-----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, AQxZt8dJjeuarAnGPHjz+FGSETDGqNalGIid5sSac3Ff0fSvaLYFYypfZYQMk0zD wC4CZCWv8sVPJw0Y/sjePQ== 0001047469-98-031614.txt : 19980817 0001047469-98-031614.hdr.sgml : 19980817 ACCESSION NUMBER: 0001047469-98-031614 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-13154 FILM NUMBER: 98689796 BUSINESS ADDRESS: STREET 1: 401 W MICHIGAN ST CITY: MILWAUKEE STATE: WI ZIP: 53203-2896 BUSINESS PHONE: 4142266900 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 0-19506 UNITED WISCONSIN SERVICES, INC. (Exact name of registrant as specified in its charter) WISCONSIN 39-1431799 (State of Incorporation) (I.R.S. Employer Identification No.) 401 WEST MICHIGAN STREET, MILWAUKEE, WISCONSIN 53203-2896 (Address of principal executive offices) (Zip Code) (414) 226-6900 (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all documents and reports required to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock outstanding as of July 31, 1998 was 16,569,578. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNITED WISCONSIN SERVICES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 1998 1997 -------------- ------------- (000's omitted, except share data) ASSETS Current Assets: Cash and cash equivalents $ 7,078 $ 45,291 Investments--available for sale 294,192 267,764 Due from affiliates 1,620 6,024 Other receivables 10,921 12,863 Prepaid and other current assets 8,145 8,701 -------- -------- Total Current Assets 321,956 340,643 Investments--held to maturity 3,928 3,804 Property and equipment, net 36,839 37,169 Goodwill and other intangible assets, net 134,557 137,797 Other noncurrent assets 4,726 7,539 Net assets of discontinued operations 126,194 123,616 -------- -------- Total Assets $628,200 $650,568 -------- -------- -------- --------
See Notes to Interim Consolidated Financial Statements. 2 UNITED WISCONSIN SERVICES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 1998 1997 -------------- ------------- (000's omitted, except share data) LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Medical and other benefits payable $102,422 $126,329 Advance premiums 20,038 19,986 Due to affiliates 777 1,548 Payables and accrued expenses 20,401 28,932 Other current liabilities 24,305 15,389 -------- -------- Total Current Liabilities 167,943 192,184 Long-term Debt: Affiliates 70,000 70,000 Other 53,132 53,378 Other noncurrent liabilities 7,956 8,629 -------- -------- Total Liabilities 299,031 324,191 Redeemable preferred stock--Series A adjustable rate nonconvertible, $1,000 stated value, 25,000 shares authorized - - Shareholders' Equity: Preferred stock (no par value, 475,000 shares authorized) - - Common stock (no par value, $1 stated value, 50,000,000 shares authorized, 16,569,536 and 16,509,578 issued and outstanding at June 30, 1998 and December 31, 1997, respectively) 16,570 16,510 Paid-in capital 188,428 186,768 Retained earnings 121,021 117,331 Unrealized gains on available for sale securities 3,150 5,768 -------- -------- Total Shareholders' Equity 329,169 326,377 -------- -------- Total Liabilities and Shareholders' Equity $628,200 $650,568 -------- -------- -------- --------
See Notes to Interim Consolidated Financial Statements. 3 UNITED WISCONSIN SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- ---------------------------- 1998 1997 1998 1997 ----------- ------------ ----------- ---------- (000's omitted, except per share data) Revenues: Insurance premiums $ 226,956 $ 240,722 $ 461,915 $ 493,915 Net investment results 5,723 5,461 11,804 10,538 Other revenue 4,675 7,193 9,475 14,378 ----------- ------------ ----------- ----------- Total Revenues 237,354 253,376 483,194 518,831 Expenses: Medical and other benefits 174,325 183,279 353,610 378,062 Selling, general and administrative expenses 57,693 62,964 116,735 130,311 Interest expense 2,336 2,409 4,707 4,627 Amortization of goodwill and intangibles 2,195 2,023 4,435 4,024 ----------- ------------ ----------- ----------- Total Expenses 236,549 250,675 479,487 517,024 ----------- ------------ ----------- ----------- Income From Continuing Operations, Before Income Taxes 805 2,701 3,707 1,807 Income Tax Expense 413 1,230 1,764 1,167 ----------- ------------ ----------- ----------- Income From Continuing Operations 392 1,471 1,943 640 Income From Discontinued Operations: Income from discontinued managed care and specialty operations, net of tax 5,822 4,092 10,662 8,293 Transaction costs associated with spin off, net of tax 4,948 - 4,948 - ----------- ------------ ----------- ----------- Income from discontinued operations, net of tax 874 4,092 5,714 8,293 ----------- ------------ ----------- ----------- Net Income $ 1,266 $ 5,563 $ 7,657 $ 8,933 ----------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- Earnings Per Common Share - Basic Income from continuing operations $ 0.03 $ 0.09 $ 0.12 $ 0.04 Income from discontinued operations 0.05 0.25 0.34 0.51 ----------- ------------ ----------- ----------- Net Income Per Common Share $ 0.08 $ 0.34 $ 0.46 $ 0.55 ----------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- Earnings Per Common Share - Diluted Income from continuing operations $ 0.03 $ 0.09 $ 0.12 $ 0.04 Income from discontinued operations 0.05 0.25 0.34 0.50 ----------- ------------ ----------- ----------- Net Income Per Diluted Common Share $ 0.08 $ 0.34 $ 0.46 $ 0.54 ----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
See Notes to Interim Consolidated Financial Statements. 4 UNITED WISCONSIN SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, --------------------------------------- 1998 1997 -------------- -------------- (000's omitted) Operating Activities: Income from continuing operations $ 1,943 $ 640 Adjustments to reconcile income from continuing operations to net cash used in operating activities: Depreciation and amortization 7,791 9,035 Realized investment (gains) losses (1,481) 366 Deferred income tax expense (benefit) 185 (1,611) Changes in operating accounts: Other assets 8,619 3,781 Medical and other benefits payable (25,622) (23,505) Advance premiums (123) (1,185) Payables and accrued expenses (9,169) 1,592 Due to/from affiliates (771) 669 Other liabilities 8,226 (15,278) -------------- -------------- Net Cash Used in Operating Activities (10,402) (25,496) Investing Activities: Acquisition of subsidiary (net of cash and cash equivalents acquired of $2,773) 2,623 - Purchases of available for sale securities (176,092) (140,217) Proceeds from sale of available for sale securities 149,648 138,982 Purchases of property and equipment (2,075) (1,103) Proceeds from sale of property and equipment 2 1,116 -------------- -------------- Net Cash Used in Operating Activities (25,894) (1,222) Financing Activities: Cash dividends paid (3,967) (3,940) Issuance of common stock 1,718 1,108 Repayment of debt (837) (600) -------------- -------------- Net Cash Used in Financing Activities (3,086) (3,432) Net Cash Provided by Discontinued Operations 1,169 6,592 -------------- -------------- Cash and Cash Equivalents: Net decrease (38,213) (23,558) Balance at beginning of year 45,291 31,999 -------------- -------------- Balance at End of Period $ 7,078 $ 8,441 -------------- -------------- -------------- --------------
See Notes to Interim Consolidated Financial Statements. 5 UNITED WISCONSIN SERVICES, INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 1998 Note A. Basis of Presentation The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-and six-month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the United Wisconsin Services, Inc. ("UWS") annual report on Form 10-K for the year ended December 31, 1997. Note B. Discontinued Operations On May 27, 1998, the Board of Directors of UWS approved a plan to spin off its managed care companies and specialty business to its shareholders. The spin off is anticipated to be completed during September 1998. Shareholders of UWS, as of the distribution date, will receive one share of common stock of a newly formed company, Newco/UWS, Inc. (Newco), for every share of UWS owned. UWS is in the process of obtaining all necessary regulatory approvals, and has received a ruling from the Internal Revenue Service that the spin off will be tax free to UWS, Newco and UWS shareholders. The operations of Newco, along with direct costs associated with the spin off of $4.9 million, have been reflected in discontinued operations. All prior periods of the interim consolidated financial statements of UWS have been restated to reflect Newco operations as discontinued operations. On July 31, 1998, in anticipation of the spin off transaction, UWS refinanced its subordinated notes outstanding in the amount of $44.9 million. The subordinated notes, including accrued interest, were replaced with borrowings of $45.2 million against a $70.0 million bank line of credit. The line of credit contains certain covenants which, among other things, restrict the ability to incur additional debt, limit future cash dividends and the transfer of assets and require the maintenance of a minimum tangible net worth. However, the terms of the line of credit agreement permit the distribution of shares of Newco common stock in connection with the spin off. 6 Discontinued operations include managed care and specialty operations. The operating results of the discontinued operations presented below include pretax expenses of $0.3 million and $0.5 million of selling, general and administrative costs for the three months and the six months ended June 30, 1998, respectively. Similar amounts are included in the 1997 results. These expenses are included below to reflect all the costs of doing business as if Newco was a stand alone company and they are not included in income from discontinued operations in the accompanying UWS consolidated statements of income.
Three months ended Six months ended June 30, June 30, ---------------------------------- ----------------------------------- 1998 1997 1998 1997 --------------- --------------- --------------- --------------- Revenues: Health services revenues $ 157,783 $ 144,888 $ 312,980 $ 287,111 Investment results 5,999 5,902 9,960 10,672 --------------- --------------- --------------- --------------- Total Revenues 163,782 150,790 322,940 297,783 Expenses: Medical and other benefits 127,641 120,322 253,708 235,763 Selling, general and administrative 26,828 23,543 50,674 47,203 Amortization of goodwill and other intangibles 99 441 215 881 Profit sharing on joint ventures 289 343 1,413 1,188 --------------- --------------- --------------- --------------- Total Expenses 154,857 144,649 306,010 285,035 --------------- --------------- --------------- --------------- Income Before Income Taxes 8,925 6,141 16,930 12,748 Income Tax Expense 3,473 2,252 6,515 4,861 --------------- --------------- --------------- --------------- Income from discontinued managed care and specialty operations, net of tax $ 5,452 $ 3,889 $ 10,415 $ 7,887 --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
The net assets of the discontinued managed care and specialty operations are carried in "Net Assets of Discontinued Operations" in the Consolidated Balance Sheets. The major components are provided as follows:
June 30, 1998 December 31, 1997 ------------- ----------------- Current assets $ 230,090 $ 231,056 Current liabilities (114,925) (117,322) ------------- ----------------- Net current assets 115,165 113,734 Property, plant and equipment 8,086 6,978 Other non-current assets 29,338 28,222 Non-current liabilities (26,395) (25,318) ------------- ----------------- Net non-current assets 11,029 9,882 ------------- ----------------- Net Assets of Discontinued Operations $ 126,194 $ 123,616 ------------- ----------------- ------------- -----------------
Note C. Net Income Per Share Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share are computed by dividing net income by 7 the weighted average number of common shares outstanding, adjusted for the effect of dilutive securities for employee stock options. The following table provides a reconciliation of the number of weighted average basic and diluted shares outstanding:
Three months ended June 30, ---------------------------- 1998 1997 ----------- ----------- Weighted average common shares outstanding 16,546,176 16,422,332 Potentially dilutive stock options 175,925 207,522 ----------- ----------- Weighted average common and potentially dilutive shares outstanding 16,722,101 16,629,854 ----------- ----------- ----------- -----------
Six months ended June 30, ---------------------------- 1998 1997 ---------- ---------- Weighted average common shares outstanding 16,531,108 16,380,208 Potentially dilutive stock options 173,671 139,527 ----------- ----------- Weighted average common and potentially dilutive shares outstanding 16,704,779 16,519,735 ----------- ----------- ----------- -----------
Options to purchase 1,040,931 and 1,142,139 shares during the six months ended June 30, 1998 and 1997, respectively, were not included in the computation of earnings per diluted common share since the options' exercise prices were greater than the average market price of the outstanding common shares. Note D. Adoption of New Generally Accepted Accounting Principles Effective January 1, 1998, UWS adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), issued by the Financial Accounting Standards Board (FASB) in June 1997. Comprehensive income is defined therein as all changes in equity during the period except those resulting from shareholder equity contributions and distributions. Comprehensive income from continuing operations totaled $0.5 million and $5.2 million for the three months ended June 30, 1998 and 1997, respectively, and $1.3 million and $0.3 million for the six months ended June 30, 1998 and 1997. Comprehensive income from discontinued operations totaled $(2.0) million and $6.7 million for the three months ended June 30, 1998 and 1997, respectively, and $3.8 million and $8.5 million for the six months ended June 30, 1998 and 1997. In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the reporting of operating segment information in both annual financial reports and interim financial reports issued to shareholders. Operating segments are components of an entity for which separate financial information is available and is evaluated regularly by the entity's chief operating management. SFAS 131 is effective for fiscal years beginning after December 15, 1997 and is not required to be adopted in interim financial reports during the first year of adoption. Adoption of this statement is not expected to have a material impact on UWS. Note E. Reclassifications Certain reclassifications have been made to the consolidated financial statements for 1997 to conform with the 1998 presentation. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS UNITED WISCONSIN SERVICES, INC. OVERVIEW United Wisconsin Services, Inc. ("UWS") is a leading provider of managed health care services and employee benefit products. UWS has three primary product lines: (i) small group managed care and life products sold through American Medical Security Holdings, Inc. ("AMS"); (ii) Health Maintenance Organization ("HMO") products, including Compcare Health Services Insurance Corporation ("Compcare"), Valley Health Plan, Inc. ("Valley"), Unity Health Plans Insurance Corporation ("Unity") and certain point of service ("POS") and other related products managed by Compcare, Valley and Unity, and (iii) specialty managed care products and services, including dental, life, disability and workers' compensation products, managed care consulting, electronic claim submission, pharmaceutical management and managed behavioral health services. On May 27, 1998, the Board of Directors of UWS approved a formal plan to spin off the managed care products and specialty managed care products and services from the AMS small group products business. The spin off, which involves the creation of a new corporation, is anticipated to be completed during September 1998. Shareholders of UWS, as of the distribution date, will receive one share of common stock of a newly formed company, Newco/UWS, Inc. ("Newco"), for every share of UWS owned. UWS has received a private letter ruling from the Internal Revenue Service that the distribution will be tax-free to UWS, Newco and UWS shareholders. As a result of the spin off, the revenues and expenses, assets and liabilities, and cash flows of the managed care and specialty segments have been classified as discontinued operations in the interim consolidated financial statements. Accordingly, the discussions of continuing operations that follow reflect the operations of the AMS small group managed care and life products. RESULTS OF CONTINUING OPERATIONS TOTAL REVENUES Total revenues decreased 6.3% for the three months ended June 30, 1998 to $237.4 million from $253.4 million for the three months ended June 30, 1997. For the six months ended June 30, total revenues decreased 6.9% to $483.2 million in 1998 from $518.8 million in 1997. The decline in revenues is primarily the result of declining insurance premiums from AMS's efforts to eliminate unprofitable business, partially offset by premium rate increases. INSURANCE PREMIUMS -- Medical insurance premiums for the three months ended June 30, 1998 decreased 6.1% to $216.0 million from $230.0 million for the three months ended June 30, 1997. Average medical membership decreased by 24.0% for the three months ended June 30, 1998 as compared to the prior year period. Medical insurance premiums for the six months ended June 30, 1998 decreased 7.0% to $439.2 million from $472.3 million for the six months ended June 30, 1997. Average medical membership decreased by 27.3% for the six months ended June 30, 1998 as compared to the prior period. Membership has declined at a faster rate than the decline in premium, which is the result of a significant reduction in the self funded business, which has a lower premium per member than insured business. Life insurance premiums for the three months ended June 30, 1998 decreased 19.0% to $6.1 million from $7.6 million for the three months ended June 30, 1997. Average life membership decreased by 29.8% for the three months ended June 30, 1998 as compared to one year prior. Life insurance premiums for the six months ended June 30, 1998 decreased 21.5% to $12.7 million from $16.1 million for the six months ended June 30, 1997. Average life membership decreased by 30.4% for the six months ended June 30, 1998 as compared to the prior year. The life membership decrease is the primary reason for the premium decline. 9 Overall medical and life insurance premiums and memberships have declined over the past two years as a result of management's efforts to return to profitability. Actions taken include: 1) exiting certain unprofitable markets in Texas and Kentucky, 2) canceling one-life dental business effective June 1, 1998, and 3) implementing substantial rate increases for certain product lines. Management continues to pursue initiatives to reverse the premium and membership decline, including new agency sales relationships, expansion into new geographic areas, acquisition of blocks of business and introduction of new products. Membership in the core medical business, excluding self-funded business and acquired closed blocks of business, increased from March 31, 1998 to June 30, 1998. This is the first such increase since the first quarter of 1996. NET INVESTMENT RESULTS -- Net investment results includes investment income and realized gains or losses on investments. Net investment income for the three months ended June 30, 1998 increased 4.8 % to $5.7 million from $5.5 million for the three months ended June 30, 1997. Net investment income for the six months ended June 30, 1998 increased 12.0% to $11.8 million from $10.5 million for the same period one year ago. Average annual investment yields, excluding realized gains and losses, were 6.8% and 7.2% for the three months ended June 30, 1998 and 1997, respectively. Average annual investment yields, excluding realized gains and losses, was 6.7% for the six months ended June 30, 1998 compared to 6.9% for the same period in the prior year. Excluding realized gains and losses, net investment income declined from the prior periods by 8.4% and 5.2% for the three month period and the six month period, respectively. Average invested assets for the three months ended June 30, 1998 decreased 3.2% to $292.8 million from $302.3 million for the three months ended June 30, 1997. The decrease in average invested assets is due primarily to the decrease in medical and other benefits payable resulting from the membership decline for AMS products over the past year as described above, and a decrease in the inventory of claims pending adjudication. EXPENSE RATIOS LOSS RATIO -- The medical loss ratio for the three months ended June 30, 1998 was 78.8% compared with 78.0% for the three months ended June 30, 1997. The medical loss ratio for the six months ended June 30, 1998 was 78.9% compared with 78.5% for the six months ended June 30, 1997. The increase in the medical loss ratio during 1998 is primarily attributable to a decline in profitability for business written in Florida due to delays in receiving approval of new rates. The life loss ratio for the three months ended June 30, 1998 was 20.6% compared to the three months ended June 30, 1997 of 34.8%. The life loss ratio for the six months ended June 30, 1998 was 26.9% compared to the six months ended June 30, 1997 of 32.8%. The life loss ratio decline in 1998 is due to decreased claims activity. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO -- The selling, general and administrative ("SGA") expense ratio for medical products for the three months ended June 30, 1998 was 21.4% compared with 22.5% for the three months ended June 30, 1997. For the six months ended, the SGA ratio for medical products was 21.4% and 22.5% for 1998 and 1997, respectively. The SGA expense ratio for life products for the second quarter of 1998 was 28.9% compared with 30.0% for the same period in the prior year. The SGA expense ratio for life products for the six months ended June 30, 1998 was 29.1% compared to the six months ended June 30, 1997 of 29.9%. AMS products are sold exclusively through independent agents who are compensated through commissions. Over time, renewal business has gradually represented a larger proportion of the total AMS medical and life business. Since renewal commissions are typically lower than commissions on new sales, this has contributed to the decrease in the expense ratios. AMS continues to focus on efforts to improve operating efficiency through process re-engineering and to align staff commensurate with gross premium revenue. 10 OTHER EXPENSES Interest expense decreased to $2.3 million for the three months ended June 30, 1998 from $2.4 million for the same period in the prior year. For the six months ended June 30, 1998, interest expense increased to $4.7 million from $4.6 million for the six months ended June 30, 1997. Amortization of goodwill and other intangibles totaled $2.2 million for the second quarter of 1998, compared with $2.0 million of amortization expense for the second quarter of 1997. On a year to date basis, amortization of goodwill and intangibles increased to $4.4 million from $4.0 million for the six months ended June 30, 1997. The increase in amortization expense in 1998 is primarily due to recorded intangibles related to the Pan American small group business acquired in October 1997. INCOME FROM CONTINUING OPERATIONS Income from continuing operations for the three months ended June 30, 1998 decreased 73.4% to $0.4 million or $.03 per share from $1.5 million or $.09 per share for the three months ended June 30, 1997. Income from continuing operations for the six months ended June 30, 1998 increased 45.5% to $1.9 million or $.12 per share from $0.6 million or $.04 per share for the six months ended June 30, 1997. The effective tax rate was 51.3% for the three months ended June 30, 1998 compared with 45.5% for the three months ended June 30, 1997. The effective tax rate for the six months ended June 30, 1998 was 47.6% compared with 64.6% for the six months ended June 30, 1997. The effective tax rate is significantly impacted by the amortization of non-deductible goodwill in relation to pretax income. Excluding the impact of non-deductible goodwill, the effective tax rate was 35.8% for the six months ended June 30, 1998 compared with 41.9% for the same period one year ago. SUMMARY OF OPERATING RESULTS AND STATISTICS - CONTINUING OPERATIONS Operating results and statistics for the AMS products are presented below for the periods indicated:
June 30, ---------------------- 1998 1997 ------- ------- Membership at end of period: Medical 577,520 666,584 Dental 411,364 486,894 Life 228,832 310,911 Other 25,539 23,454
Three months ended Six months ended June 30, June 30, ---------------- ----------------- 1998 1997 1998 1997 -------- ------ -------- ------- Operating statistics: Loss ratio (1): Medical 78.8% 78.0% 78.9% 78.5% Life 20.6% 34.8% 26.9% 32.8% Expense ratio (2): Medical 21.4% 22.5% 21.4% 22.5% Life 28.9% 30.0% 29.1% 29.9%
(1) Medical and other benefits as a percentage of premium revenue. (2) Selling, general and administrative expenses as a percentage of premium revenue. 11 LIQUIDITY AND CAPITAL RESOURCES - CONTINUING OPERATIONS UWS's sources of cash flow consist primarily of health services revenues and investment income. The primary uses of cash include medical and other benefits and operating expense payments. Positive cash flows are invested pending future payments of medical and other benefits and other operating expenses. UWS's investment policies are designed to maximize yield, preserve principal and provide liquidity to meet anticipated payment obligations. During 1997 and 1998, UWS has generated negative cash flows from operations. For the six months ended June 30, 1998 and 1997, net cash used in operating activities amounted to a use of $10.4 million and $25.5 million, respectively. Negative cash flows from operations is principally the result of the decline in medical and other benefits payable of $25.6 million and $23.5 million for 1998 and 1997, respectively. The decline in medical and other benefits payable results from the decline in membership and a reduction in inventory claims pending adjudication. UWS's investment portfolio from continuing operations consists primarily of investment grade bonds and has limited exposure to equity securities. At June 30, 1998, $275.9 million or 92.6% of UWS's total investment portfolio was invested in bonds. At December 31, 1997, $267.0 million or 98.3% of the Company's total investment portfolio was invested in bonds. The bond portfolio had an average quality rating of Aa3 at both June 30, 1998 and December 31, 1997 by Moody's Investor Service, and the majority of the bond portfolio was classified as available for sale. The market value of the total investment portfolio from continuing operations, which includes stocks and bonds, exceeded amortized cost by $2.9 million and $3.9 million at June 30, 1998 and December 31, 1997, respectively. UWS has no investments in mortgage loans, non-publicly traded securities (except for principal only strips of U.S. Government securities), real estate held for investment or financial derivatives. From time to time, UWS makes capital contributions to its subsidiaries to assist them in maintaining appropriate levels of capital and surplus for regulatory and rating purposes. Insurance subsidiaries are required to maintain certain levels of statutory capital and surplus. As of the balance sheet date presented, statutory capital and surplus for each of these insurance subsidiaries exceeded required levels. On July 31, 1998, in anticipation of the spin off transaction, UWS refinanced its subordinated notes outstanding in the amount of $44.9 million. The subordinated notes, including accrued interest, were replaced with borrowings of $45.2 million against a $70.0 million bank line of credit. The line of credit contains certain covenants which, among other things, restrict the ability to incur additional debt, limit future cash dividends and transfer of assets and require the maintenance of a minimum tangible net worth. However, the terms of the line of credit agreement permit the distribution of shares of Newco common stock in connection with the spin off. Also in conjunction with the distribution of assets pursuant to the spin off, Newco will assume a $70.0 million note obligation of UWS to Blue Cross & Blue Shield United of Wisconsin ("BCBSUW"). The obligation and related debt service costs to BCBSUW has been reflected in continuing operations in the accompanying interim consolidated financial statements. In addition to internally generated funds and periodic borrowings on its bank line of credit, UWS believes that additional financing to facilitate long-term growth could be obtained through equity offerings, debt offerings, or bank borrowings, as market conditions may permit or dictate. DISCONTINUED OPERATIONS The unaudited combined financial statements of Newco (discontinued operations) are provided below as supplemental information for the periods indicated. Newco's financial statements reflect all the costs of doing business as if Newco was a stand alone company during the periods presented. Therefore, the financial results include all costs fully allocated to Newco and additional selling, general and administrative pre-tax costs of approximately $0.3 million and $0.5 million for the three months and six months ended June 30, 1998, respectively. Similar amounts are included in the 1997 results. 12 NEWCO COMBINED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1998 1997 -------------- -------------- (000's omitted) ASSETS Current Assets: Cash and cash equivalents $ 14,750 $ 17,033 Investments--available for sale 154,365 151,653 Due from affiliates 201 313 Other receivables 52,910 53,753 Prepaid and other current assets 7,864 8,304 -------------- -------------- Total Current Assets 230,090 231,056 Investments--held to maturity 7,856 7,893 Property and equipment, net 8,086 6,978 Goodwill and other intangible assets, net 4,715 5,005 Other noncurrent assets 16,767 15,324 -------------- -------------- Total Assets $ 267,514 $ 266,256 -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Medical and other benefits payable $ 55,537 $ 60,724 Advance premiums 29,765 24,060 Due to affiliates 4,472 3,867 Payables and accrued expenses 16,869 20,926 Other current liabilities 8,282 7,745 -------------- -------------- Total Current Liabilities 114,925 117,322 Other noncurrent liabilities 26,395 25,318 -------------- -------------- Total Liabilities 141,320 142,640 Shareholders' Equity: Investments by and advances from UWS 124,947 120,405 Unrealized gains on available for sale securities 1,247 3,211 -------------- -------------- Total Shareholders' Equity 126,194 123,616 -------------- -------------- Total Liabilities and Shareholders' Equity $ 267,514 $ 266,256 -------------- -------------- -------------- --------------
13 NEWCO COMBINED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- --------------------------- 1998 1997 1998 1997 ------------- ----------- ---------- ---------- (000's omitted, except per share data) Revenues: Insurance premiums $ 150,526 $ 138,327 $ 298,602 $ 273,760 Net investment income 5,999 5,902 9,960 10,672 Other revenue 7,257 6,561 14,378 13,351 ------------ ----------- ---------- ---------- Total Revenues 163,782 150,790 322,940 297,783 Expenses: Medical and other benefits 127,641 120,322 253,708 235,763 Selling, general and administrative expenses 26,828 23,543 50,674 47,203 Profit sharing on joint ventures 289 343 1,413 1,188 Amortization of goodwill and intangibles 99 441 215 881 ------------ ----------- ---------- ---------- Total Expenses 154,857 144,649 306,010 285,035 ------------ ----------- ---------- ---------- Income Before Income Taxes 8,925 6,141 16,930 12,748 Income Tax Expense 3,473 2,252 6,515 4,861 ------------ ----------- ---------- ---------- Net Income $ 5,452 $ 3,889 $ 10,415 $ 7,887 ------------ ----------- ---------- ---------- ------------ ----------- ---------- ---------- Earnings Per Common Share - Basic $ 0.33 $ 0.24 $ 0.63 $ 0.48 ------------ ----------- ---------- ---------- ------------ ----------- ---------- ---------- Earnings Per Common Share - Diluted $ 0.33 $ 0.23 $ 0.62 $ 0.48 ------------ ----------- ---------- ---------- ------------ ----------- ---------- ----------
14 NEWCO COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, -------------------------- 1998 1997 -------------------------- (000's omitted) Cash Flows - Operating Activities: Income from operations $ 10,415 $ 7,887 Adjustments to reconcile income from operations to net cash provided by operating activities: Depreciation and amortization 1,278 1,723 Realized investment gains (5,023) (5,545) Deferred income tax expense 116 739 Changes in operating accounts: Other receivables 910 (698) Medical and other benefits payable (6,006) (2,676) Advance premiums 5,705 3,493 Due to/from affiliates 717 17,158 Other, net (5,973) (13,902) ---------- ----------- Net cash provided by operating activities 2,139 8,179 Cash Flows - Investing Activities: Purchases of available for sale investments (102,367) (103,149) Proceeds from sale of available for sale investments 98,291 107,592 Proceeds from maturity of available for sale investments 5,575 2,985 Purchases of held to maturity investments (313) (211) Proceeds from maturity of held to maturity investments 265 340 ---------- ----------- Net cash provided by investing activities 1,451 7,557 Cash Flows - Financing Activities: Decrease in investments by and advances from (to) UWS (5,873) (6,704) ---------- ----------- Net cash used in financing activities (5,873) (6,704) Cash and cash equivalents: Increase (decrease) during period (2,283) 9,032 Balance at beginning of year 17,033 19,147 ---------- ----------- Balance at end of period $ 14,750 $ 28,179 ---------- ----------- ---------- -----------
15 RESULTS OF DISCONTINUED OPERATIONS TOTAL REVENUES Total revenues for the three months ended June 30, 1998 increased 8.6% to $163.8 million from $150.8 million for the three months ended June 30, 1997. On a year-to-date basis, total revenues increased 8.4% to $322.9 million from $297.8 million for the six months ended June 30, 1997. These increases were due primarily to increased membership in a majority of the product lines and general premium increases. HEALTH SERVICES REVENUES -- HMO health services revenues for the three months ended June 30, 1998 increased 7.6% to $128.1 million from $119.0 million for the three months ended June 30, 1997. Average HMO medical premium per member for the three months ended June 30, 1998 increased 2.7% from the same period in the prior year. The average number of HMO medical members for the three months ended June 30, 1998 increased 3.9% to 296,093 from 285,031 for the three months ended June 30, 1997. HMO health services revenues for the six months ended June 30, 1998 increased 8.5% to $254.7 million from $234.8 for the same period in the prior year. Average HMO medical premium per member for the six months ended June 30, 1998 increased 3.2% from the same period in the prior year, primarily due to general premium increases. The average number of HMO medical members for the six months ended June 30, 1998 increased 4.8% to 294,409 from 280,815 for the same period in the prior year. Health services revenues for specialty managed care products and services for the three months ended June 30, 1998 increased 13.1% to $33.7 million from $29.8 million for the three months ended June 30, 1997. This increase was due primarily to an increase in general membership. Health services revenues for specialty managed care products and services for the six months ended June 30, 1998 increased 9.8% to $66.2 million from $60.3 million for the six months ended June 30, 1997. NET INVESTMENT RESULTS -- Investment results include investment income and realized gains (losses) on investments. Investment results for the three months ended June 30, 1998 increased 1.6% to $6.0 million from $5.9 million for the three months ended June 30, 1997. On a year-to-date basis, investment results decreased 6.7% to $10.0 million from $10.7 million for the same period in the prior year. Average annual investment yields, excluding net realized gains, were 5.5% for the three months ended June 30, 1998 and 5.1% for the three months ended June 30, 1997. On a year-to-date basis, average investment yields, excluding net realized gains, were 5.7% and 5.5% for the six months ended June 30, 1998 and 1997, respectively. Investment gains are realized in the normal investment process in response to market opportunities. Average invested assets for the three months ended June 30, 1998 increased 0.3% to $181.2 million from $180.7 million for the three months ended June 30, 1997. On a year-to-date basis, average invested assets held steady at $180.9 million compared to $181.6 million for the six months ended June 30, 1997. EXPENSE RATIOS LOSS RATIO -- The consolidated loss ratio represents the ratio of medical and other benefits to premium revenue on a consolidated basis, and is therefore a blended ratio for medical, life, dental, disability and other product lines. The consolidated loss ratio was 84.8% for the second quarter of 1998 compared with 87.0% for the second quarter of 1997. On a year-to-date basis, the consolidated loss ratio was 85.0% for the first six months of 1998, compared with 86.1% for the first six months of 1997. The consolidated loss ratio is influenced by the component loss ratio for each of Newco's primary product lines, as discussed below. 16 The medical loss ratio for HMO products for the three months ended June 30, 1998 was 88.3%, compared with 90.7% for the three months ended June 30, 1997. On a year-to-date basis, the medical loss ratio for HMO products was 88.4%, compared with 89.5% for the same period in 1997. The decrease in the medical loss ratio in 1998 for HMO products is due primarily to provider recontracting with a shift to additional capitation in the southeastern Wisconsin HMO market. For the six months ended June 30, 1998, approximately 43.0% of the medical benefits were provided under capitated arrangements compared to 31.0% during the comparable period in 1997. The loss ratio for the risk products within specialty managed care products and services for the three months ended June 30, 1998 was 68.7%, compared with 69.6% for the three months ended June 30, 1997. On a year-to-date basis, the loss ratio for specialty managed care products and services was 69.9% compared with 70.5% for the same period in 1997. The decrease is primarily attributable to improved results in the United Heartland worker's compensation block of business. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE RATIO -- The selling, general and administrative ("SGA") expense ratio includes commissions, administrative expenses, and premium taxes and other assessments. The SGA expense ratio for HMO products for the second quarter of 1998 was 9.8%, compared with 9.2% for the second quarter of 1997. The increase was due to higher investments in improved system capabilities and enhancements and related system conversion and training costs. On a year-to-date basis, the SGA expense ratio for HMO products was 9.4% for the six months ended June 30, 1998, which was consistent with the six months ended June 30, 1997. SGA expense ratio related to the risk products within specialty managed care products and services for the second quarter of 1998 was 26.7%, compared with 23.2% for the second quarter of 1997. On a year-to-date basis, SGA expense ratio for the risk products was 25.5% for the six months ended June 30, 1998 compared with 22.9% for the six months ended June 30, 1997. This increase was due to higher investments in improved system capabilities and enhancements and related system conversion and training costs, in addition to an increase in loss adjusting expenses recorded on the workers' compensation business. Operating expense ratio related to the service products within specialty managed care products and services for the second quarter of 1998 was 92.1%, compared with 97.7% for the second quarter of 1997. On a year-to-date basis, the operating expense ratio for the service products was 91.6% for the six months ended June 30, 1998 compared with 98.1% for the six months ended June 30, 1997. Those reductions in 1998 are primarily related to a decrease in loss adjustment expense recorded by the workers' compensation TPA unit. OTHER EXPENSES Profit sharing on joint ventures was $0.3 million for both the three months ended June 30, 1998 and the three months ended June 30, 1997. On a year-to-date basis, profit sharing on joint ventures was $1.4 million for the six months ended June 30, 1998 and $1.2 million for the six months ended June 30, 1997. These balances represent profit sharing expenses related to the Unity and Valley joint ventures. Amortization of goodwill and other intangibles totaled $0.1 million for the second quarter of 1998, compared with $0.4 million of amortization expense for the second quarter of 1997. On a year-to-date basis, amortization of goodwill and other intangibles totaled $0.2 million compared with $0.9 million of amortization expense for the same period in the prior year. The reduction is the result of a disposition of an intangible during the third quarter of 1997 related to appreciated securities. 17 NET INCOME FROM DISCONTINUED OPERATIONS Income from Discontinued Operations for the three months ended June 30, 1998 increased 40.2% to $5.5 million or $0.33 per diluted share from $3.9 million or $0.23 per diluted share for the three months ended June 30, 1997. Income from Discontinued Operations, excluding the transaction costs associated with the spin off for the six months ended June 30, 1998 increased 32.1% to $10.4 million or $0.62 per diluted share from $7.9 million or $0.48 per diluted share for the six months ended June 30, 1997. Newco's effective tax rate was 38.9% for the three months ended June 30, 1998 compared with 36.7% for the three months ended June 30, 1997. On a year-to-date basis, Newco's effective tax rate was 38.5% for the six months ended June 30, 1998, compared with 38.1% for the six months ended June 30, 1997. Newco's effective tax rate fluctuates based upon the relative profitability of Newco's two product lines and the differing effective tax rate for each of those product lines. SUMMARY OF OPERATING RESULTS AND STATISTICS - DISCONTINUED OPERATIONS Operating results and statistics for the two primary product groups are presented below for the periods indicated.
JUNE 30, -------- Membership at end of period: 1998 1997 ---- ---- HMO PRODUCTS (BY BUSINESS UNIT): Compcare 172,825 169,908 Valley 40,203 37,476 Unity 84,880 80,471 --------- --------- Total HMO products membership 297,908 287,855 --------- --------- --------- --------- SPECIALTY MANAGED CARE PRODUCTS AND SERVICES: UWG Life/AD&D 154,033 119,924 Dental - HMO 168.044 167,442 UWG Dental 12,094 12,126 Disability 99,457 74,598 Behavioral Health 913,479 851,495 Workers' Compensation 53,509 55,109 --------- --------- Total Specialty managed care products and services membership 1,400,616 1,280,694 --------- --------- --------- ---------
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 1998 1997 1998 1997 ------- ------- ----- ----- Health services revenues (as a percentage of the total): HMO products 81.2% 82.1% 81.4% 81.8% Specialty managed care products and services Service Products 6.5% 6.9% 6.7% 6.9% Risk Products 14.9% 13.7% 14.5% 14.1% Intercompany eliminations (2.6%) (2.7%) (2.6%) (2.8%) ------ ------ ------ ------ Total 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ ------ ------ ------ ------
18
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ----- ------ ----- Operating statistics: HMO products: Medical loss ratio (1) 88.3% 90.7% 88.4% 89.5% Selling, general and administrative expense ratio (2) 9.8% 9.2% 9.4% 9.4% Combined loss and expense ratio 98.1% 99.9% 97.7% 98.9% Specialty managed care products and services: Service products: Operating expense ratio* 92.1% 97.7% 91.6% 98.1% Risk products: Loss ratio (1) 68.7% 69.6% 69.9% 70.5% Selling, general and administrative expense ratio (2) 26.7% 23.2% 25.5% 22.9% Combined loss and expense ratio 95.4% 92.8% 95.4% 93.4% Consolidated: Loss ratio (1) 84.8% 87.0% 85.0% 86.1% Net income margin (3) 3.3% 2.6% 3.2% 2.6%
(1) Medical and other benefits as a percentage of premium revenue. (2) Selling, general and administrative expenses as a percentage of premium revenue. (3) Net income as a percentage of total revenues. * This business does not have insurance related risk associated with it. Newco's revenues are derived primarily from premiums, while medical benefits constitute the majority of expenses. Profitability is directly affected by many factors including, among others, premium rate adequacy, estimates of medical benefits, health care utilization, effective administration of benefit payments, operating efficiency, investment returns and federal and state laws and regulations. LIQUIDITY AND CAPITAL RESOURCES - DISCONTINUED OPERATIONS Newco's sources of cash flow consist primarily of health services revenues and investment income. The primary uses of cash include medical and other benefits and operating expense payments. Positive cash flows are invested pending future payments of medical and other benefits and other operating expenses. The investment policies are designed to maximize yield, preserve principal and provide liquidity to meet anticipated payment obligations. On a historical basis, Newco has generated positive cash flow from operations. For the six months ended June 30, 1998, net cash provided by operating activities amounted to $2.1 million, compared with $8.7 million for the six months ended June 30, 1997. The decrease in cash flows from operations in 1998 compared to 1997 was due primarily to a decrease in medical and other benefits payable and a reduction in the affiliates receivables. Due to periodic cash flow requirements of certain subsidiaries, Newco made borrowings under its bank line of credit ranging up to $10.0 million during the first six months of 1998 and $8.5 million during the first six months of 1997 to meet short-term cash needs. No balance was outstanding at June 30, 1998 or at December 31, 1997. 19 Newco's investment portfolio consists primarily of investment grade bonds, Government securities and has a limited exposure to equity securities. At June 30, 1998, $122.0 million or 75.2% of Newco's total investment portfolio was invested in bonds compared with $127.9 million or 80.1% at December 31, 1997. The bond portfolio had an average quality rating by Moody's Investor Service of A1 and Aa3 at June 30, 1998 and December 31, 1997, respectively. The majority of the bond portfolio was classified as available for sale. The market value of the total investment portfolio, which includes stocks and bonds, exceeded amortized cost by $4.2 million and $4.8 million at June 30, 1998 and December 31, 1997, respectively. Newco has no investments in mortgage loans, non-publicly traded securities (except for principal only strips of U. S. Government securities), real estate held for investment or financial derivatives. From time to time, capital contributions are made to the subsidiaries to assist them in maintaining appropriate levels of capital and surplus for regulatory and rating purposes. Insurance subsidiaries are required to maintain certain levels of statutory capital and surplus. In Wisconsin, where a large percentage of Newco's premium are written, these levels are based upon the amount and type of premiums written and are calculated separately for each subsidiary. As of the balance sheet dates presented, statutory capital and surplus for each of these insurance subsidiaries exceeded required levels. In addition to internally generated funds and periodic borrowings on its bank line of credit, Newco believes that additional financing to facilitate long-term growth could be obtained through equity offerings, debt offerings, financings from Blue Cross and Blue Shield United of Wisconsin or bank borrowings, as market conditions may permit or dictate. FORWARD LOOKING STATEMENTS This report contains certain forward looking statements with respect to the financial condition, results of operation and business of the Company. Such forward looking statements are subject to inherent risks and uncertainties that may cause actual results 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, rising health care costs, business conditions and competition in the managed care industry, developments in health care reform and other regulatory issues. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pursuant to the General Intractions to Rule 305 of Regulation S-K, the quantitative and qualitative disclosures called for by this Item 3 and by Rule 305 of Regulation S-K are inapplicable to UWS at this time. 20 PART II. OTHER INFORMATION UNITED WISCONSIN SERVICES, INC. ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION SPIN OFF OF HMO AND SPECIALTY PRODUCTS On April 22, 1998, the Company announced its intention to separate its American Medical Security small group products business from its HMO and specialty products business through a spin off. The Company has received a private letter ruling from the Internal Revenue Service that the distribution will be tax free to the Company and its shareholders. The Company expects to complete the spin off during the third quarter of 1998. SHAREHOLDER PROPOSALS Proposals of shareholders intended to be presented at the Company's 1999 annual meeting of shareholders must be received by the Secretary of the Company at the Company's principal offices no later than December 19, 1998 in order to be included in the Company's proxy statement and form of proxy relating to the 1999 annual meeting. Such proposals also must comply with all of the requirements of Rule 14a-8 of the Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Effective June 29, 1998, the Securities and Exchange Commission amended Rule 14a-4(c) under the Exchange Act which governs a company's use of discretionary proxy voting authority with respect to shareholder proposals that are not being included in a company's proxy solicitation materials pursuant to Rule 14a-8 of the Exchange Act. New Rule 14a-4(c)(1) provides that if a shareholder fails to notify the Company of such a proposal at least 45 days prior to the month and day of mailing of the prior year's proxy statement, then the management proxies named in the form of proxy distributed in connection with the Company's proxy statement would be allowed to use their discretionary voting authority to address the proposal submitted by the shareholder, without discussion of the proposal in the proxy statement. Accordingly, if a shareholder who intends to present a proposal at the 1999 annual 21 PART II. OTHER INFORMATION meeting of shareholders does not notify the Company of such proposal on or prior to March 1, 1999, then management proxies would be allowed to use their discretionary voting authority to vote on the proposal when the proposal is raised at the annual meeting, even though there is no discussion of the proposal in the 1999 proxy statement. Pursuant to Article II of the Company's Bylaws which provides procedures by which shareholders may timely raise matters at annual meetings, proposals of shareholders intended to be presented at the Company's 1999 annual meeting of shareholders must be received by the Secretary of the Company not less than 60 days nor more than 90 days prior to the last Wednesday in May; provided, however, as stated above, the proposal must be received no later than December 19, 1998 in order to be included in the proxy statement relating to the 1999 annual meeting. The Company currently believes that the 1999 annual meeting of shareholders will be held on the last Wednesday in May 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.01 United Wisconsin Services, Inc. Equity Incentive Plan, as revised effective July 1, 1998. 10.2 Acquisition Agreement between United Wisconsin Services, Inc. and Victoria Hekkers dated July 2, 1998 10.3 United Wisconsin Services, Inc. 1992 Stock Appreciation Rights Plan (Adopted July 1, 1998) 10.4 1995 Director Stock Option Plan of United Wisconsin Services, Inc. (As Amended July 24, 1998) (b) Reports on Form 8-K None 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: 8/14/98 ----------------- UNITED WISCONSIN SERVICES, INC. /s/ C. Edward Mordy ------------------------------------------ C. Edward Mordy Vice President and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) 23 UNITED WISCONSIN SERVICES, INC. INDEX TO EXHIBITS
Sequential Exhibit Page Number Document Description Number - ------- -------------------- ---------- 10.1 United Wisconsin Services, Inc. Equity Incentive Plan, 26-67 as revised effective July 1, 1998. 10.2 Acquisition Agreement between United Wisconsin Services, 69-89 Inc. and Victoria Hekkers dated July 2, 1998 10.3 United Wisconsin Services, Inc. 1992 Stock Appreciation 91-98 Rights Plan (Adopted July 1, 1998) 10.4 1995 Director Stock Option Plan of United Wisconsin 100-108 Services, Inc. (As Amended July 24, 1998)
24 EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 25 EQUITY INCENTIVE PLAN UNITED WISCONSIN SERVICES, INC. July 1, 1998 26 UNITED WISCONSIN SERVICES, INC. EQUITY INCENTIVE PLAN 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 ADMINISTRATION 3.1 The Committee 10 3.2 Authority of the Committee 10 3.3 Decisions Binding 11 4 SHARES SUBJECT TO THE PLAN 4.1 Number of Shares 11 4.2 Lapsed Awards 12 4.3 Adjustments in Authorized Shares 12 5 ELIGIBILITY AND PARTICIPATION 5.1 Eligibility 13 5.2 Actual Participation 13 6 STOCK OPTIONS 6.1 Grant of Options 13 6.2 Option Award Agreement 16 6.3 Option Price 16 6.4 Duration of Options 17 6.5 Exercise of Options 17 6.6 Payment 17 6.7 Restrictions on Share Transferability 18 6.8 Termination of Employment Due to Death, Disability or Retirement 18 6.9 Termination of Employment for Other Reasons 20 6.10 Transferability of Options 21 7 STOCK APPRECIATION RIGHTS 7.1 Grant of SARs 22 7.2 Exercise of Tandem SARs 22 7.3 Exercise of Affiliated SARs 23 27 7.4 Exercise of Freestanding SARs 23 7.5 SAR Agreement 23 7.6 Term of SARs 23 7.7 Payment of SAR Amount 23 7.8 Rule 16b-3 Requirements 24 7.9 Termination of Employment Due to Death Disability, or Retirement 24 7.10 Termination of Employment for Other Reasons 26 7.11 Nontransferability of SARs 26 8 RESTRICTED STOCK 8.1 Grant of Restricted Stock 26 8.2 Restricted Stock Agreement 27 8.3 Transferability 27 8.4 Other Restrictions 27 8.5 Certificate Legend 27 8.6 Removal of Restrictions 28 8.7 Voting Rights 28 8.8 Dividends and Other Distributions 28 8.9 Termination of Employment Due to Death, Disability, or Retirement 29 8.10 Termination of Employment for Other Reasons 29 9 PERFORMANCE UNITS AND PERFORMANCE SHARES 9.1 Grant of Performance Units/Shares 30 9.2 Value of Performance Units/Shares 30 9.3 Earning of Performance Units/Shares 30 9.4 Form and Timing of Payment of Performance Units/Shares 30 9.5 Termination of Employment Due to Death, Disability, Retirement, or Involuntary Termination (without Cause) 31 9.6 Termination of Employment for Other Reasons 31 9.7 Nontransferability 32 10 BENEFICIARY DESIGNATION 11 DEFERRALS 12 RIGHTS OF EMPLOYEES 12.1 Employment 33 12.2 Participation 33 13 CHANGE IN CONTROL 28 14 AMENDMENT, MODIFICATION, AND TERMINATION 14.1 Amendment, Modification, and Termination 34 14.2 Awards Previously Granted 34 15 WITHHOLDING 15.1 Tax Withholding 34 15.2 Share Withholding 35 16 INDEMNIFICATION 17 SUCCESSORS 18 LEGAL CONSTRUCTION 18.1 Gender and Number 37 18.2 Severability 37 18.3 Requirements of Law 37 18.4 Securities Law Compliance 38 18.5 Governing Law 38
29 UNITED WISCONSIN SERVICES, INC. EQUITY INCENTIVE PLAN ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. United Wisconsin Services, Inc. (until the Effective Date known as Newco/UWS, 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 Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units, and Performance Shares. This Plan is being created in connection with the distribution (the "Distribution"), by the corporation formerly known as United Wisconsin Services, Inc. of all of the shares in the Company in connection with the spin-off of the managed care and specialty products business to the Company and the assumption by the Company of the United Wisconsin Services, Inc. name. In connection with the Distribution, options ("Substituted Options") will be issued under this Plan in substitution for options issued under the equity incentive plan of the corporation formerly known as United Wisconsin Services, Inc. (the "Prior Plan"). Upon approval by the Board of Directors of the Company, subject to ratification by an affirmative vote of a majority of Shares of the Company, the Plan shall become effective as of the Distribution Date (the "Effective Date"), and shall remain in effect as provided in Section 1.3 herein. 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. 30 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. 1.3 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 more than ten years after the Effective Date. 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 UWSI such as Blue Cross & Blue Shield United of Wisconsin, or such other company as the Board may designate. For purposes of options received in connection with the Distribution, American Medical Security Group, Inc. (and its subsidiaries) will be considered Affiliates. (b) "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. 31 (c) "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units, or Performance Shares. (d) "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. (e) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (f) "Board" or "Board of Directors" means the Board of Directors of the Company. (g) "Cause" means: (i) willful and gross misconduct on the part of a Participant that is 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. (h) "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 32 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 33 Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting 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 nonemployee continuing Directors). (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (j) "Committee" means the Management Review Committee, as specified in Article 3, appointed by the Board 34 to administer the Plan with respect to grants of Awards. (k) "Company" means United Wisconsin Services, Inc., a Wisconsin corporation, (until the Effective Date known as Newco/UWS, Inc.) or any successor thereto as provided in Article 17 herein. (l) "Director" means any individual who is a Non-Employee member of the Board of Directors of the Company. (m) "Directors Plan" means the 1995 Directors Stock Option Plan of United Wisconsin Services, Inc. (n) "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. (o) "Distribution Date" means the date the stock of the Company is distributed by the corporation formerly known as United Wisconsin Services, Inc. (p) "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 Employees under this Plan. 35 (q) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor Act thereto. (r) "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. (s) "Freestanding SAR" means a SAR that is granted independently of any Options. (t) "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. (u) "Insider" shall mean a Participant who is, on the relevant date, an officer, Director or 10% shareholder of the Company, subject to Section 16 of the Exchange Act. (v) "Nonqualified 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. (w) "Option" means an Incentive Stock Option or a Nonqualified Stock Option. 36 (x) "Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee. (y) "Participant" means an Employee or a Director who has outstanding an Award granted under the Plan. (z) "Performance Unit" means an Award granted to an Employee, as described in Article 9 herein. (aa) "Performance Share" means an Award granted to an Employee, as described in Article 9 herein. (bb) "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. (cc) "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). (dd) "Restricted Stock" means an Award granted to a Participant pursuant to Article 8 herein. (ee) "Retirement" shall have the meaning ascribed to it in the tax-qualified defined benefit retirement plan of the Company. 37 (ff) "Shares" means the shares of common stock of the Company. (gg) "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. (hh) "Substituted Option" means an option issued under this Plan in substitution for options issued under another stock option plan, including but not limited to options issued pursuant to the Prior Plan and the Directors Plan. (ii) "Stock Appreciation Right" or "SAR" means an Award, granted alone or in connection with a related Option, designated as a SAR, pursuant to the terms of Article 7 herein. (jj) "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). (kk) "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 thirtieth day following such date. 38 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. All members of the Committee shall be Non-Employee Directors. "Non-Employee Directors," as defined in rule 16b-3 promulgated by the Securities and Exchange Commission ("SEC") under the Exchange Act, means a director who (i) is not currently an officer or otherwise employed by the Company or any affiliate (ii) does not receive compensation for consulting service or in any other capacity from the Company in excess of $60,000 in any one year, (iii) does not possess an interest in and is not engaged in business relationships required to be reported under Items 404(a) or 404(b) of Regulation S-K promulgated under the Exchange Act and (iv) is an Outside Director 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 Bylaws of the Company, and subject to the provisions herein, to determine the size and types of Awards with respect to Employees; to determine the terms and conditions of such Employee 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 39 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 stockholders, Employees, Directors, 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 4,500,000. These 4,500,000 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 40 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). 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. 4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger, reorganization, consolidation, recapitalization, 41 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 and 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; 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 Employees and Directors. 5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees, those to whom Awards shall be granted and shall determine the nature and amount of each Award. Directors shall receive Options as provided in Section 6.1. 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 Employee except that no Employee may receive options (other than Substituted Options) with respect to more than 250,000 Shares in any year. The Committee may grant ISOs, NQSOs, or a combination thereof to Employees. Directors may receive only NQSOs. Substituted Options may be issued under the Plan. The number of Substituted Options 42 shall be the number of options immediately before the substitution, adjusted to prevent dilution or enlargement of the Participant's rights. The grant date of such substituted options shall be the grant date under the plan through which the options were originally granted. Substituted Options shall be issued to Directors and Employees who participated in the Prior Plan and in the Directors Plan in accordance with the terms of the Employee Benefits Agreement executed in connection with the Distribution, and such substituted Options shall be subject to the same grant date, exercise price (as adjusted pursuant to Section 6.3), vesting and exercise period such Options were subject to under the Prior Plan and the Directors Plan. To the extent Shares are available for grant under the Plan, each Director who is first elected as a Director subsequent to the Effective Date (a "Subsequent Director") shall be granted, as of the date on which such Subsequent Director is qualified and first begins to serve as a Director, an Option to purchase 6,000 shares, subject to adjustment pursuant to Section 4.3 or to purchase such lesser number of Shares as remain available for grant under the Plan. In the event that the number of Shares available for grant under the Plan is insufficient to make all grants hereby specified on the relevant date, then all Directors who are entitled to a grant on such date shall share ratably in the number of Shares then available for grant under the Plan. The Option Price of such Option shall equal the Fair Market Value of a Share on the date the grant of this Option is effective. If sufficient Shares are not available under the Plan to fulfill the grant of Options to any Subsequent Director first elected after the Effective Date, and thereafter additional Shares become available, such Subsequent Director receiving an Option for fewer than 6,000 Shares shall then receive an Option to purchase an amount of Shares, determined by dividing the number of Shares available pro-rata among each Subsequent 43 Director receiving an Option for fewer than 6,000 Shares, then available under the Plan, not to exceed 6,000 Shares, subject to adjustment as to any one Subsequent Director. The date of grant shall be the date such additional Shares become available. The Option Price of an Option shall equal the Fair Market Value of a Share on the date the Option is granted. If a Subsequent Director receives an Option to purchase fewer than 6,000 Shares, subject to adjustment pursuant to Section 4.3 hereof, and additional Shares subsequently become available under the Plan, an Option to purchase such Shares shall first be allocated as of the date of availability to any Subsequent Director who has not previously been granted an Option. Such Options shall be granted to purchase a number of Shares no greater than the number of Shares covered by Options granted to other Subsequent Directors first elected subsequent to the Effective Date, but who have received Options to purchase fewer than 6,000 Shares (subject to adjustment pursuant to Section 4.3). Thereafter, Options for any remaining Shares shall be granted pro-rata among all Subsequent Directors granted Options to purchase fewer than 6,000 Shares. No Director first elected after the Effective Date shall receive an Option to purchase more than 6,000 Shares (subject to adjustment under Section 4.3). The Option Price of the Shares purchasable under each Option granted to a Director shall be equal to one hundred percent (100%) of the Fair Market Value per Share on the date of grant of such Option. Subject to acceleration as provided below, Options granted to Directors shall vest annually at the rate of thirty-three and one third percent (33-1/3%) of the aggregate number of Shares granted annually beginning on the first anniversary of the date of grant and on each subsequent anniversary of the date of grant 44 thereafter. If a Director's tenure ends during the applicable three-year period due to Death, Disability or Retirement or following a Change in Control, however, such Director's Options shall become immediately exercisable as to one hundred percent (100%) of the Shares covered thereby as of the Director's last day of service as a Director with the Company to the extent such Option may be exercised pursuant to Section 6.5 of this Plan. Retirement with respect to a Director shall mean the date of the Company's annual shareholders' meeting at which he or she would otherwise, but for said retirement, be a nominee for election to the Board, or the date on which the Director attains seventy (70) years of age. Once any portion of an Option issued to a Director becomes exercisable, it shall remain exercisable for the shortest period of (1) twelve years from the date of grant; or (2) two (2) years following the date on which the Director ceases to serve in such capacity for any reason other than removal for Cause. If a Director is removed for Cause, all outstanding Options held by the Director shall immediately be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the Options. 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 to an Employee shall be determined by the Committee; provided that the Option Price shall not be less than one hundred 45 percent (100%) of the Fair Market Value of a Share on the date the Option is granted. The Option Price for a Substituted Option shall be the Option Price immediately before the substitution, adjusted to prevent dilution or enlargement of the Participant's rights. 6.4 DURATION OF OPTIONS. Each Option granted 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. Substituted Options shall expire on the earlier of the date provided in this Section 6.4 or the date such options would have expired under the plan and agreement pursuant to which they were originally granted. 6.5 EXERCISE OF OPTIONS. Options granted to Employees 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 Employee. However, in no event may any Option granted under this Plan to an Employee or Director 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 46 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, 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 an Employee is terminated by reason of death, all outstanding Options granted to that Employee 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 47 the date of death, whichever period is shorter, by such person or persons as shall have been named as the Employee's beneficiary, or by such persons that have acquired the Employee'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 an Employee is terminated by reason of Disability, all outstanding Options granted to that Employee 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 an Employee 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 an Employee's employment terminates by reason of Disability or Retirement, and within the exercise period allowed by the Committee following such termination the Employee 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 48 have been named as the Employee's beneficiary, or by such persons who have acquired the Employee'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 an Employee 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 Employee 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 Employee within the period beginning on the effective date of employment termination, and ending six (6) months after such date or on such later date as is approved by the Committee. If the employment of an Employee 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 Options. 49 For Employees employed by Affiliates, termination shall mean termination of such Employee's employment with the Affiliate. 6.10 TRANSFERABILITY OF OPTIONS. No ISO granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all ISOs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. NQSOs granted hereunder may be exercised only during a Participant's lifetime by the Participant, the Participant's guardian or legal representative or by a permissible transferee. NQSOs shall be transferable by Participants pursuant to the laws of descent and distribution upon a Participant's death, and during a Participant's lifetime, NQSOs shall be transferable by Participants to members of their immediate family, trusts for the benefit of members of their immediate family, and charitable institutions ("permissible transferees") to the extent permitted under Section 16 of the Exchange Act and subject to federal and state securities laws. The term "immediate family" shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, sister-in-law, or brother-in-law and shall include adoptive relationships. NQSOs also shall be transferable by Participants other than to permissible transferees with the prior approval of the Committee which shall have the authority to approve such transfers of NQSOs on a case-by-case basis in its sole discretion. The Committee shall have the authority to establish rules and regulations specifically governing the transfer of NQSOs granted under this Plan as it deems necessary and advisable. 50 ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1 GRANT OF SARS. Subject to the terms and conditions of the Plan, an 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 Employee (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 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 51 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, an Employee 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. 52 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 an Employee is terminated by reason of death, all outstanding SARs granted to that Employee 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 Employee's beneficiary, or by such persons that have acquired the Employee's rights under the SAR by will or by the laws of descent and distribution. 53 (b) TERMINATION BY DISABILITY. In the event the employment of a Participant is terminated by reason of Disability, all outstanding SARs granted to that Employee 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 an Employee is terminated by reason of Retirement, the Committee shall retain discretion over the treatment of SARs. (d) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that an Employee's employment terminates by reason of Disability or Retirement, and within the exercise period allowed by the Committee following such termination the Employee 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 Employee's beneficiary, or by such persons who have acquired the Employee's rights under the SAR by will or by the laws of descent and distribution. 54 7.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of an Employee 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 Employee 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 Employee within the period beginning on the effective date of employment termination, and ending six (6) months after such date or on such later date as is approved by the Committee. If the employment of an Employee shall be terminated by the Company for Cause, all outstanding SARs held by the Employee 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 NONTRANSFERABILITY 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 the laws of descent and distribution. Further, all SARs granted to an Employee under the Plan shall be exercisable during his or her lifetime only by such Employee. 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 55 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 an Employee prior to six (6) months following the date of its grant. All rights with respect to the Restricted Stock granted to an Employee 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 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 56 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 Employee after the last day of the Period of Restriction. Once the Shares are released from the restrictions, the Employee 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, Employees 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, Employees 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. 57 In the event that any dividend constitutes a "derivative security" or an "equity security" pursuant to Rule 16(a) under the Exchange Act, such dividend 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 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 an Employee 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 nontransferability 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 an Employee shall terminate for any reason other than those specifically set forth in Section 8.9 herein, all Shares of Restricted Stock held by the Employee 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 on Restricted Stock 58 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 Employee. 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 Employee. 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 Employee 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 59 in a single lump sum, within forty-five (45) calendar 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 an Employee is terminated by reason of death or Disability or involuntary termination without Cause during a Performance Period, the Employee 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 Employee held the Performance Units/Shares during the Performance Period, and shall further be adjusted based on the achievement of the preestablished 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 an Employee'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 Employee to 60 the Company, and shall once again be available for grant under the Plan. 9.7 NONTRANSFERABILITY. Performance Units/Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, an Employee's rights under the Plan shall be exercisable during the Employee's lifetime only by the Employee or the Employee'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 a 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 an 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 61 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 Employee's employment at any time, nor confer upon any Employee 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 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; 62 (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. 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. 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, 63 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 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: 64 (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 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 to which such persons may be entitled under the Company's 65 Certificate of Incorporation or Bylaws, 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. 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 66 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. 67 EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 68 ACQUISITION AGREEMENT THIS AGREEMENT is made as of this ____ day of ________________, 1998, by and between UNITED WISCONSIN SERVICES, INC., a Wisconsin corporation ("UWSI"), and VICTORIA HEKKERS ("Ms. Hekkers"), sole shareholder of Intercare Network, Inc., a Wisconsin corporation (the "Company"). RECITAL Subject to the satisfaction of the terms and conditions set forth herein, UWSI desires to purchase from Ms. Hekkers, and Ms. Hekkers desires to sell to UWSI, 1,000 shares of $1.00 par value common stock of the Company (the "Company Shares"). AGREEMENTS In consideration of the recital and the mutual agreements contained herein, the parties agree as follows: ARTICLE I PURCHASE AND SALE OF THE COMPANY SHARES 1.1 PURCHASE AND SALE OF THE COMPANY SHARES. Subject to the satisfaction of the terms and conditions of Articles V and VI hereof, Ms. Hekkers shall transfer and deliver to UWSI, and UWSI shall purchase and accept from Ms. Hekkers, the Company Shares. 1.2 PURCHASE PRICE; METHOD OF PAYMENT. In exchange for the Company Shares, upon satisfaction of the terms and conditions of Article VI hereof, UWSI shall pay to Ms. Hekkers a purchase price ("Purchase Price") of One Million Dollars ($1,000,000). 1.3 POST-CLOSING ADJUSTMENTS. (a) As soon as practicable, but not later than 45 days after the Closing, (as defined in Article II) UWSI's designated accountant shall prepare a balance sheet (the "Proposed Closing Balance Sheet") of the Company as of 69 December 31, 1997. The Proposed Closing Balance Sheet shall be prepared in accordance with generally accepted accounting principles, consistently applied. UWSI's accountants shall permit Ms. Hekkers to review all accounting records and all work papers and computations used by them in the preparation of the Proposed Closing Balance Sheet. If Ms. Hekkers does not give notice of dispute to UWSI within fifteen (15) days of receiving the Proposed Closing Balance Sheet, the Proposed Closing Balance Sheet shall become the "Closing Balance Sheet." If Ms. Hekkers gives notice of dispute to UWSI within such fifteen day period, Ms. Hekkers and UWSI shall negotiate in good faith to resolve the dispute. If, after 5 days from the date notice of a dispute is given hereunder, Ms. Hekkers and UWSI cannot agree on the resolution of the dispute, the parties shall designate an independent public accounting firm acceptable to both UWSI and Ms. Hekkers to resolve the dispute, whose decision as to the Closing Balance Sheet shall be conclusive and binding upon Ms. Hekkers and UWSI in the absence of manifest error. The expenses pertaining to any dispute resolution hereunder shall be shared equally by Ms. Hekkers and UWSI. (b) If the Closing Balance Sheet results in a net book value ("Book Value") of less than Eighty Thousand, Eight Hundred Fifteen Dollars ($80,815), the Purchase Price shall be reduced by the difference between $80,815 and the Book Value (such reduction being referred to herein as the "Seller's Adjustment Amount"). If such adjustment is required, Ms. Hekkers shall pay to UWSI the Seller's Adjustment Amount within five days of Ms. Hekkers' acceptance of the Closing Balance Sheet or, if applicable, within one (1) day after receipt of a determination in resolution of any dispute over the Book Value as provided for above. If the Closing Balance Sheet results in a Book Value of more than $80,815, the Purchase Price shall be increased by the difference between $80,815 and the Book Value (such increase being referred to herein as the "Buyer's Adjustment Amount"). If such adjustment is required, UWSI shall pay to Ms. Hekkers the Buyer's Adjustment Amount within five (5) days of acceptance of the Closing Balance Sheet or, if applicable, within one (1) day after receipt of a determination in resolution of any dispute over the Book Value as provided for above. If any part of the Buyer's Adjustment Amount or Seller's Adjustment Amount remains unpaid after such one-day period, interest shall accrue on the unpaid amount at the annual rate that is equal to the lesser of 18% or the maximum rate provided by law. (c) If, after thirty (30) days from the date of resolution of the dispute referenced in this section 1.3 above, any part of the Buyer's Adjustment Amount or Seller's Adjustment Amount remains unpaid, the party to whom such 70 money is owed shall be entitled to receive from the other party such amount as a court may determine to be reasonable attorneys' fees for services rendered to enforce collection of such adjustment amount. ARTICLE II CLOSING The closing (the "Closing") of the transactions contemplated by this Agreement shall be consummated upon (1) the execution of this Agreement, and (2) the satisfaction of the terms and conditions of Articles V and VI hereof. The date on which the Closing occurs which shall be no later than August 13, 1998, is referred to in this Agreement as the Closing Date. ARTICLE III REPRESENTATIONS OF MS. HEKKERS To induce UWSI to enter into this Agreement, Ms. Hekkers makes the following representations and warranties, each of which shall be deemed to be independently material and relied upon by UWSI, regardless of any investigation made by or information known to UWSI. 3.1 SUBSIDIARIES. The Company owns no stock or other securities and has no investment in any corporation, joint venture, partnership or other business enterprise. 3.2 ORGANIZATION AND QUALIFICATION; POWER; AUTHORIZATION. (a) ORGANIZATION AND QUALIFICATION. The Company is a business corporation duly organized and validly existing under the laws of the State of Wisconsin, has filed with the Wisconsin Department of Financial Institutions the most recent annual report required to be filed by it, has not filed Articles of Dissolution and has a perpetual period of existence. The Company has full corporate power and authority to conduct its business as it is now being conducted and is not required to be qualified to transact business as a foreign corporation in any jurisdiction where the Company transacts business. (b) POWER. Ms. Hekkers has all requisite legal power to enter into this Agreement and all other agreements contemplated hereunder, to sell 71 the Company Shares, to carry out and perform her obligations under this Agreement and all other agreements contemplated hereunder and to consummate all of the transactions contemplated hereby and thereby. This Agreement and the agreements contemplated hereunder are legal, valid and binding obligations of Ms. Hekkers and are enforceable against Ms. Hekkers in accordance with their terms. (c) AUTHORIZATION. There is no corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance by Ms. Hekkers of this Agreement and the agreements contemplated hereby. (d) S CORPORATION. The Company is an S Corporation, was an S Corporation at its inception and has never changed its corporate form or election of S Corporation during its entire existence. 3.3 CONFLICTING OBLIGATIONS; CONSENTS. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not: (a) conflict with or violate any provisions of the Articles of Incorporation or By-Laws of the Company; (b) conflict with or violate any provisions of, or result in the maturation or acceleration of, any obligations under any material contract, agreement, instrument, document, lease, license, permit, indenture or obligation, or any law, statute, ordinance, rule, regulation, code, guideline, order, arbitration award, judgment or decree, to which Ms. Hekkers or the Company is subject or by which either is bound; or (c) violate any material restriction or limitation, or result in the termination or loss of any material right (or give any third party the right to cause such termination or loss) of any kind affecting the Company. Except as set forth on Schedule 3.3, no third-party consents, approvals or authorizations are necessary for Ms. Hekkers to consummate the transactions contemplated hereby. 3.4 CAPITALIZATION. The entire authorized capital stock of the Company consists of 56,000 shares of common stock, $1.00 par value. After giving effect to the consummation of the transactions contemplated by this Agreement, the only shares of capital stock of the Company issued and outstanding will be the Company Shares. When sold, transferred and delivered in accordance with the terms of this Agreement, the Company Shares will be duly and validly issued, fully paid, nonassessable, subject to the provisions of section 180.0622(2)(b) of the Wisconsin Statutes, and free and clear of all liens, charges, claims and other encumbrances. There are no outstanding options, warrants, convertible securities or other rights to subscribe for or acquire any 72 capital stock of the Company or securities convertible into capital stock of the Company. All capital stock of the Company has been issued in compliance with applicable federal and state securities laws. 3.5 ORGANIZATIONAL DOCUMENTS. The Articles of Incorporation, By-Laws and other organizational documents and corporate minute books of the Company have been delivered to UWSI and are true, correct and complete in all material respects. 3.6 FINANCIAL STATEMENTS. Attached as Schedule 3.6 are complete copies of the financial statements (including balance sheets and statement of earnings, stockholders' equity and cash flow) of the Company for each of its fiscal years through and including March 31, 1998 (collectively the "Financial Statements"). The December balance sheet of the Company for the period ending December 31, 1997 is referred to in this Agreement as the "12/97 Company Balance Sheet." The Company's books and records of account accurately reflect in all material respects all of the assets, liabilities, transactions and results of operations of the Company and the Financial Statements have been prepared based upon and in conformity therewith. Except as set forth on Schedule 3.6, the Financial Statements have been prepared in accordance with generally accepted accounting principles 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. 3.7 ACCOUNTS RECEIVABLE. All accounts receivable of the Company (the "Receivables") reflected on the March 31, 1998 financial statements arose in the ordinary course of business and represent amounts payable by a buyer for goods actually sold or services actually performed and are current and, to the knowledge of Ms. Hekkers, collectible at the aggregate recorded amounts thereof, less the reserve for bad debts reflected on the March 31, 1998 financial statements, and are not subject to any counterclaims or setoffs. To the knowledge of Ms. Hekkers, Receivables arising after the date of the March 31, 1998 financial statements have arisen in the ordinary course of business, represent amounts payable by a buyer for goods actually sold or services actually performed and are current and collectible at the aggregate recorded amounts thereof, less a reserve for bad debts consistent with the reserve stated on the March 31, 1998 financial statements. 3.8 REAL PROPERTY. The Company does not own any real properties. Schedule 3.8 sets forth an accurate summary description of all real 73 properties leased or rented by the Company ("Company Leased Real Estate"). Except for Permitted Encumbrances (as defined below), the Company has good and marketable leasehold title to all Company Leased Real Estate. "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 Company Leased Real Estate, and general taxes levied on or after January 1, 1998 and not yet due or payable. Each parcel of the Company Leased Real Estate is the subject of a written lease agreement. 3.9 PERSONAL PROPERTY. Except as set forth on Schedule 3.9, the Company owns, free and clear of all security interests and other encumbrances, good and marketable title to all property and assets used in its business (the "Assets"). Except as also set forth on Schedule 3.9, the Assets are in good working order and condition, reasonable wear and tear excepted. 3.10 INTELLECTUAL PROPERTY. Schedule 3.10 lists (or, in the case of trade secrets and secret processes, generally describes) all of the (a) patents and patent applications, (b) trademarks, trade names and applications therefor and service marks, (c) copyrights and copyright registrations, (d) trade secrets and secret processes and (e) other intellectual property rights used, employed or intended to be used or employed by the Company (the "Company Intellectual Property"). The Company owns (or has valid, unrestricted and enforceable rights to use and license) all of the Company Intellectual Property, and the Company Intellectual Property includes all intellectual property rights which are necessary to conduct the business of the Company as presently conducted. Schedule 3.10 lists, for each item of Company Intellectual Property which is registered with any foreign, federal or state agency or office, the registration number thereof, the date of registration and the agency or office where so registered. Except as otherwise described on Schedule 3.10, the Company is the sole owner of all right, title and interest in the Company Intellectual Property. With respect to the Company Intellectual Property licensed by the Company, the Company has valid, binding and enforceable rights to use and license such Company Intellectual Property. The use and licensing of the Company Intellectual Property do not infringe upon the rights of any third party. No claim, suit or action is pending or, to the knowledge of Ms. Hekkers, threatened alleging that the Company is infringing upon the intellectual property rights of others. 74 3.11 INSURANCE. (a) GENERAL. Schedule 3.11 lists and contains a description of each policy of insurance owned or held by the Company currently in effect (including without limitation, policies for fire and casualty, liability, worker's compensation, business interruption, umbrella coverage, products liability, medical, disability and other forms of insurance) specifying the insurer, amount of coverage, type of insurance, policy number, deductible limits and any pending claim (the "Company Insurance"). The Company Insurance is in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid, and no notice of cancellation or termination has been received by the Company with respect to any such policy. The Company Insurance is sufficient for compliance with all requirements of law and with all agreements to which the Company is a party. (b) DENIALS OF COVERAGE. The Company has not been refused any insurance with respect to the Assets or its operations and its coverage has not been limited by any insurance carrier to which it has applied for or with which it has carried insurance. 3.12 GOVERNMENTAL AUTHORIZATIONS. The Company possesses all governmental, regulatory and administrative licenses, permits, approvals and other authorizations as are necessary for the consummation of the transactions contemplated hereby and the conduct of its business and operations. The Company is in compliance with the terms and conditions of all such licenses, permits, approvals and authorizations. Neither the execution of this Agreement or the agreements contemplated hereby nor the consummation of the transactions contemplated hereby or thereby will result in the revocation, or an adverse change in the terms or conditions, of any such license, permit, approval or authorization. Such licenses, permits, approvals and authorizations shall continue in full force and effect in accordance with their present terms and conditions notwithstanding the consummation of the transactions contemplated hereby. 3.13 LITIGATION. Except as set forth on Schedule 3.13, there is no litigation, claim, proceeding or investigation pending, or, to the knowledge of Ms. Hekkers, threatened against or relating to the Company, the Assets, its business or the transactions contemplated hereby. Schedule 3.13 discloses, with respect to each item described thereon, the name or title of the action (and parties or potential parties thereto) and a description of the nature of the action or claim. Except as so described, Ms. Hekkers knows of no state of facts or circumstances which reasonably could be expected to ripen into any litigation, proceeding or 75 investigation or adversely affect the Assets or the Company's business or prospects. Except as described on Schedule 3.13, there is no outstanding order, decree or stipulation issued by any federal, state or local authority to which the Company is a party or subject. 3.14 COMPLIANCE WITH LAW. The conduct of the business of the Company does not violate, nor is the Company in default under, any law, rule, regulation, code, guideline, order, arbitration award, judgment, decree, restriction or condition. 3.15 ENVIRONMENTAL CONCERNS. The Company is and has been in compliance with all applicable environmental, health, safety and noise pollution laws, rules and regulations and with all laws, rules and regulations regarding the generation, production, storage, treatment, labeling, transportation or disposition of infectious, hazardous or other wastes or toxic substances ("Environmental Laws"). The Company has timely filed all reports and notices required to be filed by it, has obtained all required approvals and permits and has generated and maintained all required data, documentation and records required under the Environmental Laws. The Company has not, nor has, to the knowledge of Ms. Hekkers, any other person or entity, caused or permitted hazardous substances to be stored, discharged or released, deposited, treated, recycled, leaked, spilled or disposed of on, under or at any real property occupied by the Company. The Company Leased Real Estate contains no urea-formaldehyde, asbestos or asbestos by-products, and there are no storage tanks, vessels or other facilities on, under or at the Company Leased Real Estate which contain or previously contained materials which, if known to be present, would require cleanup, removal or other remedial action under the Environmental Laws. 3.16 CONTINGENT AND UNDISCLOSED LIABILITIES. The Company does not have any debts, obligations or liabilities and it is not subject to the imposition of any valid governmental or third-party claim arising from the conduct of its business or the ownership or use of the Assets on or prior to the date hereof, whether known or unknown, fixed or contingent, of any nature whatsoever, except those: (a) reflected or reserved against on the 12/97 Company Balance Sheet, (b) disclosed on Schedule 3.16 or (c) liabilities which have arisen in the ordinary course of business and consistent with past practice from the date of the 12/97 Company Balance Sheet through the date hereof and which are not, singly or in the aggregate, materially adverse to the Company. 3.17 TAXES. The federal and state corporate tax returns of the Company have not been audited. There is no tax audit or examination now 76 pending or, to the knowledge of Ms. Hekkers, threatened with respect to the Company. The Company has filed all federal, state and local tax reports and returns required by any law, rule or regulation to be filed by it except for extensions duly obtained, all taxes, duties and charges indicated due on the basis of such reports and returns have been paid or adequate provision for the payment thereof has been duly made and the assessment of any material amount of additional taxes in excess of those paid and reported is not reasonably expected. All taxes and assessments which the Company was or is required by law to withhold or collect have been and are being withheld or collected and have been paid over to the proper governmental authorities or, if not yet due, are being held for such payment. All such taxes and assessments which are not yet due will be paid as they become due. 3.18 PERFORMANCE OF CONTRACTS. The Company is not in material default under, nor has breached any provision of, any oral or written contract, agreement, instrument, document, lease, license, permit, indenture, insurance policy or other obligation to which the Company is a party (the "Company Contracts"), and there is no oral modification or past practice inconsistent in any material respect with the written terms of any of the Company Contracts. The Company has delivered to UWSI copies of all written Company Contracts and a description of any oral Company Contracts is set forth on Schedule 3.18. All of the Company Contracts are currently in full force and effect. To the knowledge of Ms. Hekkers, the other parties to the Company Contracts have complied with their obligations thereunder and are not in breach thereof. The Company has performed each term, condition and covenant of each Company Contract required to be performed by it on or prior to the date hereof. Ms. Hekkers or the Company know of no state of facts which, with the giving of notice or the passing of time or both, would give rise to any default under the Company Contracts. 3.19 CHANGES IN FINANCIAL POSITION. Since the date of the 12/97 Company Balance Sheet, the Company's business has been conducted in the ordinary course thereof and consistent with past practice, and, except as described on Schedule 3.19, there has not been: (a) FINANCIAL CONDITIONS. Any material and adverse change in the Assets or the business, condition (financial or otherwise) or prospects of the Company; (b) BUSINESS OR PROPERTY DAMAGE. Any material damage, destruction or loss (whether or not covered by insurance) adversely affecting the Assets or the business or prospects of the Company; or 77 (c) EXTRAORDINARY EVENTS. Any material transaction outside the ordinary course of business of the Company. 3.20 EMPLOYEE BENEFIT PLANS. Except as set forth on Schedule 3.20, the Company does not have any union contract, collective bargaining agreement, employment contract, deferred compensation agreement or bonus, incentive, profit-sharing, pension, retirement or other employee benefit plan (as that term is defined by the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) (collectively the "Plans") currently in force and effect, or any informal understanding with respect to any of the foregoing. The Company does not maintain and has not ever maintained or contributed to any funded employee pension plan (as that term is defined in ERISA). All Plans which are subject to ERISA comply with ERISA and have been administered (a) in strict compliance with ERISA and the Internal Revenue Code of 1986, as amended (the "Code") as to filing when due all materials required to be filed, and (b) in material compliance with ERISA and the Code in all other respects. With respect to each of the Plans, the Company does not have any material liability for any failure to comply with ERISA or the Code or for any action or failure to act in connection with the administration of the Plans. No Plan has engaged in any prohibited transaction in violation of ERISA or any prohibited transaction within the meaning of the Code. There are no material controversies or employment related claim or allegation pending or, to the knowledge of the Company or Ms. Hekkers, currently threatened between the Company and its employees. 3.21 BROKERAGE. The Company has not incurred, or made commitments for, any brokerage, finder's or similar fee in connection with the transaction contemplated by this Agreement. 3.22 RELATED PARTY TRANSACTIONS. Except as described on Schedule 3.22, the Company: (a) has not had any financial transactions or arrangements, other than payment of regular salary to any Related Party (as defined below) who is an employee, with any Related Party during the last three fiscal years and (b) has not had and will not have any present or future obligation to enter into any transaction or arrangement with any Related Party. For purposes hereof, the term "Related Party" shall mean: (i) any shareholder of the Company or any partner or affiliate of such shareholder, (ii) any officer or director of the Company, (iii) any spouse, in-law or lineal descendant of any other Related Party, and (iv) any Person who, directly or indirectly, Controls or is Controlled by or is under common Control with the Company. For purposes of this Agreement, "Person" shall mean an individual, partnership, corporation, trust, unincorporated 78 organization or other entity and "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of a Person, whether through the ownership of voting securities, by contract, by common management or otherwise. A Person having a contract or other arrangement giving that Person Control is deemed to be in Control despite any limitations placed by law on the validity of such contract or arrangement. Except as described on Schedule 3.22, to the knowledge of Ms. Hekkers, no Related Party owns, directly or indirectly, or is a director, shareholder, member, officer or employee of, or consultant to, any business organization that is a competitor, supplier or customer having business dealings with the Company, nor does any Related Party own any assets or properties which are used in the business of the Company. 3.23 REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. The representations and warranties contained herein, and in all other documents, certifications, materials and written statements or written information given to UWSI by or on behalf of Ms. Hekkers in connection herewith, do not include any untrue statement of any material fact or fail to state any material fact known to Ms. Hekkers required to be stated herein or therein in order to make the statements herein or therein, in light of the circumstances under which they are made, not misleading. ARTICLE IV REPRESENTATIONS OF UWSI To induce Ms. Hekkers to enter into this Agreement, UWSI makes the following representations and warranties, each of which shall be deemed to be independently material and relied upon by Ms. Hekkers, regardless of any investigation made by or information known to the Company. 4.1 POWER; AUTHORIZATION. (a) CORPORATE POWER. UWSI has all requisite legal and corporate power to enter into this Agreement and all other agreements contemplated hereunder, to carry out and perform its obligations under this Agreement and all other agreements contemplated hereunder and to consummate all of the transactions contemplated by this Agreement and all other agreements contemplated hereunder. 79 (b) AUTHORIZATION. All corporate action on the part of UWSI and its directors and shareholders necessary for the authorization, execution, delivery and performance by UWSI of this Agreement and the agreements contemplated hereby, and the consummation of the transactions contemplated hereby and thereby, has been taken. This Agreement and the agreements contemplated hereby to which UWSI is a party are legal, valid and binding obligations of UWSI enforceable against UWSI in accordance with their terms. 4.2 CONFLICTING OBLIGATIONS; CONSENTS. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not, conflict with or violate any provisions of the Articles of Incorporation or By-Laws of UWSI. No third-party consents, approvals or authorizations are necessary for UWSI's execution and consummation of the transactions contemplated hereby. 4.3 REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. The representations and warranties contained herein, and in all other documents, certifications, materials and written statements or written information given to Ms. Hekkers by or on behalf of UWSI in connection herewith, do not include any untrue statement of any material fact or fail to state any material fact known to UWSI and required to be stated herein or therein in order to make the statements herein or therein, in light of the circumstances under which they are made, not misleading. ARTICLE V CONDITIONS TO MS. HEKKERS' OBLIGATION TO CLOSE The obligation of Ms. Hekkers to consummate the transactions contemplated in this Agreement shall be subject to the satisfaction and fulfillment of each of the following express conditions precedent at or prior to Closing: 5.1 REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. The representations and warranties made by UWSI herein shall be true, correct and complete. 5.2 LEASE AGREEMENT. UWSI shall guaranty a lease agreement between Intercare Network, Inc. and the landlord to lease the property located at 80 285 Forrest Grove Drive, Pewaukee, Wisconsin, on terms and conditions acceptable to UWSI. 5.3 EXHIBITS. All Exhibits referenced in this Agreement shall be in a form acceptable to Ms. Hekkers, which acceptance shall not be unreasonably withheld. 5.4 OTHER DOCUMENTS. UWSI shall have delivered to Ms. Hekkers all other documents and instruments necessary, in the reasonable opinion of counsel to Ms. Hekkers, to consummate the transactions contemplated hereunder. ARTICLE VI CONDITIONS TO UWSI'S OBLIGATION TO CLOSE The obligation of UWSI to consummate the transactions contemplated in this Agreement shall be subject to the satisfaction and fulfillment of each of the following express conditions precedent at or prior to Closing: 6.1 REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. The representations and warranties made by Ms. Hekkers herein shall be true, correct and complete. 6.2 PROCEEDINGS AND INSTRUMENTS SATISFACTORY. All proceedings, corporate or otherwise, to be taken by Ms. Hekkers or the Company in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to UWSI. 6.3 CONSENTS, APPROVALS, CERTIFICATIONS AND LICENSES. All consents, approvals, certifications and licenses required with respect to Ms. Hekkers' consummation of the transactions contemplated hereby shall have been received. 6.4 DELIVERY OF STOCK CERTIFICATES. Ms. Hekkers shall have delivered to UWSI a stock certificate representing the Company Shares, duly endorsed for transfer to UWSI or in blank or accompanied by assignments separate from the certificate. 6.5 DUE DILIGENCE. UWSI shall have conducted a due diligence investigation and review of the Company, its operations and all matters pertaining 81 thereto that UWSI deems relevant and the results of such investigation and review shall be reasonably satisfactory to UWSI. 6.6 EMPLOYMENT AGREEMENT. Ms. Hekkers shall have executed and delivered to UWSI the Employment Agreement in the form attached hereto as Exhibit A. 6.7 SCHEDULES AND EXHIBITS. All Schedules and Exhibits referenced in this Agreement shall be in a form acceptable to UWSI, which acceptance shall not be unreasonably withheld. 6.8 OTHER DOCUMENTS. Ms. Hekkers shall have delivered to UWSI all other documents and instruments, necessary in the reasonable opinion of counsel to UWSI, to consummate the transactions contemplated hereunder. ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made by the parties in Articles III and IV of this Agreement shall survive the Closing and shall continue for a period of three years following the Closing except for those contained in sections 3.15 and 3.17, which shall continue indefinitely. 7.2 INDEMNIFICATION COVENANTS. Subject to the provisions of this Article VII, from and after the Closing: (a) BY MS. HEKKERS. Ms. Hekkers shall indemnify UWSI and its affiliates, and their respective shareholders, officers, directors, agents, employees and consultants (collectively the "UWSI Indemnified Parties"), for and defend and hold the UWSI Indemnified Parties harmless from, in connection with and against any demands, suits, orders, proceedings, claims, actions, causes of action, assessments, losses, response costs, damages, liabilities, fees, fines, forfeitures, costs and expenses, including, without limitation, interest, penalties and consultant, contractor, engineer and attorneys' fees (collectively "Damages") sustained or incurred by the UWSI Indemnified Parties as a result of, arising out of, related to, in connection with or incidental to (a) any breach, inaccuracy or nonfulfillment of any representation, warranty or covenant of Ms. Hekkers contained in or made pursuant to this Agreement or in any Schedule, Exhibit, 82 certificate or other document delivered by the Company or Ms. Hekkers to UWSI pursuant to this Agreement or (b) any debts, liabilities or obligations of the Company, whether known or unknown, fixed or contingent, or otherwise, related to ownership or occupancy of the property located at 133 Hill Street, Hartland, Wisconsin, prior to the Closing Date. (b) BY UWSI. UWSI shall indemnify Ms. Hekkers and her agents, employees and consultants (collectively "Ms. Hekkers Indemnified Parties"), for and defend and hold Ms. Hekkers Indemnified Parties harmless from and against any Damages sustained or incurred by Ms. Hekkers Indemnified Parties as a result of, arising out of, relating to, in connection with or incidental to any breach, inaccuracy or nonfulfillment of any representation, warranty or covenant of UWSI contained in or made pursuant to this Agreement or in any Schedule, Exhibit, certificate or other document delivered by UWSI to Ms. Hekkers pursuant to this Agreement. (c) PROCEDURES. The party seeking indemnification (the "Indemnified Party") shall give the party from whom indemnification is sought (the "Indemnifying Party") written notice of any claim, demand, assessment, action, suit or proceeding to which the indemnity set forth in this Agreement applies. If the document evidencing such claim or demand is a court pleading, the Indemnified Party shall give such notice within 10 days of receipt of such pleading, and otherwise shall give such notice within 30 days of the date it receives written notice of such claim. If the Indemnified Party's request for indemnification arises from the claim of a third party, the written notice shall permit the Indemnifying Party to assume the control of any such claim, or any litigation resulting from such claim. Failure by the Indemnifying Party to notify the Indemnified Party of its election to defend a complaint by a third party within 5 days of notice shall be a waiver by the Indemnifying Party of its right to respond to such complaint and, within 20 days after notice thereof, shall be a waiver by the Indemnifying Party of its right to assume control of the defense of such action. Notwithstanding the Indemnifying Party's assumption of the defense of such third-party claim or demand, the Indemnified Party shall have the right to participate in the defense of such third-party claim or demand at its own expense. The Indemnified Party shall furnish the Indemnifying Party, in reasonable detail, all information the Indemnified Party may have with respect to any such third-party claim and shall make available to the Indemnifying Party and its representatives all records and other similar materials which are reasonably required in the defense of such third-party claim and shall otherwise cooperate with and assist the Indemnifying Party in the defense of such third-party claim. If the Indemnifying Party does not assume control of the defense of any such third-party claim or 83 litigation resulting therefrom, the Indemnified Party may defend against such claim or litigation in such manner as it may reasonably deem appropriate. Notwithstanding any other provision of this Agreement, Ms. Hekkers shall not settle, compromise or otherwise dispose of any claim, demand, assessment, action, suit or proceeding relating to any breach of any representation or warranty contained in section 3.14 hereof without the prior written consent of UWSI (which consent shall not be unreasonably withheld). Additionally notwithstanding any other provision of this Agreement, UWSI shall not settle, compromise or otherwise dispose of any claim, demand, assessment, action, suit or proceeding relating to any breach of any representation or warranty contained in section 3.14 hereof without the prior written consent of Ms. Hekkers (which consent shall not be unreasonably withheld). 7.3 CAP. The aggregate liability of Ms. Hekkers to the UWSI Indemnified Parties shall not exceed the Purchase Price, as adjusted (the "Cap"); provided, however, that the Cap shall not apply to any Damages incurred by the UWSI Indemnified Parties resulting from Ms. Hekkers' breach of any representation or warranty contained in sections 3.15 or 3.17 hereof. 7.4 BASKET. No indemnification hereunder shall be payable by Ms. Hekkers unless the aggregate Damages incurred by the UWSI Indemnified Parties exceed $10,000 (the "Basket"), in which event the full amount of Damages incurred by the UWSI Indemnified Parties shall be payable by Ms. Hekkers (subject to the Cap). 7.5 EXCLUSIONS. Damages shall not, in any event: (i) include any reduction or adjustment necessitated as a result of Post-Closing Adjustments as set forth in Section 1.3 herein; (ii) be calculated based on a multiple of earnings or discounted cash flow methodology; and (iii) include any loss or expense to the extent the same has been resolved, settled, or compromised by insurance proceeds paid to the party seeking indemnification. 7.6 PAYMENT OF DAMAGES. If an Indemnified Party is entitled to Damages hereunder, the Indemnifying Party shall pay such Damages to the Indemnified Party (subject to the Cap and the Basket) within 90 days (the "Payment Period") of the date the Indemnified Party becomes entitled to such Damages. If the Indemnifying Party does not pay within the Payment Period, the 84 past-due payment shall bear interest at the lower of 18% per annum or the maximum rate permitted by applicable law and the Indemnifying Party shall pay all of the Indemnified Party's costs of collection, including, without limitation, attorneys' fees. 7.7 ATTORNEYS' FEES. If, after the Closing, a party seeks arbitration or institutes any judicial action or proceeding to recover Damages pursuant to this Article VII or to otherwise enforce any provision of this Agreement, the party in whose favor final judgment shall be entered shall be entitled to receive from the other party such amount as the arbitrator or court may determine to be reasonable attorneys' fees for the services rendered to the prevailing party in any such arbitration, action or proceeding and such fees shall be included as Damages. ARTICLE VIII COVENANTS OF UWSI 8.1 TAX RETURNS. UWSI shall not amend the Company's tax returns prior to Closing. UWSI shall file 1998 tax returns which are not inconsistent with the Proposed Closing Balance Sheet. ARTICLE IX MISCELLANEOUS 9.1 FURTHER ASSURANCES. Each party agrees that, from time to time hereafter and upon request of any other party, it shall perform any further acts and execute, acknowledge and deliver any additional documents as may be reasonably necessary to carry out the provisions of this Agreement. 9.2 BENEFIT AND ASSIGNMENT. This Agreement shall be binding upon, inure to the benefit of and be enforceable by and against the parties hereto and their successors and permitted assigns. This Agreement may not be assigned by either party without the prior written consent of the other party except that UWSI may assign this Agreement to any new entity formed by UWSI. 9.3 GOVERNING LAW; CONSTRUCTION. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Wisconsin, and without reference to any rules of construction regarding the party responsible for the drafting hereof. 85 9.4 EXPENSES. All expenses and costs incurred in connection with this Agreement or the transactions contemplated hereby shall be paid by the party or parties incurring such expenses and costs. 9.5 NOTICES. All notices, demands and other communications required or permitted to be given under this Agreement shall, for all purposes, be deemed to be duly given as of the date when personally delivered to the recipient thereof, or as of the date that is three business days after the date when mailed by registered or certified mail, postage prepaid, addressed in each case as follows, until some other address shall have been designated in a written notice given in like manner: If to UWSI: Mr. Roger A. Formisano United Wisconsin Services, Inc. 401 West Michigan Street Milwaukee, WI 53203 Barbara Van Dam, Esq. United Wisconsin Services, Inc. 401 West Michigan Street Milwaukee, WI 53203 With a copy to: Larri J. Broomfield, Esq. Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c. 1000 North Water Street, Suite 2100 Milwaukee, WI 53202 If to Ms. Hekkers:___________________________________ ___________________________________ ___________________________________ ___________________________________ With a copy to: Mr. John M. Remmers Cramer, Multhauf & Hammes, LLP 1601 East Racine Avenue, Suite 200 Waukesha, WI 53187 86 9.6 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.7 HEADINGS. All section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Agreement. 9.8 AMENDMENT, MODIFICATION AND WAIVER. This Agreement may not be modified, amended or supplemented except by mutual written agreement of UWSI and Ms. Hekkers. Either party may waive in writing any term or condition contained in this Agreement and intended to be for its or their benefit; provided, however, that no waiver by any party, whether by conduct or otherwise, in any one or more instances, shall be deemed or construed as a further or continuing waiver of any such term or condition. Each amendment, modification, supplement or waiver shall be in writing signed by the party to be charged. 9.9 ENTIRE AGREEMENT. This Agreement and the Schedules and Exhibits delivered herewith represent the entire agreement of the parties with respect to the subject matter hereof and no provision or document of any kind shall be included in or form a part of this Agreement unless signed and delivered to the other party by the party to be charged. 9.10 PUBLICITY. The parties agree that no publicity announcements or disclosures of any kind concerning the terms of this Agreement or concerning the transactions contemplated hereby shall be made without the mutual consent of UWSI and Ms. Hekkers, except to the extent that disclosure is required by legal process or to accountants, counsel, other professionals and to lenders on a need to know basis. 9.11 KNOWLEDGE. As used herein, any reference to the "knowledge" of any party shall include the knowledge of such party after making due inquiry and, if such party fails to make such inquiry, shall include constructive knowledge of such facts as would have been learned had such due inquiry been made. 9.12 RECORDS. Following Closing, for a period of five (5) years, UWSI will permit Ms. Hekkers to have access to, and examine and make copies of, all books and records of Ms. Hekkers relating to the business or assets of the Company, which books and records are retained by UWSI and which relate to transactions or events occurring prior to Closing. 87 9.13 TAX RETURN AMENDMENTS. In the event Ms. Hekkers wishes to amend any of the Company's tax returns for years prior to 1997, UWSI shall cooperate with Ms. Hekkers' filing of such amendments as long as such amendments are prepared solely at Ms. Hekkers' cost and expense and will not create a corporate tax obligation to UWSI or any of its affiliates. 88 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. VICTORIA HEKKERS ---------------------------------------- UNITED WISCONSIN SERVICES, INC. BY ------------------------------------- Its --------------------------------- 89 EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 90 UNITED WISCONSIN SERVICES, INC. 1992 STOCK APPRECIATION RIGHTS PLAN (Adopted July 1, 1998) 1. PURPOSE. The purpose of the United Wisconsin Services, Inc. 1992 Stock Appreciation Rights Plan (the "Plan") is to attract and retain outstanding individuals as officers and key employees of United Wisconsin Services, Inc. (the "Corporation") (until the Effective Date, known as Newco/UWS, Inc.) and its subsidiaries, and to furnish incentives to such individuals through rewards upon the performance of the common stock of the Corporation. To this end, the Management Review Committee of the Corporation, or such other committee as determined by the Board of Directors (the "Committee") may grant stock appreciation rights ("SARs") to officers and other key employees of the Corporation and its subsidiaries, on the terms and subject to the conditions set forth in this Plan. This Plan is being created in connection with the distribution (the "Distribution"), by the corporation formerly known as United Wisconsin Services, Inc., of shares in connection with the spin-off of the managed care and specialty products business to the Corporation and the assumption by the Corporation of the United Wisconsin Services, Inc. name. In connection with the Distribution, SARs will be issued under the Plan in substitution for SARs issued under the 1992 Stock Appreciation Rights Plan maintained by the corporation formerly known as United Wisconsin Services, Inc., (the "Prior Plan") effective as of the date of the Distribution (the "Distribution Date"). 2. PARTICIPANTS. Participants in the Plan shall consist of such officers and employees of the Corporation and its subsidiaries as the Committee in its sole discretion may select from time to time to receive stock appreciation rights. In determining the officers and employees to whom stock appreciation rights will be granted, the Committee shall take into account the duties of the respective officers and employees, their past, present and potential contributions to the success of the Corporation, their level of responsibility for the growth, development and financial success of the Corporation, and such other factors as the Committee deems relevant in connection with accomplishing the purposes of the Plan. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. The Committee shall consist of not less than two members of the Board of Directors. All members of the Committee shall be "Non-Employee Directors". Non-Employee Director, as defined in rule 16b-3 promulgated by the Securities and Exchange Commission ("SEC") under the Exchange Act, means a director who (i) is not currently an officer or otherwise employed by the Company or any Affiliate, (ii) does not receive compensation for consulting services or in any 91 other capacity from the Company in excess of $60,000 in an one year, (iii) does not possess an interest in and is not engaged in business relationships required to be reported under Items 404(a) or 404(b) of Regulation S-K promulgated under the Exchange Act and (iv) is an Outside Director as defined in Treas. Reg. 1.162-27. Subject to the provisions of the Plan, the Committee shall have sole discretion and authority (i) to determine which officers and employees of the Corporation and its subsidiaries shall be eligible for participation in the Plan; (ii) to select officers and employees to receive grants under the Plan; (iii) to determine the number of stock appreciation rights subject to the grant, the conditions of exercise, the fair market value of the common stock of the Corporation for purposes of the Plan, and all other terms and conditions of any grant; and (iv) to prescribe the form of agreement, certificate or other instrument evidencing the grant. The Committee shall also have authority to interpret the Plan and to establish, amend and rescind rules and regulations for the administration of the Plan, and all such interpretations, rules and regulations shall be conclusive and binding on all persons, provided, however, that the Committee shall not exercise such authority in a manner adversely and significantly affecting stock appreciation rights previously granted unless the action taken is required to comply with any applicable law or regulation. 4. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall be effective as of the Distribution Date. The Plan shall terminate only by action of the Board of Directors. No further grants may be made under the Plan after its termination, but the termination of the Plan shall not adversely and significantly affect the rights of any participant under, or the authority of the Committee with respect to, any grants made prior to termination unless the action taken is required to comply with any applicable law or regulations. 5. NUMBER OF STOCK APPRECIATION RIGHTS SUBJECT TO THE PLAN. Subject to adjustment as provided in paragraph 7 hereof, the aggregate number of stock appreciation rights which may be granted under the Plan shall not exceed 150,000, multiplied by a fraction (the "Adjustment Factor") the numerator of which is the Market Price of the common stock of the corporation formerly known as United Wisconsin Services, Inc. on the Distribution Date and the denominator of which is the Market Price of Corporation common stock on the day after the Distribution Date. The "Market Price" of a security is defined to be the closing sales price of such security as reported on the NYSE Composite Tape. Each stock appreciation right evidences the right upon exercise to receive payment from the Corporation of the amount set forth in Section 6(d) hereof. Whenever stock appreciation rights granted under the Plan can no longer under any circumstances be exercised, these 92 stock appreciation rights shall be available for additional grants under the Plan. Stock appreciation rights which are exercised shall thereafter be canceled and retired. 6. STOCK APPRECIATION RIGHTS. (a) Grants. Stock appreciation rights entitling the grantee to receive cash equal to the sum of (i) the appreciation in value and (ii) the value of dividends paid on a stated number of shares of common stock of the Corporation between the date of grant and the date of exercise may be granted without consideration from time to time to such officers and employees of the Corporation and its subsidiaries as may be selected by the Committee. (b) Terms of Grant and Exercise: General. The grantee's rights with respect to stock appreciation rights granted shall vest three years after the date of grant as to 50% of the stock appreciation rights; the remaining 50% of the stock appreciation rights granted shall vest six years after the date of grant. Notwithstanding the above, the Committee has the sole discretion to alter the time in which previously granted SARs vest in the event a grantee becomes disabled, retires or dies; provided, however, that no previously granted SARs vest prior to six months from the date of grant. Stock appreciation rights are exercisable in whole or in part provided all of the following conditions are met at the time of exercise: (i) the stock appreciation rights to be exercised are vested; (ii) the stock appreciation rights are exercised only during the period beginning on the third business day following the date of release of the Corporation's quarterly or annual summary statements of revenues and earnings and ending on the thirtieth day following such date (the "Exercise Date"); (iii) the stock appreciation rights are exercised prior to the expiration of twelve years from the date of grant; and (iv) the grantee is employed by the Corporation or any present or future parent or subsidiary of the Corporation at the time of exercise. Stock appreciation rights not exercised on or before the close of business twelve years from the date of grant shall automatically expire and the stock 93 appreciation rights shall become void. The Committee may at the time of grant or at any time thereafter impose such additional terms and conditions on the exercise of stock appreciation rights as it deems necessary or desirable for compliance with Section 16. SARs may be granted under this Plan in substitution for SARs issued under the Prior Plan. For purposes of this Plan, the date of grant shall mean, with respect to such substituted SARs, the date such SARs were originally granted under the Prior Plan. The number of substituted SARs issued under this Plan to any Participant shall be determined by multiplying the number of outstanding SARs on the Distribution Date by the Adjustment Factor. The grant price of such substituted SARs shall be determined by dividing the grant price on the Distribution Date by the Adjustment Factor. (c) Terms of Grant and Exercise: Termination of Employment or Death. If a grantee ceases to be employed by the Corporation or any of its subsidiaries for any reason other than death, any stock appreciation right held by such grantee may be exercised only on the Exercise Date immediately following the date of such cessation of employment, but only with respect to that number of stock appreciation rights which were exercisable immediately prior to the date of cessation of employment. If a grantee ceases to be employed by the Corporation or any of its subsidiaries by reason of death, or dies after termination of his employment by the Corporation or any of its subsidiaries but prior to the Exercise Date immediately following thereto, any stock appreciation right held by such grantee which was exercisable by the grantee immediately prior to his or her death, may be exercised by the grantee's personal representative or executor of his or her estate on an Exercise Date so long as such Exercise Date is during the period ending on the earlier of the first anniversary of the date of such grantee's death or the date of expiration of such stock appreciation rights. The Committee has the sole discretion to alter the time in which previously granted SARs vest 94 in the event a grantee becomes disabled, retires or dies; provided, however, that no previously granted SARs vest prior to six months from the date of grant. (d) Payment on Exercise. Upon exercise of a stock appreciation right, the grantee shall be paid within five business days an amount in cash equal to the sum of (i) the amount by which the fair market value of one share of the Corporation's common stock on the date of exercise exceeds the date of grant value thereof multiplied by the number of stock appreciation rights being exercised and (ii) the value of the cash dividends associated therewith. The value of the cash dividends associated with exercised stock appreciation rights shall be equal to the actual cash dividend paid on a share of common stock between the date of grant and the date of exercise, plus annual interest earned on the dividend paid between the date the cash dividend is paid and the date of exercise, multiplied by the number of stock appreciation rights being exercised. Annual interest shall be reset annually and shall be at the rate of the one year Treasury Bill as of September 30th of the prior year plus 150 basis points; provided, however, the annual interest rate shall in no event be less than 7.00% or greater than 10.00% per annum. For purposes of this paragraph, the fair market value of a share of common stock of the Corporation shall be determined using the first of the following rules which apply: (A) During such time as the Corporation's common stock is traded on the New York Stock Exchange (the "Exchange"), the closing price of the Corporation's common stock on the Exchange; or (B) If the Corporation's common stock is not then traded on the Exchange, the mean between the published bid and asked prices of the common stock of the Corporation if the common stock of the Corporation was then traded on a bona fide over-the-counter market; or 95 (C) If the common stock of the Corporation was not traded on the Exchange or on a bona fide over-the-counter market, a value determined by an appraiser selected by the Committee. In the event that the date of exercise of a stock appreciation right is a date for which there were no sales of the Corporation's common stork if the stock is traded on the Exchange, such fair market value shall be determined by taking an average of the closing prices on the nearest day before and the nearest day after the exercise date. In the event that the date of exercise of a stock appreciation right is a date for which there is no published bid and asked prices if the stock is traded on the over-the-counter market, such fair market value shall be determined by referring to the next preceding business day on which trading occurs or on which published prices are available. (e) Additional Terms and Conditions. The agreement or instrument evidencing the grant of stock appreciation rights may contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee in its sole discretion. 7. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION, ETC. The terms and conditions of stock appreciation rights shall be subject to adjustment by the Committee in its sole discretion as to the number, kind and date of grant value in the event of changes in the outstanding common stock of the Corporation by reason of stock dividends, stock splits, recapitalization, reorganizations, mergers, consolidations, combinations, exchanges or other relevant changes in corporate structure or capitalization occurring after the date of the grant of any stock appreciation right, provided that if the Corporation shall change its common stock into a greater or lesser number of shares through a stock dividend, stock split up, or combination of shares, outstanding rights shall be adjusted proportionately, consistent with existing law and regulation, to prevent inequitable results. 8. EFFECT OF LIQUIDATION, MERGER, CONSOLIDATION OR OTHER EVENTS. Nothing contained in the Plan or in the terms of any stock appreciation rights granted under the Plan shall in any way prohibit the Corporation from merging with or consolidating 96 into another corporation, or from selling or transferring all or substantially all of its assets, or from distributing all of its assets to its shareholders in liquidation, or from dissolving and terminating its corporate existence; and in any such event, all outstanding stock appreciation rights granted under the Plan which have vested shall be deemed to have been exercised at the time of any such merger, consolidation, sale or transfer of assets, liquidation, or dissolution, except to the extent that any agreement or undertaking of any party to such merger, consolidation, or sale or transfer of assets, or any plan pursuant to which such liquidation or dissolution is effected, shall make specific provision to continue such stock appreciation rights and the rights of such person or persons entitled to exercise such stock appreciation rights. 9. AMENDMENT AND TERMINATION OF PLAN. The Plan may be amended or terminated by the Board of Directors of the Corporation in any respect; provided, however, the Board shall not exercise such authority in a manner adversely and significantly affecting stock appreciation rights previously granted unless the action taken is required to comply with any applicable law or regulation. 10. MISCELLANEOUS. (a) No Right to a Grant. Neither the adoption of the Plan nor any action of the Board of Directors or of the Committee shall be deemed to give any officer or employee any right to be selected as a participant or to be granted a stock appreciation right. (b) No Rights as Shareholder. No officer or employee shall have any rights of any kind as a shareholder of the Corporation with respect to stock appreciation rights. (c) Employment. Nothing contained in this Plan shall be deemed to confer upon any officer or employee any right of continued employment with the Corporation or any of its subsidiaries or to limit or diminish in any way the right of the Corporation or any such subsidiary to terminate his or her employment at any time with or without cause. (d) Taxes. The Corporation shall be entitled to deduct from any payment under the Plan the amount of any tax required by law to be withheld with respect to such payment or may require any participant to pay such amount to 97 the Corporation prior to and as a condition of making such payment. (e) Nontransferability. No stock appreciation right shall be transferable except by will or the laws of descent and distribution. During the grantee's lifetime, stock appreciation rights shall be exercisable only by such grantee. 98 EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 99 1995 DIRECTOR STOCK OPTION PLAN OF UNITED WISCONSIN SERVICES, INC. (AS AMENDED JULY 24, 1998) 1. PURPOSE OF THE PLAN The purpose of the Plan is to attract and retain superior Directors, to provide a stronger incentive for such Directors to put forth maximum effort for the continued success and growth of the Company and its affiliates and, in combination with these goals, to encourage stock ownership in the Company by Directors. 2. DEFINITIONS Unless the context otherwise requires, the following terms shall have the meanings set forth below: (a) "Administrator" shall mean the Board of Directors or any executive officer or officers of the Company designated by the Board of Directors which may include the Company's Director of Human Resources. (b) "Board of Directors" or "Board" shall mean the entire board of directors of the Company, consisting of both Employee and non-Employee members. (c) "Cause" shall mean: (i) willful and gross misconduct on the part of a Participant that is 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. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) "Company" shall mean United Wisconsin Services, Inc., a Wisconsin corporation. (f) "Director" shall mean an individual who is a non-Employee member of the Board of Directors. (g) "Disability" shall mean a physical or mental incapacity which results in a Director no longer serving as a member of the Board of Directors. (h) "Effective Date" shall mean February 22, 1995, or such other date as the Board of Directors may establish as the Effective Date. (i) "Employee" shall mean an individual who is a full-time employee of the Company or a Subsidiary. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 100 (k) "Fair Market Value" for a Share shall mean the Market Price for a Share on the business day immediately preceding the relevant date. (l) "Market Price" shall mean the closing price for Shares on the relevant date as reported on the New York Stock Exchange, 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. (m) "Option" shall mean an option which does not comply with the provisions of Section 422 of the Code and which is granted under the Plan to purchase Shares. (n) "Option Agreement" shall mean the agreement between the Company and a Director whereby an Option is granted to a Director. (o) "Participant" shall mean a Director of the Company who has outstanding an Option granted under the Plan. (p) "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). (q) "Plan" shall mean the 1995 Director Stock Option Plan of the Company. (r) "Retirement" shall mean: (i) a Director's determination after serving a full three-year term not to stand for reelection to the Board of Directors at the next annual meeting of the Board, (ii) the inability of the Director to stand for reelection to the Board due to age guidelines adopted by the Board, or (iii) a Director's resigning from the Board after reaching seventy (70) years of age. (s) "Share" shall mean a share of the no par value common stock of the Company. (t) "Subsidiary" shall mean a subsidiary corporation of the Company as defined in Section 424(f) of the Code and shall be deemed to include American Medical Security Group, Inc., or any successor entity thereto, and any affiliates thereof. (u) "Triggering Event" 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 (within the meaning of Rule 13d-3 under the Exchange Act), 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 101 (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) (the "Incumbent Board"), cease for any reason to constitute a majority thereof; PROVIDED, HOWEVER, that any person becoming a Director after the Effective Date and whose initial assumption of office occurs as a result of an actual or threatened election contest which was (or, if threatened, would have been) subject to Rule 14a-11 under the Exchange Act shall be excluded from being considered a member of the Incumbent Board; 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 of 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 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 "Triggering Event" be deemed to have occurred, with respect to a Participant, if the Participant is part of a purchasing group which consummates the Triggering Event 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 an equity participation in the purchasing company or group which is otherwise not significant, as determined prior to the Triggering Event by a majority of the continuing Directors). Following the occurrence of an event which is not a Triggering Event whereby there is a successor holding company to the Company, or, if there is no such successor, whereby the Company is not the surviving corporation in a merger or consolidation, the surviving corporation or successor holding company (as the case may be), for purposes of this definition, shall thereafter be referred to as the Company. Words importing the singular shall include the plural and vice versa and words importing the masculine shall include the feminine. 102 3. ADMINISTRATION The Plan shall be administered by the Administrator. The terms and conditions under which Options may be granted are set forth in Paragraph 6. The Administrator shall have the authority to interpret the provisions of the Plan, to establish such rules and procedures as may be necessary or advisable to administer the Plan and to make all determinations necessary or advisable for the administration of the Plan; PROVIDED, HOWEVER, that no such interpretation or determination shall change or affect the eligibility of Directors to receive Options, the number of Shares covered by or the timing of any Option grant under the Plan or the terms and conditions thereof. The interpretation and construction by the Administrator of any Plan provision or of any Option Agreement shall be final and binding upon all persons. 4. SHARES RESERVED UNDER THE PLAN The aggregate number of Shares which may be issued or sold under the Plan and which are subject to outstanding Options at any time shall not exceed seventy-five thousand (75,000) Shares, which may be treasury Shares or authorized but unissued Shares, or a combination of the two, subject to adjustment as provided in Paragraph 10 hereof. Any Shares subject to an Option which expires or terminates for any reason (whether by voluntary surrender, lapse of time or otherwise) and is unexercised as to such Shares may again be the subject of an Option under the Plan subject to the limits set forth above. A Director shall be entitled to the rights and privileges of ownership with respect to the Shares subject to the Option only after actual purchase and issuance of such Shares pursuant to exercise of all or part of an Option. 5. PARTICIPATION Only Directors shall be eligible to receive Options under the Plan. 6. OPTIONS: TERMS AND CONDITIONS (a) OPTION AGREEMENT. Each Option granted under the Plan shall be evidenced by a written Option Agreement which shall specify the number of Shares that may be acquired through its exercise, and which shall comply with and be subject to the following terms and conditions: (i) INITIAL OPTION GRANTS. Upon the Effective Date of the Plan each Director shall be granted an Option to purchase five thousand (5,000) Shares, subject to adjustment as provided in Paragraph 10 hereof. The effective date of these initial grants shall be the Effective Date of the Plan. (ii) GRANTS TO SUBSEQUENT DIRECTORS. To the extent Shares are available for grant under the Plan, each Director who is first elected as a Director subsequent to the Effective Date (a "Subsequent Director") shall be granted, as of the date on which such Subsequent Director is qualified and first begins to serve as a Director, an Option to purchase 5,000 Shares, subject to adjustment pursuant to Paragraph 10, or to purchase such lesser number of Shares as remain available for grant under the Plan. In the event that the 103 number of Shares available for grant under the Plan is insufficient to make all grants hereby specified on the relevant date, then all Directors who are entitled to a grant on such date shall share ratably in the number of Shares then available for grant under the Plan. The purchase price per Share deliverable upon exercise of such Option shall equal the Fair Market Value of a Share on the date the grant of this Option is effective. If sufficient Shares are not available under the Plan to fulfill the grant of Options to any Subsequent Director first elected after the Effective Date, and thereafter additional Shares become available, such Subsequent Director receiving an Option for fewer than 5,000 Shares shall then receive an Option to purchase an amount of Shares, determined by dividing the number of Shares available pro-rata among each Subsequent Director receiving an Option for fewer than 5,000 Shares, then available under the Plan, not to exceed 5,000 Shares, subject to adjustment as to any one Subsequent Director. The date of grant shall be the date such additional Shares become available. The purchase price per Share deliverable upon exercise of an Option shall equal the Fair Market Value of a Share on the date the Option is granted. If a Subsequent Director receives an Option to purchase fewer than 5,000 Shares, subject to adjustment pursuant to Paragraph 10 hereof, and additional Shares subsequently become available under the Plan, an Option to purchase such Shares shall first be allocated as of the date of availability to any Subsequent Director who has not previously been granted an Option. Such Options shall be granted to purchase a number of Shares no greater than the number of Shares covered by Options granted to other Subsequent Directors first elected subsequent to the Effective Date, but who have received Options to purchase fewer than 5,000 Shares (subject to adjustment pursuant to Paragraph 10). Thereafter, Options for any remaining Shares shall be granted pro-rata among all Subsequent Directors granted Options to purchase fewer than 5,000 Shares. No Director first elected after the Effective Date shall receive an Option to purchase more than 5,000 Shares (subject to adjustment under Paragraph 10). (b) OPTION EXERCISE PRICE. The per share exercise price of the Shares purchasable under each Option shall be equal to one hundred percent (100%) of the Fair Market Value per Share on the date of grant of such Option. (c) VESTING OF OPTIONS. An Option for Shares can not be exercised until it is vested. Subject to acceleration as provided below, Options shall vest annually at the rate of thirty-three and one third percent (33-1/3%) of the aggregate number of Shares granted annually beginning on the first anniversary of the date of grant and on each subsequent anniversary of the date of grant thereafter. If a Director's tenure ends during the applicable three-year period, however, the Director's rights in the Option shall be as follows: (i) DEATH, DISABILITY. Upon the death or Disability of a Director, each Option of such Director shall become immediately exercisable as to one hundred percent (100%) of the Shares covered thereby as of the Director's last day of service as a Director with the Company; 104 (ii) RETIREMENT. In the event of a Director's Retirement from the Board, such Director's Option shall become exercisable as to one hundred percent (100%) of the Shares covered thereby as of the earlier of: (i) the date of the Company's annual shareholders' meeting at which he or she would otherwise, but for said Retirement, be a nominee for election to the Board, or (ii) the date on which the Director attains seventy (70) years of age; (iii) TRIGGERING EVENT. Upon the occurrence of a Triggering Event, each Option outstanding under the Plan shall become immediately exercisable as to one hundred percent (100%) of the Shares covered thereby; or (iv) ANY OTHER REASON. If a Director's tenure ends for any reason other than death, Disability, Retirement or as the result of a Triggering Event, the unvested portion of such Director's Option shall lapse immediately. Once any portion of an Option becomes exercisable, it shall remain exercisable for the shortest period of (1) twelve years from the date of grant; or (2) two (2) years following the date on which the Director ceases to serve in such capacity for any reason other than removal for Cause. If a Director is removed for Cause, all outstanding Options held by the Participant shall immediately be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the Options. (d) PAYMENT OF EXERCISE PRICE. The purchase or exercise price shall be payable in whole or in part in cash or Shares; and such price shall be paid in full at the time that an Option is exercised. If a Director elects to pay all or a part of the purchase or exercise price in Shares, such Director shall make such payment by delivering to the Company a number of Shares already owned by the Director equal in value to the purchase or exercise price. All Shares so delivered shall be valued at their Market Price on the business day immediately preceding the day on which such Shares are delivered. 7. TRANSFERABILITY An Option granted to a Director under this Plan shall not be transferable or subject to execution, attachment or similar process, and during the lifetime of the Director shall be exercisable only by the Director. A Director shall have the right to transfer the Option upon such Director's death, either by the terms of such Director's will or under the laws of descent and distribution, and all such distributees shall be subject to all terms and conditions of this Plan to the same extent as would the Director, except as otherwise expressly provided herein. 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 a 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 105 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. 8. EXERCISE An Option shall be exercisable by a Director's giving written notice of exercise to the Secretary of the Company specifying the number of Shares to be purchased and such other documentation as the Administrator shall reasonably require accompanied by payment in full of the required exercise price. The Company shall have the right to delay the issue or delivery of any Shares under the Plan until: (a) the completion of such registration or qualification of such Shares under any federal or state law, ruling or regulation as the Company shall determine to be necessary or advisable, and (b) receipt from the Director of such documents and information as the Company may deem necessary or appropriate in connection with such registration or qualification. In no event may any Option become exercisable prior to six (6) months following the date of its grant. The Administrator also may allow cashless exercise as permitted under the Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or exercise by any other means which the Administrator determines to be consistent with the Plan's purpose and applicable law. 9. SECURITIES LAWS Each Option Agreement shall contain such representations, warranties and other terms and conditions as shall be necessary in the opinion of counsel to the Company to comply with all applicable federal and state securities laws. The Plan is intended to comply with Rule 16b-3 promulgated under the Exchange Act. Any provision of the Plan or of any Option Agreement inconsistent with the terms of such Rule shall be inoperative and shall not affect the validity of the Plan, such Option Agreement or any provision thereof. 10. ADJUSTMENT PROVISIONS In the event of any stock dividend, split-up, recapitalization, merger, consolidation, combination or exchange of shares, or the like, as a result of which shares of any class shall be issued in respect of the outstanding Shares, or the Shares shall be changed into the same or a different number of the same or another class of stock, or into securities of another person, cash or other property (not including a regular cash dividend), the total number of Shares authorized to be offered in accordance with Paragraph 4, the number of Shares subject to each outstanding Option, the exercise price applicable to each such Option, and/or the consideration to be received upon exercise of each such Option shall be appropriately adjusted. 106 11. TAXES 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 required by law to be withheld with respect to any taxable event arising or as a result of this Plan, and the Company may defer making delivery of Shares obtained pursuant to the exercise of an Option until arrangements satisfactory to it have been made with respect to any such withholding obligations. If a withholding obligation should arise, a Director exercising an Option may, at his or her election, provided applicable laws and regulations are complied with, satisfy his or her obligation for payment of withholding taxes either by having the Company retain a number of Shares having an aggregate Market Price on the date the Shares are withheld equal to the amount of the withholding tax or by delivering to the Company Shares already owned by the Director having an aggregate Market Price on the business day immediately preceding the day on which such Shares are delivered equal to the amount of the withholding tax. In addition, the Director's tax obligation may be satisfied through a cashless exercise, if the Administrator so allows. 12. EFFECTIVE DATE OF THE PLAN 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 22, 1995, or such later date as the Board may determine, and shall remain in effect as provided herein. Options 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 Options shall become null and void. 13. TERMINATION AND AMENDMENT With the approval of the Board of Directors, the Administrator may terminate the Plan or make such modifications or amendments thereof as it shall deem advisable, including, but not limited to, such modifications or amendments as it shall deem advisable in order to conform to any law or regulation applicable thereto; PROVIDED, HOWEVER, that the Administrator may not amend the Plan more frequently than once every six months (except as to comport with changes in the Code or the Employee Retirement Income Security Act of 1974, as amended) and may not, unless otherwise permitted under federal law, without further approval of the holders of a majority of the Shares voted at any meeting of shareholders at which a quorum is present and voting, adopt any amendment to the Plan for which shareholder approval is required under tax, securities or any other applicable law, including, but not limited to, any amendment to the Plan which would cause the Plan to no longer comply with Rule 16b-3 of the Exchange Act or any successor rule or other regulatory requirements. Subject to the right of the Administrator to terminate the Plan at any time, the Plan shall remain in effect until all Shares subject to it shall have been purchased or acquired according to the Plan's provisions. However, in no event may an Option award be granted under the Plan on or after February 22, 2005. No termination, modification or amendment of the Plan may, without the consent of a Director, adversely affect the rights of such Director under an outstanding Option then held by the Director. 107 14. TENURE The grant of an Option pursuant to the Plan is no guarantee that a Director will be renominated, reelected or reappointed as a Director, and nothing in the Plan shall be construed as conferring upon a Director the right to continue to be associated with the Company as a Director or otherwise. 15. SUCCESSORS All obligations of the Company under the Plan, with respect to Option grants 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. 16. APPLICABLE LAW The Plan will be administered in accordance with the laws of the State of Wisconsin. 108 EX-27 6 EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET FOR CONTINUING OPERATIONS AT JUNE 30, 1998 (UNAUDITED) AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) FOR CONTINUING OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 294,192 3,928 0 0 0 0 298,120 7,078 0 0 628,200 0 20,038 102,422 0 123,132 0 0 16,570 312,599 628,200 461,915 11,804 0 9,475 353,610 0 116,735 3,707 1,764 3,707 5,714 0 0 7,657 .12 .12 0 0 0 0 0 0 0
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