMATE THE MERGER. The respective obligations of each party to consummate the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following conditions: (a) HSR WAITING PERIOD. All applicable waiting periods under the Hart-Scott-Rodino Act shall have expired. (b) REGISTRATION STATEMENT. The Registration Statement shall have been declared effective and shall not be subject to a stop order or any threatened stop order. The Registration Statement, in the form in which it becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective, shall comply in all material respects with the provisions of the 1933 Act and shall not at any such time contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) COMPANY AUTHORIZATION. The Plan of Merger shall have been approved and adopted by the requisite vote of the holders of the outstanding shares of Company Common Stock. (d) UWSI AUTHORIZATIONS. The Plan of Merger and the increase in the shares of UWSI Common Stock issuable pursuant to the UWSI Equity Incentive Plan to cover the options on UWSI Common Stock being granted pursuant to the Employment Agreements referred to in Section 6.03(i) hereof shall each have been approved by the requisite vote of the holders of UWSI Common Stock. (e) LISTING. The shares of UWSI Common Stock to be issued in the Plan of Merger and upon exercise of the Options, shall have been approved for listing on the New York Stock Exchange subject to notice of issuance. (f) PROCEEDINGS. At the Effective Time there shall be no action or proceeding initiated by any governmental agency or any third party pending which seeks to restrain, prohibit or invalidate any material transaction contemplated by this Agreement or the Plan of Merger or to recover A-15 substantial damages or other substantial relief with respect thereto and no injunction or restraining order shall have been issued by any court restraining, prohibiting or invalidating any such material transaction. (g) INSURANCE REGULATORY APPROVALS. (i) This Agreement, and all aspects of the transactions contemplated hereby, shall have received all appropriate and necessary insurance regulatory consents and approvals ("Approvals") as contemplated in Section 5.06, which Approvals shall be in full force and effect; (ii) any conditions and directions contained in the Approvals shall have been fully complied with in all material respects; and (iii) the Approvals shall not modify the terms and conditions of this Agreement, and the transactions contemplated herein, in any material respect. 6.02 CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS TO CONSUMMATE THE MERGER. The obligations of the Company and the Principal Shareholders to consummate the Merger shall be subject to the fulfillment (or waiver by the Company and the Principal Shareholders) at or prior to the Effective Time of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of UWSI set forth in Article III hereof shall be true and correct as of the date of this Agreement and as of the Effective Time as though made on and as of the Effective Time, except as otherwise contemplated by this Agreement or approved by the Company, and the Company shall have received a certificate signed by the Chief Executive Officer, the President or an Executive Vice President of UWSI to that effect. (b) PERFORMANCE OF OBLIGATIONS. UWSI shall have performed all obligations required to be performed by it under this Agreement prior to the Effective Time, and the Company shall have received a certificate signed by the Chairman of the Board, the President or an Executive Vice President of UWSI to that effect. (c) PERMITS, AUTHORIZATIONS, ETC. UWSI shall have obtained any and all material permits, authorizations, consents or approvals of state securities commissions and of any other public body or authority required for the lawful consummation of the Merger. (d) OPINION OF COUNSEL. Michael Best & Friedrich, counsel for UWSI, shall have furnished its opinion to the Company as of the Effective Time in form and substance reasonably satisfactory to the Company. (e) OPINION OF TAX COUNSEL. The Company shall have received from Godfrey & Kahn an opinion, in form and substance reasonably satisfactory to the Company, to the effect that, on the basis of the facts, representations and assumptions set forth in such opinion, and based on the Code and the regulations and interpretations thereunder as of the date of such opinion, that (a) the Merger will for federal income tax purposes constitute a reorganization within the meaning of Section 368 of the Code, (b) no gain or loss will be recognized by the Company Shareholders to the extent that they receive UWSI Common Stock solely in exchange for shares of Company Common Stock; (c) the gain, if any, to be realized by Company Shareholders who exchange their Company Common Stock for UWSI Common Stock and cash will be the excess of (i) the amount of cash plus the fair market value at the Effective Time of the UWSI Common Stock received over (ii) the basis of the Company Common Stock to be surrendered in exchange thereof and such gain will be recognized on the exchange, but in an amount not in excess of the cash to be received; (d) the basis of the shares of UWSI Common Stock to be received by the Company Shareholders will be the same as the basis of the Company Common Stock surrendered in exchange therefor, adjusted as provided in Section 358(a) of the Code in the event that any cash is received; and (e) the holding period of UWSI Common Stock received by the Company Shareholders will include the holding period of the Company Common Stock surrendered in exchange therefor, A-16 provided that the Company Shareholders held and will hold the Company Common Stock and UWSI Common Stock as capital assets. In rendering such opinion, Godfrey & Kahn may rely upon representations contained in certificates of officers of UWSI, the Company and others. (f) REGISTRATION RIGHTS AND STOCK RESTRICTION AGREEMENT. UWSI shall have executed and delivered the Registration Rights and Stock Restriction Agreement (the "Registration Rights Agreement") in substantially the form of Exhibit B hereto. 6.03 CONDITIONS TO OBLIGATIONS OF UWSI TO CONSUMMATE THE MERGER. The obligations of UWSI to consummate the Merger shall be subject to the fulfillment (or waiver by UWSI) at or prior to the Effective Time of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company and the Principal Shareholders set forth in Article II hereof shall be true and correct as of the date of this Agreement and as of the Effective Time as though made on and as of the Effective Time, except for such matters as would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, and UWSI shall have received a certificate signed by the Principal Shareholders and by the President of the Company to that effect. (b) PERFORMANCE OF OBLIGATIONS. The Company and the Principal Shareholders shall have performed all obligations required to be performed by it or them under this Agreement prior to the Effective Time, and UWSI shall have received a certificate signed by the Principal Shareholders and by the President of the Company to that effect. (c) PERMITS, AUTHORIZATIONS, ETC. The Company shall have obtained any and all consents or waivers from other parties to loan agreements or other contracts material to the Company's business for the lawful consummation of the Merger, and the Company and UWSI shall have obtained any and all permits, authorizations, consents or approvals of state securities commissions and of any other public body or authority required for the lawful consummation of the Merger. (d) AGREEMENTS OF AFFILIATES. Each person who is identified on the Disclosure Schedule pursuant to Section 2.03 hereof as an "affiliate" shall have delivered to UWSI a written agreement in the form of Exhibit C hereto. (e) FINANCIAL STATEMENTS. UWSI shall have received the Interim Financial Statements. (f) OPINION OF COUNSEL. Godfrey & Kahn, counsel for the Company, shall have furnished to UWSI its opinion as of the Closing in form and substance satisfactory to UWSI. (g) OPINION OF TAX COUNSEL. UWSI shall have received from Michael Best & Friedrich an opinion, in form and substance reasonably satisfactory to UWSI, to the effect that, on the basis of the facts, representations and assumptions set forth in such opinion, and based on the Code and the regulations and interpretations thereunder as of the date of such opinion, the Merger will for federal income tax purposes constitute a reorganization within the meaning of Section 368 of the Code. In rendering such opinion, Michael Best & Friedrich may rely upon representations contained in certificates of officers of UWSI, the Company and others. (h) DISSENTING SHAREHOLDERS. UWSI shall have received a certificate signed by the President of the Company to the effect that shareholders of the Company owning no more than five percent of the Company's Common Stock have filed with the Company written objections to the Merger under Section 262 of the DGCL. (i) EMPLOYMENT AGREEMENTS. Hilliard and Weyers, respectively, shall have executed the Employment Agreements in the form previously agreed to. (j) TERMINATION OF EXISTING EMPLOYMENT AGREEMENTS. The Company shall have terminated (at no additional expense to the Company) the current Employment Agreements between the Company and Hilliard and Weyers, respectively. A-17 (k) OPTIONS. The substitution of UWSI Options (as such term is defined in the Plan of Merger) for Options shall be approved by the Boards of Directors of the Company and UWSI. The shareholders of UWSI shall have approved the option plan amendment contemplated by Section 2.2(b) of the Plan of Merger. The Management Review Committee which administers such option plan shall have approved the substitution of options contemplated by Section 2.2(b) of the Plan of Merger and the issuance of UWSI Options to the Principal Shareholders, as contemplated in their respective Employment Agreements. (l) BRING DOWN OF FAIRNESS OPINION. Merrill Lynch & Co. shall have confirmed or redelivered its opinion previously delivered to UWSI concerning the fairness, from a financial point of view, of the Merger to the shareholders of UWSI. Such confirmation or redelivery shall be dated the date on which proxy materials are first mailed to UWSI Shareholders for the special meeting of shareholders referred to in Section 5.04 hereof. (m) ESCROW AGREEMENT. The Shareholders shall have deposited the Escrow Amount into, and Hilliard, as Agent, shall have executed, an Escrow Agreement in the form attached hereto as Exhibit D (the "Escrow Agreement"). ARTICLE VII TERMINATION, AMENDMENT 7.01 TERMINATION. (a) This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval by the shareholders of the Company: (i) by mutual consent of the Company and UWSI; (ii) by any of the Company, the Principal Shareholders or UWSI if the Merger has not taken place by June 30, 1997; (iii) by UWSI if any of the conditions contained in Sections 6.01 and 6.03 have not been satisfied prior to the Closing; or (iv) by the Company if any of the conditions contained in Sections 6.01 or 6.02 have not been satisfied prior to the Closing. (b) In the event this Agreement is terminated pursuant to Section 7.01: (i) all obligations and rights of the parties hereunder shall cease and the parties shall have all of the rights and obligations which existed immediately prior to the execution of this Agreement; and (ii) such termination shall be without any liability or further obligation of any party to another and the obligations and agreements in this Agreement shall terminate and have no further effect except for liabilities and obligations based on any intentional failure to perform or comply with any covenant or agreement herein or for any intentional misrepresentation or material breach of any warranty herein (and such termination shall not constitute a waiver of any claim with respect thereto). 7.02 AMENDMENT. Subject to applicable law, this Agreement may be amended, modified or supplemented only by written agreement of the parties hereto duly authorized by the respective Board of Directors at any time prior to the Effective Time; provided, however, that, after the approval and adoption of the Plan of Merger by the shareholders of the Company, no such amendment, modification or supplement shall change the amount or the form of the consideration to be delivered to the holders of Company Common Stock or Options as contemplated by this Agreement and the Plan of Merger. ARTICLE VIII INDEMNIFICATION 8.01 INDEMNIFICATION BY SHAREHOLDERS. As UWSI's sole and exclusive remedy for breach of this Agreement from and after the Effective Time, the Shareholders of the Company other than UWSI (the A-18 "Shareholders"), shall indemnify, defend and hold UWSI and its subsidiaries, directors, officers, employees, agents and shareholders (collectively, "UWSI" as used in this Article VIII) harmless from and against any damages, liability, loss, cost or deficiency (including, but not limited to, reasonable attorneys' fees ) net of any tax benefits, insurance proceeds or similar benefits, arising out of, resulting from or relating to: (a) any inaccuracy in or breach of a representation or warranty of the Company or the Shareholders pursuant to this Agreement or any failure of the Company or the Principal Shareholders to duly perform or observe any term, provision, covenant or agreement to be performed or observed by them pursuant to this Agreement. (b) the Employee Claim (as defined in the letter from the Company to UWSI of even date herewith) (collectively, "UWSI Damages"). 8.02 LIMITATIONS. (a) UWSI DAMAGES. No indemnification shall be payable by the Shareholders to UWSI with respect to an Indemnified Claim (as hereinafter defined) for UWSI Damages pursuant to Section 8.01(a) unless the Agent (as such term is defined in the Escrow Agreement) shall have received notice thereof on or before June 30, 1997 or, if the Effective Time is after December 31, 1996, on or before nine months after the Effective Time; Further, no claim pursuant to Section 8.01(a) shall be made until UWSI's Damages for all Indemnified Claims pursuant to Section 8.01(a), in the aggregate, exceed Seven Hundred Fifty Thousand Dollars ($750,000) (the "Basket Amount"). For the purposes of determining whether a breach or inaccuracy of a representation, warranty or covenant contained in this Agreement has occurred, which can give rise to an Indemnified Claim and for the purposes of calculating the amount of any Indemnified Claim, such determination shall be made by considering each of such representations, warranties or covenants as if the terms "material", "materially" or "Material Adverse Effect" did not appear therein. At such time that UWSI's Damages under Section 8.01(a) exceed the Basket Amount the Shareholders shall be liable to UWSI only for the portion of such UWSI's Damages that exceed the Basket Amount. (b) EMPLOYEE CLAIM. No indemnification shall be payable by the Shareholders to UWSI with respect to an Indemnified Claim pursuant to Section 8.01(b) unless the Agent shall have received notice thereof on or before three years after the Effective Time. Further, no claim hereunder shall be made until UWSI's Damages for all Indemnified Claims under Section 8.01(b) in the aggregate, exceed Seven Hundred Fifty Thousand Dollars ($750,000) (the "Employee Basket Amount"). At such time that UWSI's Damages under Section 8.01(b) exceed the Employee Basket Amount, the Shareholders shall be liable to UWSI for only fifty percent (50%) of the portion of such UWSI's Damages for Section 8.01(b) which exceed the Employee Basket Amount. (c) MAXIMUM AMOUNT. In no event shall the Shareholders' liability with respect to the Employee Claim exceed One Million Dollars ($1,000,000), and in no event shall the Shareholders' liability with respect to all Indemnified Claims, in the aggregate, including the Employee Claim, exceed Eight Million Dollars ($8,000,000) (the "Escrow Amount") which sum shall be deposited into escrow concurrently with the Effective Time pursuant to the Escrow Agreement. 8.03 PROCEDURE. (a) NOTICE OF CLAIMS. UWSI shall provide the Agent quarterly with a list of all Indemnified Claims (each of which shall be in a minimum amount of $10,000) that UWSI is applying to the Basket Amount. Once the Indemnified Claims exceed the Basket Amount, UWSI shall simultaneously give the Agent and the Escrow Agent (as such term is defined in the Escrow Agreement) prompt notice of any claim, demand, assessment, action, suit or proceeding to which UWSI believes the indemnity set forth in section 8.01 applies each of which shall be in the minimum amount of $10,000 (an "Indemnified Claim"); provided however that no Indemnified Claim shall be made for a breach or inaccuracy of A-19 any representation or warranty, if Joseph Decker, Gail L. Hanson, Samuel V. Miller or C. Edward Mordy had knowledge of such a breach or inaccuracy at the time it was made. Such notice shall provide in reasonable detail such information as UWSI may have with respect to such Indemnified Claim (including, without limitation, copies of any summons, complaints or other pleadings which may have been served on UWSI or its agents and any written claim, demand, invoice, billing or other document evidencing the same). If such Indemnified Claim is evidenced by a court pleading, UWSI shall give such notice within five (5) days of receipt of such pleading. If such Indemnified Claim is evidenced by some other writing from a third party, UWSI shall give such notice within ten (10) days of the date it receives such writing. If the Agent shall object to such notice of claim, the Agent shall simultaneously deliver a written notice of objection to UWSI and the Escrow Agent within fifteen (15) days after UWSI's delivery of the notice of claim. Such notice of objection shall set forth the grounds upon which the objection is based and state whether the Agent objects to all or only a portion of the matter described in the notice of claim. If the notice of objection shall not have been so delivered within such fifteen (15) day period, all Shareholders (as defined in the Escrow Agreement) shall be conclusively deemed to have acknowledged the correctness of the claim or claims specified in the notice of claim for the full amount thereof, and the UWSI's Damages set forth in the notice of claim shall be promptly paid to UWSI from the Escrow by the Escrow Agent, without the necessity of further action, as provided in the Escrow Agreement to the full extent of the amount of funds held in the Escrow. If the Agent shall make timely objection to a claim or claims set forth in any notice of claim, and if such claim or claims shall not have been resolved or compromised within sixty (60) days from the date of delivery of the notice of objection, then such claims shall be settled by arbitration pursuant to Section 9.07 hereof. The arbitrator shall promptly obtain such information regarding the matter the arbitrator deems necessary and shall decide the matter and render a written award which shall be delivered to UWSI, the Agent and the Escrow Agent. Any award shall be a conclusive determination of the matter and shall be binding upon UWSI and the Shareholders. If, by arbitration, it shall be determined that UWSI shall be entitled to any UWSI's Damages by reason of its claim or claims, the UWSI's Damages so determined shall be paid to UWSI by the Escrow Agent in the same manner as if the Agent had not delivered a notice of objection. (b) CONTROL OF DEFENSE OF CLAIMS. If UWSI's request for indemnification arises from the claim of a third party, (i) UWSI may assume control of the defense of such Indemnified Claim or any litigation resulting from such Indemnified Claim at its own expense by giving the Principal Shareholders notice of UWSI's decision to do so or (ii) UWSI may allow the Agent to assume control of such defense by giving written notice to the Agent. If the Agent elects to assume such defense after written notice by UWSI, or if within ten (10) days after delivery of such notice the Agent has not notified UWSI in writing of its intent to assume such defense, such defense shall be conducted at the Shareholders' sole expense. Notwithstanding UWSI's assumption of the defense of an Indemnified Claim pursuant to Section 8.03(b)(i) hereof, the Principal Shareholders shall have the right to participate in the defense of such Indemnified Claim at their own expense. 8.04 INDEMNIFICATION BY UWSI. As the Shareholders' sole and exclusive remedy for breach of this Agreement from and after the Effective Time, UWSI agrees to indemnify, defend and hold the Shareholders, harmless from and against any damage, liability, loss, cost or deficiency (including, but not limited to, reasonable attorneys' fees) arising out of, resulting from or relating to: (a) any inaccuracy in or breach of representation or warranty of UWSI pursuant to this Agreement; and (b) any failure to duly perform or observe any term, provision or covenant to be performed or observed by UWSI pursuant to this Agreement. 8.05 PROCEDURE. The Principal Shareholders, acting on behalf of the Shareholders, shall give UWSI prompt notice of any claim, demand, assessment, action, suit or proceeding to which the Principal Shareholders believe the indemnity set forth in section 8.04 applies (for purposes of this A-20 Section 8.05, an "Indemnified Claim"). Such notice shall provide in reasonable detail such information as the Principal Shareholders may have with respect to such Indemnified Claim (including, without limitation, copies of any summons, complaints or other pleadings which may have been served on Shareholders or their respective agents and any written claim, demand, invoice, billing or other document evidencing the same). If such Indemnified Claim is evidenced by a court pleading, UWSI shall be given such notice within five (5) days of receipt of such pleading. If such Indemnified Claim is evidenced by some other writing from a third party, UWSI shall be given such notice within ten (10) days of the date it receives such writing. If UWSI shall object to such notice of claim, the UWSI shall deliver a written notice of objection to the Principal Shareholders within fifteen (15) days after delivery of the notice of claim. Such notice of objection shall set forth the grounds upon which the objection is based and state whether UWSI objects to all or only a portion of the matter described in the notice of claim. If the notice of objection shall not have been so delivered within such fifteen (15) day period, UWSI shall be conclusively deemed to have acknowledged the correctness of the claim or claims specified in the notice of claim for the full amount thereof, and the damages set forth in the notice of claim shall be promptly paid to Principal Shareholders (on behalf of all Shareholders), in cash. If UWSI shall make timely objection to a claim or claims set forth in any notice of claim, and if such claim or claims shall not have been resolved or compromised within sixty (60) days from the date of delivery of the notice of objection, then such claims shall be settled by arbitration pursuant to Section 9.07 hereof. The arbitrator shall promptly obtain such information regarding the matter the arbitrator deems necessary and shall decide the matter and render a written award which shall be delivered to UWSI and the Principal Shareholders. Any award shall be a conclusive determination of the matter and shall be binding upon UWSI and the Shareholders. ARTICLE IX GENERAL PROVISIONS 9.01 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given (i) when delivered personally; (ii) the second business day after being deposited in the United States mail registered or certified (return receipt requested); (iii) the first business day after being deposited with Federal Express or any other recognized national overnight courier service or (iv) on the business day on which it is sent and received by facsimile, in each case to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) If to UWSI or BCBSUW: 401 West Michigan Street Milwaukee, WI 53203 Attention: Thomas R. Hefty With copies to: Geoffrey R. Morgan Michael Best & Friedrich 100 East Wisconsin Avenue Milwaukee, Wisconsin 53202 (b) If to the Company or the Principal Shareholders: American Medical Security Group, Inc. 3100 AMS Boulevard Green Bay, WI 54313 Attention: President A-21 American Medical Security Group, Inc. 3100 AMS Boulevard Green Bay, WI 54313 Attention: General Counsel American Medical Security Group, Inc. 3100 AMS Boulevard Green Bay, WI 54313 Attention: Wallace J. Hilliard American Medical Security Group, Inc. 3100 AMS Boulevard Green Bay, WI 54313 Attention: Ronald A. Weyers to Principal Shareholders: Wallace J. Hilliard 4443 Indian Trails Green Bay, WI 54313 Ronald A. Weyers 2643 Good Sheperd Lane Green Bay, WI 54313 with copies to: Benjamin W. Laird Godfrey & Kahn, S.C. 333 Main Street, Suite 600 Green Bay, WI 54307-3067 Randall J. Erickson Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, WI 53202 9.02 MISCELLANEOUS. This Agreement (including the exhibits, documents and instruments referred to herein or therein): (i) constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof; (ii) is not intended to confer upon any other person any rights or remedies hereunder; and (iii) shall not be assigned by operation of law or otherwise; and (iv) may be executed in two or more counterparts which together shall constitute a single agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs, next of kin, distributees, executors, administrators and personal representatives. 9.03 WAIVER: REMEDIES. No delay or failure on the part of any party hereto to exercise any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power, or privilege hereunder operate as a waiver of any other right, A-22 power, or privilege hereunder, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege hereunder. 9.04 SEVERABILITY. If any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, invalid or unenforceable, such provision shall be construed and enforced as if it had been more narrowly drawn so as not to be illegal, invalid or unenforceable, and such illegality, invalidity or unenforceability shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement. 9.05 GOVERNING LAW. This Agreement shall be construed in accordance with the DGCL, to the extent applicable, and the law of the State of Wisconsin (without regard to principles of conflicts of laws) applicable to contracts made and to be performed within such State. 9.06 "KNOWLEDGE". As used herein, any reference to the "knowledge" of the Company or the Shareholders, or the like, shall include the knowledge of (i) with respect to the Company, those persons listed on the Disclosure Schedule after reasonable inquiry, and (ii) the Principal Shareholders, respectively, each after making reasonable inquiry of those persons listed on Section 9.06 of the Disclosure Schedule and, if any such person fails to make such inquiry, shall include constructive knowledge of such facts as would have been learned had such reasonable inquiry been made; provided however, that such persons shall not have any duty to make any inquiry of third parties who are not officers, directors, employees or agents (including, without limitation, attorneys and accountants) of the Company or a Controlled Subsidiary. 9.07 ARBITRATION. Any controversy or dispute arising out of or relating to the payment of Indemnified Claims of either UWSI or Shareholders shall be settled by a single arbitrator in arbitration conducted in Chicago, Illinois in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator's decision shall be in writing and shall be final and nonappealable. The arbitrator also shall make a determination regarding which party's legal position in any such controversy or claim is the more substantially correct (the "Prevailing Party") and the arbitrator may require the other party to pay the reasonable legal and other professional fees and costs incurred by the Prevailing Party in connection with such arbitration proceeding and any necessary court action. A-23 IN WITNESS WHEREOF, UWSI and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized, and the Principal Shareholders have executed this Agreement, all as of the date first written above. UNITED WISCONSIN SERVICES, INC. By: /S/ THOMAS R. HEFTY Its: Chairman, President and Chief Executive Officer AMERICAN MEDICAL SECURITY GROUP, INC. By: /S/ WALLACE J. HILLIARD Its: President /S/ WALLACE J. HILLIARD WALLACE J. HILLIARD, individually and as Trustee under the Voting Trust Agreement /S/ RONALD A. WEYERS RONALD A. WEYERS, individually and as successor Trustee under the Voting Trust Agreement BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN (solely for purposes of Section 5.10 hereof) By: /S/ THOMAS R. HEFTY Its: President A-24 APPENDIX B OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED July 31, 1996 Board of Directors United Wisconsin Services, Inc. 401 West Michigan, 10th Floor Milwaukee, Wisconsin 53202 Attention: Thomas R. Hefty Chairman, President and Chief Executive Officer Gentlemen: United Wisconsin Services, Inc. (the "Company"), a wholly owned subsidiary of the Company (the "Purchaser"), and American Medical Security Group, Inc. (the "Subject Company") propose to enter into an agreement (the "Agreement") pursuant to which the Subject Company will be merged with the Purchaser in a transaction (the "Merger") in which all outstanding shares of common stock, par value $1.00 per share ("Subject Company Common Stock"), other than 20,967 shares of Subject Company common stock (representing approximately 12% of the total number outstanding) which are held by the Company, and all outstanding common stock options of the Subject Company will be converted into the right to receive, in aggregate, $67.2 million cash and four million shares of the common stock, no par value, of the Company ("Company Common Stock"). The Merger is expected to be considered by the shareholders of the Company and the Subject Company at a special shareholders' meetings to be held on or about November, 1996 and consummated on or shortly after the date of such meeting. You have asked us whether, in our opinion, the proposed consideration to be paid by the Company pursuant to the Merger, taken as a whole, is fair to the shareholders of the Company from a financial point of view. In arriving at the opinion set forth below, we have, among other things: (1) Reviewed the Subject Company's Annual Reports and related financial information for the five fiscal years ended December 1995 and the Subject Company's related unaudited financial information for the monthly periods ending June 1996; (2) Reviewed the Company's Annual Reports, Forms 10-K and related financial information for the five fiscal years ended December 1995 and the Company's Form 10-Q and the related unaudited financial information for the quarterly period ending March 31, 1996; (3) Reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets and prospects of the Subject Company and the Company, furnished to us by the Subject Company and the Company; (4) Conducted discussions with members of senior management of the Subject Company and the Company concerning the Subject Company's and the Company's businesses and prospects; (5) Compared the results of operations of the Subject Company and the Company with those of certain companies which we deemed to be reasonably similar to the Subject Company and the Company, respectively; (6) Reviewed the historical market prices and trading activity for Company Common Stock; B-1 (7) Compared the proposed financial terms of the Merger with the financial terms of certain other mergers and acquisitions which we deemed to be relevant; (8) Considered the pro forma effect of the Merger on the Company's capitalization ratios and earnings, cash flow and book value per share; (9) Considered the terms of the Joint Venture Agreement effective October 1, 1988, as amended, and the Stock Restriction Agreement made February 3, 1989, as amended; (10) Reviewed a draft of the Agreement dated July 31, 1996; and (11) Reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as we deemed necessary, including our assessment of general economic, market and monetary conditions. In preparing our opinion, we have relied on the accuracy and completeness of all information supplied or otherwise made available to us by the Subject Company and the Company, and we have not independently verified such information or undertaken an independent appraisal of the assets of the Subject Company or the Companyfmth respect to the financial forecasts furnished by the Subject Company and the Company, we have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of the Subject Company's or the Company's management as to the expected future financial performance of the Subject Company or the Company, as the case may be. Our opinion necessarily is based on economic, monetary and market conditions prevailing, and other circumstances and conditions existing on the date of this letter. Nothing contained in this opinion shall be construed as creating or imposing upon us any understanding or obligation to advise any person of any change in any fact or matter affecting our opinion of which we become aware after the date hereof. In the ordinary cause of our business, we and our affiliates may actively trade Company Common Stock for our or their own accounts and for the accounts of our customers and, accordingly may at any time hold a long or short position in such common stock. We have, in the past, provided financial advisory and financing services to the Company and have received fees for the rendering of such services. On the basis of, and subject to the foregoing, we are of the opinion that the proposed consideration to be paid by the Company pursuant to the Merger, taken as a whole, is fair to the shareholders of the Company from a financial point of view. Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By ___________________________________ Title: Investment Banking Group B-2 APPENDIX C DISSENTERS' RIGHTS APPRAISAL RIGHTS UNDER SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to the provisions of subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with the provisions of subsection (d) of this Section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to Section228 of this Chapter shall be entitled to an appraisal by the Court of Chancery of the fair value of his shares of stock under the circumstances described in subsections (b) and (c) of this Section. As used in this Section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a non-stock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a non-stock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to Sections 251, 252, 254, 257, 258, 263 or 164 of this Chapter; (1) provided, however, that no appraisal rights under this Section shall be available for the shares of any class or series of stock which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of Section 251 of this Chapter. (2) Notwithstanding the provisions of subsection (b)(1) of this Section, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of this Chapter to accept for such stock anything except (i) shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; (ii) shares of stock of any other corporation or depository receipts in respect thereof, which shares of stock or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; (iii) cash in lieu of fractional shares or fractional depository receipts described in the foregoing clauses (i) and (ii); or (iv) any combination of the shares of stock, depository receipts and cash in lieu of fractional shares, or fractional depository receipts described in the foregoing clauses (i), (ii) and (iii) of this subsection. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under Section 253 of this Chapter is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. C-1 (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this Section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such provision, the procedures of this Section, including those set forth in subsections (d) and (e), shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this Section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsections (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this Section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with the provisions of this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to Section 228 or Section 253 of this Chapter, the surviving or resulting corporation, either before the effective date of the merger or consolidation or within 10 days thereafter, shall notify each of the stockholders entitled to appraisal rights of the effective date of the merger or consolidation and that appraisal rights are available for any or all of the shares of the constituent corporation, and shall include in such notice a copy of this Section. The notice shall be sent by certified or registered mail, return receipt requested, addressed to the stockholder at his address as it appears on the records of the corporation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of the notice, demand in writing from the surviving or resulting corporation the appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with the provisions of subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. C-2 (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholder who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by one or more publications at least one week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publications as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with the provisions of this Section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this Section and who has submitted his certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under this Section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and in the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any other state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all of the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this Section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an C-3 appraisal shall be filed within the time provided in subsection (e) of this Section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this Section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation into which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. C-4 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. UWS is incorporated under the Wisconsin business Corporation Law ("WBCL"). Under Section 180.0851(1) of the WBCL, UWS is required to indemnify a director or officer, to the extent such person is successful on the merits or otherwise in the defense of a proceeding, for all reasonable expenses incurred in the proceeding if such person was a party because he or she was a director or officer of UWS. In all other cases, UWS is required by Section 180.0851(2) to indemnify a director or officer against liability incurred in a proceeding to which such a person was a party because he or she was a director or officer of UWS, unless it is determined that he or she breached or failed to perform a duty owed to UWS and the breach or failure to perform constitutes: (i) a willful failure to deal fairly with UWS or its shareholders in connection with a matter in which the director or officer has a material conflict of interest; (ii) a violation of criminal law, unless the director or officer had reasonable cause to believe his or her conduct was lawful or no reasonable cause to believe his or her conduct was unlawful; (iii) a transaction from which the director or officer derived an improper personal profit; or (iv) willful misconduct. Section 180.0858(1) provides that, subject to certain limitations, the mandatory indemnification provisions do not preclude any additional right to indemnification or allowance of expenses that a director or officer may have under UWS's articles of incorporation, bylaws, a written agreement or a resolution of the Board of Directors or shareholders. Section 180.0859 of the WBCL provides that it is the public policy of the state of Wisconsin to require or permit indemnification, allowance of expenses and insurance to the extent required or permitted under Sections 180.0850 to 180.0858 of the WBCL, for any liability incurred in connection with a proceeding involving a federal or state statute, rule or regulation regulating the offer, sale or purchase of securities. Section 180.0828 of the WBCL provides that, with certain exceptions, a director is not liable to a corporation, its shareholders, or any person asserting rights on behalf of the corporation or its shareholders, for damages, settlements, fees, fines, penalties or other monetary liabilities arising from a breach of, or failure to perform, any duty resulting solely from his or status as a director, unless the person asserting liability proves that the breach or failure to perform constitutes any of the four exceptions to mandatory indemnification under Section 180.0851(2) referred to above. Under Article VI of UWS's Bylaws, directors and officers are indemnified against liability, in both derivative and nonderivative suits, which they may incur in their capacities as such, subject to certain determinations by the Board of Directors, independent legal counsel or the shareholders that the applicable standards of conduct have been met. The scope of such indemnification is substantially the same as permitted and described in Sections 180.0850 to 180.0858 of the WBCL. Under Section 180.0833 of the WBCL, directors of UWS against whom claims are asserted with respect to the declaration of improper dividends or distributions to shareholders or certain other improper acts which they approved are entitled to contribution from other directors who approved such actions and from shareholders who knowingly accepted an improper dividend or distribution, as provided therein. The directors and officers of UWS and its subsidiaries are included in the directors' and officers' liability insurance policy applicable to BCBSUW. UWS has not obtained substitute directors' and officers' liability coverage; the officers and directors of UWS and its subsidiaries will continue to be included in BCBSUW's policy. BCBSUW's insurance policy provides that, subject to the applicable liability limits and retention amounts, the insurer will reimburse directors and officers of BCBSUW and its subsidiaries, including UWS, for a "loss" (as defined in the policy) sustained by a director of officer resulting from any "claim" (as defined in the policy) made against them for a "wrongful act" (as defined in the policy), except for such a loss against which BCBSUW or its subsidiaries, including UWS, indemnifies (or is required or permitted to indemnify) the director of officer. The policy also II-1 provides that, subject the applicable liability limits and retention amounts, the insurer will reimburse BCBSUW and its subsidiaries, including UWS, for a loss for which BCBSUW or its subsidiaries, including UWS, has lawfully indemnified (or is required or permitted by law to indemnify) a director or officer resulting from any such claim. Subject to certain exclusions set forth in the policy, "wrongful act" is defined in the policy to mean any negligent act, error, omission, misstatement, misleading statement, or breach of duty by BCBSUW or its subsidiaries, including UWS's directors or officers in the discharge of their duties solely in their capacities as such directors or officers. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION - ------------ ----------------------------------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger dated as of July 31, 1996 among United Wisconsin Services, Inc., American Medical Security Group, Inc., Wallace J. Hilliard and Ronald A. Weyers. 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 (15). 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). 4.4 Registration Rights and Stock Restriction Agreement dated , 1996 among Registrant, Wallace J. Hilliard and Ronald A. Weyers. 4.5 Form of Letter Agreement dated , 1996 between Registrant and each Affiliate of American Medical Security Group, Inc. relating to resale of stock of Registrant. 5.1 Opinion of Michael Best & Friedrich.** 8.1 Opinion of Godfrey & Kahn, S.C.** 10.1 United Wisconsin Insurance Company ("UWIC"), United Wisconsin Life Insurance Company ("UWLIC"), American Medical Security, Inc. ("AMSG"), American Medical Security Insurance Company (f/k/a Old Northwest Life Insurance Company) "AMSIC"), Wallace J. Hilliard and Ronald A. Weyers (as amended) (1). 10.2 Voting Trust Agreement among owners and holders of shares of the capital stock of AMSG and Wallace J. Hilliard (1). 10.3 Stock Restriction Agreement among the Registrant, AMSG and the owners and holders of the shares of capital stock of AMSG (as amended). As amended by Agreement dated August 2, 1993 (7). As amended by Agreements dated October 9, 1991, October 29, 1991 and October 29, 1991 (8). 10.4 Administrative Services Agreement among UWIC, UWLIC, AMSG and AMSIC dated January 1, 1994 (12). 10.5 Reinsurance Agreement between UWIC and AMSIC (1). As amended by Amendments to Reinsurance Agreement, dated January 1, 1992 and January 1, 1993 (5).
II-2
NUMBER DESCRIPTION - ------------ ----------------------------------------------------------------------------------------------------- 10.6 Reinsurance Agreement between UWLIC and AMSIC (f/k/a) Old Northwest Life Insurance Company) (1) (as amended by Amendment to Reinsurance Agreement dated January 1, 1992) (5). 10.7 Employment Contract between AMSG and Wallace J. Hilliard (1). As superseded by Employment Agreement between and Wallace J. Hilliard. 10.8 Employment Contract between AMSG and Ronald A. Weyers (1). As superseded by Employment Agreement between and Ronald A. Weyers. 10.9 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). 10.10 Underwriting Management Agreement between United Heartland, Inc. and UWIC (1). 10.11 Underwriting Management Agreement between United Heartland, Inc. and Virginia Surety Company, Inc. (1). 10.12 Agreement for Electronic Date 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). 10.13 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). 10.14 Comprehensive Tax Allocation Agreement dated July 1, 1994 among BCBSUW, the Registrant and various subsidiaries thereof (12). 10.15 Federal Income Tax Allocation Agreement for the period starting July 1, 1994 among the Registrant and certain affiliates thereof (9). As modified by Agreements effective October 1, 1994 and January 1, 1995 (12). 10.16 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). 10.17 BCBSUW Deferred Compensation Plan for Directors (1).* 10.18 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).* 10.19 BCBSUW Voluntary Deferred Compensation Plan (1).* 10.20 BCBSUW Voluntary Deferred Compensation Trust Agreement (1).* 10.21 Executive Reimbursement Group Insurance Policy (1).* 10.22 BCBSUW Salaried Employees Retirement Plan effective January 1, 1993 (5).* 10.23 BCBSUW Supplemental Executive Retirement Plan (1).* 10.24 1992 Stock Appreciation Rights Plan and Form of Grant of Stock Appreciation Rights (2). As amended February 15, 1995 (12).*
II-3
NUMBER DESCRIPTION - ------------ ----------------------------------------------------------------------------------------------------- 10.25 Purchase and Sale Agreement of Midelfort Health Plan, Inc. between Registrant and Midelfort Clinic, Ltd. (4). 10.26 Joint Venture Agreement between BCBSUW, Registrant, Midelfort Health Plan, Inc. and Midelfort Clinic, Ltd. (4). 10.27 Service Agreement between BCBSUW and Registrant, effective January 1, 1996 (15). 10.28 Service Agreement between BCBSUW and Registrant, effective January 1, 1995 (12). 10.29 General Services Agreement between United Heartland and BCBSUW, effective January 1, 1991 (11). 10.30 Service Agreement between BCBSUW and Meridian Managed Care, Inc. (f/k/a Take Control, Inc.), effective January 1, 1991 (11). 10.31 Service Agreement between BCBSUW and Valley health Plan, Inc., effective January 1, 1993 (11). 10.32 Partnership Agreement between UWIC and AMSIC (5). 10.33 Stock Purchase Agreement by and among the Registrant, Ralph P. Cavaiani, Dianne M. Kiehl, Adam Kiehl and The Milwaukee Foundation Corporation dated May 26, 1994 (11). 10.34 Joint Acquisition Agreement by and between Compcare and St. Mary's Hospital of Milwaukee dated December 20, 1993 (7). 10.35 Service Agreement between the Registrant and Community Health Systems, LLC dated November 1, 1994 (9). 10.36 Amended and Restated Joint Venture Agreement among BCBSUW, the Registrant, UHC, U-Care, HPI and HPW dated October 31, 1994 (9). 10.37 Service Agreement between the Registrant and HPI dated November 1, 1994 (9). 10.38 License Agreement between the Registrant and U-Care dated November 1, 1994 (9). 10.39 Assumption Reinsurance Agreement between U-Care and HMOW (9). 10.40 Registrant's and BCBSUW's 1996 Management Incentive Plan (15).* 10.41 Registrant's and BCBSUW's 1995 Management Incentive Plan (12).* 10.42 Registrant's and BCBSUW's 1996 Profit Sharing Plan (15).* 10.43 Registrant's and BCBSUW's 1995 Profit Sharing Plan (12).* 10.44 BCBSUW 1995-1997 Long Term Executive Incentive Plan (15).* 10.45 BCBSUW 1994 Long Term Executive Incentive Plan (12).* 10.46 Registrant's Equity Incentive Plan as amended by the 1996 amendments through August 15, 1996. 10.47 Registrant's and BCBSUW's Supplemental Benefit Restoration Plan as Amended and Restated Effective January 1, 1994 (7)* 10.49 Employment Agreement between the Company and Samuel V. Miller dated October 30, 1995 (15)*. As superseded by the Employment Agreement dated , 1996. 10.50 1995 Director Stock Option Plan (14).* 10.51 1996 Profit Sharing Plan between Registrant and Unity Health Plans Insurance Corporation (15).* 10.52 Registrant's Voluntary Deferred Compensation Plan (15). 10.53 Trust under Registrant's Voluntary Deferred Compensation Plan (15).
II-4
NUMBER DESCRIPTION - ------------ ----------------------------------------------------------------------------------------------------- 10.54 Registrant's Deferred Compensation Plan for Directors (15). 10.55 Escrow Agreement dated , 1996 among Registrant, Wallace J. Hilliard and Bank One, Green Bay, N.A. 11 Statement regarding computation of per share earnings. (See Note 1 of Notes to Consolidated Financial Statements) (15). 13. 1995 Annual Report to Shareholders (15). 21. Subsidiaries of the Registrant (15). 23.1 Consent of Godfrey & Kahn, S.C. (included in legal opinion filed as Exhibit 8.1)** 23.2 Consent of Michael Best & Friedrich (included in legal opinion filed as Exhibit 5.1)** 23.3 Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. 23.4 Consent of Ernst & Young LLP -- United Wisconsin Services, Inc. 23.5 Consent of Ernst & Young LLP -- American Medical Security Group, Inc. 24.1 Powers of Attorney (set forth on signature page). 99.1 Form of Proxy for UWS Special Meeting. 99.2 Form of Proxy for AMSG Special Meeting. 99.4 Letter to Certificate Holders.**
- ------------------------ (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. (4) Incorporated by reference to exhibits filed with Registrant's Form 8-K filed on March 27, 1992. (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 period ended March 31, 1994. (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. II-5 (13) Incorporated by reference to exhibits filed with the Registrant's Form 10-Q for the period ended March 31, 1995. (14) Incorporated by reference to exhibits filed with Registrant's Form 10-Q for the period ended June 30, 1995. (15) Incorporated by reference to exhibits filed with Registrant's Form 10-K for the year ended December 31, 1995. - ------------------------ *Management contract or compensatory plan. **To be filed by amendment. (b) Financial Statement Schedules. None. (c) Reports, Opinions or Appraisals. All included in Appendix B to the Joint Proxy Statement/Prospectus. ITEM 22. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) To file, during any period, in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement, provided that, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (c) The registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post- II-6 effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (d) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (e) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (e) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (f) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Milwaukee, State of Wisconsin, on the 27th day of August, 1996. UNITED WISCONSIN SERVICES, INC. By: /S/ THOMAS R. HEFTY ----------------------------------- CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER KNOW ALL MEN BY THESE PRESENTS, that each person whose signature below constitutes and appoints Thomas R. Hefty and C. Edward Mordy, or either of them, his or her true and lawful attorneys-in-fact and agents, for him or her and in his or her name, place and stead in any and all capacities, to sign any and all amendments (including pre- and post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and any state of the United States, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED. SIGNATURE TITLE DATE - ----------------------------------- ------------------------- ------------------ Chairman of the Board /s/ THOMAS R. HEFTY (Principal Executive - ----------------------------------- Officer), President, August 27, 1996 Thomas R. Hefty Chief Executive Officer and Director /s/ C. EDWARD MORDY Vice President (Principal - ----------------------------------- Financial and Accounting August 27, 1996 C. Edward Mordy Officer) /s/ RICHARD A. ABDOO - ----------------------------------- Director August 27, 1996 Richard A. Abdoo /s/ THOMAS A. BAUSCH - ----------------------------------- Director August 27, 1996 Thomas A. Bausch /s/ JANE T. COLEMAN - ----------------------------------- Director August 27, 1996 Jane T. Coleman
II-8 SIGNATURE TITLE DATE - ----------------------------------- ------------------------- ------------------ /s/ JAMES L. FORBES - ----------------------------------- Director August 27, 1996 James L. Forbes /s/ JAMES C. HICKMAN - ----------------------------------- Director August 27, 1996 James C. Hickman /s/ WILLIAM R. JOHNSON - ----------------------------------- Director August 27, 1996 William R. Johnson /s/ EUGENE A. MENDEN - ----------------------------------- Director August 27, 1996 Eugene A. Menden /s/ DONALD P. MUENCH - ----------------------------------- Director August 27, 1996 Donald P. Muench /s/ ARTHUR W. NESBITT - ----------------------------------- Director August 27, 1996 Arthur W. Nesbitt
II-9 EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NO. - ------------ ------------------------------------------------------------------------------------------- ----------- 2.1 Agreement and Plan of Merger dated as of July 31, 1996 among United Wisconsin Services, Inc., American Medical Security Group, Inc., Wallace J. Hilliard and Ronald A. Weyers. 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 (15). 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). 4.4 Registration Rights and Stock Restriction Agreement dated , 1996 among Registrant, Wallace J. Hilliard and Ronald A. Weyers. 4.5 Form of Letter Agreement dated , 1996 between Registrant and each Affiliate of American Medical Security Group, Inc. relating to resale of stock of Registrant. 5.1 Opinion of Michael Best & Friedrich.** 8.1 Opinion of Godfrey & Kahn, S.C.** 10.1 United Wisconsin Insurance Company ("UWIC"), United Wisconsin Life Insurance Company ("UWLIC"), American Medical Security, Inc. ("AMSG"), American Medical Security Insurance Company (f/k/a Old Northwest Life Insurance Company) "AMSIC"), Wallace J. Hilliard and Ronald A. Weyers (as amended) (1). 10.2 Voting Trust Agreement among owners and holders of shares of the capital stock of AMSG and Wallace J. Hilliard (1). 10.3 Stock Restriction Agreement among the Registrant, AMSG and the owners and holders of the shares of capital stock of AMSG (as amended). As amended by Agreement dated August 2, 1993 (7). As amended by Agreements dated October 9, 1991, October 29, 1991 and October 29, 1991 (8). 10.4 Administrative Services Agreement among UWIC, UWLIC, AMSG and AMSIC dated January 1, 1994 (12). 10.5 Reinsurance Agreement between UWIC and AMSIC (1). As amended by Amendments to Reinsurance Agreement, dated January 1, 1992 and January 1, 1993 (5). 10.6 Reinsurance Agreement between UWLIC and AMSIC (f/k/a) Old Northwest Life Insurance Company) (1) (as amended by Amendment to Reinsurance Agreement dated January 1, 1992) (5). 10.7 Employment Contract between AMSG and Wallace J. Hilliard (1). As superseded by Employment Agreement between and Wallace J. Hilliard.
NUMBER DESCRIPTION PAGE NO. - ------------ ------------------------------------------------------------------------------------------- ----------- 10.8 Employment Contract between AMSG and Ronald A. Weyers (1). As superseded by Employment Agreement between and Ronald A. Weyers. 10.9 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). 10.10 Underwriting Management Agreement between United Heartland, Inc. and UWIC (1). 10.11 Underwriting Management Agreement between United Heartland, Inc. and Virginia Surety Company, Inc. (1). 10.12 Agreement for Electronic Date 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). 10.13 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). 10.14 Comprehensive Tax Allocation Agreement dated July 1, 1994 among BCBSUW, the Registrant and various subsidiaries thereof (12). 10.15 Federal Income Tax Allocation Agreement for the period starting July 1, 1994 among the Registrant and certain affiliates thereof (9). As modified by Agreements effective October 1, 1994 and January 1, 1995 (12). 10.16 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). 10.17 BCBSUW Deferred Compensation Plan for Directors (1).* 10.18 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).* 10.19 BCBSUW Voluntary Deferred Compensation Plan (1).* 10.20 BCBSUW Voluntary Deferred Compensation Trust Agreement (1).* 10.21 Executive Reimbursement Group Insurance Policy (1).* 10.22 BCBSUW Salaried Employees Retirement Plan effective January 1, 1993 (5).* 10.23 BCBSUW Supplemental Executive Retirement Plan (1).* 10.24 1992 Stock Appreciation Rights Plan and Form of Grant of Stock Appreciation Rights (2). As amended February 15, 1995 (12).* 10.25 Purchase and Sale Agreement of Midelfort Health Plan, Inc. between Registrant and Midelfort Clinic, Ltd. (4).
NUMBER DESCRIPTION PAGE NO. - ------------ ------------------------------------------------------------------------------------------- ----------- 10.26 Joint Venture Agreement between BCBSUW, Registrant, Midelfort Health Plan, Inc. and Midelfort Clinic, Ltd. (4). 10.27 Service Agreement between BCBSUW and Registrant, effective January 1, 1996 (15). 10.28 Service Agreement between BCBSUW and Registrant, effective January 1, 1995 (12). 10.29 General Services Agreement between United Heartland and BCBSUW, effective January 1, 1991 (11). 10.30 Service Agreement between BCBSUW and Meridian Managed Care, Inc. (f/k/ a Take Control, Inc.), effective January 1, 1991 (11). 10.31 Service Agreement between BCBSUW and Valley health Plan, Inc., effective January 1, 1993 (11). 10.32 Partnership Agreement between UWIC and AMSIC (5). 10.33 Stock Purchase Agreement by and among the Registrant, Ralph P. Cavaiani, Dianne M. Kiehl, Adam Kiehl and The Milwaukee Foundation Corporation dated May 26, 1994 (11). 10.34 Joint Acquisition Agreement by and between Compcare and St. Mary's Hospital of Milwaukee dated December 20, 1993 (7). 10.35 Service Agreement between the Registrant and Community Health Systems, LLC dated November 1, 1994 (9). 10.36 Amended and Restated Joint Venture Agreement among BCBSUW, the Registrant, UHC, U-Care, HPI and HPW dated October 31, 1994 (9). 10.37 Service Agreement between the Registrant and HPI dated November 1, 1994 (9). 10.38 License Agreement between the Registrant and U-Care dated November 1, 1994 (9). 10.39 Assumption Reinsurance Agreement between U-Care and HMOW (9). 10.40 Registrant's and BCBSUW's 1996 Management Incentive Plan (15).* 10.41 Registrant's and BCBSUW's 1995 Management Incentive Plan (12).* 10.42 Registrant's and BCBSUW's 1996 Profit Sharing Plan (15).* 10.43 Registrant's and BCBSUW's 1995 Profit Sharing Plan (12).* 10.44 BCBSUW 1995-1997 Long Term Executive Incentive Plan (15).* 10.45 BCBSUW 1994 Long Term Executive Incentive Plan (12).* 10.46 Registrant's Equity Incentive Plan as amended by the 1996 amendments through August 15, 1996. 10.47 Registrant's and BCBSUW's Supplemental Benefit Restoration Plan as Amended and Restated Effective January 1, 1994 (7)* 10.49 Employment Agreement between the Company and Samuel V. Miller dated October 30, 1995 (15)*. As superseded by the Employment Agreement dated , 1996. 10.50 1995 Director Stock Option Plan (14).* 10.51 1996 Profit Sharing Plan between Registrant and Unity Health Plans Insurance Corporation (15).* 10.52 Registrant's Voluntary Deferred Compensation Plan (15).
NUMBER DESCRIPTION PAGE NO. - ------------ ------------------------------------------------------------------------------------------- ----------- 10.53 Trust under Registrant's Voluntary Deferred Compensation Plan (15). 10.54 Registrant's Deferred Compensation Plan for Directors (15). 10.55 Escrow Agreement dated , 1996 among Registrant, Wallace J. Hilliard and Bank One, Green Bay, N.A. 11 Statement regarding computation of per share earnings. (See Note 1 of Notes to Consolidated Financial Statements) (15). 13. 1995 Annual Report to Shareholders (15). 21. Subsidiaries of the Registrant (15). 23.1 Consent of Godfrey & Kahn, S.C. (included in legal opinion filed as Exhibit 8.1)** 23.2 Consent of Michael Best & Friedrich (included in legal opinion filed as Exhibit 5.1)** 23.3 Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. 23.4 Consent of Ernst & Young LLP -- United Wisconsin Services, Inc. 23.5 Consent of Ernst & Young LLP -- American Medical Security Group, Inc. 24.1 Powers of Attorney (set forth on signature page). 99.1 Form of Proxy for UWS Special Meeting. 99.2 Form of Proxy for AMSG Special Meeting. 99.4 Letter to Certificate Holders.**
- ------------------------ (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. (4) Incorporated by reference to exhibits filed with Registrant's Form 8-K filed on March 27, 1992. (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 period ended March 31, 1994. (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 March 31, 1995. (14) Incorporated by reference to exhibits filed with Registrant's Form 10-Q for the period ended June 30, 1995. (15) Incorporated by reference to exhibits filed with Registrant's Form 10-K for the year ended December 31, 1995. - ------------------------ *Management contract or compensatory plan. **To be filed by amendment. (b) Financial Statement Schedules. None. (c) Reports, Opinions or Appraisals. All included in Appendix B to the Joint Proxy Statement/Prospectus. EX-2.1 2 EXHIBIT 2.1 APPENDIX A AGREEMENT AND PLAN OF MERGER BETWEEN UNITED WISCONSIN SERVICES, INC., BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN AMERICAN MEDICAL SECURITY GROUP, INC., WALLACE J. HILLIARD AND RONALD A. WEYERS TABLE OF CONTENTS
PAGE --------- ARTICLE I................................................................................................... A-2 The Merger.............................................................................................. A-2 1.01 THE MERGER........................................................................... A-2 1.02 CLOSING.............................................................................. A-2 ARTICLE II.................................................................................................. A-2 Representations and Warranties of the Company and the Principal Shareholders............................ A-2 2.01 ORGANIZATION AND AUTHORITY........................................................... A-2 2.02 SUBSIDIARIES AND AFFILIATES.......................................................... A-2 2.03 CAPITALIZATION OF THE COMPANY........................................................ A-3 2.04 AUTHORIZATION........................................................................ A-3 2.05 FINANCIAL STATEMENTS................................................................. A-4 2.06 INSURANCE COMPANY FINANCIAL STATEMENTS............................................... A-4 2.07 RECEIVABLES.......................................................................... A-5 2.08 ABSENCE OF CERTAIN CHANGES........................................................... A-5 2.09 LITIGATION AND OTHER PROCEEDINGS..................................................... A-6 2.10 COMPLIANCE WITH LAWS................................................................. A-6 2.11 TAXES................................................................................ A-6 2.12 TITLE TO PROPERTIES.................................................................. A-7 2.13 CONTRACTS AND COMMITMENTS............................................................ A-7 2.14 EMPLOYEE RELATIONS................................................................... A-7 2.15 EMPLOYEE BENEFIT PLANS............................................................... A-8 2.16 INTELLECTUAL PROPERTY................................................................ A-8 2.17 ENVIRONMENTAL MATTERS................................................................ A-9 2.18 CONTINGENT OR UNDISCLOSED LIABILITIES................................................ A-9 2.19 INSURANCE............................................................................ A-9 2.20 RELATED PARTY TRANSACTIONS........................................................... A-9 2.21 REGISTRATION STATEMENT, ETC.......................................................... A-10 2.22 BROKERS AND FINDERS.................................................................. A-10 2.23 DISCLOSURE........................................................................... A-10 ARTICLE III................................................................................................. A-10 Representations and Warranties of UWSI.................................................................. A-10 3.01 ORGANIZATION AND AUTHORITY........................................................... A-10 3.02 CAPITALIZATION....................................................................... A-10 3.03 AUTHORIZATION........................................................................ A-11 3.04 REGISTRATION STATEMENT, ETC.......................................................... A-11 3.05 BROKERS AND FINDERS.................................................................. A-11 3.06 DISCLOSURE........................................................................... A-11 3.07 SEC REPORTS.......................................................................... A-12 ARTICLE IV.................................................................................................. A-12 Conduct of Business Prior to the Effective Time......................................................... A-12 4.01 CONDUCT OF THE COMPANY'S BUSINESS PRIOR TO THE EFFECTIVE TIME........................ A-12 ARTICLE V................................................................................................... A-12 Additional Agreements................................................................................... A-12 5.01 ACCESS AND INFORMATION............................................................... A-12 5.02 REGISTRATION STATEMENT AND PROXY STATEMENT........................................... A-12 5.03 COMPANY SHAREHOLDERS' APPROVAL....................................................... A-13 5.04 UWSI SHAREHOLDERS APPROVAL........................................................... A-13 5.05 MISCELLANEOUS AGREEMENTS AND CONSENTS................................................ A-13 5.06 INTERIM FINANCIAL STATEMENTS......................................................... A-14
A-i 5.07 INSURANCE REGULATORY APPROVALS....................................................... A-14 5.08 HART-SCOTT-RODINO COMPLIANCE......................................................... A-14 5.09 CERTAIN NOTIFICATIONS................................................................ A-14 5.10 VOTING AGREEMENT..................................................................... A-14 5.11 BEST EFFORTS......................................................................... A-14 5.12 PRESS RELEASES....................................................................... A-14 5.13 EXPENSES............................................................................. A-14 5.14 CERTAIN AGREEMENTS................................................................... A-15 5.15 UWSI CAPITALIZATION.................................................................. A-15 ARTICLE VI.................................................................................................. A-15 Conditions.............................................................................................. A-15 6.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO CONSUMMATE THE MERGER...................... A-15 6.02 CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS TO CONSUMMATE THE MERGER.......................................................................... A-16 6.03 CONDITIONS TO OBLIGATIONS OF UWSI TO CONSUMMATE THE MERGER........................... A-17 ARTICLE VII................................................................................................. A-18 Termination, Amendment.................................................................................. A-18 7.01 TERMINATION.......................................................................... A-18 7.02 AMENDMENT............................................................................ A-18 ARTICLE VIII................................................................................................ A-18 Indemnification......................................................................................... A-18 8.01 INDEMNIFICATION BY SHAREHOLDERS...................................................... A-18 8.02 LIMITATIONS.......................................................................... A-19 8.03 PROCEDURE............................................................................ A-19 8.04 INDEMNIFICATION BY UWSI.............................................................. A-20 8.05 PROCEDURE............................................................................ A-20 ARTICLE IX.................................................................................................. A-21 General Provisions...................................................................................... A-21 9.01 NOTICES.............................................................................. A-21 9.02 MISCELLANEOUS........................................................................ A-22 9.03 WAIVER: REMEDIES..................................................................... A-22 9.04 SEVERABILITY......................................................................... A-23 9.05 GOVERNING LAW........................................................................ A-23 9.06 "KNOWLEDGE".......................................................................... A-23 9.07 ARBITRATION.......................................................................... A-23
EXHIBITS Exhibit A Plan of Merger Exhibit B Registration Rights and Stock Restriction Agreement Exhibit C Agreements of Affiliates Exhibit D Escrow Agreement
A-ii AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into this 31st day of July, 1996 by and among UNITED WISCONSIN SERVICES, INC., a Wisconsin corporation ("UWSI"), AMERICAN MEDICAL SECURITY GROUP, INC., a Delaware corporation (the "Company"), BLUE CROSS & BLUE SHIELD UNITED OF WISCONSIN ("BCBSUW"), and WALLACE J. HILLIARD ("Hilliard"), individually and as trustee under the Voting Trust Agreement hereinafter defined, and RONALD A. WEYERS ("Weyers"), individually and as successor trustee under the Voting Trust Agreement (Hilliard, individually, and Weyers, individually, are referred to collectively as the "Principal Shareholders"). RECITALS: WHEREAS, all of the shareholders of the Company are parties to that certain Voting Trust Agreement, dated as of February 3, 1989 (the "Voting Trust Agreement"), pursuant to which Voting Trust Agreement Hilliard has been appointed Trustee and to which Weyers has been appointed successor Trustee; WHEREAS, the Principal Shareholders own, in the aggregate, approximately 43 percent of the outstanding shares of capital stock of the Company; WHEREAS, the parties hereto are party to that certain Joint Venture Agreement, effective October 1, 1988, as amended (the "Joint Venture Agreement") and to that certain Stock Restriction Agreement, dated February 3, 1989 (the "Stock Restriction Agreement"); WHEREAS, on April 29, 1996, UWSI gave notice of intent to exercise the option under Paragraphs 5.4 and 5.5 of Article V of the Joint Venture Agreement and Paragraph 3 of Article III of the Stock Restriction Agreement; WHEREAS, the parties hereto desire to amend and restructure the exercise of such option in accordance with the terms hereof. WHEREAS, the respective Boards of Directors of UWSI and the Company have approved the transactions provided for by this Agreement, pursuant to which the Company is to be merged into UWSI in accordance with the applicable provisions of the Delaware General Corporation Law (the "DGCL") and the Wisconsin Business Corporation Law (the "WBCL"), which merger is intended to qualify as a reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, in exchange for all of the issued and outstanding shares of common stock, $1.00 par value per share, of the Company (the "Company Common Stock") and in settlement of all of the outstanding options to acquire shares of Company Common Stock (the "Options"), UWSI has agreed to pay to the holders of the Company Common Stock (other than UWSI) and the Options, in the aggregate and in such proportions as may be determined by the holders thereof (other than UWSI), (i) 4,000,000 shares of common stock, no par value per share, of UWSI ("UWSI Common Stock"), as adjusted as set forth in the Plan of Merger attached hereto as Exhibit A (the "Plan of Merger"), and (ii) $67,010,000, less expenses attributable to the Shareholders as provided herein, each subject to the provisions of this Agreement and the Plan of Merger, all upon the terms and conditions hereinafter set forth; A-1 NOW, THEREFORE, in order to consummate the transactions set forth above and in consideration of the mutual covenants, agreements, representations and warranties herein contained, the parties agree as follows: ARTICLE I THE MERGER 1.01 THE MERGER. Subject to the terms and conditions of this Agreement and the Plan of Merger: the Company shall be merged with and into UWSI (the "Merger") in accordance with Section 252 of the DGCL and Section 180.1101 of the WBCL; the separate corporate existence of the Company shall cease; and UWSI shall be the surviving corporation . The Plan of Merger sets forth (i) the terms of the Merger and the mode of carrying the same into effect, (ii) the manner of converting the outstanding shares of Company Common Stock (other than Company Common Stock held by UWSI) into a combination of shares of UWSI Common Stock and cash, and (iii) the manner of converting the outstanding Options into options to acquire shares of UWSI Common Stock. The Merger shall be consummated following the Closing provided for in Section 1.02 hereof when properly executed Articles of Merger are executed and filed with the Secretary of State of Delaware in accordance with the DGCL and the Department of Financial Institutions of the State of Wisconsin in accordance with the WBCL and when the Plan of Merger is received and accepted as filed by the Delaware Secretary of State and the Department of Financial Institutions of the State of Wisconsin (the "Effective Time"). 1.02 CLOSING. The closing of the transactions contemplated by this Agreement (the "Closing") and the Plan of Merger shall take place at the offices of Michael Best & Friedrich, 100 East Wisconsin Avenue, Milwaukee, Wisconsin, immediately following the meeting of UWSI's shareholders referred to in Section 5.04 or at such other time and place as UWSI and the Company shall agree. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS The Company and the Principal Shareholders (on behalf of all the Shareholders of the Company, other than UWSI) hereby make the following representations and warranties to UWSI. The "Disclosure Schedule" shall mean the disclosure schedule relating to each section of this Article II which has previously been delivered to UWSI. Disclosure of any information in any one section or schedule of the Disclosure Schedule shall be deemed to be disclosure in any other section or schedule thereof. 2.01 ORGANIZATION AND AUTHORITY. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with all requisite corporate power and corporate authority to own, lease and operate its properties and to carry on its business as now being conducted, is qualified in the jurisdictions set forth on the Disclosure Schedule, and is not otherwise required to be qualified in any other jurisdiction, except where the failure to do so would not have a Material Adverse Effect. For purposes of this Agreement unless otherwise specified, "Material Adverse Effect" shall mean a material adverse effect on the Company and its subsidiaries, taken as a whole. Copies of the articles or certificate of incorporation and by-laws of each of the Company and each Controlled Subsidiary and Noncontrolled Subsidiary (as such terms are hereinafter defined) that have been heretofore delivered and/or made available to UWSI are complete and correct as of the date hereof. 2.02 SUBSIDIARIES AND AFFILIATES. Except as set forth on the Disclosure Schedule, the corporations, partnerships or other entities in which the Company has a greater than 50 percent equity interest (the "Controlled Subsidiaries") and the corporations, partnerships or other entities in which the Company's equity interest is not a controlling interest (the "Noncontrolled Subsidiaries") are set forth on the Disclosure Schedule. The Company is, directly or indirectly, the record and beneficial owner of the percentage of the outstanding shares of capital stock of each of the Controlled and A-2 Noncontrolled Subsidiaries shown on the Disclosure Schedule and the capitalization of each such subsidiary is set forth on the Disclosure Schedule. Except as set forth on the Disclosure Schedule, no equity securities of any of the Controlled Subsidiaries are, or may become, required to be issued by reason of any options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of capital stock of any Controlled Subsidiaries, and there are no contracts, commitments, understandings or arrangements by which any Controlled Subsidiary is bound to issue additional shares of its capital stock, or options, warrants, or rights to purchase or acquire any additional shares of its capital stock. Except as set forth on the Disclosure Schedule, all of such equity interests are owned by the Company free and clear of any claim, lien, encumbrance or agreement with respect thereto. 2.03 CAPITALIZATION OF THE COMPANY. The authorized capital stock of the Company consists of (a) 600,000 shares of common stock, $1.00 par value per share, of which 174,733 2/3 shares of Company Common Stock are issued and outstanding as of the date of this Agreement, and (b) 15,000 shares of Series A Preferred Stock, $1.00 par value, with a stated value of $1,000 per share, of which 15,000 shares are issued and outstanding as of the date of this Agreement. The Disclosure Schedule sets forth a list of all of the holders of Company Common Stock and the number of shares owned by each such holder. All of the outstanding shares of Company Common Stock have been issued pursuant to and in accordance with valid exemptions from registration under the Securities Act of 1933, as amended and the rules and regulations promulgated thereunder (collectively the "1933 Act"), and any applicable state securities laws and rules and regulations under such laws. All of the outstanding shares of Company Common Stock are duly authorized, validly issued, fully paid and nonassessable, with no liability attaching to the ownership thereof except as provided in Section 180.0622 of the WBCL and judicial interpretations thereof, and all such shares are free of pre-emptive rights. The Disclosure Schedule sets forth a list of all Options, the number of shares acquirable upon exercise of the Options, the exercise price, the expiration date and the beneficial owner of each such Option. Except as set forth on the Disclosure Schedule, there are no other shares of capital stock or other equity securities (or debt securities with any voting rights or convertible into securities with any voting rights) of the Company or any Controlled Subsidiary outstanding and no other outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of capital stock of the Company or any Controlled Subsidiary. 2.04 AUTHORIZATION. The Company has full corporate power and corporate authority to enter into this Agreement and the Plan of Merger and to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Plan of Merger and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Company's Board of Directors and, except for the approval of the Plan of Merger by its shareholders, no other corporate proceedings on the part of the Company or any Controlled Subsidiary are necessary to authorize this Agreement, the Plan of Merger and the transactions contemplated hereby and thereby. This Agreement and the Plan of Merger have each been duly executed and delivered by the Company. This Agreement and the Plan of Merger are, and subject to approval by the shareholders of the Company will be, the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms except to the extent limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general equitable principles. This Agreement has been duly executed and delivered by the Principal Shareholders and is the legal, valid and binding obligation of the Principal Shareholders enforceable against each of the Principal Shareholders in accordance with its terms except to the extent limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general equitable principles. Except as set forth on the Disclosure Schedule, neither the execution and delivery of this Agreement nor the Plan of Merger by the Company, nor the execution and delivery of this Agreement by the Principal Shareholders, nor the consummation of the transactions contemplated hereby and thereby, nor compliance by the Company or the Principal Shareholders with any of the provisions hereof or thereof will (i) violate, conflict with, or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a A-3 default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration, or result in the creation of any lien, security interest, charge or encumbrance upon, except for Permitted Encumbrances (as hereinafter defined), any of the properties or assets of the Company or any Controlled Subsidiary, under any of the terms, conditions or provisions of (x) their respective certificates of incorporation or by-laws, or (y) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company, any Controlled Subsidiary or any of the Principal Shareholders is a party, or by which any property or assets of the foregoing may be subject, or (ii) violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any Controlled Subsidiary or any of the Principal Shareholders or any of their respective properties or assets, except where such a violation, breach, default, termination or lien of any of the foregoing would not have a Material Adverse Effect. Other than in connection with or in compliance with the provisions of the DGCL, the 1933 Act, the securities laws of the various states, Section 7A of the Clayton Act and the rules and regulations thereunder (the "Hart-Scott-Rodino Act"), no notice or report to, filing with, or authorization, consent or approval of, any public body or authority (other than the insurance regulatory authorities listed on the Disclosure Schedule) is necessary for the execution, delivery and performance by the Company or any Controlled Subsidiary and the Principal Shareholders of this Agreement or the Plan of Merger. 2.05 FINANCIAL STATEMENTS. Attached on the Disclosure Schedule are (i) the audited consolidated financial statements (including balance sheet and statements of stockholders' equity, income and cash flow) of the Company for its fiscal years ended December 31, 1993 through December 31, 1995, including in each case the related footnotes thereto, together with the applicable reports of the Company's independent auditors Ernst & Young LLP, and (ii) the unaudited consolidated financial statements (including balance sheet and statement of income) as of June 30, 1996 (collectively, the "Financial Statements") (the balance sheet as of June 30, 1996 being herein referred to as the "Company Balance Sheet"). The Company's books and records of accounts accurately reflect all of the assets, liabilities, transactions and results of operations of the Company, except where any inaccuracy would not have a Material Adverse Effect, and the Financial Statements have been prepared based upon and in conformity therewith. The Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") maintained and applied on a consistent basis throughout the indicated periods, and fairly present the financial condition and results of operation of the Company at the dates and for the relevant periods indicated in accordance with GAAP. True and correct copies of all written reports submitted to the Company or the Principal Shareholders by the Company's auditors since January 1, 1994 relating to the findings of audits or examination of the books and records of the Company or any Controlled Subsidiary have been delivered to UWSI. 2.06 INSURANCE COMPANY FINANCIAL STATEMENTS. Except as set forth on the Disclosure Schedule, each Controlled Subsidiary that is an insurance company or a health maintenance organization has delivered to UWSI complete and correct copies of the Annual Statements for the years ended December 31, 1995, 1994 and 1993, and the Quarterly Statement for the quarter ended March 31, 1996, together with all Exhibits and Schedules thereto (the "Statements"); provided, however, that any such Controlled Subsidiary was licensed to operate as an insurance company or health maintenance organization during said fiscal years ("Insurers"). The Statements have been prepared in accordance with Statutory Accounting Practices throughout the periods involved and in accordance with the books and records of said Insurers, except as expressly set forth or disclosed in the notes, Exhibits or Schedules thereto. The Statements fairly and accurately present the assets, liabilities and capital and surplus of said Insurers as of the respective dates thereof in accordance with Statutory Accounting Practices consistently applied, and do not omit to state or reflect any material fact concerning said Insurers required to be stated or reflected therein or necessary to make the statements made therein not misleading in light of the circumstances under which made. As used in this Agreement, "Statutory Accounting Practices" means the accounting procedures and methods prescribed or permitted by the National Association of Insurance Commissioners as modified by the Department of Insurance for the state of domicile of each Insurer. A-4 (a) Except as disclosed on the Disclosure Schedule, as of March 31, 1996, no Insurer had any material liability, whether accrued, absolute, fixed, contingent or otherwise, of a nature required to be reflected on the balance sheet of said Insurer prepared in accordance with Statutory Accounting Practices, which liability is not fully and correctly reflected or reserved against in the balance sheet forming a part of the Insurers Statements for the quarter ended March 31, 1996. Except as set forth on the Disclosure Schedule, since March 31, 1996, no Insurer has incurred any liabilities or obligations (absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise) except liabilities incurred in the ordinary course of business consistent with past practice. (b) Each Insurer's reserves met, as of December 31, 1995 and April 1, 1996, and will meet as of the Closing Date, the requirements of the state of domicile and were and will be at least as great as the minimum aggregate amount required by each state in which each Insurer was and will be licensed to do direct business. 2.07 RECEIVABLES. Except as set forth on the Disclosure Schedule, all accounts, notes and other receivables of the Company, whether reflected in the Financial Statements or otherwise, represent sales in the ordinary course of business. 2.08 ABSENCE OF CERTAIN CHANGES. (a) Since June 25, 1996 through the date of this Agreement, the Company has conducted its business only in the ordinary course thereof and has not experienced any changes in its condition (financial or otherwise), assets, liabilities, business, prospects or operations which individually or in the aggregate had or could have a material adverse effect. For purposes of this Section 2.08 only, an item shall be deemed "material" if the dollar amount or value associated with such item exceeds $25,000. Without limiting the generality of the foregoing sentence, since June 25, 1996, neither the Company nor any Controlled Subsidiary has, except as set forth on the Disclosure Schedule: (i) in a single transaction or a series of related transactions, sold (including by sale-leaseback), leased, licensed, pledged, disposed of or encumbered any assets which individually or in the aggregate, have a fair market value in excess of $50,000; (ii) incurred or became contingently liable with respect to any indebtedness for borrowed money or guaranteed any such indebtedness, where the aggregate amount of indebtedness so incurred or guaranteed exceeded $10,000 or redeemed, purchased, acquired or offered to purchase or acquire any long-term debt; (iii) acquired or agreed to acquire by merging with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business entity, in a transaction or series of related transactions; (iv) changed any of its accounting practices or procedures; (v) amended or proposed to amend its charter or bylaws; or split, combined or reclassified its outstanding capital stock, or declared, set aside or paid any dividend or distribution in respect of any capital stock; (vi) entered into, amended or became obligated under any employment, severance, bonus, profit sharing or other employee benefit arrangement; (vii) issued, purchased or redeemed any shares of capital stock of the Company or any Controlled Subsidiary (including any security convertible or exchangeable into capital stock) other than: the issuance of shares of Company Common Stock upon exercise of options outstanding on, and in accordance with their terms as of, June 25, 1996, or issued, granted or otherwise created any portion or right to acquire any such capital stock; (viii) prepaid any material expenses, indebtedness or other obligations; A-5 (ix) entered into or amended any contract, agreement or commitment, or engaged in any transaction, in each case which was material to the Company and which was not in the usual and ordinary course of business; (x) entered into any contract, agreement or commitment or engaged in any transaction (other than transactions pursuant to agreements in existence on June 25, 1996 which on such date had been previously disclosed in writing to UWSI) with any affiliate of Hilliard, Weyers or any officer of the Company or any Controlled Subsidiary; (xi) settled any material claim (including without limitations, any tax claim), action or lawsuit involving the Company or any of its Controlled Subsidiaries pending as of or arising on or after June 25, 1996, or amended any tax return in any respect; (xii) released, waived or terminated any material obligation of any third party to the Company or any Controlled Subsidiary; (xiii) solicited or encouraged any inquiries or proposals regarding, or offers for, or entered into or continued any discussions with, or provided any information to, any third party concerning any sale or transfer of the Company or any of its assets or entered into or consummated any agreement or understanding providing for a sale or transfer of the Company or any of its assets, other than as contemplated herein; or (xiv) agreed, whether or not in writing, to take any of the actions described in clauses (i)-(xiii) above. 2.09 LITIGATION AND OTHER PROCEEDINGS. Except as set forth on the Disclosure Schedule, none of the Company, any Controlled Subsidiary or either Principal Shareholder is currently a party to any pending or, to the Company's and each Principal Shareholder's knowledge, threatened, claim (other than benefit claims in the ordinary course of business), action, suit, investigation or proceeding or is a party to any order, judgment or decree relating to or affecting the Company, any Controlled Subsidiary or, with respect to the Principal Shareholders, relating to or affecting their shares of Company Common Stock or their positions with the Company. Except as set forth on the Disclosure Schedule, since January 1, 1993, neither the Company nor any Controlled Subsidiary has been a party to any such claim, action, suit, investigation or proceeding. Except as described on the Disclosure Schedule, there is no outstanding order, decree or stipulation issued by any federal, state or local authority to which the Company or any Controlled Subsidiary is a party or subject and which has or is reasonably likely to have a Material Adverse Effect. 2.10 COMPLIANCE WITH LAWS. Except as set forth on the Disclosure Schedule, to the knowledge of the Company and each Principal Shareholder, the Company and each Controlled Subsidiary is conducting its business in compliance with all applicable laws and regulations in each jurisdiction in which it conducts business, including any insurance or insurance-related laws, regulations or rules, except where a failure to comply would not have a Material Adverse Effect. The Disclosure Schedule lists all licenses, registrations and permits, and applications with respect to the business and operations of each of the Company and the Controlled Subsidiaries. Except as set forth on the Disclosure Schedule, to the knowledge of the Company and each Principal Shareholder, the Company and each of the Controlled Subsidiaries currently has all governmental approvals, consents, licenses, registrations, and permits necessary to carry on its business as presently conducted (collectively, "Licenses"), except where the failure to have any such License would not have a Material Adverse Effect, and neither the Company nor any Principal Shareholder has received notice of violation of any laws or notice of any proposed regulations or changes in the requirement of such approvals, consents, licenses, registrations, or permits which notice has not previously been disclosed to UWSI in writing. 2.11 TAXES. To the knowledge of the Company and each Principal Shareholder, and except as set forth in the Disclosure Schedule: (i) the Company has duly filed all material reports and returns and extensions ("Tax Returns") required to be filed by it relating to all taxes imposed by any jurisdiction ("Taxes"); (ii) all material liabilities for Taxes which are due from the Company with A-6 respect to periods ending on or before the Closing Date for which a statute of limitations has not barred the assessment of deficiencies have been paid or provision therefor has been made on the Company Balance Sheet; and (iii) the Tax Returns reflect all Taxes due and payable with respect to the periods covered thereby and there are no other tax liabilities, deficiencies, interest or penalties payable or asserted with respect to such periods. Except as set forth on the Disclosure Schedule, there are no actions, suits, proceedings, investigations or claims pending with respect to tax matters. Except as set forth on the Disclosure Schedule, there are no pending audits by any federal, state, local or foreign taxing authority of any payment, return or report made or filed by the Company. 2.12 TITLE TO PROPERTIES. (a) Except as set forth on the Disclosure Schedule, the Company has good and marketable title to all of the properties and assets recorded on the Company Balance Sheet free and clear of all mortgages, liens, pledges, charges or encumbrances of any nature whatsoever, except for (i) such properties and assets as may have been sold in the ordinary course of business since the date of the Company Balance Sheet, or (ii) Permitted Encumbrances. As used herein "Permitted Encumbrances" means municipal and zoning ordinances, recorded easements, covenants and restrictions provided the same do not prohibit or materially interfere with the present use, or materially affect the present value, of the real property owned by the Company or any Controlled Subsidiary. All properties and assets owned and currently used by the Company in the Company's business are in good condition and repair, normal wear and tear excepted. Surveys of all real property owned by the Company, true and correct copies of which have been furnished to UWSI, are listed on the Disclosure Schedule. (b) The Disclosure Schedule sets forth: (i) a true and complete list of all real property leases of the Company and all personal property leases to which the Company is a party as lessee as of the date hereof involving an annual lease payment of more than $20,000, including an identification of the parties, the property, the term of the lease and the rent or lease payments thereunder; and (ii) a true and complete list of all real property owned by the Company as of the date hereof, including an identification of the property, the record owner and the principal structures on it. 2.13 CONTRACTS AND COMMITMENTS. Except as set forth on the Disclosure Schedule, neither the Company nor any Controlled Subsidiary has any written or oral contract, commitment, or other agreement or arrangement, including any note, loan agreement, guarantee or other evidence of indebtedness of the Company, which involves an annual aggregate consideration with a value in excess of $100,000 (excluding any agreements with insureds or plan sponsors), or any contracts, commitments, or other agreements or arrangements with any Related Party individually in excess of $60,000. All of such contracts, commitments, or other agreements or arrangements to which the Company or any Controlled Subsidiary is a party or by which any of its assets or properties are bound or affected are in full force and effect and no event or condition has occurred or exists or has been threatened in writing by any of the other parties thereto to have occurred or exist, which constitutes or with lapse of time or giving of notice would constitute a default or basis for acceleration under any such contract, commitment, arrangement or other agreement. Except as set forth on the Disclosure Schedule, neither the Company nor any Controlled Subsidiary has given any revocable or irrevocable power of attorney to any person, firm or corporation for any purpose whatsoever. Set forth on the Disclosure Schedule are written descriptions of all such contracts, commitments, agreements or arrangements that are oral. The Company is not bound by any covenant not to compete or otherwise restricted by any agreement to which it is a party from carrying on or engaging in any business anywhere in the world. 2.14 EMPLOYEE RELATIONS. Neither the Company nor any Controlled Subsidiary is a party to any collective bargaining agreement covering or relating to any of its employees and has not recognized, is not required to recognize and during the past five years has not received a demand for recognition by any collective bargaining representative or experienced any strikes or work stoppages or slowdowns. Each of the Company and its Controlled Subsidiaries is in compliance with all applicable laws, rules and regulations relating to employment or employment practices, including A-7 those relating to wages, hours, collective bargaining and the withholding and payment of taxes and contributions, and the Company is in compliance with the Occupational Safety and Health Act and applicable Federal Civil Rights laws except where the failure to so comply would not have a Material Adverse Effect. 2.15 EMPLOYEE BENEFIT PLANS. (a) Listed in the Disclosure Schedule are all written employment agreements presently in effect between the Company and its employees, all collective bargaining agreements between Company and its employees, and all benefit plans in effect for employees of the Company, including with-out limitation all bonus, pension and retirement, deferred compensation, vacation, and severance pay plans. (b) The Company is in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to so comply would not have a Material Adverse Effect on the Company. There is no labor strike, dispute, slowdown, representation campaign or work stoppage actually pending with respect to the Company's employees. (c) Since June 25, 1996, there has not been (i) any increase in the rate or terms of compensation payable by the Company to, or any increase in the rate or terms of any bonus, insurance, pension, or other employee benefit plan on behalf of, its officers, except increases occurring in the ordinary course of business in accordance with its customary practices (which shall include normal period performance reviews and related compensation and benefit increases), or (ii) any general or uniform increase in the compensation or benefits of employees of the Company. (d) There are no "employee pension benefit plans" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), subject to Title IV of ERISA, in which the Company's employees are participants. Each employee pension benefit plan listed on the Disclosure Schedule is in compliance in all material respects with the applicable provisions of the Code and ERISA, including the fiduciary and prohibited transaction rules and funding requirements. Except as required by law, the Company has made no commitment to provide retiree health coverage to any employee. The consummation of the transactions contemplated by this Agreement will not trigger any severance payments. (e) Except as set forth on the Disclosure Schedule, there are no pending claims, lawsuits or arbitrations which have been asserted or instituted against the Company with respect to any laws respecting employment and employment practices of the Company. (f) The Company is not a party to any collective bargaining agreement and no such contract is being negotiated with the Company. No representation question exists or has been raised respecting the employees of the Company, nor are there any campaigns being conducted to solicit cards from the employees of the Company to authorize representation by any labor organization. (g) The Company has (i) timely filed with the United States Department of Labor and the Internal Revenue Service, all reports required to be filed by it (including, without limitation, all Forms 5500), and (ii) attached to the Disclosure Schedule all determination letters from the Internal Revenue Service which are currently applicable to any benefit plan of the Company. 2.16 INTELLECTUAL PROPERTY. The Disclosure Schedule sets forth a correct and complete list of all letters patent, patent applications, trade names, trademarks, service marks, trademark registrations and applications, copyrights and copyright registrations and applications, both domestic and foreign, presently owned, possessed, used or held by the Company or any Controlled Subsidiary (the "Intellectual Property") which are material to the conduct of the business of the Company and the Controlled Subsidiaries taken as a whole. To the Company's and each Principal Shareholder's knowledge, the Company and each Controlled Subsidiary owns the entire right, title and interest in and to all Intellectual Property. The Disclosure Schedule sets forth a correct and complete list of all licenses A-8 EX-4.4 3 EXHIBIT 4.4 REGISTRATION RIGHTS AND STOCK RESTRICTION AGREEMENT This Agreement, ("Agreement") is made and entered into as of this ____ day of ______________, 1996 by and among United Wisconsin Services, Inc., a Wisconsin corporation (the "Company"), Wallace J. Hilliard and Ronald A. Weyers (individually a "Holder" and collectively the "Holders"). RECITALS WHEREAS, the Company, Blue Cross & Blue Shield United of Wisconsin ("BCBSUW"), American Medical Security Group, Inc., a Delaware corporation ("AMSG"), and the Holders are parties to an Agreement and Plan of Merger dated as of July 31, 1996 (the "Merger Agreement") pursuant to which, among other things, the Holders are acquiring shares of common stock, no par value, of the Company ("UWSI Common Stock") and in connection with employment agreements being entered into with American Medical Security Holdings, Inc., a Nevada corporation and wholly owned subsidiary of UWSI ("Holdings"), are acquiring options to purchase shares of UWSI Common Stock ("Options"). WHEREAS, pursuant to the Merger Agreement, AMSG was merged into UWSI and the assets previously held by AMSG were transferred by operation of law to UWSI, and the parties hereto anticipate that UWSI will transfer substantially all of such assets to Holdings. WHEREAS, in connection with the transactions contemplated by the Merger Agreement, the Holders desire to obtain certain registration rights with respect to UWSI Common Stock to be received in the Merger and the Options, and UWSI desires to enter into the agreements with the Holders as set forth below. NOW THEREFORE, the parties agree as follows: ARTICLE I REGISTRATION RIGHTS Section 1.01 GENERAL. For purposes of Article I: (i) the terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement (a "registration statement") in compliance with the Securities Act of 1933, as amended (the "1933 Act"), and the declaration or ordering of effectiveness of such registration statement; and (ii) the term "Registrable Securities" means the ______ shares of UWSI Common Stock to be received by the Holders in the Merger and any shares of UWSI common stock acquired by the Holders through the exercise of Options or any securities issued in exchange therefor in the event of a recapitalization, stock split, merger, consolidation or other combination or exchange of shares. Capitalized terms used herein and not defined shall have the meanings set forth in the Merger Agreement. Section 1.02 REQUEST FOR REGISTRATION. Subject to Section 1.07(a) hereof, at any time on or after the date hereof if the Company shall receive a written request (specifying that it is being made pursuant to this Section 1.02) from both Holders that the Company register at least fifty percent (50%) of the then outstanding Registrable Securities, then the Company shall use its best efforts to cause to be registered all Registrable Securities that the Holders have requested be registered. Notwithstanding the foregoing, the Company shall not be obligated to effect a registration pursuant to this Section 1.02 during the period starting with the date forty-five (45) days prior to the Company's estimated date of filing of, and ending on a date one-hundred-eighty (180) days following the effective date of, a registration statement pertaining to an underwritten public offering of UWSI Common Stock for the account of the Company. The Company shall be obligated to effect not more than two (2) registrations pursuant to this Section 1.02. Any request for registration under this Section must be for a firmly underwritten public offering in accordance with terms agreed upon between the underwriter or underwriters and the Holders to be managed by an underwriter or underwriters designated by the Holders and reasonably acceptable to the Company. Notwithstanding anything else in this Agreement to the contrary, all of the Company's obligations under this Section shall expire on the earlier of the fifth anniversary of the date hereof or the date on which the Holders own in the aggregate less than three percent of the outstanding UWSI Common Stock. Subject to the provisions of Section 1.07(a) hereof, the Company shall be permitted to cause to be registered additional shares of UWSI Common Stock (whether previously unissued or owned by a person or entity designated by UWSI) in connection with any registration effected pursuant to this Section 1.02. If, while a registration request is pending pursuant to this Section 1.02, the Company has determined in good faith that (A) the filing of a registration statement could jeopardize or delay any contemplated material transaction other than a financing plan involving the Company or would require the disclosure of material information that the Company had a bona fide business purpose for preserving as confidential; or (B) the Company then is unable to comply with requirements of the Securities and Exchange Commission ("SEC") applicable to the requested registration (notwithstanding its best efforts to so comply), the Company shall not be required to effect a registration pursuant to this Section 1.02 until the earlier of (1) the date upon which such contemplated transaction is completed or abandoned or such material information is otherwise disclosed to the public or ceases to be material or the Company is able to so comply with applicable SEC requirements, as the case may be, and (2) 45 days after the Company makes such good-faith determination. Section 1.03 COMPANY REGISTRATION. Subject to Section 1.07(b) hereof, if at any time the Company determines to register any UWSI Common Stock under the 1933 Act in connection with the public offering of such securities solely for cash on a form that would also permit the registration of any of the Registrable Securities, the Company shall promptly give the Holders written notice of such determination. Upon the written request of any Holder received by the Company within thirty (30) days after the giving of any such notice by the Company, the Company shall use its best efforts to cause to be registered all of the Registrable Securities that the Holders have requested be registered together with the registration of the UWSI Common Stock otherwise being registered by the Company. Notwithstanding anything else in this Agreement to the contrary, all of the Company's obligations under this Section shall expire on the earlier of the fifth anniversary of the date hereof or the date on which the Holders own in the aggregate less than three percent of the outstanding UWSI Common Stock. The Company shall be obligated to include Registerable Securities in not more than two (2) registrations pursuant to this Section 1.03. The Company may, for any reason or for no reason, elect to either not file or withdraw the filing of any registration statement relating to a registration described in this Section 1.03 at any time prior to the effectiveness thereof and in such case the request by the Holders to be included in such registration will not be deemed to have been the exercise of one registration right under this Section 1.03. Section 1.04 OBLIGATIONS OF THE COMPANY. Whenever the Company shall be required under Sections 1.02 or 1.03 hereof to use its best efforts to effect the registration of any Registrable Securities, the Company shall: (a) as expeditiously as reasonable possible, prepare and file with the Securities and Exchange Commission ("SEC," which term includes any successor agency) a registration statement with respect to such Registrable Securities and use its reasonable efforts to cause such registration statement to become and remain effective under the 1933 Act, except that the Company shall in no event be obligated to cause any such registration to remain effective for more than three months; (b) as expeditiously as reasonably possible, prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all securities covered by such registration statement; (c) as expeditiously as reasonably possible, furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them; (d) as expeditiously as reasonably possible, use its reasonable efforts to register and qualify the securities covered by such registration statement under such securities or Blue Sky laws of such jurisdictions as shall be reasonably appropriate or requested by the Holders, except that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such jurisdiction; (e) advise each Holder, promptly after it shall receive notice or obtain knowledge thereof, of (i) the issuance of any stop order by the SEC suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose, and (ii) any similar action by any regulatory agency of competent jurisdiction under the securities or Blue Sky laws of any jurisdiction, and in any such case promptly use its reasonable best efforts to prevent the issuance of any stop order or the taking of any such similar action or to obtain its withdrawal if such stop order should be issued or any such similar action shall be taken; and (f) furnish to each Holder of Registrable Securities covered by such registration statement copies of all documents proposed to be filed with respect to any amendment or supplement to such registration statement or prospectus at a reasonable time prior to such filing. Section 1.05 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Article I that the Holders shall furnish to the Company such information regarding them, the Registrable Securities held by them, and the intended method of disposition of such securities and such other matters as may be required by the 1933 Act and other applicable law and regulation as the Company shall request and as shall be required in connection with the action to be taken by the Company. Section 1.06 EXPENSES OF REGISTRATION. In connection with a registration pursuant to Section 1.02, all underwriter's discounts and commissions, all registration and qualification fees, printers' and any extraordinary accounting fees, required as a result of the Holders' registration, shall be borne by the Holders and, all such expenses incurred in connection with a registration pursuant to Section 1.03 shall be borne by the Company, the Holders and any other sellers pro rata in relation to the number of shares of UWSI Common Stock being registered by each such party. For any registrations pursuant to Sections 1.02 or Section 1.03, all parties shall pay all of their own respective attorneys' fees. Section 1.07 UNDERWRITING REQUIREMENTS. (a) In connection with any registration requested by Holders under Section 1.02, the Company shall not be required under Section 1.02 to register any Registrable Securities of any Holder unless such Holder accepts the terms of the underwriting required by Section 1.02, and then only in such quantity as will not, in the written opinion of the managing underwriters, exceed the maximum number of shares that can be marketed at a price reasonably related to the then current market price for such shares, or otherwise materially and adversely affect such offering or the trading market for such shares (the "Maximum Feasible Quantity"). All securities sold to cover any over-allotment shall be apportioned among the Holders and the Company in proportion to the total number of shares being sold by each, provided, however, that any such over-allotment shall first be allocated to the Holders to the extent any of the Registrable Securities of the Holders were not included in such registration because the total number of Registrable Securities requested to be registered by the Holders exceeded the Maximum Feasible Quantity for such registration, and shall thereafter be allocated to the Company to the extent that the shares requested to be registered by the Company were not included in such registration because such shares, when added to the shares being registered by the Holders, exceeded the Maximum Feasible Quantity for such registration. (b) In connection with any registration in which Registerable Securities are included pursuant to Section 1.03 hereof, the Company shall not be required to include any of the Holders' Registrable Securities in such registration unless the Holders accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it, and then only in such quantity as will not, when added to the shares otherwise being registered by the Company, in the written opinion of the managing underwriters, exceed the Maximum Feasible Quantity for such registration. All securities sold to cover any over-allotment shall be apportioned among the Holders and the Company in proportion to the total number of shares being sold by each; provided, however, that any such over-allotment shall first be allocated to the Company to the extent any of the securities of the Company were not included in such registration because the total number of Registrable Securities included in such registration by the Holders, when added to the shares otherwise being registered by the Company, exceeded the Maximum Feasible Quantity for such registration, and shall thereafter be allocated to the Holders to the extent that the Registrable Securities requested to be registered by the Holders were not included in such registration because such shares when added to the shares being requested by the Company, included the Maximum Feasible Quantity for such registration. ARTICLE II STANDSTILL Section 2.01 PURCHASES OF VOTING SECURITIES. Hilliard and Weyers each agrees that, for a period of ten years from the date of this Agreement, without the prior written consent of the Company, he will not acquire, offer or propose to acquire, directly or indirectly, by purchase or otherwise, any securities of the Company, other than pursuant to the Options, with the power to vote with respect to the election of directors generally ("Voting Securities"), or direct or indirect rights or options to acquire (through purchase, exchange, conversion or otherwise) any Voting Securities, if any such acquisitions would require any regulatory approval, application or notification other than as required by the 1934 Act. Section 2.02. OTHER STANDSTILL PROVISIONS. Hilliard and Weyers each agrees that for a period of three years from the date of this Agreement, without the prior written consent of the Company, he will not: (a) make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies" (as such terms are defined in Rule 14a-1 under the 1934 Act) to vote any Voting Securities, initiate or propose any shareholder proposal or induce or attempt to induce any other person to initiate any shareholder proposal; (b) make any proposal, whether written or oral, to the Board of Directors of the Company, or to any director or officer of the Company, or otherwise make any public announcement or proposal whatsoever with respect to a merger or other business combination, sale or transfer of assets, liquidation or other extraordinary corporate transaction with the Company; (c) form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the 1934 Act) with respect to any securities of the Company or otherwise act, alone or in concert with others, to seek to exercise any control or influence over the management, Board of Directors or policies of the Company other than pursuant to his employment with the Company or any of its subsidiaries. Section 2.03. NO PUBLIC REQUESTS. Hilliard and Weyers each agrees that he will not make a public request to the Company (or its directors, officers, shareholders, employees or agents) to amend or waive any provisions of this Article III, including without limitation any public request to permit him or any other person to take any other action referred to in Sections 3.01 and 3.02 hereof. ARTICLE III VOTING AGREEMENT Hilliard and Weyers each agree for a period of ten years from the date hereof, to vote all shares of UWSI Common Stock owned or held by them respectively, (or over which they have or share voting power) in accordance with BCBSUW directions on any matters relating to or affecting the Blue Cross Blue Shield Association market conditions or rules and regulations, as may be determined in good faith by the BCBSUW Board of Directors. ARTICLE IV GENERAL PROVISIONS Section 4.01 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given (i) when delivered personally; (ii) the second business day after being deposited in the United States mail registered or certified (return receipt requested); (iii) the first business day after being deposited with Federal Express or any other recognized national overnight courier service or (iv) on the business day on which it is sent and received by facsimile, in each case to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) If to the Company: United Wisconsin Services, Inc. 401 West Michigan Street Milwaukee, WI 53203 Attention: Thomas R. Hefty, President With a copy to: Michael Best & Friedrich 100 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Attention: Geoffrey R. Morgan, Esq. (b) If to the Holders: Wallace J. Hilliard 4443 Indian Trails Green Bay, WI 54313 Ronald A. Weyers 2643 Good Sheperd Lane Green Bay, WI 54313 With a copy to: Godfrey & Kahn, S.C. 333 Main Street, Suite 600 Green Bay, WI 54307-3067 Attention: Benjamin W. Laird, Esq. Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, WI 53202 Attention: Randall J. Erickson, Esq. Section 4.02 MISCELLANEOUS. This Agreement (including the exhibits, documents and instruments referred to herein or therein): (a) constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof; (b) is not intended to confer upon any person which is not a party hereto any rights or remedies hereunder; (c) shall not be assigned by operation of law or otherwise; and (d) may be executed in two or more counterparts which together shall constitute a single agreement. Section 4.03 WAIVER: REMEDIES. No delay or failure on the part of any party hereto to exercise any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power, or privilege hereunder operate as a waiver of any other right, power, or privilege hereunder, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege hereunder. Section 4.04 SEVERABILITY. If any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, invalid or unenforceable, such provision shall be construed and enforced as if it had been more narrowly drawn so as not to be illegal, invalid or unenforceable, and such illegality, invalidity or unenforceability shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement. Section 4.05 GOVERNING LAW. This Agreement shall be construed in accordance with the law of the State of Wisconsin (without regard to principles of conflicts of laws) applicable to contracts made and to be performed within such State. United Wisconsin Services, Inc. By:__________________________________ _____________________________________ Wallace J. Hilliard _____________________________________ Ronald A. Weyers EX-4.5 4 EXHIBIT 4.5 AFFILIATE AGREEMENT United Wisconsin Services, Inc. 401 West Michigan Avenue Milwaukee, WI 53203 Ladies and Gentlemen: Reference is made to the Agreement and Plan of Merger (the "Agreement and Plan of Merger") dated as of July 31, 1996, by and among United Wisconsin Services, Inc., a Wisconsin corporation ("UWSI"), Blue Cross & Blue Shield United of Wisconsin, American Medical Security Group, Inc., a Delaware corporation (the "Company") and Wallace J. Hilliard (individually and as trustee) and Ronald A. Weyers (individually and as successor trustee), which provides that the Company will be merged with and into UWSI (the "Merger") and the outstanding shares of common stock of the Company ("Company Common Stock") will be converted into a combination of shares of common stock of UWSI ("UWSI Common Stock") and cash. The undersigned has been advised that the issuance of shares of UWSI Common Stock to the undersigned in connection with the Merger has been registered with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"), on a Registration Statement on Form S-4 and that such registration does not cover any resale or other disposition of UWSI Common Stock. The undersigned also has been advised that the undersigned may be deemed to be an affiliate of the Company within the meaning of Rule 145 of the rules and regulations of the SEC under the Securities Act and that the shares of UWSI Common Stock acquired by the undersigned in connection with the Merger may only be disposed of in conformity with the provisions hereof. The undersigned represents and warrants to and agrees with UWSI as follows: (a) The undersigned has full power to execute this Agreement and to make the representations, warranties and agreements herein, and to perform the obligations of the undersigned hereunder. (b) The undersigned will not sell, exchange, transfer or otherwise dispose of any shares of UWSI Common Stock which the undersigned may acquire in connection with the Merger or any securities which may be paid as a dividend or otherwise distributed thereon or with respect thereto or issued or delivered in exchange or substitution therefor (all such shares and other securities being herein sometimes collectively referred to as "Restricted Securities"), or any option, right or other interest with respect to any Restricted Securities, unless such sale, exchange, transfer or disposition is effected (i) in conformity with the terms of Rule 145(d) or (ii) pursuant to an effective registration statement under the Securities Act (provided that the undersigned may make bona fide gifts or other dispositions without consideration so long as the recipients thereof agree not to sell, exchange, transfer or otherwise dispose of the UWSI Common Stock except as provided herein). If UWSI or its counsel reasonably believes that the provisions of Rule 145 have not been or would not be complied with, or if requested by UWSI or its counsel in connection with a proposed disposition other than pursuant to Rule 145 or in a registered offering, the undersigned shall furnish to UWSI a copy of a "no action" letter or other communication from the staff of the SEC, or an opinion of counsel in form and substance reasonably satisfactory to UWSI and its counsel, to the effect that the applicable provisions of paragraphs (c), (e), (f) and (g) of Rule 144 under the Securities Act (which provisions are incorporated into Rule 145(d)) have been complied with or that the disposition may be otherwise effected in the manner proposed in compliance with the Securities Act. (c) The undersigned has no present plan or intent, and as of the effective date of the Merger shall have no present plan or intent, to engage in a sale, exchange, transfer, distribution (including a distribution by a partnership to its partners, a corporation to its shareholders, or a trust to its beneficiaries), redemption, pledge or reduction in any way of the undersigned's risk of ownership, by short sale or otherwise, or other disposition, directly or indirectly (collectively, a "Sale") with respect to any of the UWSI Common Stock to be received by the undersigned in the Merger. The undersigned is not aware of, or participating in any plan or intent on the part of any of the shareholders (a "Plan") to engage in any Sale of the UWSI Common Stock to be issued in the Merger. A Sale of UWSI Common Stock shall be considered to have occurred pursuant to a Plan if, for example, such Sale occurs in a transaction that is in contemplation of, or related to, the Merger (a "Related Transaction"). In addition, Company shares (i) with respect to which dissenters' rights are exercised and (ii) with respect to which a pre-Merger Sale occurs in a Related Transaction, shall be considered to be shares that are exchanged for UWSI Common Stock which are disposed of pursuant to a Plan. The undersigned understands that stop transfer instructions will be given to UWSI's transfer agent with respect to the Restricted Securities and agrees that no transfers of the Restricted Securities will be made by UWSI unless and until the undersigned has complied with the provisions of this Agreement. The undersigned also understands that there will be placed on the certificates for the Restricted Securities, or any substitutions therefor, a legend stating in substance: "THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULE 145, PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), APPLIES AND MAY ONLY BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE REGISTERED HOLDER HEREOF AND UWSI CO., A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF UWSI CO." UWSI agrees that such stop transfer instructions and legend will be promptly removed upon the sale, exchange, transfer or other disposition of Restricted Securities in full compliance with the provisions of this Agreement. This Agreement shall be binding upon, and enforceable against administrators, executors, personal representatives, heirs, legatees and devisees of the undersigned and any pledgee holding the Restricted Securities as collateral. Very truly yours, -------------------------------- Signature -------------------------------- Print Name Agreed to and accepted this _____ day of _________, 1996 UNITED WISCONSIN SERVICES, INC. By: --------------------------- Title: ------------------------ EX-10.7 5 EXHIBIT 10.7 EMPLOYMENT AND NONCOMPETITION AGREEMENT THIS AGREEMENT is executed as of this ____ day of _______, 1996, by and between AMS HOLDINGS, INC., a Nevada 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 ___, 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 ______________, shall have such duties as may be set forth by the _____________ 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 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 _______________ 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 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 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 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 three years following termination thereof, within the geographical area in which such use, publication or disclosure would 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 information relating to existing or 5 potential business, customers, trade or industrial practices, plans, costs, processes, technical or engineering data, or trade secrets; 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 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 solely or jointly with others has conceived, made, acquired or suggested 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 three-year period following the termination thereof, Employee shall not, without the prior written consent of the Company, engage, 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) or in any other capacity, in any competition with the Company in any geographical area in which the Company conducts its business or promotes its products and services or in any geographical area the Company has plans, existing at the time that Employee's employment is terminated, to enter. 4.3 NON-SOLICITATION. For a period of three years after termination of Employee's employment, Employee will not solicit, or assist any person or entity to solicit, any employee, customer, supplier or other person having business relations with the Company to terminate such employee's employment or terminate or curtail such customer's, 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 6 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. 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. 7 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 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year written above. COMPANY: AMS HOLDINGS, INC. By:_____________________________ ______________, _____________ EMPLOYEE: ________________________________ 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:_____________________________ ______________, _____________ 9 EX-10.8 6 EXHIBIT 10.8 EMPLOYMENT AND NONCOMPETITION AGREEMENT THIS AGREEMENT is executed as of this ____ day of _______, 1996, by and between AMS HOLDINGS, INC., a Nevada 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 ___, 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 and ______________, 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 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 _______________ 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 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 2 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 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 3 (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. 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 three years following termination thereof, within the geographical area in which such use, publication or disclosure would 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 information relating to existing or potential business, customers, trade or industrial practices, plans, costs, processes, technical or engineering data, or trade secrets; 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 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 4 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 solely or jointly with others has conceived, made, acquired or suggested 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 three-year period following the termination thereof, Employee shall not, without the prior written consent of the Company, engage, 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) or in any other capacity, in any competition with the Company in any geographical area in which the Company conducts its business or promotes its products and services or in any geographical area the Company has plans, existing at the time that Employee's employment is terminated, to enter. 4.3 NON-SOLICITATION. For a period of three years after termination of Employee's employment, Employee will not solicit, or assist any person or entity to solicit, any employee, customer, supplier or other person having business relations with the Company to terminate such employee's employment or terminate or curtail such customer's, 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. 5 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. 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. 6 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year written above. COMPANY: AMS HOLDINGS, INC. By: ----------------------------- ----------------------------- EMPLOYEE: -------------------------------- 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: ----------------------------- ----------------------------- 7 EX-10.46 7 EXHIBIT 10.46 EQUITY INCENTIVE PLAN UNITED WISCONSIN SERVICES, INC. FEBRUARY 1993 UNITED WISCONSIN SERVICES, INC. EQUITY INCENTIVE PLAN (REFLECTS ALL AMENDMENTS THROUGH AUGUST 15, 1996) TABLE OF CONTENTS ARTICLE SECTION PAGE 1 ESTABLISHMENT, PURPOSE AND DURATION 1.1 Establishment of the Plan 1 1.2 Purpose of the Plan 1 1.3 Duration of the Plan 2 2 DEFINITIONS 3 3 ADMINISTRATION 3.1 The Committee 7 3.2 Authority of the Committee 7 3.3 Decisions Binding 7 4 SHARES SUBJECT TO THE PLAN 4.1 Number of Shares 8 4.2 Lapsed Awards 9 4.3 Adjustments in Authorized Shares 9 5 ELIGIBILITY AND PARTICIPATION 5.1 Eligibility 10 5.2 Actual Participation 10 6 STOCK OPTIONS 6.1 Grant of Options 10 6.2 Option Award Agreement 10 6.3 Option Price 10 6.4 Duration of Options 11 i 6.5 Exercise of Options 11 6.6 Payment 11 6.7 Restrictions on Share Transferability 12 6.8 Termination of Employment Due to Death, 12 Disability or Retirement 6.9 Termination of Employment for Other Reasons 13 6.10 Restrictions on Transferability 13 7 STOCK APPRECIATION RIGHTS 7.1 Grant of SARs 14 7.2 Exercise of Tandem SARs 14 7.3 Exercise of Affiliated SARs 15 7.4 Exercise of Freestanding SARs 15 7.5 SAR Agreement 15 7.6 Term of SARs 15 7.7 Payment of SAR Amount 15 7.8 Rule 16b(3 Requirements) 16 7.9 Termination of Employment Due to Death, 16 Disability or Retirement 7.10 Termination of Employment for Other Reasons 17 7.11 Non-transferability of SARs 17 8 RESTRICTED STOCK 8.1 Grant of Restricted Stock 18 8.2 Restricted Stock Agreement 18 8.3 Transferability 18 8.4 Other Restrictions 18 8.5 Certificate Legend 19 8.6 Removal of Restrictions 19 ii 8.7 Voting Rights 19 8.8 Dividends and Other Distributions 19 8.9 Termination of Employment Due to Death, 20 Disability or Retirement 8.10 Termination of Employment for Other Reasons 20 9 PERFORMANCE UNITS AND PERFORMANCE SHARES 9.1 Grant of Performance Units/Shares 21 9.2 Value of Performance Units/Shares 21 9.3 Earning of Performance Units/Shares 21 9.4 Form and Timing of Payment of Performance 21 Units/Shares 9.5 Termination of Employment Due to Death, 22 Disability, Retirement or Involuntary Termination (Without Cause) 9.6 Termination of Employment for Other Reasons 22 9.7 Non-transferability 22 10 BENEFICIARY DESIGNATION 23 11 DEFERRALS 23 12 RIGHTS OF EMPLOYEES 12.1 Employment 23 12.2 Participation 24 13 CHANGE IN CONTROL 24 14 AMENDMENT, MODIFICATION AND TERMINATION 14.1 Amendment, Modification and Termination 25 14.2 Awards Previously Granted 25 15 WITHHOLDING 15.1 Tax Withholding 25 15.2 Share Withholding 25 iii 16 INDEMNIFICATION 26 17 SUCCESSORS 27 18 LEGAL CONSTRUCTION 18.1 Gender and Number 27 18.2 Severability 27 18.3 Requirements of Law 28 18.4 Securities Law Compliance 28 18.5 Governing Law 28 iv UNITED WISCONSIN SERVICES, INC. EQUITY INCENTIVE PLAN (REFLECTS ALL AMENDMENTS THROUGH AUGUST 15, 1996) ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. United Wisconsin Services, Inc., a Wisconsin corporation (hereinafter referred to as the "Company"), hereby establishes an incentive compensation plan to be known as the "United Wisconsin Services, Inc. Equity Incentive Plan" (hereinafter referred to as the "Plan"), as set forth in this document. The Plan permits the grant of Non-qualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units, and Performance Shares. Upon approval by the Board of Directors of the Company, subject to ratification by an affirmative vote of a majority of Shares at an annual shareholders' meeting of the Company, the Plan shall become effective as of February 24, 1993 (the "Effective Date"), and shall remain in effect as provided in Section 1.3 herein. Awards may be granted prior to shareholder ratification of the Plan; provided, however, that in the event shareholder approval of the Plan is not obtained, all outstanding Awards shall become null and void. 1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success, and enhance the value, of the Company by linking the personal interests of Participants to those of Company shareholders, and by providing Participants with an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Participants upon whose judgment, interest, and special effort the successful conduct of its operation is dependent. 1 1.3 DURATION OF THE PLAN. Subject to approval by the Board of Directors of the Company and ratification by the shareholders of the Company, the Plan shall commence on the Effective Date, as described in Section 1.1 herein, and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 14 herein, until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. However, in no event may an Award be granted under the Plan on or after February 24, 2003. ARTICLE 2. DEFINITIONS Whenever used in the Plan, the following terms shall have the meanings set forth below and when the meaning is intended, the initial letter of the word is capitalized: (a) "Affiliate" - A company closely related to United Wisconsin Services, Inc. such as United Heartland and American Medical Security, or such other company as the Board may designate. "Affiliated SAR" means a SAR that is granted in connection with a related Option, and which will be deemed to automatically be exercised simultaneous with the exercise of the related Option. (b) "Award" means, individually or collectively, a grant under this Plan of Non-qualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units, or Performance Shares. (c) "Award Agreement" means an agreement entered into by each Participant and the Company, setting forth the terms and provisions applicable to Awards granted to Participants under this Plan. (d) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (e) "Board" or "Board of Directors" means the Board of Directors of the Company. (f) "Cause" means: (i) willful and gross misconduct on the part of a Participant that is 2 materially and demonstrably detrimental to the Company; or (ii) the commission by a Participant of one or more acts which constitute an indictable crime under United States Federal, state, or local law. "Cause" under either (i) or (ii) shall be determined in good faith by the Committee. (g) "Change in Control" of the Company shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied: (i) Any Person (other than those Persons in control of the Company as of the Effective Date, or other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or (ii) During any period of two (2) consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board (and any new Director, whose election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was so approved), cease for any reason to constitute a majority thereof; or (iii) The stockholders of the Company approve: A. a plan of complete liquidation of the Company; or B. an agreement for the sale or disposition of all or substantially all the Company's assets; or C. a merger, consolidation, or reorganization of the Company with or involving any other corporation, other than a merger, consolidation, or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting 3 securities of the surviving entity), at least fifty percent (50%) of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation, or reorganization. However, in no event shall a Change-in-Control be deemed to have occurred, with respect to a Participant, if the Participant is part of a purchasing group which consummates the Change-in- Control transaction. A Participant shall be deemed "part of a purchasing group" for purposes of the preceding sentence if the Participant is an equity participant in the purchasing company or group (except for: (i) passive ownership of less than three percent (3%) of the stock of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise not significant, as determined prior to the Change-in-Control by a majority of the non-employee continuing Directors). (h) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (i) "Committee" means the Management Review Committee, as specified in Article 3, appointed by the Board to administer the Plan with respect to grants of Awards. (j) "Company" means United Wisconsin Services, Inc., a Wisconsin corporation or any successor thereto as provided in Article 17 herein. (k) "Director" means any individual who is a member of the Board of Directors of the Company. (l) "Disability" means a permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Committee in good faith, upon receipt of sufficient competent medical advice from one or more individuals, selected by the Committee, who are qualified to give professional medical advice. (m) "Employee" means any full-time employee of the Company or of the Company's Subsidiaries or affiliates. Directors who are not otherwise employed by the Company shall not be considered 4 Employees under this Plan. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor Act thereto. (o) "Fair Market Value" means the closing price for Shares on the relevant date, or (if there were no sales on such date) the average of closing prices on the nearest day before and the nearest day after the relevant date, on a stock exchange or over the counter, as determined by the Committee. (p) "Freestanding SAR" means a SAR that is granted independently of any Options. (q) "Incentive Stock Option" or "ISO" means an option to purchase Shares, granted under Article 6 herein, which is designated as an Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code. (r) "Insider" shall mean an Employee who is, on the relevant date, an officer, director of the Company, as defined in Rule 16 under the Exchange Act. (s) "Non-qualified Stock Option" or "NQSO" means an option to purchase Shares, granted under Article 6 herein, which is not intended to be an Incentive Stock Option. (t) "Option" means an Incentive Stock Option or a Non- qualified Stock Option. (u) "Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee. (v) "Participant" means an Employee of the Company who has outstanding an Award granted under the Plan. (w) "Performance Unit" means an Award granted to an Employee, as described in Article 9 herein. (x) "Performance Share" means an Award granted to an Employee, as described in Article 9 herein. 5 (y) "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, at its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Article 8 herein. (z) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). (aa) "Restricted Stock" means an Award granted to a Participant pursuant to Article 8 herein. (bb) "Retirement" shall have the meaning ascribed to it in the tax-qualified defined benefit retirement plan of the Company. (cc) "Shares" means the shares of common stock of the Company. (dd) "Subsidiary" means any corporation in which the Company owns directly, or indirectly through subsidiaries, at least fifty percent (50%) of the total combined voting power of all classes of stock, or any other entity (including, but not limited to, partnerships and joint ventures) in which the Company owns at least fifty percent (50%) of the combined equity thereof. (ee) "Stock Appreciation Right" or "SAR" means an Award, granted alone or in connection with a related Option, designated as an SAR, pursuant to the terms of Article 7 herein. (ff) "Tandem SAR" means a SAR that is granted in connection with a related Option, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, a SAR shall similarly be cancelled). (gg) "Window Period" means the period beginning on the third business day following the date of public release of the Company's quarterly sales and earnings information, and ending on the twelfth (12th) business day following such date. 6 ARTICLE 3. ADMINISTRATION 3.1 THE COMMITTEE. The Plan shall be administered by the Management Review Committee of the Board, or by any other Committee appointed by the Board consisting of not less than two (2) Directors who are not Employees. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. The Committee shall be comprised solely of Directors who are both: (i) Non-Employee Directors, as defined in Rule 16b-3 under the Exchange Act; and (ii) Outside Directors, as defined in Treas. Reg. 1.162-27. 3.2 AUTHORITY OF THE COMMITTEE. The Committee shall have full power except as limited by law or by the Articles of Incorporation or By-laws of the Company, and subject to the provisions herein, to determine the size and types of Awards; to determine the terms and conditions of such Awards in a manner consistent with the Plan; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend, or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 14 herein) to amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Further, the Committee shall make all other determinations which may be necessary or advisable for the administration of the Plan. As permitted by law, the Committee may delegate its authority as identified hereunder. 3.3 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board of Directors shall be final, conclusive, and binding on all Persons, including the Company, its 7 stockholders, Employees, Participants, and their estates and beneficiaries. ARTICLE 4. SHARES SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3 herein, the total number of Shares available for grant under the Plan may not exceed 2,750,000. These 2,750,000 Shares may be either authorized but unissued or reacquired Shares. The following rules will apply for purposes of the determination of the number of Shares available for grant under the Plan: (a) While an Award is outstanding, it shall be counted against the authorized pool of Shares, regardless of its vested status. (b) The grant of an Option or Restricted Stock shall reduce the Shares available for grant under the Plan by the number of Shares subject to such Award. (c) The grant of a Tandem SAR shall reduce the number of Shares available for grant by the number of Shares subject to the related Option (i.e., there is no double counting of Options and their related Tandem SARs). (d) The Grant of an Affiliated SAR shall reduce the number of Shares available for grant by the number of Shares subject to the SAR, in addition to the number of Shares subject to the related Option. (e) The grant of a Freestanding SAR shall reduce the number of Shares available for grant by the number of Freestanding SARs granted. (f) The Committee shall in each case determine the appropriate number of Shares to deduct from the authorized pool in connection with the grant of Performance Units and/or Performance Shares. (g) To the extent that an Award is settled in cash rather than in Shares, the authorized Share pool shall be credited with the appropriate number of Shares represented by the cash settlement of the Award, as determined at the sole discretion of the Committee (subject to the limitation set forth in Section 4.2 herein). The maximum number of Shares with respect to which Awards may be made to any 8 Employee during any three (3) year period shall not exceed 100,000 shares. Notwithstanding the foregoing, if the Employee receives the Award prior to March 31, 1997 in connection with the Employee's initial employment by the Company or in connection with a merger or acquisition by the Company, the maximum number of Shares with respect to which Awards may be made during the three (3) year period ended March 31, 1997 shall be 850,000 Shares. 4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled, terminates, expires, or lapses for any reason (with the exception of the termination of a Tandem SAR upon exercise of the related Option, or the termination of a related Option upon exercise of the corresponding Tandem SAR), any Shares subject to such Award again shall be available for the grant of an Award under the Plan. However, in the event that prior to the Award's cancellation, termination, expiration, or lapse, the holder of the Award at any time received one or more "benefits of ownership" pursuant to such Award (as defined by the Securities and Exchange Commission, pursuant to any rule or interpretation promulgated under Section 16 of the Exchange Act), the shares subject to such Award shall not be made available for regrant under the Plan. 4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the corporate structure of the Company affecting the Shares, such adjustment shall be made in the number of class of Shares which may be delivered under the Plan, and in the number and class of and/or price of Shares subject to outstanding Options, SARs, and Restricted Stock granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; 9 and provided that the number of Shares subject to any Award shall always be a whole number. ARTICLE 5. ELIGIBILITY AND PARTICIPATION 5.1 ELIGIBILITY. Persons eligible to participate in this Plan include all full-time, active Employees of the Company and its Subsidiaries, as determined by the Committee, including Employees who are members of the Board, but excluding Directors who are not Employees. 5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees, whose to whom Awards shall be granted and shall determine the nature and amount of each award. ARTICLE 6. STOCK OPTIONS 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Employees at any time and from time to time as shall be determined by the Committee. The Committee shall have discretion in determining the number of Shares subject to Options granted to each Participant. The Committee may grant ISOs, NQSOs, or a combination thereof. 6.2 OPTION AWARD AGREEMENT. Each Option grant shall be evidenced by an Option Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Committee shall determine. The Option Award Agreement also shall specify whether the Option is intended to be an ISO within the meaning of Section 422 of the Code, or a NQSO whose grant is intended not to fall under the Code provisions of Section 422. 6.3 OPTION PRICE. The Option Price for each grant of an Option shall be determined by the Committee; provided that the Option Price shall not be less than one hundred percent 10 (100%) of the Fair Market Value of a Share on the date the Option is granted. 6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no ISO shall be exercisable later than the tenth (10th) anniversary date of its grant, and no NQSO shall be exercisable later than the twelfth (12th) anniversary date of its grant. 6.5 EXERCISE OF OPTIONS. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant. However, in no event may any Option granted under this Plan become exercisable prior to six (6) months following the date of its grant. 6.6 PAYMENT. Options shall be exercised by the delivery of a written notice of exercise to the Secretary of the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent, or (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price (provided that the Shares which are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), or (c) by a combination of (a) and (b). The Committee also may allow cashless exercise as permitted under Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or by any other means which the Committee determines to be consistent with the Plan's purpose and applicable law. As soon as practicable after receipt of a written notification of exercise and full payment, 11 the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). 6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option under the Plan, as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any Stock exchange or market upon which such Shares are then listed and/or traded, and under any Blue Sky or state securities laws applicable to such Shares. 6.8 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY OR RETIREMENT. (a) TERMINATION BY DEATH. In the event the employment of a Participant is terminated by reason of death, all outstanding Options granted to that Participant shall immediately vest one hundred percent (100%), and shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date of death, whichever period is shorter, by such person or persons as shall have been named as the Participant's beneficiary, or by such persons that have acquired the Participant's rights under the Option by will or by the laws of descent and distribution. (b) TERMINATION BY DISABILITY. In the event the employment of a Participant is terminated by reason of Disability, all outstanding Options granted to that Participant shall immediately vest one hundred percent (100%) as of the date the Committee determines the definition of Disability to have been satisfied, and shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date that the Committee determines the definition of Disability to have been satisfied, whichever period is shorter. (c) TERMINATION BY RETIREMENT. In the event the employment of a Participant is terminated by reason of Retirement, the Committee shall retain discretion over the treatment of Options. (d) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that a Participant's employment terminates by reason of Disability or Retirement, and within the exercise period allowed by the Committee following such 12 termination the Participant dies, then the remaining exercise period under outstanding Options shall equal the longer of: (i) one (1) year following death; or (ii) the remaining portion of the exercise period which was triggered by the employment termination. Such Options shall be exercisable by such person or persons who shall have been named as the Participant's beneficiary, or by such persons who have acquired the Participant's rights under the Option by will or by the laws of descent and distribution. (e) EXERCISE LIMITATIONS ON ISOS. In the case of ISOs, the tax treatment prescribed under Section 422 of the Internal Revenue Code of 1986, as amended, may not be available if the Options are not exercised within the Section 422 prescribed time periods after each of the various types of employment termination. 6.9 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a Participant shall terminate for any reason other than the reasons set forth in Section 6.8 (and other than for Cause), all Options held by the Participant which are not vested as of the effective date of employment termination immediately shall be forfeited to the Company (and shall once again become available for grant under the Plan). However, the Committee, in its sole discretion, shall have the right to immediately vest all or any portion of such Options, subject to such terms as the Committee, in its sole discretion, deems appropriate. Options which are vested as of the effective date of employment termination may be exercised by the Participant within the period beginning on the effective date of employment termination, and ending six (6) months after such date. If the employment of a Participant shall be terminated by the Company for Cause, all outstanding Options held by the Participant immediately shall be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the Option. 6.10 RESTRICTIONS ON TRANSFERABILITY. No Option granted under the Plan may be sold, 13 transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and shall be exercisable by a Participant during his or her lifetime only by the Participant except that NQSOs may be transferred by a Participant to the Participant's spouse, children or grandchildren or to a trust for the benefit of such spouse, children or grandchildren. ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1 GRANT OF SARS. Subject to the terms and conditions of the Plan, a SAR may be granted to an Employee at any time and from time to time as shall be determined by the Committee. The Committee may grant Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination of these forms of SAR. The Committee shall have complete discretion in determining the number of SARs granted to each Participant (subject to Article 4 herein) and consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs. However, the grant price of a Freestanding SAR shall be at least equal to one hundred percent (100%) of the Fair Market Value of a Share on the date of grant of the SAR. The grant price of Tandem or Affiliated SARs shall equal the Option Price of the related Option. In no event shall any SAR granted hereunder become exercisable within the first six (6) months of its grant. 7.2 EXERCISE OF TANDEM SARS. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. Notwithstanding any other provision of this Plan to the contrary, with respect to a 14 Tandem SAR granted in connection with an ISO: (i) the Tandem SAR will expire no later than the expiration of the underlying ISO; (ii) the value of the payout with respect to the Tandem SAR may be for no more than one hundred percent (100%) of the difference between the Option Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option Price of the ISO. 7.3 EXERCISE OF AFFILIATED SARS. Affiliated SARs shall be deemed to be exercised upon the exercise of the related Options. The deemed exercise of Affiliated SARs shall not necessitate a reduction in the number of related Options. 7.4 EXERCISE OF FREESTANDING SARS. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon them. 7.5 SAR AGREEMENT. Each SAR grant shall be evidenced by an Award Agreement that shall specify the grant price, the term of the SAR, and such other provisions as the Committee shall determine. 7.6 TERM OF SARS. The term of a SAR granted under the Plan shall be determined by the Committee, in its sole discretion; provided, however, that such term shall not exceed twelve (12) years. 7.7 PAYMENT OF SAR AMOUNT. Upon exercise of a SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying: (a) The difference between the Fair Market Value of a Share on the date of exercise over the grant price; by (b) The number of Shares with respect to which the SAR is exercised. 15 At the discretion of the Committee, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof. 7.8 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision of the Plan, the Committee may impose such conditions on exercise of a SAR (including, without limitation, the right of the Committee to limit the time of exercise to specified periods) as may be required to satisfy the requirements of Section 16 (or any successor rule) of the Exchange Act. For example, if the Participant is an Insider, the ability of the Participant to exercise SARs for cash will be limited to Window Periods. However, if the Committee determines that the Participant is not an Insider, or if the securities laws change to permit greater freedom of exercise of SARs, then the Committee may permit exercise at any point in time, to the extent the SARs are otherwise exercisable under the Plan. 7.9 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. (a) TERMINATION BY DEATH. In the event the employment of a Participant is terminated by reason of death, all outstanding SARs granted to that Participant shall immediately vest one hundred percent (100%), and shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date of death, whichever period is shorter, by such person or persons as shall have been named as the Participant's beneficiary, or by such persons that have acquired the Participant's rights under the SAR by will or by the laws of descent and distribution. (b) TERMINATION BY DISABILITY. In the event the employment of a Participant is terminated by reason of Disability, all outstanding SARs granted to that Participant shall immediately vest one hundred percent (100%) as of the date the Committee determines the definition of Disability to have been satisfied, and shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date that the Committee determines the definition of Disability to have been satisfied, whichever period is shorter. (c) TERMINATION BY RETIREMENT. In the event the employment of a Participant is terminated by reason of Retirement, the Committee shall 16 retain discretion over the treatment of SARs. (d) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that a Participant's employment terminates by reason of Disability or Retirement, and within the exercise period allowed by the Committee following such termination, the Participant dies, then the remaining exercise period under outstanding SARs shall equal the longer of: (i) one (1) year following death; or (ii) the remaining portion of the exercise period which was triggered by the employment termination. Such SARs shall be exercisable by such person or persons who shall have been named as the Participant's beneficiary, or by such persons who have acquired the Participant's rights under the SAR by will or by the laws of descent and distribution. 7.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a Participant shall terminate for any reason other than the reasons set forth in Section 7.9 (and other than for Cause), all SARs held by the Participant which are not vested as of the effective date of employment termination immediately shall be forfeited to the Company (and shall once again become available for grant under the Plan). However, the Committee, in its sole discretion, shall have the right to immediately vest all or any portion of such SARs, subject to such terms as the Committee, in its sole discretion, deems appropriate. SARs which are vested as of the effective date of employment termination may be exercised by the Participant within the period beginning on the effective date of employment termination, and ending six (6) months after such date. If the employment of a Participant shall be terminated by the Company for Cause, all outstanding SARs held by the Participant immediately shall be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the SARs. 7.11 NON-TRANSFERABILITY OF SARS. No SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by 17 the laws of descent and distribution. Further, all SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. ARTICLE 8. RESTRICTED STOCK 8.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to eligible Employees in such amounts as the Committee shall determine. 8.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be evidenced by a Restricted Stock Agreement that shall specify the Period of Restriction, or Periods, the number of Restricted Stock Shares granted, and such other provisions as the Committee shall determine. 8.3 TRANSFERABILITY. Except as provided in this Article 8, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Restricted Stock Agreement, or upon earlier satisfaction of any other conditions, as specified by the Committee in its sole discretion and set forth in the Restricted Stock Agreement. However, in no event may any Restricted Stock granted under the Plan become vested in a Participant prior to six (6) months following the date of its grant. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant. 8.4 OTHER RESTRICTIONS. The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, restrictions based upon the achievement of specific performance goals (Company-wide, divisional, and/or individual), and/or restrictions under applicable Federal or 18 state securities laws; and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. 8.5 CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to Section 8.4 herein, each certificate representing Shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of the Shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the United Wisconsin Services, Inc. Equity Incentive Plan, and in a Restricted Stock Agreement. A copy of the Plan and such Restricted Stock Agreement may be obtained from the Secretary of United Wisconsin Services, Inc." 8.6 REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Article 8, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Period of Restriction. Once the Shares are released from the restrictions, the Participant shall be entitled to have the legend required by Section 8.5 removed from his or her Share certificate. 8.7 VOTING RIGHTS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares. 8.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other distributions paid with respect to those Shares while they are so held. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid. 19 In the event that any dividend constitutes a "derivative security" or an "equity security" pursuant to Rule 16(a) under the Exchange Act, such diffident shall be subject to a vesting period equal to the longer of: (i) the remaining vesting period of the Shares of Restricted Stock with respect to which the dividend is paid; or (ii) six (6) months. The Committee shall establish procedures for the application of this provision. 8.9 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the event the employment of a Participant is terminated by reason of death or Disability, all outstanding Shares of Restricted Stock shall immediately vest one hundred percent (100%) as of the date of employment termination (in the case of Disability, the date employment terminates shall be deemed to be the date that the Committee determines the definition of Disability to have been satisfied). The Committee retains discretion over the treatment of Restricted Stock upon Retirement. In the event of full vesting, the holder of the certificates of Restricted Stock shall be entitled to have any non- transferability legends required under Sections 8.4 and 8.5 of this Plan removed from the Share certificates. 8.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a Participant shall terminate for any reason other than those specifically set forth in Section 8.9 herein, all Shares of Restricted Stock held by the Participant which are not vested as of the effective date of employment termination immediately shall be forfeited and returned to the Company (and, subject to Section 4.2 herein, shall once again become available for grant under the Plan). With the exception of a termination of employment for Cause, the Committee, in its sole discretion, shall have the right to provide for lapsing of the restrictions of Restricted Stock 20 following employment termination, upon such terms and provisions as it deems proper. ARTICLE 9. PERFORMANCE UNITS AND PERFORMANCE SHARES 9.1 GRANT OF PERFORMANCE UNITS/SHARES. Subject to the terms of the Plan, Performance Units and Performance Shares may be granted to eligible Employees at any time and from time to time, as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Performance Units and Performance Shares granted to each Participant. 9.2 VALUE OF PERFORMANCE UNITS/SHARES. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Units/Shares that will be paid out to the Participants. The time period during which the performance goals must be met shall be called a "Performance Period." Performance Periods shall, in all cases, exceed six (6) months in length. 9.3 EARNING OF PERFORMANCE UNITS/SHARES. After the applicable Performance Period has ended, the holder of Performance Units/Shares shall be entitled to receive payout on the number of Performance Units/Shares earned by the Participant over The Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved. 9.4 FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES. Payment of earned Performance Units/Shares shall be made in a single lump sum, within forty-five (45) calendar 21 days following the close of the applicable Performance Period. The Committee, in its sole discretion, may pay earned Performance Units/Shares in the form of cash or in Shares (or in a combination thereof), which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period. Prior to the beginning of each Performance Period, Participants may elect to defer the receipt of Performance Unit/Share payout upon such terms as the Committee deems appropriate. 9.5 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, RETIREMENT, OR INVOLUNTARY TERMINATION (WITHOUT CAUSE). In the event the employment of a Participant is terminated by reason of death or Disability or involuntary termination without Cause during a Performance Period, the Participant shall receive a prorated payout of the Performance Units/Shares. The Committee retains discretion over the treatment of Performance Units/Shares upon Retirement. Any prorated payout shall be determined by the Committee, in its sole discretion, and shall be based upon the length of time that the Participant held the Performance Units/Shares during the Performance Period, and shall further be adjusted based on the achievement of the pre-established performance goals. Timing of payment of earned Performance Units/Shares shall be determined by the Committee at its sole discretion. 9.6 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a Participant's employment terminates for any reason other than those reasons set forth in Section 9.5 herein, all Performance Units/Shares shall be forfeited by the Participant to the Company, and shall once again be available for grant under the Plan. 9.7 NON-TRANSFERABILITY. Performance Units/Shares may not be sold, transferred, 22 pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further a Participant's rights under the Plan shall be exercisable during the Participant's lifetime only by the Participant or the Participant's legal representative. ARTICLE 10. BENEFICIARY DESIGNATION Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in the form prescribed by the Company and will be effective only when any necessary spousal consent is obtained and filed by the Participant in writing with the Secretary of the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. ARTICLE 11. DEFERRALS The Committee may permit a Participant to defer such Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of the Option or SAR, the lapse or waiver of restrictions with respect to Restricted Stock, or the satisfaction of any requirements or goals with respect to Performance Units/Shares. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. ARTICLE 12. RIGHTS OF EMPLOYEES 12.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any 23 Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) or Parent (Blue Cross & Blue Shield United of Wisconsin) shall not be deemed a termination of employment. 12.2 PARTICIPATION. No Employee shall have the right to be selected to receive an Award under this Plan, or having been so selected, to be selected to receive a future Award. ARTICLE 13. CHANGE IN CONTROL Upon the occurrence of a Change in Control, unless otherwise specifically prohibited by the terms of Section 18, herein: (a) Any and all Options and SARs granted hereunder shall become immediately exercisable; (b) Any restriction periods and restrictions imposed on Restricted Shares shall lapse, and within ten (10) business days after the occurrence of a Change in Control, the stock certificates representing Shares of Restricted Stock, without any restrictions or legend thereon, shall be delivered to the applicable Participants; (c) The target value attainable under all Performance Units and Performance Shares shall be deemed to have been fully earned for the entire Performance Period 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 with respect to Performance Units or Performance Shares which were granted less than six (6) months prior to the effective date of the Change in Control; (d) Subject to Article 14 herein, the Committee shall have the authority to make any modifications to the Awards as determined by the Committee to be appropriate before the effective date of the Change in Control. 24 ARTICLE 14. AMENDMENT, MODIFICATION, AND TERMINATION 14.1 AMENDMENT, MODIFICATION AND TERMINATION. With the approval of the Board, at any time and from time to time, the Committee may terminate, amend, or modify the Plan. However, without the approval of the shareholders of the Company (as may be required by the Code, by the insider trading rules of Section 16 of the Exchange Act, by any national securities exchange or system on which the Shares are then listed or reported, or by a regulatory body having jurisdiction with respect hereto), no such termination, amendment or modification may: (a) Materially increase the total number of Shares which may be issued under this Plan, except as provided in Section 4.3 herein; or (b) Materially modify the eligibility requirements to add a class of Insiders; or (c) Materially increase the benefits accruing to Insiders under the Plan. 14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award. ARTICLE 15. WITHHOLDING 15.1 TAX WITHHOLDING. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising or as a result of this Plan. 15.2 SHARE WITHHOLDING. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event hereunder, Participants may elect, subject to the approval of the Committee, to satisfy the 25 withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All elections shall be irrevocable, made in writing, signed by the Participant, and elections by Insiders shall additionally comply with the applicable requirement set forth in (a) or (b) of this Section 15.2. (a) AWARDS HAVING EXERCISE TIMING WITHIN INSIDERS' DISCRETION. The Insider must either: (i) Deliver written notice of the stock withholding election to the Committee at least six (6) months prior to the date specified by the Insider on which the exercise of the Award is to occur; or (ii) Make the stock withholding election in connection with an exercise of an Award which occurs during a Window Period. (b) AWARDS HAVING A FIXED EXERCISE/PAYOUT SCHEDULE WHICH IS OUTSIDE INSIDERS' CONTROL. The Insider must either: (i) Deliver written notice of the stock withholding election to the Committee at least six (6) months prior to the date on which the taxable event (e.g., exercise or payout) relating to the Award is scheduled to occur; or (ii) Make the stock withholding election during a Window Period which occurs prior to the scheduled taxable event relating to the Award (for this purpose, an election may be made prior to such a Window Period, provided that it becomes effective during a Window Period occurring prior to the applicable taxable event). ARTICLE 16. INDEMNIFICATION Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in 26 which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or By-laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. ARTICLE 17. SUCCESSORS All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 18. LEGAL CONSTRUCTION 18.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 18.2 SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 27 18.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. Notwithstanding any other provision set forth in the Plan, if required by the then-current Section 16 of the Exchange Act, any "derivative security" or "equity security" offered pursuant to the Plan to any Insider may not be sold or transferred for at least six (6) months after the date of grant of such Award. The terms "equity security" and "derivative security" shall have the meanings ascribed to them in the then-current Rule 16(a) under the Exchange Act. 18.4 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions or Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 18.5 GOVERNING LAW. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Wisconsin. 28 EX-10.55 8 EXHIBIT 10.55 ESCROW AGREEMENT This ESCROW AGREEMENT is made this day of , 1996, by and among UNITED WISCONSIN SERVICES, INC., a Wisconsin corporation ("UWSI"), WALLACE J. HILLIARD ("Agent") and , a (the "Escrow Agent"). RECITALS: WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated July 31, 1996 (the "Merger Agreement"), by and among UWSI, Blue Cross & Blue Shield United of Wisconsin, American Medical Security Group, Inc., a Delaware corporation ("AMSG"), Agent (individually and as trustee under the Voting Trust Agreement, as defined in the Merger Agreement) and Ronald A. Weyers (individually and as successor trustee under the Voting Trust Agreement), and pursuant to the Plan of Merger of even date herewith between UWSI and AMSG, AMSG has been merged with and into UWSI, which is the surviving corporation; WHEREAS, the former shareholders of AMSG (the "Shareholders") irrevocably have appointed the Agent as their agent and attorney-in-fact to act on the Shareholders' behalf with respect to this Agreement; WHEREAS, pursuant to the Merger Agreement, UWSI has deposited with the Escrow Agent the sum of $8,000,000 in cash to be held in escrow and disbursed by the Escrow Agent, subject to the terms, provisions and conditions hereinafter set forth, as security for payment to UWSI of the Shareholders' obligations to indemnify UWSI pursuant to Article VIII of the Merger Agreement for breaches of certain Shareholders' and the Company's representations, warranties covenants and other agreements contained in the Merger Agreement; NOW, THEREFORE, in satisfaction of a condition of the consummation of the transactions contemplated by the Merger Agreement, IT IS HEREBY AGREED AS FOLLOWS: AGREEMENT: 1. ACCEPTANCE OF ESCROW. The Escrow Agent hereby agrees to act as Escrow Agent hereunder and confirms receipt from UWSI of the sum of $8,000,000. Such sum and any income and proceeds therefrom which are not distributed in accordance with the terms hereof as shall be held from time to time by the Escrow Agent hereunder are hereinafter referred to as the "Escrowed Funds." 2. INVESTMENT OF ESCROWED FUNDS. The Escrow Agent shall invest and reinvest the Escrowed Funds as the Agent may from time to time direct in any Permitted Investments consistent with the duration, term and provisions of this Escrow Agreement. The term "Permitted Investments" shall mean: (a) Commercial paper of any United States issuer rated "Prime-1" or greater by Moody's Investors Service, Inc. or rated "A-1" or greater by Standard & Poor's Corporation; (b) Direct obligations of the United States of America or any agency thereof, or any state; (c) Certificates of deposit of any commercial bank which is a member of the Federal Reserve System and which has capital, surplus and undivided profits (as shown upon its most recently published statement of condition) aggregating not less than $100,000,000; and (d) Such other investments as may be mutually agreed in writing upon by UWSI and the Agent and communicated to the Escrow Agent. 3. COMPENSATION, COSTS AND EXPENSES OF ESCROW AGENT. The Escrow Agent shall be entitled to a reasonable fee for its services, and shall be reimbursed for out-of-pocket costs and expenses, including reasonable attorneys' fees, incurred by it in rendering its services hereunder. Half of such fees and expenses shall be borne by each of UWSI and the Shareholders (pro-rata in accordance with their respective ownership of AMSG common stock immediately prior to the Effective Time, as defined in the Merger Agreement). UWSI shall pay such fees and expenses within ten (10) days of receipt of an invoice from the Escrow Agent. The Shareholders' share of such fees shall be deducted from the Escrowed Funds. Such fees and expenses shall not exceed the fees and expenses charged by the Escrow Agent for comparable services to others. 4. DISBURSEMENTS OF ESCROWED FUNDS; TERMINATION. (a) INCOME. All income received on the Escrowed Funds shall be retained by the Escrow Agent, and shall be added to and considered a part of the Escrowed Funds, until the termination of this Escrow Agreement as provided in Section 4(d) hereof. Income generated by the Escrowed Funds shall not be available for indemnification payments pursuant to Article VIII of the Merger Agreement to the extent that such payments would exceed $8,000,000 in the aggregate. -2- (b) PRINCIPAL. (i) SECURITY FOR SHAREHOLDERS' INDEMNIFICATION. If the Escrow Agent receives a notice of claim pursuant to Section 8.03(a) of the Merger Agreement, seeking the payment of (A) a claim pursuant to Section 8.01(a) of the Merger Agreement, or (B) a claim pursuant to Section 8.01(b) of the Merger Agreement (an "Escrow Claim"), and if the Agent has not delivered to the Escrow Agent the notice of objection described in Section 8.03(a) of the Merger Agreement, within fifteen (15) days after delivery of the notice of claim, the Escrow Agent shall promptly pay and disburse to UWSI from the Escrowed Funds an amount equal to the amount of such Escrow Claim. If, however, the Agent within said 15-day time period delivers to the Escrow Agent such notice of objection, objecting to the payment of all or a portion of the Escrow Claim so made by UWSI, the Escrow Agent shall continue to hold the Escrowed Funds and shall not make a payment or disbursement to UWSI (unless, and to the extent, that the Agent does not object in its notice of objection to a portion of the Escrow Claim -- in which event the Escrow Agent shall promptly pay and disburse to UWSI from the Escrowed Funds an amount equal to such portion of the Escrow Claim with respect to which no objection was made) pending receipt of written instructions signed by UWSI and Agent directing the disposition of the Escrow Claim or, in the absence of such written instructions, receipt of a written copy of the arbitrator's determination of such Escrow Claim as provided in Section 9.07 of the Merger Agreement. Upon receipt of such written instructions or arbitrator's determination, the Escrow Agent promptly shall pay and disburse to UWSI from the Escrowed Funds the amount of the Escrow Claim, if any, so indicated as payable to UWSI. (ii) PARTIAL RELEASE. [UPON THE EXPIRATION OF NINE (9) MONTHS FROM THE DATE HEREOF (IF THE EFFECTIVE TIME IS ON OR PRIOR TO DECEMBER 31, 1996)][ON JUNE 30, 1997 (IF THE EFFECTIVE TIME IS AFTER DECEMBER 31, 1996)], the Escrow Agent shall disburse to the Agent the balance of the Escrowed Funds then held by the Escrow Agent hereunder, LESS an amount equal to (A) $1,000,000, PLUS (B) the aggregate of all claims which have been asserted by UWSI pursuant to Section 4(b)(i)(A) hereof prior to said date and which remain unresolved between UWSI and the Agent on that date ("Class A Unresolved Claims"). All amounts relating to Class A Unresolved Claims shall continue to be held in escrow only until resolved and disposed of in accordance with this Agreement. (iii) TERMINATION OF ESCROW. Upon the expiration of three (3) years from the date hereof (the "Termination Date"), the Escrow Agent shall disburse to the Agent the balance of the Escrowed Funds then held by the Escrow Agent hereunder, less an amount equal to the aggregate (A) all Class A Unresolved Claims which remain unresolved as of the Termination Date, and (B) all claims which have been asserted by UWSI pursuant to Section -3- 4(b)(i)(B) hereof prior to the Termination Date which remain unresolved between UWSI and the Agent on the Termination Date ("Class B Unresolved Claims"). All amounts relating to Class B Unresolved Claims shall continue to be held in escrow only until resolved and disposed of in accordance with this Agreement. (c) JOINT WRITTEN INSTRUCTIONS. Notwithstanding anything to the contrary contained herein, the Escrow Agent shall pay and disburse the Escrowed Funds upon receipt of written instructions concerning the disposition thereof signed by UWSI and the Agent. (d) TERMINATION. The Escrow Agreement shall terminate and the Escrow Agent shall be discharged of all responsibility hereunder at such time as the Escrow Agent shall have completed its duties hereunder. 5. COORDINATION WITH MERGER AGREEMENT. The provisions of this Agreement are intended to be in PARI MATERIA with the provisions of the Merger Agreement governing the payment of the Escrowed Funds upon an occurrence of a claim for indemnification. In the event of any inconsistency between this Agreement and the Merger Agreement concerning the making of an Escrow Claim, the procedure for the resolution thereof, the determination of the amount of money payable in satisfaction of such Escrow Claim, the limitations and restrictions upon the payment of an Escrow Claim, or any other matters affecting the Shareholders' obligations to make indemnification payments to UWSI, the same shall be subject to, and governed by, the applicable provisions contained in the Merger Agreement. 6. REPORTS AND ACCOUNTINGS. As soon as possible after the end of each calendar quarter, and at such other times as UWSI or the Agent may reasonably request, the Escrow Agent shall provide UWSI and the Agent with a full accounting of all investments of the Escrowed Funds and a report of all transactions with respect to the Escrowed Funds (including receipts, investments and disbursements) not previously reported. 7. RESPONSIBILITY OF ESCROW AGENT. The Escrow Agent shall be entitled to rely upon written notices and instructions of UWSI and of the Agent pursuant to this agreement and shall have no liability for any action taken in such reliance or upon reliance on the sufficiency or adequacy of the notices, except in the event of bad faith, negligence or wilful misconduct. The Escrow Agent is hereby expressly authorized and directed to disregard any and all notices or warnings, other than notices, instructions or directions herein expressly provided for, whether given by the parties hereto or by any other person, firm or corporation, excepting only the orders or processes of courts with proper jurisdiction. It is agreed by the parties hereto that the Escrow Agent assumes no -4- responsibility to UWSI, the Agent, the Shareholders, or to any other person other than to hold, invest by direction and disburse the Escrowed Funds pursuant to the terms of this Escrow Agreement. The Escrow Agent shall not be liable as such for any investment losses arising out of the investment of the Escrowed Funds in accordance herewith. UWSI and the Shareholders jointly and severally agree to indemnify and hold the Escrow Agent harmless with respect to any loss or liability or cost and expense reasonably incurred by it arising out of anything done by it in good faith in accordance with the terms hereof. The Escrow Agent may consult with legal counsel in the event of any dispute or question as to the construction of any of the provisions herein or its duties hereunder, and it shall incur no liability and shall be fully protected in acting in accordance with the opinion and instruction of such counsel. 8. NOTICES. All notices required or permitted to be given shall be given in the manner, and with the effect, described in Section 9.01 of the Merger Agreement. Notices to the Escrow Agent shall be delivered to: _____________________________ _____________________________ _____________________________ _____________________________ 9. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Wisconsin (regardless of such State's conflict of laws principles), and without reference to any rules of construction regarding the party responsible for the drafting hereof. -5- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. UNITED WISCONSIN SERVICES, INC. By: ------------------------------------- Its: ----------------------------------- ---------------------------------------- WALLACE J. HILLIARD, Agent ESCROW AGENT: ---------------------------------------- By: ------------------------------------- Authorized Officer -6- EX-23.3 9 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF MERRILL LYNCH & CO., INC. We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-4 of United Wisconsin Services, Inc. ("UWS") of our opinion dated July 31, 1996 relating to the fairness to UWS, from a financial point of view, of the consideration to be paid to the holders of capital stock of American Medical Security Group, Inc. We also hereby consent to the reference to our firm under the sections captioned "Summary" and "Background of and Reasons for the Merger." Merrill Lynch & Co., Inc. Chicago, Illinois August 27, 1996 EX-23.4 10 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Selected Consolidated Financial Data", and "Experts" in the Registration Statement on Form S-4 and related prospectus of United Wisconsin Services, Inc. for the registration of 4,000,000 shares of its common stock and to the incorporation by reference therein of our reports dated February 9, 1996, with respect to the consolidated financial statements of United Wisconsin Services, Inc. incorporated by reference in its Annual Report on Form 10-K for the year ended December 31, 1995 and the related financial statement schedules included therein, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Milwaukee, Wisconsin August 27, 1996 EX-23.5 11 EXHIBIT 23.5 EXHIBIT 23.5 CONSENT OF INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Selected Consolidated Financial Data", and "Experts" in the Registration Statement on Form S-4 and related prospectus of United Wisconsin Services, Inc. for the registration of 4,000,000 shares of its common stock and to the use of our report dated April 5, 1996, with respect to the consolidated financial statements of American Medical Security Group, Inc. ERNST & YOUNG LLP Milwaukee, Wisconsin August 27, 1996 EX-99.1 12 EX-99.1 UNITED WISCONSIN SERVICES, INC. 401 WEST MICHIGAN STREET, MILWAUKEE, WISCONSIN 53203 PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Thomas R. Hefty and C. Edward Mordy, and each of them, proxies of the undersigned with power of substitution, to vote all shares of the common stock the undersigned is entitled to vote at the Special Meeting of the Shareholders of United Wisconsin Services, Inc. (the "Company") to be held on , 1996 at 11:00 a.m., and at any adjournments thereof, as indicated below: 1. On the proposal to approve the merger (the "Merger") of the American Medical Security Group, Inc., with and into the Company pursuant to an Agreement and Plan of Merger dated July 31, 1996, as described in the accompanying statement. / / FOR the Merger / / AGAINST the Merger / / ABSTAIN 2. On the proposal to approve the amendments (the "Amendments") to the United Wisconsin Services, Inc. Equity Incentive Plan, as described in the accompanying proxy statement. / / FOR the Amendments / / AGAINST the Amendments / / ABSTAIN 3. With discretionary power upon any and all other businesses that may properly come before the meeting and upon matters incident to the conduct of the meeting. The Board of Directors recommends a vote FOR the Merger and FOR the Amendments. (Continued and to be signed on reverse side.) PROXY NO. NO. OF SHARES The shares of common stock represented by this proxy will be voted as directed. If no direction is specified, the shares of common stock will be voted FOR Item 1 and FOR Item 2. Dated: ---------------------------------------------------------------------------, 1996 ---------------------------- ---------------------------- Shareholder(s) Sign Here Please sign exactly as your name appears on this proxy giving your full title if signing as attorney of fiduciary. If shares are held jointly, each joint owner should sign. If a corporation, please sign in full corporate name, by duly authorized officer. If a partnership, please sign in partnership name by authorized person. PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE U.S. EX-99.2 13 EXHIBIT 99.2 AMERICAN MEDICAL SECURITY GROUP, INC. PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS Please sign and return immediately I, the undersigned stockholder of American Medical Security Group, Inc. ("AMSG"), Green Bay, Wisconsin, revoke any previous proxy I may have given and appoint Wallace J. Hilliard and Ronald A. Weyers as my attorneys, with full power of substitution, to vote all of the stock of AMSG in my name (on its books) at the special meeting of stockholders at 11:00 a.m. on , 1996, or any adjournment, as follows: AGREEMENT AND PLAN OF MERGER Proposal to approve the Agreement and Plan of Merger dated July 31, 1996 by and between AMSG, United Wisconsin Services, Inc., Blue Cross and Blue Shield United of Wisconsin, Wallace J. Hilliard and Ronald A. Weyers. VOTE FOR VOTE AGAINST ABSTAIN / / / / / /
The above item is proposed by the Board of Directors, and it recommends a vote in favor of such item. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSAL. I confer discretionary authority on the above-named individuals with respect to any other matters which properly come before the meeting, which approval shall not constitute ratification of actions taken at that meeting. IN EXERCISING DISCRETIONARY AUTHORITY, SHARES WILL BE VOTED ACCORDING TO THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS. Dated: ----------------- , 199 -- --------------------------------------------- (please fill in date) (Signature of Stockholder) --------------------------------------------- (Signature of Stockholder)
(WHEN SIGNING AS PERSONAL REPRESENTATIVE, TRUSTEE, GUARDIAN, ETC., PLEASE GIVE YOUR FULL TITLE. IF MORE THAN ONE TRUSTEE, ALL SHOULD SIGN, UNLESS ANY ONE PERSON IS AUTHORIZED TO ACT. IF SHARES ARE HELD IN JOINT NAMES, EITHER OR BOTH MAY SIGN.) -----END PRIVACY-ENHANCED MESSAGE-----