SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to 14a-11(c) or Rule 14a-12
Cobalt Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(1) Amount previously paid:
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[COBALT LOGO]
COBALT CORPORATION
401 West Michigan Street
Milwaukee, Wisconsin 53203
(414) 226-6900
April 30, 2003
To All Shareholders:
You are cordially invited to attend Cobalt Corporation's 2003 Annual
Meeting of Shareholders on Wednesday, June 4, 2003, in Milwaukee, Wisconsin. The
Annual Meeting will begin promptly at 10:15 a.m. at the Hilton Milwaukee City
Center located at 509 West Wisconsin Avenue, Milwaukee, Wisconsin.
The official Notice of Annual Meeting, Proxy Statement and appointment of
proxy form are included with this letter. The matters listed in the Notice of
Annual Meeting are described in detail in the Proxy Statement.
The vote of every shareholder is important to us. Please note that
returning your completed proxy will not prevent you from voting in person at the
Annual Meeting if you wish to do so. Your cooperation in promptly signing,
dating and returning your proxy will be greatly appreciated.
Sincerely,
/s/ Stephen E. Bablitch
Stephen E. Bablitch
Chairman of the Board and
Chief Executive Officer
[COBALT LOGO]
COBALT CORPORATION
401 West Michigan Street
Milwaukee, Wisconsin 53203
(414) 226-6900
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE HOLDERS OF COMMON STOCK OF
COBALT CORPORATION:
The 2003 Annual Meeting of the Shareholders (the "Meeting") of Cobalt
Corporation (the "Company") will be held at the Hilton Milwaukee City Center
located at 509 West Wisconsin Avenue, Milwaukee, Wisconsin, on Wednesday, June
4, 2003, at 10:15 a.m. local time, for the following purposes:
1. To elect three directors of the Company for terms expiring at the
2006 Annual Meeting of Shareholders;
2. Approval of the Cobalt Corporation 2003 Incentive Plan;
3. To transact any other business as may properly come before the
Meeting or any adjournments or postponements thereof.
Only shareholders of record at the close of business on April 17, 2003, the
record date for the Meeting, are entitled to receive notice of and to vote at
the Meeting or any adjournments or postponements thereof.
A copy of the Proxy Statement furnished in connection with the solicitation
of proxies by the Company's Board of Directors for use at the Meeting
accompanies this Notice.
Shareholders who cannot attend in person are requested to date, fill in,
sign and return the enclosed proxy form in the envelope provided. You may revoke
your proxy at any time prior to the voting thereof by advising the Secretary of
the Company in writing (by subsequent proxy or otherwise) of such revocation at
any time before it is voted.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE
PROVIDED.
By Order of the Board of Directors,
/s/ Lorna J. Granger
Lorna J. Granger
Secretary
Milwaukee, Wisconsin
April 30, 2003
[COBALT LOGO]
COBALT CORPORATION
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Cobalt Corporation (the "Company" or
"Cobalt") for use at the 2003 Annual Meeting of Shareholders (the "Meeting") to
be held at the Hilton Milwaukee City Center located at 509 West Wisconsin
Avenue, Milwaukee, Wisconsin, on Wednesday, June 4, 2003, at 10:15 a.m. local
time, and at any adjournments or postponements thereof. At the Meeting,
shareholders of the Company will consider and vote upon:
(i) the election of three directors of the Company for terms expiring at
the 2006 Annual Meeting of Shareholders;
(ii) a proposal to approve the Company's 2003 Incentive Plan (the "2003
Plan"); and
(iii) such other business as may be properly brought before the Meeting.
Only holders of record of shares of Common Stock at the close of business
on April 17, 2003, the record date for the Meeting, are entitled to receive
notice of and to vote at the Meeting. Shareholders will be entitled to one vote
for each share of Common Stock held. On April 17, 2003, 41,866,362 shares of
Common Stock were issued and outstanding and entitled to vote at the Meeting.
Richard A. Abdoo, Barry K. Allen and Michael S. Joyce have been nominated
for election to the Company's Board of Directors with terms expiring in 2006.
The Board of Directors expects all nominees for director to be available for
election. In case any nominee for director is not available, the proxy holders
may vote for a substitute.
Returning your completed proxy form will not prevent you from voting in
person at the Meeting should you be present and wish to do so. You may revoke
your proxy at any time before it is voted by advising the Secretary of the
Company of such revocation in writing (by subsequent proxy or otherwise).
The Company knows of no specific matter to be brought before the Meeting
that is not referred to in the Notice of Annual Meeting. If any such matter
properly comes before the Meeting, then it is the intention of the persons
acting pursuant to the enclosed appointment of proxy form to vote the shares
represented thereby in accordance with their best judgment.
Directors will be elected at the Meeting by a plurality of the votes cast
at the Meeting. The affirmative vote of a majority of the votes cast at the
Meeting on the 2003 Plan (assuming a quorum is present) is required to approve
the 2003 Plan, provided that a majority of the outstanding shares of Common
Stock are voted on the proposal. Abstentions will be included in the
determination of shares present and voting for purposes of determining whether a
quorum exists. Neither abstentions nor broker non-votes will impact the election
of directors. Broker non-votes will have no impact on the proposal to approve
the 2003 Plan; however, shares of Common Stock as to which holders abstain from
voting will have the same effect as votes
1
against the 2003 Plan. Pursuant to the Voting Trust and Divestiture Agreement
which is described on page 29 of this Proxy Statement, Wisconsin United for
Health Foundation, Inc. (the "Foundation") is required to vote its 25,009,390
shares of Common Stock "FOR" the nominees for directors listed on page 4 of this
Proxy Statement and "FOR" approval of the 2003 Plan. Accordingly, those nominees
will be elected as directors and the 2003 Plan will be approved at the Meeting.
The costs associated with this solicitation of proxies will be borne by the
Company. Officers and other employees of the Company may solicit proxies by
personal interview, telephone and facsimile, in addition to the use of the
mails, but will receive no additional compensation for such activities. The
Company also has made arrangements with brokerage firms, banks, nominees and
other fiduciaries to forward proxy solicitation materials for shares of the
Common Stock held of record by them to the beneficial owners of such shares. The
Company will reimburse them for reasonable out-of-pocket expenses.
The Annual Report to Shareholders for the year ended December 31, 2002, the
Notice of the Meeting, this Proxy Statement and the accompanying appointment of
proxy form were first mailed to shareholders on or about April 30, 2003.
2
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of Common
Stock as of March 31, 2003 by each shareholder known to the Company to
beneficially own more than five percent (5%) of the shares of Common Stock
outstanding, by each director of the Company, each person nominated to be a
director, each of the executive officers of the Company who appears in the
Summary Compensation Table below, and all directors and executive officers of
the Company as a group. Unless otherwise indicated, each shareholder listed
below has sole voting and dispositive power with respect to the shares of Common
Stock beneficially owned.
<Table>
<Caption>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED(1) CLASS
- ---- --------------------- ----------
Wisconsin United for Health Foundation, Inc.(2)............. 25,009,390 59.7%
Thomas R. Hefty(3)(4)....................................... 877,998 2.1%
Stephen E. Bablitch(3)(4)................................... 366,797 *
Michael E. Bernstein(4)..................................... 131,916 *
James E. Hartert(4)......................................... 117,789 *
Gail L. Hanson(4)........................................... 208,998 *
Timothy F. Cullen(3)(4)..................................... 212,369 *
Penny J. Siewert(3)(4)...................................... 276,620 *
Richard A. Abdoo............................................ 8,759 *
Barry K. Allen.............................................. 14,333 *
James L. Forbes............................................. 8,459 *
Michael S. Joyce(3)......................................... 42,433 *
D. Keith Ness, M.D.......................................... 4,333 *
William C. Rupp, M.D........................................ 5,333 *
Janet D. Steiger............................................ 4,333 *
Kenneth M. Viste, Jr., M.D.................................. 5,333 *
All directors and executive officers as a group (21
persons)(4)(5)............................................ 2,383,430 5.4%
</Table>
- ------------------------------
* Amount represents less than 1% of the total shares of the Common Stock
issued and outstanding.
(1) Includes the following number of shares that may be acquired upon the
exercise of options within 60 days of March 31, 2003: Mr. Hefty, 843,743;
Mr. Bablitch, 328,791; Mr. Bernstein, 88,750; Mr. Hartert, 114,043; Ms.
Hanson, 190,750; Mr. Cullen, 197,614; Ms. Siewert, 260,573; Mr. Abdoo,
6,959; Mr. Allen, 4,333; Mr. Forbes, 6,959; Mr. Joyce, 4,333; Mr. Ness,
4,333; Mr. Rupp, 2,333; Ms. Steiger, 4,333; Mr. Viste, 4,333; and all
directors and executive officers as a group, 2,119,183.
(2) Based on the Schedule 13D filed by the Foundation with the Company pursuant
to the Securities Exchange Act of 1934, as amended. The address for the
Foundation is 10 East Doty Street, Madison, Wisconsin 53701.
(3) Includes the following shares owned jointly with such person's spouse, with
respect to which such person shares voting power and dispositive power: Mr.
Bablitch, 4,000 shares. Also includes the following shares owned separately
by such person's spouse and/or child, with respect to which such person
shares voting power and dispositive power: Mr. Hefty, 750 shares; Mr.
Cullen, 250 shares; Ms. Siewert, 3,000 shares; and Mr. Joyce, 200 shares.
(4) Includes the following shares held under the Company's 401(k) plan, as to
which such person has dispositive power: Mr. Hefty, 7,255; Mr. Bablitch,
3,006; Mr. Bernstein, 2,166; Mr. Hartert, 2,746; Ms. Hanson, 3,311; Mr.
Cullen, 3,425; Ms. Siewert, 5,697; and all directors and executive officers
as a group, 31,730.
(5) Includes shares beneficially owned by Mr. Hefty and Mr. Hartert, neither of
whom was a director or executive officer of the Company as of March 31,
2003.
3
ELECTION OF DIRECTORS
GENERAL
The Company's Bylaws fix the number of directors at nine. The Board of
Directors is divided into three classes, each of whose members serve terms of
three years (and until their successors are elected and qualified). The terms of
one of the three classes expire at each annual meeting of shareholders.
Messrs. Abdoo, Allen and Joyce are in the class of directors whose terms
expire at the Meeting and have been nominated to serve as directors for terms
expiring at the Annual Meeting of Shareholders in 2006 and until their
successors are elected and qualified. The terms of Ms. Steiger and Messrs.
Bablitch and Viste will expire at the Annual Meeting of Shareholders in 2004.
The terms of Messrs. Forbes, Ness and Rupp will expire at the Annual Meeting of
Shareholders in 2005. There are no family relationships among any of the
directors, nominees and/or executive officers of the Company.
The nominees standing for election have been approved by the Board of
Directors. The Board of Directors has no reason to believe that any nominee will
be unable or unwilling to serve as a director if elected.
For purposes of this Proxy Statement, "Predecessor Corporation" refers to
the Company's predecessor corporation formerly named "United Wisconsin Services,
Inc." and now named "American Medical Security Group, Inc." The name and age as
of March 31, 2003, and certain additional information as to each such nominee
and each director serving an unexpired term is as follows:
NOMINEES STANDING FOR ELECTION AT THE MEETING WITH TERMS EXPIRING IN 2006
<Table>
<Caption>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------ ------------------------------------------------------------
Richard A. Abdoo Director of the Company since 1998. Director of the
Age: 59 Predecessor from 1991 through 1998. Chairman and Chief
Executive Officer of Wisconsin Energy Corporation, a
diversified energy services holding company, since May 1991.
Chairman of the Board and Chief Executive Officer of
Wisconsin Electric Power Company, a utility company, since
1990. Director of Wisconsin Energy Corporation since 1988.
Director of M&I Marshall & Ilsley Corporation, a bank
holding company; Sensient Technologies Corporation, an
ingredient manufacturer; and AK Steel Corporation, a steel
manufacturer.
Barry K. Allen Director of the Company since 2000. Executive Vice President
Age: 54 and Chief Human Resources Officer of Qwest Communications
International, Inc., a provider of broadband Internet-based
voice, video and data services, since August 2002. President
of Allen Enterprises, LLC, a private equity investment and
management company, since August 2000. President of
Ameritech Corporation, a telecommunications company, from
November 1999 to August 2000; Executive Vice President of
Ameritech from August 1995 to October 1999. Director of
Harley-Davidson Inc.; and Fiduciary Management, Inc., an
investment advisory firm.
Michael S. Joyce Director of the Company since 2001. Director of Blue Cross &
Age: 60 Blue Shield United of Wisconsin ("BCBSUW"), which is now a
subsidiary of the Company, from 1996 through 2001. President
and Chief Executive Officer of the Foundation for Community
and Faith-Centered Enterprise, a charitable foundation,
since July 2001. President and Chief Executive Officer of
the Lynde and Harry Bradley Foundation, a charitable
foundation, from 1985 to July 2001.
</Table>
4
DIRECTORS WHOSE TERMS CONTINUE UNTIL 2004
<Table>
<Caption>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------ ------------------------------------------------------------
Stephen E. Bablitch Director of the Company since 2002. Chairman of the Board
Age: 49 and Chief Executive Officer of the Company since December
2002. President and Chief Operating Officer of the Company
from May 2002 to December 2002. Secretary of the Company
from 1998 through 2002. Senior Vice President and General
Counsel of the Company from 2001 to May 2002. Vice President
and General Counsel of the Company from 1998 to 2001. Vice
President, General Counsel and Secretary of the Predecessor
from 1996 to 1998. Chairman of the Board and Chief Executive
Officer of BCBSUW since December 2002. Director of BCBSUW
since 2001. President of BCBSUW from May 2002 to December
2002. Secretary and General Counsel of BCBSUW from 1996
through 2002. Senior Vice President of BCBSUW from 2000 to
2002. Vice President of BCBSUW from 1996 through 2000.
Director of United Way of Greater Milwaukee, a nonprofit
organization; and Director of Milwaukee Metropolitan
Association of Commerce, a private, nonprofit organization.
Janet D. Steiger Director of the Company since 2001. Director of BCBSUW from
Age: 63 1998 through 2001. Member of the United States Federal Trade
Commission from 1989 to 1997; Chair of the Federal Trade
Commission from 1989 to 1995.
Kenneth M. Viste, Jr., M.D. Director of the Company since 2001. Director of BCBSUW from
Age: 61 1992 through 2001. Practicing physician in neurology since
1974. Principal of Lakeside Neurocare, Limited, an
independent medical office. Clinical Professor of Neurology
at the University of Wisconsin Medical School since 1995.
President and Trustee of the American Academy of Neurology
Foundation, a nonprofit organization affiliated with the
American Academy of Neurology, since 2003.
</Table>
5
DIRECTORS WHOSE TERMS CONTINUE UNTIL 2005
<Table>
<Caption>
NAME AND AGE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------ ------------------------------------------------------------
James L. Forbes Director of the Company since 1998. Director of the
Age: 70 Predecessor from 1991 through 1998. Director of BCBSUW from
1974 to 2001. Chairman and Director of Badger Meter, Inc., a
manufacturer of products using flow measurement technology,
since 1999; Chief Executive Officer of Badger Meter, Inc.
from 1999 to 2002; and President and Chief Executive Officer
of Badger Meter, Inc. from 1987 to 1999. Director of
Sensient Technologies Corporation, an ingredient
manufacturer, and Journal Communications, Inc., a
diversified media and communications company.
D. Keith Ness, M.D Director of the Company since 2001; Director of BCBSUW from
Age: 54 1998 through 2001. Practicing family physician since 1978.
Director, President and Chief Executive Officer of Community
Physician's Network, IPA, a group of primary care
physicians, since 1998. Medical Director of Heritage Manor
Nursing Home since 1996. Medical Director of State of
Wisconsin Sand Ridge Secure Treatment Facility since 2001.
William C. Rupp, M.D Director of the Company since 1998. Director of the
Age: 56 Predecessor from 1997 through 1998. Practicing physician in
oncology since 1982. Chief Executive Officer of Immanuel St.
Joseph's Mayo Health System, a network of community-based
healthcare providers in Southeast Minnesota, since November
2002. President and Chief Executive Officer of
Luther/Midelfort Mayo Health System, a network of
community-based healthcare providers in West-Central
Wisconsin, from 1994 to 2001. President of Midelfort Clinic
from 1991 to 2001.
</Table>
Directors will be elected by a plurality of the votes cast at the meeting.
Unless otherwise specified, the shares of Common Stock represented by proxies
returned to the Company will be voted in favor of the election of the
above-described nominees. If, at or prior to their election, any one or more of
the nominees is unwilling or unable to serve, the proxies shall have
discretionary authority to select and/or vote for substituted nominees. Pursuant
to the Voting Trust and Divestiture Agreement which is described on page 29 of
this Proxy Statement, the Foundation is required to vote its 25,009,390 shares
of Common Stock "FOR" the nominees for director listed on page 4 of this Proxy
Statement. Accordingly, those nominees will be elected as directors at the
Meeting.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE NOMINEES FOR DIRECTOR.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS
In 2002, the Board of Directors held five meetings. During 2002, all
directors other than Mr. Rupp attended at least 75% of the aggregate number of
meetings of the Board of Directors and of the committees of the Board of
Directors held during his or her tenure as a Board or committee member. Mr. Rupp
attended 73% of the aggregate meetings of the Board of Directors and the
committees on which he served. The Board of Directors has standing Executive,
Finance, Management Review, Nominating and Board Governance, and Audit
Committees.
The Executive Committee discharges certain responsibilities of the Board of
Directors when so instructed by the Board and studies proposals and makes
recommendations to the Board. Specifically, the Executive Committee has the
authority to approve long range corporate and strategic plans, advise and
consult with management on corporate policies, approve the annual operating plan
and approve major changes in policy affecting new services and programs. The
Executive Committee held two meetings during 2002. The members of the Executive
Committee are Messrs. Bablitch (Chairman), Allen, Forbes, Joyce, and Rupp.
6
The Finance Committee approves investment policies and plans and approves
the investment of the Company's funds, consults with management regarding real
estate, accounts receivable and other assets, determines the amounts and types
of insurance carried by the Company, advises and consults with management
regarding selection of insurance carriers and corporate tax policies, and
discharges certain other responsibilities of the Board of Directors when so
instructed by the Board. The Finance Committee held four meetings during 2002.
The members of the Finance Committee are Messrs. Rupp (Chairman), Ness, and
Viste.
The Management Review Committee evaluates the performance of the Company's
executive officers, approves executive officer development programs, determines
the compensation of the executive officers and reviews management's
recommendations as to the compensation of other key personnel, makes
recommendations to the Board of Directors regarding the types, methods and
levels of director compensation, administers the compensation plans for the
officers, directors and key employees, and discharges certain other
responsibilities of the Board of Directors when so instructed by the Board. The
Management Review Committee held four meetings during 2002. The members of the
Management Review Committee are Messrs. Allen (Chairman), Forbes, Joyce, and Ms.
Steiger.
In March 2003, the Board of Directors amended the Company's Bylaws to
change the name and duties of the Nominating and Board Governance Committee. In
addition to its existing duties, the Nominating and Board Governance Committee
has been charged with annually recommending to the Board of Directors, prior to
the annual shareholders meeting, nominees for election to the Board, identifying
or assisting the Board of Directors in identifying qualified Board candidates,
determining the composition of the Board of Directors and its committees,
developing and recommending to the Board of Directors corporate governance
guidelines applicable to the Board of Directors, and evaluating the
effectiveness of the Board of Directors and its committees.
In making nominee recommendations to the Board of Directors prior to the
annual shareholders meeting, the Nominating and Board Governance Committee will
consider a nominee for election to the Board of Directors recommended by a
shareholder if the shareholder submits the nomination in compliance with the
requirements of the Company's Bylaws relating to nominations by shareholders.
(See "Election of Directors--Nominations for Directors by Shareholders.") The
Nominating and Board Governance Committee held one meeting during 2002. The
members of the Nominating and Board Governance Committee are Messrs. Joyce
(Chairman), Abdoo, and Viste.
The Audit Committee oversees the integrity of the Company's financial
statements, the Company's internal and disclosure controls, the Company's
compliance with legal and regulatory requirements, and the performance of the
Company's internal audit function. It also reviews the Company's independent
auditors' qualifications, independence and performance and discharges certain
other responsibilities of the Board of Directors when so instructed by the
Board. The Audit Committee held five meetings during 2002. The Audit Committee
amended its charter in May 2002 and again in March 2003. At its December
meeting, the Board elected Mr. Forbes as the Audit Committee chair, and
determined that he meets the definition of "audit committee financial expert" as
that term is defined in Item 401 of the Securities and Exchange Commission's
Regulation S-K. The members of the Audit Committee, all of whom are
"independent" directors as that term is defined in Sections 303.01(B)(2)(a) and
(3) of the listing standards of the New York Stock Exchange, are Messrs. Forbes
(Chairman), Abdoo, Allen, and Ms. Steiger.
NOMINATIONS FOR DIRECTORS BY SHAREHOLDERS
The Board of Directors will consider a nominee for election to the Board
recommended by a shareholder if the shareholder submits the nomination in
compliance with the requirements of the Company's Bylaws relating to nominations
by shareholders. Only "Qualified Candidates," as such term is defined in the
Bylaws, may be elected to the Board of Directors. Article III, Section 3.04 of
the Company's Bylaws provides that if a shareholder desires to make a nomination
for the election of directors at an annual meeting, then he or she must give
timely written notice of the nomination to the Secretary of the Company. Notice
is timely if received by the Secretary at the Company's principal office not
less than 90 days nor more than 120 days
7
prior to the first anniversary of the preceding year's annual meeting. The
notice must set forth certain information required by the Bylaws, including (i)
the name of the person such shareholder proposes to nominate for election or
reelection as a director and all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors
in an election contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934 (the "Exchange Act"),
as amended; (ii) each nominee's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected; (iii) the name
and address of the shareholder giving the notice; and (iv) certain other
information. Article III, Section 3.04 of the Bylaws provides that notices with
respect to any nomination for a Board election to be held at any special meeting
must contain all the information set forth above and must be received by the
Secretary of the Company not later than ten days after notice of such meeting is
first given to shareholders. Shareholders wishing to submit a nomination should
review the Bylaw requirements regarding nominations by shareholders and should
communicate with the Secretary, Cobalt Corporation, 401 West Michigan Street,
Milwaukee, Wisconsin 53203, for further information.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors and persons owning in excess of ten percent of the shares of the
Common Stock outstanding to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC") and the New York Stock
Exchange. Officers, directors and ten percent shareholders are also required to
furnish the Company with copies of all Section 16(a) forms they file.
Based upon a review of the information furnished to the Company, the
Company believes that during the fiscal year ended December 31, 2002, its
officers, directors, BCBSUW and the Foundation complied with all applicable
Section 16(a) filing requirements, except that due to an administrative error,
Mr. Raymond C. Repede, the Company's Vice President and Controller,
inadvertently did not timely file (i) a Form 3 and (ii) a Form 4 with respect to
the grant of options to purchase 20,000 shares of Common Stock. Both forms were
filed one day after their due date.
AUDIT COMMITTEE REPORT
The primary responsibility of the Audit Committee is to oversee the
Company's financial reporting process on behalf of and to report the results of
its activities to the Board of Directors. Management has the primary
responsibility for preparing the Company's financial statements and the
reporting process, including the systems of internal controls. The Audit
Committee has reviewed and discussed the audited financial statements with
management and has discussed with the Company's internal and external auditors
the overall scope and other aspects of their respective audits. This included a
discussion of the quality, not just the acceptability, of the accounting
principles applied, and the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.
The Company's independent auditors are responsible for expressing an
opinion on the conformity of the audited financial statements with generally
accepted accounting principles. The Audit Committee has discussed with the
independent auditors the judgments of the independent auditors as to the
quality, not just the acceptability, of the Company's accounting principles and
such other matters that the independent auditors are required to discuss with
the Audit Committee under generally accepted auditing standards, including
Statement on Auditing Standards No. 61, as amended, "Communication with Audit
Committees." In addition, the Audit Committee has discussed with the independent
auditors the independence of the auditors from management and the Company,
including the matters in the written disclosures and the letter received from
the independent auditors required by the Independence Standards Board Standard
No. 1, "Independence Discussions with Audit Committees." The Audit Committee
considered the compatibility of nonaudit services with the auditors'
independence.
The Audit Committee met with the independent auditors, with and without
management present, to discuss the results of their examinations, their
evaluations of the Company's internal controls and the overall
8
quality of the Company's financial reporting. The Audit Committee also met with
the internal auditor to discuss the results of internal audit examinations.
Based upon the Audit Committee's reviews and discussions referred to above,
the Audit Committee recommended to the Board of Directors that the audited
financial statements be included in the Annual Report on Form 10-K for the year
ended December 31, 2002, for filing with the Securities and Exchange Commission.
The Audit Committee has selected Ernst & Young LLP as the Company's
independent auditors for 2003.
The Audit Committee approved, at its March 4, 2003 meeting, an amended
Audit Committee Charter. The Board of Directors approved the amended Audit
Committee Charter at its March 5, 2003 meeting. The approved Charter, as
amended, is attached hereto as Appendix A.
AUDIT COMMITTEE
James L. Forbes, Chairman
Richard A. Abdoo
Barry K. Allen
Janet D. Steiger
9
APPROVAL OF
THE COBALT CORPORATION 2003 INCENTIVE PLAN
GENERAL
The purpose of the Cobalt Corporation 2003 Incentive Plan (the "2003 Plan")
is to promote the long-term interests of the Company and its shareholders by
strengthening the Company's ability to attract, motivate, and retain employees
and directors upon whose judgment, initiative, and efforts the financial success
and growth of the business of the Company largely depend, and to provide
additional incentives for such individuals through stock ownership and other
rights that promote and recognize the financial success and growth of the
Company and create value for shareholders.
On May 29, 2002, the Company's shareholders approved an amendment to the
Cobalt Corporation Equity Incentive Plan (the "Equity Incentive Plan"),
increasing the number of shares available for issuance thereunder from 4,500,000
to 8,700,000. As of April 1, 2003, there were 3,007,710 shares remaining
available for issuance under the Equity Incentive Plan. The Management Review
Committee of the Board of Directors intends that the 2003 Plan will replace the
Equity Incentive Plan. As a result, no new awards may be granted under the
Equity Incentive Plan after the effective date of the 2003 Plan (however, any
awards issued under the Equity Incentive Plan will continue to be subject to and
administered pursuant to its terms). Consequently, the Management Review
Committee determined that the number of shares to be reserved for issuance under
the 2003 Plan should be 3,007,710, which is equal to the number that remained
available for grant under the Equity Incentive Plan.
The following summary description of the 2003 Plan is qualified in its
entirety by reference to the full text of the 2003 Plan, a copy of which is
attached to this Proxy Statement as Appendix B.
ADMINISTRATION AND ELIGIBILITY
The 2003 Plan will be administered by the Management Review Committee (the
"Committee") of the Company's Board of Directors. The Committee must have at
least two directors, each of whom must be a "non-employee director" under the
Exchange Act and an "outside director" under the Internal Revenue Code of 1986,
as amended, (the "Code"). The Committee administers the 2003 Plan, with the
authority to:
- designate participants in the 2003 Plan;
- interpret the 2003 Plan;
- make, change and rescind rules and regulations relating to the 2003
Plan; and
- make any other determination and take any other action it deems
necessary or desirable for the administration of the 2003 Plan.
To the extent permitted by law, the Board can delegate to another committee
of the Board or to one or more of the Company's officers the authority and
responsibility of the Committee. However, for actions related to individuals
subject to the provisions of Section 16 of the Exchange Act, the Board can
delegate that authority and responsibility only to another committee of the
Board consisting entirely of non-employee directors.
Non-employee directors, officers and other employees, as selected by the
Committee, will be eligible to become participants in the 2003 Plan. Also, each
non-employee director is automatically entitled, as described below, to receive
options and restricted stock units under the 2003 Plan, without action of the
Committee.
AWARDS UNDER THE 2003 PLAN; AVAILABLE SHARES
The 2003 Plan permits the grant of:
- stock options, which may be either "incentive stock options" meeting the
requirements of section 422 of the Code (which we refer to as "ISOs") or
"non-qualified stock options" that do not meet the requirements of
section 422 of the Code;
10
- stock appreciation rights ("SARs"), including freestanding SARs and
tandem SARs;
- restricted stock;
- restricted stock units;
- performance shares;
- performance units;
- cash-based awards;
- annual incentive awards; and
- annual profit sharing awards.
Subject to any limits in the 2003 Plan, the Committee can determine the types of
awards to be granted and their terms and conditions, including:
- the type or types of awards to be granted to each participant;
- the number of shares of Common Stock with respect to which an award is
granted;
- the terms and conditions of any award;
- whether, how and in what circumstances any award may be settled,
exercised, forfeited or suspended; and
- whether, how and in what circumstances any award will be deferred.
The Committee can grant awards under the 2003 Plan either alone or in
addition to any other award (or any other award granted under another of the
Company's plans). It also can grant tandem awards. The 2003 Plan also provides
for the automatic grant of stock options and restricted stock units to the
Company's non-employee directors, including members of the Committee.
The 2003 Plan reserves 3,007,710 shares of Common Stock for issuance. This
number may be adjusted as described below. The number of shares reserved for
issuance will be reduced only by the number of shares delivered in payment or
settlement of awards.
In general, if an award terminates or is canceled without the issuance of
shares, is settled in cash in lieu of shares, or if shares are issued under any
award and are reacquired pursuant to rights reserved on the issuance of the
shares, or if shares are delivered to the Company in payment of the exercise
price of an award, then these shares may be reused for new awards under the 2003
Plan.
In addition, if any shares subject to awards granted under the Equity
Incentive Plan would again become available for new grants under the terms of
the Equity Incentive Plan if it were still in effect, then those shares will
generally be available to grant awards under the 2003 Plan. Those shares would
not be available for future awards under the terms of the Equity Incentive Plan.
The 2003 Plan also provides that, subject to adjustment as described below,
no participant may be granted awards that could result in such participant
receiving in any single fiscal year:
- stock options (including tandem SARs) for more than 1,000,000 shares of
Common Stock;
- freestanding SARs to which more than 1,000,000 shares are subject;
- awards of shares or units of restricted stock relating to more than
500,000 shares;
- awards of performance shares or units for more than 500,000 shares;
- a cash-based award, (other than an annual management incentive award or
annual profit sharing award) greater than $5,000,000;
- an annual management incentive award greater than $5,000,000; or
11
- an annual profit sharing award greater than $1,000,000.
TERMS OF AWARDS
STOCK OPTIONS. The Committee establishes the exercise price for each stock
option, which may not be less than the fair market value of the shares subject
to the stock option as determined on the grant date. A stock option will be
exercisable on the terms the Committee specifies, except that an ISO must
terminate no later than ten years after the grant date and a non-qualified stock
option must terminate no later than twelve years after the grant date. In all
other respects, unless the Committee determines otherwise, the terms of any ISO
must comply with the provisions of section 422 of the Code.
STOCK APPRECIATION RIGHTS. Under the 2003 Plan, the Committee may grant
freestanding SARs, tandem SARs, or any combination of the two. SARs will be
subject to such terms and conditions as the Committee deems appropriate.
However, the grant price of a freestanding SAR may not be lower than the fair
market value of a share of Common Stock on the grant date, and the grant price
of a tandem SAR must be equal to the option price of the related option.
Unless the Committee provides for a shorter term, each freestanding SAR
will expire twelve years after its grant date. Each tandem SAR will have the
same term as its related option.
Under the 2003 Plan, the Committee will have the power to unilaterally
substitute SARs for outstanding options granted to participants, provided that
the terms and economic benefits of the substituted SARs are equivalent.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS. Under the 2003 Plan, each
award of restricted stock or restricted stock units will be subject to such
terms as the Committee deems appropriate, including achievement of one or more
performance goals. Restricted stock units are similar to restricted stock except
that no shares are actually awarded to the participant on the date of the grant.
PERFORMANCE SHARES AND PERFORMANCE UNITS. Each award of performance shares
or performance units will be subject to such terms as the Committee deems
appropriate. Performance shares and performance units will entitle participants
to receive a payout based on the value and number of such shares and/or units to
the extent that the participant has achieved pre-established performance goals
during a pre-determined performance period.
The initial value of each performance share or unit will be the fair market
value of a share of Common Stock on the date of the grant. Other terms
applicable to performance shares and performance units, such as the applicable
performance period and performance goals, will be determined by the Committee.
CASH-BASED AWARDS. Under the 2003 Plan, the Committee will determine the
terms of any cash-based awards it grants. Payment of cash-based awards may, but
need not, be based on the achievement of performance goals. If the payment of a
cash-based award is to be determined by the achievement of performance goals,
the Committee will determine the extent to which such goals have been achieved.
PERFORMANCE MEASURES. For purposes of the 2003 Plan, one or more of the
following performance goals may be used to determine the payment, vesting or
realization of awards under the 2003 Plan that are intended to qualify as
"performance-based compensation": net earnings; earnings per share; net sales
growth; net income (before or after taxes); net operating profit; return
measures (including, but not limited to, return on assets, capital, equity, or
sales); cash flow (including, but not limited to, operating cash flow and free
cash flow); cash flow return on capital; earnings before or after taxes,
interest, depreciation, and/or amortization; gross or operating margins;
productivity ratios; share price (including, but not limited to, growth measures
and total shareholder return); expense targets; margins; operating efficiency;
customer satisfaction; and working capital targets. These performance goals may
not be changed unless such a change is approved by the Company's shareholders or
unless applicable laws are changed to permit the Committee to alter or add to
the performance goals set forth in the 2003 Plan without shareholder approval.
ANNUAL MANAGEMENT INCENTIVE AWARDS. Under the 2003 Plan, the Committee may
designate Company executive officers who are eligible to receive annual
management incentive awards, which are cash payments
12
with respect to any fiscal year based on the attainment of one or more
performance measures. The Committee will determine the terms of any annual
management incentive awards it grants, subject to the terms of the 2003 Plan.
ANNUAL PROFIT-SHARING AWARDS. Under the 2003 Plan, the Committee may
designate executive officers of the Company who are eligible to receive annual
profit-sharing awards, which are cash payments based on the achievement or
partial achievement of one or more performance goals during the specified
period. The Committee will determine the terms of any annual profit-sharing
awards it grants, subject to the terms of the 2003 Plan.
AUTOMATIC DIRECTOR STOCK OPTION GRANTS. The 2003 Plan provides that,
beginning in 2004, on the first trading day of each calendar year, each
non-employee director will receive an option to purchase 4,000 shares of Common
Stock at a purchase price equal to the fair market value of the shares on the
date such stock options are granted. Each such stock option will vest annually
at the rate of 33 1/3% of the number of shares subject to such option and,
except as the Committee may otherwise provide, will terminate in twelve years,
or a lesser period of time, depending on the time and reason the director ceases
to serve on the Board.
AUTOMATIC RESTRICTED STOCK UNIT GRANTS TO DIRECTORS. The 2003 Plan
provides that, beginning in 2004, on the first trading day of each calendar
year, each non-employee director will receive a grant of 4,000 restricted stock
units. All such restricted stock units will vest annually at the rate of 33 1/3%
of the number of units, subject to earlier immediate vesting or forfeiture
depending on the time and reason the director ceases to serve on the Board.
In addition to the automatic grants to all directors described above, the
"presiding director," which is defined as the director, other than the Chairman
of the Board, appointed by the Board to preside over Board meetings (if any),
will receive an automatic grant of 1,000 restricted stock units on the first
trading day of each calendar year. Restricted stock units granted to the
presiding director in his or her capacity as such will vest as determined by the
Board, but in any event in no more than three years, subject to earlier vesting
or forfeiture depending on the time and reason the presiding director ceases to
serve on the Board.
OTHER TERMS. Any award granted under the 2003 Plan may also be subject to
other provisions (whether or not applicable to an award awarded to any other
participant) as the Committee determines appropriate, including, without
limitation, provisions to:
- defer the delivery of shares or recognition of taxable income relating
to awards or cash payments derived from the awards;
- permit participants to pay for stock options using cash or other shares
of Common Stock;
- restrict voting rights with respect to the shares subject to the award;
- allow the participant to receive dividend payments or dividend
equivalent payments for the shares subject to the award (both before and
after such shares are earned, vested or acquired); and
- restrict resale or other disposition of shares acquired under the 2003
Plan.
ADJUSTMENTS
If the Committee determines that a certain corporate event or transaction,
including, among other things, a dividend or other distribution,
recapitalization, stock split, reorganization or merger, affects the shares such
that an adjustment is appropriate to prevent dilution or enlargement of the
benefits intended to be made available under the 2003 Plan, then the Committee
may adjust:
- the number and type of shares subject to the 2003 Plan and which may,
after the event, be made the subject of awards (including the per
participant limits);
- the number and type of shares subject to outstanding awards; and
- the grant, purchase or exercise price with respect to any award.
13
The Board may, in connection with any merger, consolidation, acquisition of
property or stock, or reorganization, and without affecting the number of shares
otherwise reserved or available under the 2003 Plan, authorize the issuance or
assumption of awards upon terms it deems appropriate.
CHANGE OF CONTROL
Except to the extent an individual participant's employment agreement or
other agreement with the Company applies to his or her awards or the Committee
provides otherwise, in the event of a "Change of Control" of the Company (as
defined in the 2003 Plan):
- Any and all options and SARs will become immediately exercisable;
additionally, if a participant's employment or directorship is
terminated for any reason except for "Cause" (as defined in the 2003
Plan) within twelve months after a Change of Control, the participant
will have until the earlier of: (i) twelve months following such
termination date, or (ii) the expiration of the option or SAR term, to
exercise any such option or SAR.
- Any period of restriction imposed on restricted stock or restricted
stock units (that are not subject to performance goals) will lapse.
- Subject to certain exceptions, the target payout opportunities
attainable under all outstanding awards of performance-based restricted
stock, performance-based restricted stock units, performance units,
performance shares, and performance-based cash-based awards will be
deemed to have been fully earned as of the effective date of the Change
of Control.
TRANSFERABILITY
Awards granted under the 2003 Plan are not transferable other than by will,
operation of law, or as otherwise allowed by the Committee. Additionally, the
Committee may allow a participant or non-employee director to designate a
beneficiary to exercise the award after the participant's or non-employee
director's death.
AMENDMENT AND TERMINATION OF THE 2003 PLAN
The Committee or the Board can amend, alter, suspend, discontinue or
terminate the 2003 Plan at any time, except that shareholders must approve any
amendment of the 2003 Plan if such approval is required by law, regulation, or
stock exchange rule.
WITHHOLDING
The Company can deduct or withhold, or require a participant to remit to
the Company, the minimum statutory amount necessary to satisfy federal, state,
local, domestic or foreign taxes to be withheld with respect to any taxable
event arising in connection with an award. Unless the Committee determines
otherwise, participants can elect to satisfy the withholding requirement by
having the Company withhold shares having a fair market value on the date the
tax is to be determined equal to the tax that could be imposed on the
transaction, except that if the Company is using APB Opinion 25 to account for
equity awards in its financial statements, the amount of tax cannot exceed the
minimum statutory total tax that could be imposed on the transaction.
FEDERAL INCOME TAX CONSEQUENCES
The following summarizes certain federal income tax consequences relating
to the 2003 Plan under current tax law.
STOCK OPTIONS. The grant of a stock option under the 2003 Plan will create
no income tax consequences to the Company or the recipient. An employee or
non-employee director who is granted a non-qualified stock option will generally
recognize ordinary compensation income at the time of exercise in an amount
equal to the excess of the fair market value of the Common Stock at such time
over the exercise
14
price. The Company will generally be entitled to a deduction in the same amount
and at the same time as ordinary income is recognized by the employee or
non-employee director. Upon the employee's or director's subsequent disposition
of the shares received with respect to such stock option, the employee or non-
employee director will recognize a capital gain or loss (long-term or
short-term, depending on the holding period) to the extent the amount realized
from the sale differs from the tax basis, i.e., the fair market value of the
Common Stock on the exercise date.
In general, an employee will recognize no income or gain upon the exercise
of an ISO (except that the alternative minimum tax may apply). Except as
described below, the employee will recognize a long-term capital gain or loss on
the disposition of the Common Stock acquired pursuant to the exercise of an ISO
and the Company will not be allowed a deduction. If the employee fails to hold
the shares of Common Stock acquired pursuant to the exercise of an ISO for at
least two years from the grant date of the ISO and one year from the exercise
date, the employee will recognize ordinary compensation income at the time of
the disposition equal to the lesser of (a) the gain realized on the disposition,
or (b) the excess of the fair market value of the shares of Common Stock on the
exercise date over the exercise price. The Company will generally be entitled to
a deduction in the same amount and at the same time as ordinary income is
recognized by the employee. Any additional gain realized by the employee over
the fair market value at the time of exercise will be treated as a capital gain.
STOCK APPRECIATION RIGHTS. The grant of a SAR will create no income tax
consequences for the participant or the Company. Upon exercise of a SAR, the
participant will recognize ordinary compensation income equal to the amount of
any cash and the fair market value of any shares of Common Stock or other
property received, except that if the participant receives an option or shares
of restricted stock upon exercise of a SAR, recognition of income may be
deferred in accordance with the rules applicable to such other awards. The
Company will be entitled to a deduction in the same amount and at the same time
as income is recognized by the participant.
RESTRICTED STOCK. Generally, a participant will not recognize income and
the Company will not be entitled to a deduction at the time an award of
restricted stock is made under the 2003 Plan, unless the participant makes the
election described below. A participant who has not made such an election will
recognize ordinary income at the time the restrictions on the stock lapse in an
amount equal to the fair market value of the restricted stock at such time. The
Company will generally be entitled to a corresponding deduction in the same
amount and at the same time as the participant recognizes income. Any otherwise
taxable disposition of the restricted stock after the time the restrictions
lapse will result in a capital gain or loss to the extent the amount realized
from the sale differs from the tax basis, i.e., the fair market value of the
Common Stock on the date the restrictions lapse. Dividends paid in cash and
received by a participant prior to the time the restrictions lapse will
constitute ordinary income to the participant in the year paid and the Company
will generally be entitled to a corresponding deduction for such dividends. Any
dividends paid in stock will be treated as an award of additional restricted
stock subject to the tax treatment described herein.
A participant may, within 30 days after the date of the award of restricted
stock, elect to recognize ordinary income as of the date of the award in an
amount equal to the fair market value of such restricted stock on the date of
the award (less the amount, if any, the participant paid for such restricted
stock). If the participant makes such an election, the Company will generally be
entitled to a corresponding deduction in the same amount and at the same time as
the participant recognizes income. If the participant makes the election, any
cash dividends the participant receives with respect to the restricted stock
will be treated as dividend income to the participant in the year of payment and
will not be deductible by the Company. Any otherwise taxable disposition of the
restricted stock (other than by forfeiture) will result in a capital gain or
loss. If the participant who has made an election subsequently forfeits the
restricted stock, the participant will not be entitled to deduct any loss
(except to the extent of the amount, if any, the participant paid for the
restricted stock). In addition, the Company would then be required to include as
ordinary income the amount of any deduction the Company originally claimed with
respect to such shares.
15
PERFORMANCE SHARES. The grant of performance shares will create no income
tax consequences for the Company or the participant. Upon the participant's
receipt of shares at the end of the applicable performance period, the
participant will recognize ordinary income equal to the fair market value of the
shares received, except that if the participant receives shares of restricted
stock in payment of performance shares, recognition of income may be deferred in
accordance with the rules applicable to restricted stock as described above. In
addition, the participant will recognize ordinary compensation income equal to
the dividend equivalents paid on performance shares prior to or at the end of
the performance period. The Company will generally be entitled to a deduction in
the same amount and at the same time as income is recognized by the participant.
Upon the participant's subsequent disposition of the shares, the participant
will recognize capital gain or loss (long-term or short-term depending on the
holding period) to the extent the amount realized from the disposition differs
from the shares' tax basis, i.e., the fair market value of the shares on the
date the employee received the shares.
PERFORMANCE UNITS. The grant of a performance unit will create no income
tax consequences to the Company or the participant. Upon the participant's
receipt of cash and/or shares at the end of the applicable performance period,
the participant will recognize ordinary income equal to the amount of cash
and/or the fair market value of the shares received, and the Company will be
entitled to a corresponding deduction in the same amount and at the same time.
If performance units are settled in whole or in part in shares, upon the
participant's subsequent disposition of the shares the participant will
recognize a capital gain or loss (long-term or short-term depending on how long
the shares have been held) to the extent the amount realized upon disposition
differs from the shares' tax basis, i.e., the fair market value of the shares on
the date the participant received the shares.
ANNUAL INCENTIVE AWARDS. A participant who is paid an annual incentive
award will recognize ordinary income equal to the amount of cash paid, and the
Company will be entitled to a corresponding deduction in the same amount and at
the same time.
162(M) LIMIT ON COMPENSATION. Code section 162(m) limits the deduction the
Company can take for compensation it pays to its CEO and four other highest paid
officers (determined as of the end of each year) to $1 million per year per
individual. However, certain performance-based compensation that meets the
requirements of Code section 162(m) does not have to be included as part of the
$1 million limit. The 2003 Plan is designed so that awards granted to the
covered individuals, including cash-based awards, may meet the Code section
162(m) requirements for performance-based compensation.
INTERNAL REVENUE CODE SECTIONS 280G AND 4999. Code section 280G limits the
Company's income tax deductions for compensation in the event the Company
undergoes a change in control. Accordingly, all or some of the amount which
would otherwise be deductible may not be deductible with respect to those stock
options, stock appreciation rights, shares of restricted stock, restricted stock
units, performance shares and performance units that become immediately
exercisable in the event of a change in control. In addition, if section 280G
limits our deduction with respect to an award to a given participant, a 20%
federal excise tax (in addition to federal income tax) will be withheld from
that participant under Section 4999 on that portion of the cash or value of the
common stock received by that participant that is nondeductible under section
280G.
NEW PLAN BENEFITS
As discussed above, the 2003 Plan provides that, on the first trading day
of each calendar year beginning in 2004, (i) non-employee directors will receive
stock options to purchase 4,000 shares of Common Stock at a purchase price equal
to the fair market value of the shares on the date such stock options are
granted, (ii) non-employee directors will receive 4,000 restricted stock units,
and (iii) the presiding director, if any, will receive an additional 1,000
restricted stock units. Except for those awards, the Company cannot currently
determine the awards that may be granted under the 2003 Plan in the future to
the named executive officers (as defined in "Executive Compensation"), other
officers or other persons. The Committee will make such determinations from time
to time.
16
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of Common
Stock represented at the Annual Meeting and authorized to vote on the matter
(assuming a quorum is present) is required to approve the 2003 Plan, provided
that a majority of the outstanding shares of Common Stock are voted on the
proposal. Any shares of Common Stock not voted at the Annual Meeting with
respect to the 2003 Plan (whether as a result of broker nonvotes or otherwise,
except abstentions) will have no impact on the vote. Shares of Common Stock as
to which holders abstain from voting will have the same effect as votes against
the 2003 Plan. Pursuant to the Voting Trust and Divestiture Agreement which is
described on page 29 of this Proxy Statement, the Foundation is required to vote
its 25,009,390 shares of Common Stock "FOR" the 2003 Plan. Accordingly, the 2003
Plan will be approved at the Meeting.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE 2003 PLAN. Shares of Common
Stock represented by executed but unmarked proxies will be vote "FOR" the 2003
Plan.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2002 about the
Company's existing equity incentive plans, consisting solely of the Company's
Equity Incentive Plan.
<Table>
<Caption>
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES UNDER EQUITY
TO BE ISSUED UPON WEIGHTED-AVERAGE COMPENSATION PLANS
THE EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN THE
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FIRST COLUMN)
- ------------- -------------------- -------------------- ---------------------
Equity compensation plans approved by
security holders..................... 3,763,997(1) $9.00 4,936,003(2)
Equity compensation plans not approved
by security holders.................. -- -- --
--------- ----- ---------
Total.................................. 3,763,997 $9.00 4,936,003
========= ===== =========
</Table>
- ------------------------------
(1) Represents options to purchase the Company's Common Stock granted under the
Company's Equity Incentive Plan.
(2) All of the available shares under the Equity Incentive Plan may be issued
upon the exercise of stock options or granted as restricted stock,
performance shares, performance units or restricted stock units.
17
EXECUTIVE COMPENSATION
The following table summarizes the total compensation paid by the Company
or its subsidiaries to both individuals who served as Chief Executive Officer
during 2002 and certain other executive officers for services rendered to the
Company and BCBSUW for the years ended December 31, 2002, 2001 and 2000. The
persons in the table below are referred to as the "named executive officers."
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------------- SECURITIES
NAME AND TOTAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS(1,2) COMPENSATION(3) OPTIONS COMPENSATION(4)
- ------------------ ---- --------- ---------- --------------- ------------ ---------------
Thomas R. Hefty(5)..... 2002 $673,751 $515,420 $6,317 230,000 $5,000
Chairman of the 2001 677,505 223,712 13,577 -- 4,250
Board & Chief 2000 617,508 -- 12,735 147,500 4,250
Executive Officer
Stephen E. Bablitch.... 2002 432,142 520,000(6) 98,716 250,000 5,000
Chairman of the 2001 303,603 127,935 1,271 -- 4,250
Board & Chief 2000 260,826 -- 4,327 121,200 4,250
Executive Officer
Michael Bernstein...... 2002 459,209 520,000(7) 7,362 250,000 5,000
President & Chief 2001 250,800 53,847 19,365 -- 4,250
Operating Officer 2000 230,000 -- 2,126 35,000 4,250
James E. Hartert, 2002 286,743 283,502(9) 4,299 100,000 5,000
M.D.(8)..............
Vice President & 2001 273,057 29,436 3,908 -- 4,250
Chief
Medical Officer 2000 243,838 -- 1,692 121,200 4,250
Gail L. Hanson......... 2002 285,252 139,943 5,169 125,000 5,000
Senior Vice 2001 265,602 71,613 4,923 -- 4,250
President,
Treasurer & Chief 2000 248,256 -- 4,327 121,200 4,250
Financial Officer
Timothy F. Cullen...... 2002 272,932 131,367 5,129 55,000 3,961
Senior Vice 2001 263,535 77,259 4,885 -- 4,250
President-
Corporate & Public 2000 246,753 -- 4,327 121,200 4,250
Affairs, Chairman of
the Board-UGS
Regional Services
Penny J. Siewert....... 2002 261,627 131,413 960 110,000 5,000
Senior Vice President 2001 254,004 56,515 6,051 -- 4,250
Individual and 2000 249,630 -- 5,726 121,200 4,250
Specialty Risk
</Table>
- ------------------------------
(1) Amounts include compensation earned and deferred at the election of the
named executive officer during the fiscal years indicated and paid
subsequent to the end of each fiscal year.
(2) Amounts represent bonuses earned under the Company's Profit Sharing Plan,
Management Incentive Plan and Special Bonuses.
(3) Amounts represent reimbursement for the payment of taxes, the payout for
unused personal days and a lump sum payment for deferring a merit increase.
The amounts indicated do not include perquisites and other personal
benefits to the named executive officers which for each such officers did
not exceed the lesser of $50,000 or 10% of the officer's total annual
salary and bonus.
(4) Amounts represent the Company's matching contributions to the Cobalt
Corporation 401(k) Plan.
18
(5) Mr. Hefty retired from the positions of Chairman of the Board and Chief
Executive Officer on December 1, 2002 and retired from the Company on
January 31, 2003.
(6) Mr. Bablitch was named the Company's President and Chief Operating Officer
on May 29, 2002 and the Company's Chairman of the Board and Chief Executive
Officer on December 1, 2002. Mr. Bablitch was awarded an additional bonus,
beyond the Profit Sharing and Management Incentive bonuses, in recognition
of these new responsibilities, the Company's outstanding performance and
his personal outstanding performance in 2002.
(7) Mr. Bernstein was named the Company's Executive Vice President on May 29,
2002 and the Company's President and Chief Operating Officer on December 1,
2002. Mr. Bernstein was awarded an additional bonus, beyond the Profit
Sharing and Management Incentive bonuses, in recognition of these new
responsibilities, the Company's outstanding performance and his personal
outstanding performance in 2002.
(8) Dr. Hartert's position, Vice President & Chief Medical Officer, was
eliminated on September 16, 2002. Thereafter, he was no longer an officer
of the Company, but he remained employed with the Company through the
remainder of 2002. Dr. Hartert appears in the Summary Compensation Table
since his 2002 compensation would otherwise have placed him within the
Company's four most highly compensated executive officers other than the
Chief Executive Officer had he been serving as an executive officer on
December 31, 2002.
(9) Dr. Hartert was awarded a special bonus in the amount of $178,123 in
connection with the sale of Innovative Resource Group, LLC in March 2002.
OPTIONS GRANTED IN LAST FISCAL YEAR
<Table>
<Caption>
Individual Grants
---------------------------------------------------------- Potential Realizable Value at
% of Assumed Annual Rates of
# OF SECURITIES Total Options Stock Price Appreciation for
UNDERLYING Granted to Exercise or Option Term
OPTIONS Employees in Base Price Expiration -----------------------------
EXECUTIVE GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% 10%
- --------- --------------- ------------- ----------- ---------- ------------- -------------
Thomas R. Hefty...... 230,000(2) 14.44% 8.20 03/24/2014 $1,500,985 $4,033,076
Stephen E.
Bablitch........... 160,000 10.05% 8.20 03/24/2014 1,044,164 2,805,618
90,000 5.65% 19.99 05/28/2014 1,431,825 3,847,246
Michael E.
Bernstein.......... 160,000 10.05% 8.20 03/24/2014 1,044,164 2,805,618
90,000 5.65% 19.99 05/28/2014 1,431,825 3,847,246
James E. Hartert,
M.D. .............. 100,000 6.28% 8.20 03/24/2014 652,602 1,753,511
Gail L. Hanson....... 125,000 7.85% 8.20 03/24/2014 815,753 2,191,889
Timothy F. Cullen.... 55,000 3.45% 8.20 03/24/2014 358,931 964,431
Penny J. Siewert..... 110,000 6.91% 8.20 03/24/2014 717,862 1,928,862
</Table>
- ------------------------------
(1) All options granted vest at the rate of 25% each year on the anniversary of
the grant date. All options for Messrs. Hefty, Hartert, Cullen, Ms. Hanson
and Ms. Siewert were granted on March 25, 2002. Options for Messrs.
Bablitch and Bernstein were granted on March 25, 2002 and May 29, 2002.
(2) Mr. Hefty's option fully vested upon his retirement from the Company on
January 31, 2003.
19
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
Set forth below is certain information about the cash values realized by
the named executive officers who exercised stock options during 2002, as well as
the number of unexercised options and the total value of unexercised
in-the-money options held by the named executive officers at December 31, 2002.
<Table>
<Caption>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED VALUE UNDERLYING UNEXERCISED IN-THE-MONEY
ON EXERCISE REALIZED OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)
NAME (#) ($) (1) EXERCISABLE/ UNEXERCISABLE(2) EXERCISABLE/ UNEXERCISABLE(3)
- ---- ----------- -------- ----------------------------- -----------------------------
Thomas R. Hefty........... 66,261 938,816 503,118/340,625 2,745,782/2,183,141
Stephen E. Bablitch....... 0 0 225,741/320,850 1,155,106/1,525,268
Michael E. Bernstein...... 0 0 17,500/267,500 164,938/1,060,938
James E. Hartert.......... 66,122 886,286 54,243/165,100 304,714/1,158,793
Gail L. Hanson............ 0 0 124,700/190,100 918,165/1,298,793
Timothy F. Cullen......... 51,200 491,220 147,814/121,350 589,433/913,418
Penny J. Siewert.......... 62,400 612,003 190,473/182,900 986,588/1,256,133
</Table>
- ------------------------------
(1) Reflects the difference between the fair market value of the underlying
shares of Common Stock at the time of exercise and the exercise price of
the options exercised.
(2) Options become immediately exercisable upon a change in control of Cobalt.
A change in control includes: the acquisition by certain persons or groups
of 25% or more of the outstanding Common Stock; a change in the membership
of a majority of the Board of Directors, if not approved by the incumbent
directors; or the approval by the Company's shareholders of a plan of
liquidation, an agreement to sell substantially all of Cobalt's assets, or
certain mergers, consolidations or reorganizations.
(3) The dollar value is calculated by determining the difference between the
fair market value of the underlying Common Stock at the fiscal year end
($13.80) and the exercise price of the option.
DEFINED BENEFIT PENSION PLANS
The Company has provided a non-contributory defined benefit plan to its
employees pursuant to its pension plan ("Pension Plan"). The Pension Plan
generally utilizes a cash balance formula which provides annual pay credits of
4% plus transition credits of 4% for the number of years of service on December
31, 1996 (up to 15 years). Interest is calculated monthly and credited annually
on the cash balance account based on the yield on 10-year Treasury securities
for the month of October of the previous year.
In addition, the Company provides to executives defined benefits from its
supplemental executive retirement plan ("SERP"). The SERP provides a total
benefit (taking into account Pension Plan benefits and Social Security benefits)
of 2% of final 5-year average pay (which includes base salary, profit sharing
and management incentive bonuses, and other performance-related bonuses) per
year of service, up to 30 years.
20
The approximate annual benefits for the following pay classifications and years
of service are expected to be as follows:
DEFINED BENEFIT PENSION PLANS TABLE
<Table>
<Caption>
YEARS OF SERVICE
-------------------------------------------
REMUNERATION 15 20 25 30 OR MORE
- ------------ -------- -------- -------- ----------
$ 100,000... $ 30,000 $ 40,000 $ 50,000 $ 60,000
200,000... 60,000 80,000 100,000 120,000
300,000... 90,000 120,000 150,000 180,000
400,000... 120,000 160,000 200,000 240,000
500,000... 150,000 200,000 250,000 300,000
600,000... 180,000 240,000 300,000 360,000
700,000... 210,000 280,000 350,000 420,000
800,000... 240,000 320,000 400,000 480,000
900,000... 270,000 360,000 450,000 540,000
1,000,000... 300,000 400,000 500,000 600,000
1,100,000... 330,000 440,000 550,000 660,000
</Table>
The persons named in the Summary Compensation Table have the following
years of credited service, which includes all years of service with the
Predecessor: Mr. Hefty, twenty years; Mr. Bablitch, six years; Mr. Bernstein,
eleven years; Ms. Siewert, twenty-six years; Ms. Hanson, eighteen years; Mr.
Cullen, fourteen years; and Mr. Hartert, six years.
AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
Cobalt is party to Executive Severance Agreements with each of the named
executive officers. The agreements extend for three year terms, and then
automatically renew for successive one year periods unless Cobalt gives notice
at least six months prior to the end of any such period that the agreement will
not be extended. However, if a Change in Control (as defined therein) occurs
during the term, then the agreements will remain in effect for the longer of 24
months beyond the month in which the Change in Control occurs or until all
obligations of Cobalt under the agreements have been fulfilled.
The agreements generally provide that a named executive is entitled to
receive certain severance benefits if his or her employment is terminated by
Cobalt for any reason other than Cause, Disability, Retirement (all as defined
therein) or death, or if the named executive terminates his or her employment
for Good Reason (as defined therein), in either case during the six month period
prior to a Change in Control or within 24 months following a Change in Control.
The severance benefits to which the named executives would be entitled following
such a termination include, generally speaking (i) an amount equal to two times
their respective annualized base salaries (three in the case of Messrs. Hefty,
Bablitch and Bernstein) as in effect on the date of termination; (ii) an amount
equal to two times their respective target awards under the annual bonus plan
and profit sharing plan (three in the case of Mr. Messrs. Hefty, Bablitch and
Bernstein) for the year in which the termination occurs; (iii) a continuation of
health care, life and disability coverage for two years after the date of
termination (three years in the case of Messrs. Hefty, Bablitch and Bernstein);
(iv) an amount equal to their respective unpaid targeted annual bonuses for the
plan year in which the termination occurs, prorated through the date of
termination; and (v) an amount equal to their unpaid allocations from the profit
sharing plan for the plan year in which the termination occurs, prorated through
the date of termination. Messrs. Bablitch and Bernstein would also become
immediately and fully vested, and would receive credit for not less than fifteen
years' service, under the SERP and all stock options owned by Messrs. Bablitch
and Bernstein would immediately become fully vested and remain exercisable
through the end of the respective option agreement covering such options. The
named executives would also be eligible for benefits under Cobalt's Retiree
Medical Plan beginning at age 55. Cobalt will also pay the named executives
additional amounts in cash, if necessary, such that the net amount retained by
them after deduction of any excise tax
21
imposed by the Code will equal the total amount that they would have been
entitled to without taking such deductions into account; provided, however, that
for all named executives other than Messrs. Hefty, Bablitch and Bernstein, such
additional payments will only be made if they would result in the named
executive receiving additional amounts in excess of $100,000. If such payments
would result in those named executives receiving additional amounts less than
$100,000, then the total severance benefits to which they will be entitled under
the agreements will be capped at the maximum amounts that may be paid without
incurring such excise taxes.
The Company is party to employment agreements with Messrs. Bablitch and
Bernstein, each dated and effective as of May 29, 2002. Each of these employment
agreements provides that the Company will employ the executive for an initial
period of three years, with automatic one-year extensions thereafter, unless
either party provides notice of termination at least thirty days prior to the
expiration of the initial three year term or any one year extension thereof. The
employment agreements specify the base salary to be paid to each executive
during 2002 and 2003, and provide that the Company's Management Review Committee
will establish the executives' base salaries beginning in 2004. However, the
employment agreements also provide that the executives' base salaries may not be
decreased except as part of an across-the-board reduction in the salaries of the
Company's senior executives. The employment agreements entitle the executives to
participate in the Company's short-term and long-term incentive plans, as well
as all applicable savings, retirement and welfare benefit plans. Under the
employment agreements, each of Messrs. Bablitch and Bernstein was granted an
option to purchase 90,000 shares of Common Stock. Mr. Bablitch's employment
agreement entitles him to reimbursement of certain relocation expenses,
including reasonable legal expenses. If either of Mr. Bablitch or Mr. Bernstein
(a) is terminated by the Company other than for "cause" (as defined) or (b)
terminates his employment for "good reason" (as defined) during the term of his
employment agreement, the Company will (1) continue to pay his base salary and
incentive compensation and continue to provide benefits as if the executive
continued to be employed through the remaining term of the employment agreement,
(2) cause the executive to be fully vested under the SERP and (3) credit the
executive with not less than fifteen years of service under the SERP. If either
of Mr. Bablitch or Mr. Bernstein is entitled to receive severance benefits under
both his employment agreement and his severance agreement, the terms of his
severance agreement will control and the executive will receive the severance
benefits under his severance agreement in lieu of any severance benefits under
his employment agreement.
The Company also entered into a services agreement with Mr. Hartert, dated
September 16, 2002. Under the services agreement, Mr. Hartert ceased to be an
officer of the Company effective September 16, 2002, but remained an employee of
the Company until March 31, 2003. During that period, Mr. Hartert continued to
receive his salary and benefits while performing such services as the Company
required of him. The services agreement specified that Mr. Hartert's March 31,
2003 termination of employment constituted a "qualifying termination" under Mr.
Hartert's severance agreement, entitling Mr. Hartert to the severance benefits
described in his severance agreement in the event that a change of control of
the Company occurs during the six months following his March 31, 2003
termination of employment.
The Company is also party to a Supplemental Retirement Agreement, dated as
of June 13, 2001, with Thomas R. Hefty. The agreement provides that the Company
will pay Mr. Hefty (or his beneficiary or estate) a lump sum cash payment of
$1,000,000 upon the earlier of Mr. Hefty's retirement, death, Disability,
termination by Cobalt for any reason other than Cause, or termination by Mr.
Hefty for Good Reason (as such terms are defined in Mr. Hefty's Executive
Severance Agreement, discussed above). Mr. Hefty retired on January 31, 2003,
and the Company paid Mr. Hefty $1,000,000 pursuant to the terms of the agreement
on February 11, 2003.
COMPENSATION OF DIRECTORS
Directors who are officers or employees of Cobalt receive no compensation
as such for service as members of the Board of Directors or committees of the
Board. For the period from January 1, 2002 through March 31, 2002, a director
who was not an officer or employee of Cobalt received a fee of $1,100 for each
Board or committee meeting attended, and a monthly retainer of $1,917. In
addition, each committee chairperson received a monthly fee of $250. Effective
April 1, 2002, a director who was not an officer or
22
employee of Cobalt received a fee of $1,500 for each Board or committee meeting
attended, in addition to the monthly retainer of $1,917. Effective April 1,
2002, each committee chairperson received a monthly fee of $333.33. Also, each
director is granted in connection with his or her first election as a director
an option to purchase 6,000 shares of Common Stock at an exercise price equal to
the fair market value of the Common Stock on the date of grant. Furthermore,
each of the Company's non-employee directors receives an annual option grant of
1,000 shares of Common Stock at an exercise price equal to the fair market value
on the date of grant. The Audit Committee chairperson will receive a monthly fee
of $833.33 in calendar year 2003.
MANAGEMENT REVIEW COMMITTEE REPORT ON
EXECUTIVE COMPENSATION
INTRODUCTION
The Management Review Committee of the Board of Directors (the "Committee")
is comprised of four independent, non-employee directors and establishes and
directs the administration of all programs under which benefits are provided and
compensation is paid or awarded to the Company's executive officers, directors,
and other key employees. In addition, the Committee evaluates executive officer
performance, approves executive officer development programs, determines the
compensation of the executive officers, reviews management's recommendations as
to the compensation of other key employees, and assesses the overall
effectiveness of the Company's executive compensation programs.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Company's executive compensation program is designed to directly align
executive compensation with corporate performance and total shareholder return.
The Company has developed an overall compensation philosophy and implemented
plans that are designed to tie a significant portion of executive compensation
to the Company's success in meeting specified performance goals and appreciation
in the price of the Common Stock.
The overall objectives of this compensation philosophy are:
- To attract and retain the executive talent required to attain the
Company's goals;
- To motivate these executives to achieve the Company's goals;
- To link executive and shareholder financial interests through
equity-based long-term incentive awards; and
- To provide a compensation package that recognizes individual
contributions and overall business results.
Accordingly, the Committee sets compensation opportunities at approximately
the 50(th) percentile of the market for comparable positions at companies that
it considers comparable to the Company. The Company's compensation programs are
designed to be dependent on performance, and individual compensation delivered
from these programs may be higher or lower than the 50(th) percentile of the
market depending on that performance.
Each year the Committee conducts a full review of the Company's executive
compensation program to ensure that compensation opportunities are competitive
with the current market and that there is appropriate linkage between Company
performance and executive compensation. Throughout 2002, this process included
independent director consultation with the Committee's outside advisor, Hewitt
Associates ("Hewitt"), on such issues as base salaries, annual incentives,
equity-based awards, and total compensation. The Committee's review included a
comparison of the Company's executive compensation with a peer group against
which the Company competes for executive talent. The Committee believes that the
Company's competitors for executive talent include many types of companies and,
therefore, the peer group used for the compensation
23
analysis included, but extended beyond, the companies noted in the Performance
Graph included in this Proxy Statement.
ELEMENTS OF EXECUTIVE COMPENSATION
The elements of executive compensation include base salary, profit sharing,
an annual performance-based management incentive plan and long-term incentives
(consisting of nonqualified Common Stock options and, subsequent to calendar
year 2002, grants of restricted stock). While the elements of compensation
described in this report are considered separately, the Committee takes into
account the total compensation package afforded by the Company to the executive,
including salary, incentive compensation, pension benefits, supplemental
retirement benefits, insurance and other benefits. In reviewing the individual
performance of the executives, the Committee takes into account the views of the
Company's Chief Executive Officer for positions other than his own.
BASE SALARY
The Committee, in consultation with its outside advisor, Hewitt, determines
base salaries for executive officers by evaluating their positions relative to
the competitive marketplace for executive talent. The Committee determines base
salary adjustments by evaluating the performance of the Company and of each
executive and by surveying the industry to determine the average industry change
in executive base salary. In the case of executives with responsibility for a
particular business unit, the Committee also considers such unit's financial
results. The Committee, where appropriate, considers non-financial performance
measures such as increase in market share, gains in administrative cost
efficiency, improvements in product quality, and improvements in relations with
customers, suppliers, and employees.
ANNUAL INCENTIVE COMPENSATION
PROFIT SHARING PROGRAM. The Company annually establishes a Profit Sharing
Plan for all employees who are employed with the Company for a given portion of
the calendar year. The Cobalt Corporation 2002 Profit Sharing Plan (the "Profit
Sharing Plan") compensated employees based on corporate profitability,
individual business unit or regional area profitability (called the "Local
Component") and the attainment of high levels of customer satisfaction, all
measured against targets set at the beginning of the year.
Under the corporate profitability goal, the Profit Sharing Plan would pay
each employee up to 9% of 2002 eligible earnings depending on the attainment of
specified profit levels. For employees to receive the maximum 9% payout in 2002,
the Company and BCBSUW needed to attain a specified level of combined net
income, excluding net income or loss from extraordinary items. If a specified
minimum level of profitability had not been attained, no awards would have been
made under any portion of the Profit Sharing Plan.
Individual business unit or regional area profitability also was measured
under the "Local Component" of the Plan. Separate business unit or regional area
profitability scales were established for each business unit or regional area,
with employees eligible to receive an additional payout of up to 9% of 2002
eligible earnings on the "Local Component."
The Profit Sharing Plan also contained a customer satisfaction modifier
which enabled employees to earn up to an additional 3% of 2002 eligible earnings
for achievement of high customer satisfaction levels, generally in excess of
93.5%, or which could reduce an award by up to 2% of 2002 eligible earnings for
lower levels of customer satisfaction.
Under the Profit Sharing Plan the Company paid the Chief Executive Officer
and the next four most highly compensated officers bonuses of between 16.2% and
17.0% of 2002 eligible earnings. This compensation was paid in 2003.
MANAGEMENT INCENTIVE PLAN. The Company's executive officers are eligible
for an annual performance bonus under the Management Incentive Plan. The bonus
paid from this plan has two components: the Corporate Component and the
Individual Performance/Business Unit Component. The Corporate Component is equal
to the executives' total payouts from the Profit Sharing Plan (two times the
Profit Sharing Plan
24
payout for the Chief Executive Officer and Chief Operating Officer) as described
above. The maximum payout on the Individual Performance/Business Unit Component
would be 18% for executives other than the Chief Executive Officer and 30% for
the Chief Executive Officer. Therefore, annual performance bonus amounts under
the Management Incentive Plan could range from 0% to 39% of 2002 eligible
earnings for executives other than the Chief Executive Officer and Chief
Operating Officer (up to 21% from the Corporate Component and up to 18% from the
Individual Performance/Business Unit Component) and from 0% to 72% of 2002
eligible earnings for Mr. Hefty (up to 42% from the Corporate Component and up
to 30% from the Individual Performance/Business Unit Component.) The annual
performance bonus amounts under the Management Incentive Plan could range from
0% to 51.5% for Messrs. Bablitch and Bernstein (up to 21% from the Corporate
Component for the period of January 1, 2002 until May 28, 2002 and up to 42%
from the Corporate Component for the period of May 29, 2002 until December 31,
2002 and up to 18% from the Individual Performance/Business Unit Component.)
The Individual Performance/Business Unit Component has two parts. First,
individual performance objectives are established for each eligible executive.
To determine how well executives other than the Chief Executive Officer have
performed on their individual performance objectives, the Committee considers
the relevant performance results as well as input from the Chief Executive
Officer. Not all individual performance objectives are quantifiable, but all are
measurable. The Committee used discretion in evaluating the relative importance
of achievements against both quantitative and non-quantitative, but measurable,
individual performance objectives. Individual performance objectives also are
established for the Chief Executive Officer. The Committee evaluates all
relevant data to determine to what extent the Chief Executive Officer has met
his performance expectations. Again, the Committee uses its discretion in
evaluating both quantitative and non-quantitative, but nonetheless measurable,
performance goals.
The second part of the Individual Performance/Business Unit Component is
based on the executives' payouts from the Local Component of the 2002 Profit
Sharing Plan. Bonus payments are made according to a schedule that correlates
percentages of 2002 eligible earnings paid under the Local Component of the
Profit Sharing Plan with specific bonus amounts.
The bonus amounts for Messrs. Bablitch and Bernstein were primarily
determined by their respective employment agreements, with additional amounts
awarded by the Committee for outstanding performance during 2002. 2002
performance bonus awards for the executives discussed herein, other than Messrs.
Bablitch, Bernstein, and Hefty, from the Individual Performance/Business Unit
Component ranged from 15.74% to 16.66% of 2002 eligible earnings. This
compensation was paid in 2003.
If approved by the shareholders at the Meeting, the 2003 Plan will govern
Management Incentive and Profit Sharing awards for Messrs. Bablitch and
Bernstein for the 2003 performance year on terms that will permit such awards to
qualify as performance based compensation under Section 162(m) of the Code.
LONG-TERM INCENTIVE COMPENSATION
The Company's executive compensation strategy includes providing long-term
compensation at a competitive level for the managed care market.
EQUITY GRANTS. The Committee is responsible for administering the
Company's equity incentive program, which is designed to motivate employees to
maximize shareholder value and maintain a long-term perspective. Option grants
are made at the fair market value on the date of grant and become exercisable in
equal annual installments over a four-year term, expiring 12 years after the
date of grant.
When determining the size of the option grants made to executives, the
Committee considered the results of the competitive market compensation survey
performed by the Committee's outside advisor, Hewitt, which focused on the
managed care and Blue Cross markets. Based on the specific market data, Hewitt
recommended appropriate option grant ranges for each executive position. The use
of grant ranges reinforced the Committee's desire for flexibility to tailor
actual grants to individual or Company circumstances. Further, the Committee
considered its own evaluation of the executives' past and prospective
contributions to the
25
success of the Company, anticipated performance requirements and contributions
of each executive officer, and historical option award data. The Committee
awarded options to individual executives as shown in the option grant table on
page 19.
At its December 2002 meeting, the Committee decided to grant both stock
options and restricted stock to the Chief Executive Officer, Chief Operating
Officer, and other executive employees in 2003. These grants were structured
such that two-thirds of the economic value of the total award was realized from
stock options and one-third of the economic value of the total award was
realized from restricted stock.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Hefty announced his retirement as the Chairman of the Board, President,
and Chief Executive Officer at the Company's Annual Meeting on May 29, 2002. At
that same Annual Meeting, Mr. Bablitch was named the Company's President and
Chief Operating Officer and Mr. Bernstein was named the Company's Executive Vice
President. Upon Mr. Hefty's retirement from the position of Chairman of the
Board and Chief Executive Officer on December 1, 2002, Mr. Bablitch became the
Company's Chief Executive Officer and Chairman of the Board and Mr. Bernstein
became the Company's President and Chief Operating Officer.
Mr. Hefty's annual cash compensation for 2002 included his base salary,
profit sharing, and management incentive bonus and totaled $1,189,171. The
profit sharing and management incentive bonus elements of his cash compensation
paid in 2003 based on 2002 performance are discussed below.
Mr. Hefty's base salary in 2002 approximated the estimated market value for
the Chief Executive Officer position among the peer group used for the
compensation analysis.
With respect to annual incentive compensation, Mr. Hefty received a bonus
of 16.2% of his 2002 eligible earnings under the Profit Sharing Plan. Mr. Hefty
was awarded a bonus of 60.3% of his 2002 eligible earnings under the combined
components of the Management Incentive Plan, based on Cobalt's financial results
and his achievement of individual performance goals set at the beginning of the
year.
Mr. Hefty received an option to purchase 230,000 shares of Common Stock on
March 25, 2002. The Award Agreement provided that this option would fully vest
upon Mr. Hefty's retirement from the Company, which occurred on January 31,
2003.
Mr. Bablitch's annual cash compensation for 2002 included his base salary,
profit sharing, and management incentive bonus and totaled $952,142. The profit
sharing and management incentive bonus elements of his cash compensation paid in
2003 based on 2002 performance are discussed below.
Mr. Bablitch's base salary, up until May 29, 2002, was reflective of his
responsibilities as the Company's General Counsel and Secretary and head of
several of the Company's business units or regional areas. Mr. Bablitch was
awarded a base salary increase on May 29, 2002, upon his appointment as the
Company's President and Chief Operating Officer, consistent with the terms of
his employment agreement. This same employment agreement will establish his base
salary for 2003.
With respect to annual incentive compensation, Mr. Bablitch received a
bonus of 16.2% of his 2002 eligible earnings under the Profit Sharing Plan. Mr.
Bablitch was awarded a bonus of 44.1% of his 2002 eligible earnings under both
components of the Management Incentive Plan, based on Cobalt's financial results
and his achievement of individual performance goals set at the beginning of the
year and at the time of his appointment as the Company's President and Chief
Operating Officer. In addition, the Committee chose to award Mr. Bablitch an
additional bonus of 60.1% of his 2002 eligible earnings in recognition of
outstanding Company and individual performance during 2002. The primary factors
considered in this additional award were: Cobalt's 2002 earnings, and Mr.
Bablitch's leadership during the strong financial turnaround during the past
year, achieved during an extremely difficult economic environment generally, and
also during a period of rapid change in healthcare management; Mr. Bablitch's
personal leadership and contributions in effecting a successful top management
transition, including the development of a cohesive senior leadership team and
other organizational initiatives undertaken in 2002; and Mr. Bablitch's
leadership in renewing Cobalt's commitment to the Milwaukee-metro community and
to strengthening agent and
26
business relationships within that community and the State of Wisconsin. This
additional award amount was given outside the Management Incentive Plan.
The Committee awarded options to Mr. Bablitch as shown in the option grant
table on page 19.
CONCLUSION
Section 162(m) of the Code limits a publicly held corporation's deductions
for certain executive compensation in excess of $1 million. Certain
performance-based compensation is excepted from the $1 million limitation. The
Committee believes that all 2002 executive compensation is fully deductible for
purposes of section 162(m). The Committee has, however, reviewed section 162 (m)
and considered its impact on the Company's future executive compensation plans.
After its review of the total compensation program for the executives of
the Company, the Committee continues to believe that these executive
compensation policies and practices serve the interests of shareholders and the
Company effectively. We also believe that the compensation programs offered are
appropriately balanced to provide increased motivation for executive officers to
contribute to the Company's overall future success, thereby increasing the value
of the Company for the shareholders' benefit. In consultation with our advisors,
we will continue to ensure the effectiveness of the Company's total compensation
program to meet the ongoing needs of the Company.
MANAGEMENT REVIEW COMMITTEE
Barry K. Allen, Chairman
James L. Forbes
Michael S. Joyce
Janet D. Steiger
27
PERFORMANCE GRAPH
The following performance graph compares the cumulative shareholder return
of the Company's Common Stock to the cumulative shareholder return of the NYSE
Composite and the Morgan Stanley Health Care Payor Index for the period of
September 28, 1998 through December 31, 2002. The graph assumes an investment of
$100 in each of the Company's Common Stock, the NYSE Composite Index, and the
Morgan Stanley Healthcare Payor Index on September 28, 1998, and assumes
reinvestment of all dividends.
COMPARISON OF CUMULATIVE TOTAL RETURNS THROUGH DECEMBER 31, 2002
PERFORMANCE GRAPH FOR
COBALT CORPORATION
PERFORMANCE GRAPH
<Table>
<Caption>
09/28/98 12/31/98 12/31/99 12/31/00 12/31/2001 12/31/2002
-------- -------- -------- -------- ---------- ----------
Cobalt Corporation................ $100.00 $121.59 $ 61.97 $ 48.48 $ 91.64 $198.22
NYSE Composite Index.............. $100.00 $115.83 $128.50 $131.82 $120.33 $ 98.38
Morgan Stanley Health Care Payor
Index........................... $100.00 $118.36 $105.67 $229.16 $208.79 $239.98
</Table>
28
CERTAIN TRANSACTIONS
VOTING TRUST AND DIVESTITURE AGREEMENT
In March 2001, the Company completed a restructuring (the "Combination")
whereby, generally speaking, (i) BCBSUW converted its form of ownership from a
service insurance corporation to a stock corporation; (ii) all of the common
stock of BCBSUW was transferred to the Company; (iii) the Company issued
31,313,390 shares of Common Stock to the Foundation; and (iv) the Company, which
was previously known as United Wisconsin Services, Inc., changed its name to
"Cobalt Corporation." As a result, BCBSUW is now a wholly owned subsidiary of
the Company, and the Foundation now owns 25,009,390 shares of Common Stock,
representing approximately 59.7% of the outstanding Common Stock as of March 31,
2003.
In connection with the Combination, Blue Cross Blue Shield Association
("Association") rules required the Foundation to deposit all of its shares of
Common Stock into a voting trust and to sell its shares within prescribed time
periods. Accordingly, Cobalt, the Foundation and Marshall & Ilsley Trust Company
entered into a voting trust and divestiture agreement, pursuant to which the
Foundation deposited into a voting trust all of the shares of Cobalt it received
in the Combination. The terms of the voting trust significantly limit the
Foundation's voting rights, and the trustee of the voting trust will vote those
shares in the manner described below. In addition, the Foundation must sell its
shares of Common Stock within prescribed periods of time and may dispose of
those shares only in a manner that would not violate the ownership requirements
contained in the Company's Amended and Restated Articles of Incorporation.
In general, in order to maintain Cobalt's independence from the Foundation,
the trustee of the voting trust will vote the shares of Common Stock owned by
the Foundation as directed by the directors of Cobalt, except that the
Foundation will decide how to vote these shares on a merger or similar business
combination proposal that would result in the then existing shareholders of
Cobalt owning less than 50.1% of the resulting company, or that would result in
any person or entity who owned 50.1% or less of Common Stock owning more than
50.1% of the voting securities of the resulting entity. Specifically, the
trustee of the voting trust will vote all of the Foundation's shares of Cobalt
in the voting trust in the following manner:
- If the matter is the election of directors of Cobalt, the trustee will
vote the shares in favor of each nominee whose nomination has been
approved by (i) a majority of the members of the Cobalt Board of
Directors who were not nominated at the initiative of the Foundation or
of a person or entity owning shares of Cobalt in excess of the ownership
limits contained in Cobalt's Amended and Restated Articles of
Incorporation (such directors being called "Independent Directors," and
currently comprising the entire Board), and (ii) a majority of the
entire Cobalt Board of Directors.
- The trustee will vote against the removal of any director of Cobalt, and
against any change to Cobalt's Amended and Restated Articles of
Incorporation or Bylaws, unless (i) a majority of the Independent
Directors, and (ii) a majority of the entire Cobalt Board of Directors,
initiates or consents to such removal or amendment action.
- In the event that any candidates are eligible for election to the Board
of Directors under Article III of the Company's Bylaws who, if elected,
would not qualify as Independent Directors, the trustee will vote the
Foundation's shares in the same proportion and for the same candidates
as voted for by the other Cobalt shareholders. This provision will
sunset at such time as the Foundation owns less than 20% of the
outstanding shares of Common Stock.
- The trustee will vote as directed by the Board of Directors of the
Foundation on any proposed business combination transaction that, if
consummated, would result in (1) the then existing Cobalt shareholders,
including the Foundation, owning less than 50.1% of the outstanding
voting securities of the resulting entity, or (2) any person or entity
who, prior to the proposed transaction, owned less than 50.1% of the
outstanding Common Stock of Cobalt owning 50.1% or more of the
outstanding voting securities of the resulting entity.
29
- The trustee will vote in accordance with the recommendation of the
Cobalt Board of Directors on any action requiring prior approval of the
Cobalt Board of Directors as a prerequisite to becoming effective.
In addition, unless a majority of the Independent Directors and a majority
of the entire Cobalt Board of Directors initiates or consents to such action,
neither the Foundation nor the trustee of the voting trust may:
- nominate any candidate to fill any vacancy on the Cobalt Board of
Directors;
- call any special meeting of Cobalt shareholders;
- make any shareholder proposal pursuant to Section 2.14 of the Bylaws; or
- take any action that would be inconsistent with the voting requirements
contained in the voting trust and divestiture agreement.
The Foundation also agreed not to take actions that a shareholder of a
corporation ordinarily could take in its capacity as a shareholder including,
among other things, acquiring additional shares of Common Stock (other than in a
stock split or other similar transaction).
OTHER
Effective January 1, 2003, Valley Health Plan, Inc. ("VHP"), a wholly-owned
subsidiary of the Company, and the Company negotiated a three-year renewal of
their joint venture with Luther Hospital and Midelfort Clinic, Ltd. ("Luther
Midelfort"). Luther Midelfort is owned by Mayo Health System and is affiliated
with Mayo Clinic. The joint venture enables VHP to produce, market and
administer managed care products in northwestern Wisconsin through the
utilization of a provider network. Pursuant to the joint venture, VHP has a
discounted fee-for-service arrangement with Luther Midelfort. In fiscal 2002,
VHP paid $47,087,395 to Luther Midelfort for professional services,
pharmaceutical services, hospital services and profit-sharing. All terms of the
joint venture were negotiated at arm's-length between the parties.
In October 1999, Unity Health Plans Insurance Corporation ("Unity"), a
wholly-owned subsidiary of the Company, BCBSUW and the Company negotiated a
five-year renewal of their joint venture with Community Health Systems, LLC
("CHS"), a Wisconsin limited liability company. The Unity joint venture is the
combination of two separate joint ventures, one with CHS and one with University
Health Care, Inc. ("UHC"), the contracting agent for the University of Wisconsin
Hospital and Clinics) and several of UHC's affiliates. The operations of the two
joint ventures were combined and began operating as a single health plan under
the auspices of a joint governing board. The joint venture enables Unity to
produce, market and administer managed care products in southwestern Wisconsin
through the utilization of a provider network. Pursuant to the joint venture,
Community Physicians Network, Inc. ("CPN"), a part owner of CHS, provides
credentialing and utilization management services for Unity and arranges for the
delivery of health care services through its contracted providers to members
enrolled with Unity. In fiscal 2002, Unity paid $1,602,788 directly to CPN for
those services. In addition, CPN has an accumulated balance due to Unity of
$5,421,800 relating to the current and past joint venture agreements. Dr. D.
Keith Ness, one of the Company's directors, is the Chairman of CHS and the
President of CPN. All terms of the joint venture were negotiated at arms-length
between the parties. Additionally, on June 15, 1998, BCBSUW and CPN entered into
a loan agreement that provided for a line of credit to CPN in the principal
amount of $4,000,000. Use of the loan proceeds is restricted to the maintenance,
operation and expansion of CPN's provider network. The maximum aggregate amount
of indebtedness of CPN outstanding under this agreement for fiscal 2002 was
$2,934,255. The rate of interest on such indebtedness is calculated at the prime
rate (which as of December 31, 2002 was 4.25% per annum).
In connection with obtaining approval of the Combination from the Office of
the Commissioner of Insurance of the State of Wisconsin, the Company agreed to
contribute a total of $2 million in cash to the Foundation. Of this amount, an
aggregate of $1 million was contributed during 2001 and 2002. The remaining $1
million was contributed on January 30, 2003.
30
AUDITORS
The Audit Committee of the Board of Directors selected Ernst & Young LLP
("Ernst & Young) as independent auditors for the Company for the year ended
December 31, 2002. Ernst & Young has examined the accounts of the Company since
1988. Ernst & Young has also been selected as the Company's independent auditors
for 2003. Representatives of Ernst & Young will be present at the Meeting, and
be available to respond to questions and may make a statement if they so desire.
AUDIT SERVICES
The aggregate fees billed by Ernst & Young for professional services
rendered for the audits of the Company's and certain subsidiaries' annual
financial statements for the fiscal years ended December 31, 2002 and 2001, for
reviews of the financial statements included in the Company's Quarterly Reports
on Form 10-Q for those fiscal years, and for comfort letters and consents were
$1,342,000 and $835,000, respectively.
AUDIT-RELATED FEES
The aggregate fees billed by Ernst & Young for services rendered to the
Company for the fiscal years ended December 31, 2002 and 2001 were $50,000 and
$1,219,000, respectively. In 2002, "Audit-Related Fees" includes fees related to
the last information system audit and employee benefit plan audit performed by
Ernst & Young for the Company. In 2001, "Audit-Related Fees" included
information system auditing, website security certification, due diligence, and
employee benefit plan audit fees.
TAX FEES
The aggregate fees billed by Ernst & Young for tax services, not included
in "Audit Services", were $6,000 and $10,000 for the fiscal years ended December
31, 2002 and 2001, respectively. In 2002 and 2001, "Tax Fees" include
consultations regarding tax filing and accounting matters.
ALL OTHER FEES
The aggregate fees for "All Other Fees" billed by Ernst & Young were $7,000
and $11,000 for the fiscal years ended December 31, 2002 and 2001, respectively.
In 2002 and 2001, "All Other Fees" primarily include the purchase of Medicare
cost report related software licensing fees.
OTHER MATTERS
Pursuant to Article II of the Company's Bylaws, proposals that shareholders
intend to present at the 2004 Annual Meeting of Shareholders must be received by
the Company between February 5, 2004 and March 6, 2004 to be presented at that
meeting. If such a proposal is received after March 6, 2004, then it would be
untimely. Should the Board nevertheless choose to present such proposal, the
proxies will be able to vote on the proposal using their best judgment. To be
eligible for inclusion in the proxy material for that meeting, shareholder
proposals made pursuant to Rule 14 a-8 under the Exchange Act must be received
by January 1, 2004.
The Company knows of no other matters to come before the Meeting. If any
other matters properly come before the Meeting, or any adjournments or
postponements thereof, it is the intention of the persons acting pursuant to the
accompanying appointment of proxy form to vote the shares represented thereby in
accordance with their best judgment.
Pursuant to the rules of the Securities and Exchange Commission, services
that deliver the Company's communications to shareholders that hold their stock
through a bank, broker or other holder of record may deliver to multiple
shareholders sharing the same address a single copy of the Company's annual
report to shareholders and proxy statement. Upon written or oral request, the
Company will promptly deliver a separate copy of the annual report to
shareholders and/or proxy statement to any shareholder at a shared address to
which a single copy of each document was delivered. Shareholders may notify the
Company of their requests
31
by calling or writing Lorna J. Granger, Secretary, Cobalt Corporation, 401 West
Michigan Street, Milwaukee, Wisconsin 53203, phone number (414) 226-5000.
COBALT CORPORATION
/s/ Lorna J. Granger
Lorna J. Granger
Secretary
Milwaukee, Wisconsin
April 30, 2003
A COPY (WITHOUT EXHIBITS) OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2002, WILL BE PROVIDED WITHOUT CHARGE TO EACH RECORD OR
BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK AS OF APRIL 17, 2003, ON THE
WRITTEN REQUEST OF SUCH PERSON DIRECTED TO: LORNA J. GRANGER, SECRETARY, COBALT
CORPORATION, 401 WEST MICHIGAN STREET, MILWAUKEE, WISCONSIN 53203.
32
APPENDIX A
COBALT CORPORATION AUDIT COMMITTEE CHARTER
NAME
There shall be a committee of the Cobalt Corporation (the "Company") Board
of Directors ("Board") which shall be called the Audit Committee (the
"Committee").
PURPOSE
The purpose of the Committee shall be to assist Board oversight of:
(1) the integrity of the financial statements of the Company;
(2) the Company's internal and disclosure controls;
(3) the Company's compliance with legal and regulatory requirements;
(4) the independent auditors' qualifications, independence and
performance; and
(5) the performance of the Company's internal audit function.
COMMITTEE MEMBERSHIP
The Committee shall consist of no fewer than three members. All Committee
members shall be financially literate (or shall become financially literate
within a reasonable period of time after appointment to the Committee). They
shall possess the highest personal and professional ethics, integrity and
values, and be committed to representing the long-term interests of the
shareholders. Each member of the Committee shall satisfy the independence,
experience and financial expertise requirements of the New York Stock Exchange
("NYSE") and Section 10A of the Securities Exchange Act of 1934, as amended by
the Sarbanes-Oxley Act of 2002, and the rules promulgated thereunder. At least
one member shall have accounting or related financial management expertise, as
defined by SEC regulations. The Board shall appoint the members of the Committee
annually, considering the recommendation of the Nominating and Board Governance
Committee, and further considering the views of the Chairman of the Board and
the Chief Executive Officer, as appropriate. The Board shall designate a
Committee Chairperson, and shall have the power at any time to change the
membership of the Committee and to fill vacancies in it, subject to such new
member(s) satisfying the independence, experience and financial expertise
requirements referred to above. Committee members shall serve until their
successors are appointed and qualify. Director's fees (including, without
limitation, stock, stock options and restricted stock units) are the only
compensation that a Committee member may receive from the Company. Except as
expressly provided in this Charter or the by-laws of the Company, or as
otherwise provided by law or the rules of the New York Stock Exchange, the
Committee shall establish its own rules of procedure.
COMMITTEE AUTHORITY AND RESPONSIBILITIES
In performing its functions, the Committee shall undertake those tasks and
responsibilities that, in its judgment, would most effectively contribute and
implement the purposes of the Committee. The following shall be the duties and
responsibilities of the Committee. The Committee shall have the authority to
carry out the following duties and responsibilities as set forth in this
Charter:
RETENTION, SCOPE OF WORK AND TERMINATION OF INDEPENDENT AUDITORS AND
OUTSIDE CONSULTANTS. The Committee shall be directly responsible for the
appointment, compensation, retention and oversight over the work of the
Company's independent auditors (including resolution of disagreements
between management and the auditors regarding financial reporting) for the
purpose of preparing or issuing an audit report or related work, and the
independent audit firm shall report directly to the Committee. The
Committee shall discuss with the independent auditors the overall scope and
plans for their respective audits including the adequacy of staffing and
firm compensation. The Committee shall have the sole
A-1
authority to appoint or replace the independent auditors, and shall approve
all audit engagement fees and terms and all non-audit engagements with the
independent auditors. The Committee shall consult with management but shall
not delegate these responsibilities, except that the Committee Chair may
pre-approve non-audit services involving fees up to five percent of total
revenues paid to the independent auditors for the fiscal year. The
Committee shall have the authority, to the extent it deems necessary or
appropriate, to retain special legal, accounting or other consultants to
advise the Committee and carry out its duties, and to conduct or authorize
investigations into any matters within its scope of responsibilities.
QUALITY CONTROL REVIEW AND INDEPENDENCE OF INDEPENDENT AUDITORS. The
Committee shall obtain and review a report from the independent auditors at
least annually regarding (a) the independent auditors' internal
quality-control procedures, (b) any material issues raised by the most
recent quality-control review, or peer review, of the firm, or by any
inquiry or investigation by governmental or professional authorities within
the preceding five years respecting one or more independent audits carried
out by the firm, (c) any steps taken to deal with any such issues, and (d)
all relationships between the independent auditors and the Company. This
review shall include an evaluation of the qualifications (including
verification that the independent auditors are properly licensed in
accordance with applicable legal requirements), performance and
independence of the auditors, and the lead partner thereof taking into
account the opinions of management and the Company's internal auditors.
REVIEW OF QUARTERLY AND ANNUAL FINANCIAL STATEMENTS. The Committee or the
Committee Chair shall review with management and the independent auditors
the financial statements and required disclosures under "Management
Discussion and Analysis of Financial Condition and Results of Operations"
to be included in the Company's reports on Form 10-Q and 10-K in advance of
such filings. Also, the Committee shall discuss the results of the annual
audit and any other matters required to be communicated to the Committee by
the independent auditors under generally accepted auditing standards,
applicable legal, regulatory or New York Stock Exchange requirements. The
Committee shall receive regular reports from the independent auditor on the
critical policies and practices of the Company, and all alternative
treatments of financial information within generally accepted accounting
principles, including the ramifications of the use of such alternative
treatments and disclosures, the treatment preferred by the independent
auditor, and other material written communications between the independent
auditors and management.
SEPARATE SESSIONS WITH MANAGEMENT, THE INDEPENDENT AUDITORS AND INTERNAL
AUDIT. The Committee shall meet periodically with management, the internal
auditors and the independent auditors in separate executive sessions in
furtherance of its purposes. The Committee may request any officer or
employee of the Company or the Company's outside counsel or independent
auditor to attend a meeting of the Committee or to meet with any members
of, or consultants to, the Committee.
DISCUSSIONS WITH MANAGEMENT AND INDEPENDENT AUDITORS REGARDING AUDIT
PROBLEMS OR DIFFICULTIES. The Committee shall review and discuss with
management and the independent auditors, as applicable, any management
letter or other material written communication provided by the independent
auditors and the Company's response to that letter; any problems,
difficulties or differences encountered in the course of the audit work,
including any disagreements with management or restrictions on the scope of
the independent auditors' activities or on access to requested information
and management's response thereto.
POLICIES AND PROCEDURES TO ASSESS AND MANAGE RISK. The Committee shall
discuss with management, the internal auditors, and the independent
auditors the adequacy and effectiveness of the accounting, financial and
disclosure controls and procedures, including the Company's system to
assess, monitor and control business risk, including guidelines and
policies to govern the process by which management assesses and manages
risk. The Committee shall review management's report on its assessment of
the effectiveness of internal controls as of the end of the most recent
fiscal year and the independent auditors' evaluation of management's
report. The Committee shall review significant findings prepared by the
independent auditors and the internal audit department together with
management's responses,
A-2
including the status of previous recommendations. On at least an annual
basis, the Committee shall review any legal matters that could have a
material impact on the Company's financial statements, the Company's
compliance with applicable laws and regulations, and inquiries or reviews
by regulators or governmental agencies.
COMPLIANCE WITH LAWS AND REGULATIONS; SUBMISSION OF ANONYMOUS COMPLAINTS
REGARDING ACCOUNTING, INTERNAL CONTROLS OR ACCOUNTING MATTERS. The
Committee shall ensure that the Company has in place an effective program
to prevent and detect and if necessary, report violations of law and
Company policies (the "Compliance and Ethics Program"). The Committee shall
ensure that high-level personnel of the Company are assigned overall
responsibility to oversee compliance, and that, as part of any Compliance
and Ethics Program, standards and procedures capable of reducing the
prospect of unlawful activity are put into place. The Committee shall
review and revise the Compliance Program and any Code of Conduct or Code of
Ethics developed in connection therewith as necessary to ensure that it is
current within the general operating standards in the industry in which the
Company operates and provides training to employees so they are educated on
the availability and use of the Company's ethics reporting process. The
Committee shall establish procedures for the receipt, retention, and
treatment of complaints received regarding accounting, internal accounting
controls, or auditing matters; and the confidential, anonymous submission
by employees of Cobalt and other interested parties of concerns regarding
questionable accounting or auditing matters. The Committee may, at its
option utilize the Corporate Compliance Department for receipt, retention,
investigation and treatment of such complaints. Any matters pertaining to
the integrity of management shall be reviewed and investigated, including
conflicts of interest, or adherence to or waivers of standards of business
conduct as required in the policies of the Company. The Committee shall
receive corporate attorneys' reports of evidence of a material violation of
securities laws or breaches of fiduciary duty.
OTHER GENERAL DUTIES AND RESPONSIBILITIES OF THE AUDIT COMMITTEE. In
addition to the foregoing, the Committee shall have the following general
duties and responsibilities:
(a) The Committee shall ensure that the Company has an appropriate
control process in place for reviewing and approving its internal
transactions and accounting.
(b) The Committee shall make, not less than quarterly, reports to the
Board of Directors, reviewing with the Board any issues that arise
with respect to the quality or integrity of the Company's
financial statements, the performance and independence of the
Company's independent auditors (including the results of the
quality control review) and of the performance of the internal
audit function.
(c) The Committee shall review: (i) major issues regarding accounting
principles and financial statement presentation; (ii) analyses
prepared by management and/or the independent auditor setting
forth significant financial reporting issues and judgments made in
connection with the preparation of the financial statements; (iii)
the effect of regulatory and accounting initiatives as well as off
balance sheet structures, on the financial statements of the
Company; (iv) quarterly earnings press releases as well as
financial information and earnings guidance, if any, provided to
analysts and rating agencies; (v) the adequacy of this Charter as
well as any recommended changes for Board approval; and (vi) the
Committee's own performance.
(d) The Committee shall recommend to the Board policies, in accordance
with applicable legal requirements, for the Company's hiring of
employees or former employees of the independent auditors who were
engaged on the Company's account.
(e) The Committee shall review disclosures made by the Company's Chief
Executive Officer and Chief Financial Officer regarding compliance
with their certification obligations as required under the
Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder,
including the Company's disclosure controls and procedures and
internal controls for financial reporting and evaluations thereof.
A-3
RELATIONSHIP TO SUBSIDIARIES
The Committee is also primarily responsible for the above-referenced areas
of responsibility as they relate to wholly-owned subsidiaries of the Company
("Subsidiaries"). In fulfilling the foregoing duties and responsibilities, the
Committee will review the Subsidiaries' audit work plans, meet at least annually
with at least one representative of each Subsidiary's Audit Committee (if any),
and review the results of work performed by internal and external auditors of
the Subsidiaries.
A-4
APPENDIX B
2003 INCENTIVE PLAN
Cobalt Corporation
Effective June 4, 2003
B-1
CONTENTS
<Table>
<Caption>
PAGE
----
Article 1. Establishment, Purpose, and Duration........................ B-3
Article 2. Definitions................................................. B-3
Article 3. Administration.............................................. B-6
Article 4. Shares Subject to the Plan and Maximum Awards............... B-7
Article 5. Eligibility and Participation............................... B-8
Article 6. Stock Options............................................... B-8
Article 7. Stock Appreciation Rights................................... B-10
Article 8. Restricted Stock and Restricted Stock Units................. B-11
Article 9. Performance Units/Performance Shares........................ B-13
Article 10. Annual Cash-Based Awards.................................... B-14
Article 11. Performance Measures........................................ B-15
Article 12. Annual Management Incentive Awards.......................... B-16
Article 13. Annual Profit Sharing Awards................................ B-16
Article 14. Beneficiary Designation..................................... B-17
Article 15. Deferrals................................................... B-17
Article 16. Rights of Participants/Employment........................... B-17
Article 17. Change of Control........................................... B-18
Article 18. Amendment, Modification, Suspension, and Termination........ B-18
Article 19. Withholding................................................. B-19
Article 20. Indemnification............................................. B-19
Article 21. Successors.................................................. B-20
Article 22. General Provisions.......................................... B-20
Article 23. Arbitration................................................. B-21
</Table>
B-2
COBALT CORPORATION
2003 INCENTIVE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 ESTABLISHMENT. Cobalt Corporation, a Wisconsin corporation
(hereinafter referred to as the "Company"), establishes an incentive plan to be
known as the Cobalt Corporation 2003 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, Stock Appreciation Rights ("SARs"), Restricted Stock, Restricted Stock
Units, Performance Shares, Performance Units, and Cash-based Awards.
The Plan shall become effective as of June 4, 2003 (the "Effective Date")
and shall remain in effect as provided in Section 1.3.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the
long-term interests of the Company and its shareholders by strengthening the
Company's, its Affiliates', and/or its Subsidiaries' ability to attract,
motivate, and retain Employees and Directors upon whose judgment, initiative,
and efforts the financial success and growth of the business of the Company
largely depend, and to provide additional incentives for such individuals
through stock ownership and other rights that promote and recognize the
financial success and growth of the Company and create value for shareholders.
The Plan is also intended to replace the Cobalt Corporation Equity
Incentive Plan (the "Prior Plan"), under which no new awards may be granted
after the Effective Date. However, any awards issued under the Prior Plan shall
continue to be subject to and administered pursuant to the terms of such Prior
Plan.
1.3 DURATION OF THE PLAN. The Plan shall commence as of the Effective
Date and shall remain in effect, subject to the right of the Committee or Board
to amend or terminate the Plan at any time pursuant to Article 18, until all
Shares subject to it have been purchased or acquired according to the Plan's
provisions.
ARTICLE 2. DEFINITIONS
Capitalized terms used in the Plan shall have the meanings set forth below:
2.1 "AFFILIATE" shall have the meaning ascribed to such term in Rule
12b-2 of the General Rules and Regulations of the Exchange Act.
2.2 "ANNUAL MANAGEMENT INCENTIVE AWARD" means a Cash-based Award granted
under Article 12.
2.3 "ANNUAL PROFIT SHARING AWARD" means a Cash-based Award granted under
Article 13.
2.4 "AWARD" means, individually or collectively, a grant under this Plan
of Nonqualified Stock Options, Incentive Stock Options, SARs,
Restricted Stock, Restricted Stock Units, Performance Shares,
Performance Units, and/or Cash-based Awards.
2.5 "AWARD AGREEMENT" means either (a) an agreement entered into by the
Company and a Participant setting forth the terms and provisions
applicable to the Participant's Award, or (b) a statement issued by
the Company to a Participant describing the terms and provisions of
the Participant's Award.
2.6 "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the meaning
ascribed to such term in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.
2.7 "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the
Company.
2.8 "CASH-BASED AWARDS" means an Award granted to a Participant as
described in Article 10, 12, or 13.
2.9 "CAUSE" with respect to a Director means (a) willful and gross
misconduct on the part of the Director that is materially and
demonstrably detrimental to the Company, or (b) the commission by
B-3
a Director of one or more acts which constitutes an indictable crime
under United States Federal, state or local law, in each case as
determined in good faith by the Committee.
2.10 "CHANGE OF CONTROL" of the Company shall be deemed to have occurred:
(a) As of the first day that any Person (other than (i) the Wisconsin
United for Health Foundation, Inc.; (ii) the Company or its
Subsidiaries; (iii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or its
Subsidiaries; (iv) an underwriter temporarily holding securities
pursuant to an offering of such securities; or (v) a corporation
owned directly or indirectly by the shareholders 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
(b) As of the first day that the following individuals cease for any
reason to constitute a majority of the number of Directors then
serving: individuals who, on January 1, 2003, constitute the Board
and any new Director (other than a Director whose initial
assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent
solicitation, relating to the election of Directors of the
Company, as such terms are used in Rule 14a-11 of Regulation 14A
under the Exchange Act) whose appointment or election by the Board
or nomination for election by the Company's shareholders was
approved by a vote of at least two-thirds (2/3) of the Directors
then still in office who either were Directors on January 1, 2003,
or whose appointment, election or nomination for election was
previously so approved; or
(c) Simultaneous with the consummation of: (i) a plan of complete
liquidation or dissolution of the Company; or (ii) an agreement
for the sale or disposition of all or substantially all the
Company's assets (except to a wholly-owned Subsidiary or to an
entity, at least seventy-five percent (75%) of the combined voting
power of the voting securities of which are owned by Persons in
substantially the same proportions as their ownership of the
Company immediately prior to such sale); or (iii) 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.
2.11 "CODE" means the U.S. Internal Revenue Code of 1986, as amended from
time to time. Any reference to a particular provision of the Code
shall be deemed to include reference to any successor provision
therein.
2.12 "COMMITTEE" means the Management Review Committee of the Board or any
other committee appointed by the Board to administer the Plan in
accordance with Article 3.
2.13 "COMPANY" means Cobalt Corporation, a Wisconsin Corporation, or any
successor thereto as provided in Article 21.
2.14 "COVERED EMPLOYEE" means a Participant who is a "covered employee," as
defined in Code Section 162(m) and the regulations promulgated
thereunder, and any other Participant identified by the Committee as
an Employee or Director who may become a "Covered Employee" at some
future date.
2.15 "DIRECTOR" means any individual who is a member of the Board of
Directors and is not an Employee of the Company or a Subsidiary.
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2.16 "DISABILITY" with respect to a Director 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, as selected by the
Committee, who are qualified to give professional medical advice.
2.17 "EMPLOYEE" means any employee of the Company, its Affiliates, and/or
its Subsidiaries.
2.18 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto. Any reference to a
particular provision of the Exchange Act shall be deemed to include
reference to any successor provision therein.
2.19 "FAIR MARKET VALUE" means, with respect to a Share on the relevant
date, (a) if the Shares are listed on a national securities exchange,
the last sales price on such date on the national securities exchange
on which the Shares are then traded, or if no sales of Shares occur on
the date in question, on the last preceding date on which there was a
sale on such exchange; (b) if the Shares are not listed on a national
securities exchange, but are traded in an over-the-counter market, the
last sales price (or, if there is no last sales price reported, the
average of the closing bid and asked prices) for the Shares on the
particular date, or on the last preceding date on which there was a
sale of Shares on that market; or (c) if the Shares are neither listed
on a national securities exchange nor traded in an over-the-counter
market, the price determined by the Committee.
2.20 "FISCAL YEAR" means the fiscal year of the Company; provided that if
the Company changes the period for its fiscal year, the prior fiscal
year period shall continue to apply for purposes of the Award Limits
specified in Section 4.1, unless shareholder approval is obtained for
the new fiscal year period under Section 4.1.
2.21 "FREESTANDING SAR" means an SAR that is granted independently of any
Options, as described in Article 7.
2.22 "INCENTIVE STOCK OPTION" OR "ISO" means an Option that meets the
requirements of Code Section 422.
2.23 "INSIDER" means an individual who is, on the relevant date, subject to
Section 16 of the Exchange Act.
2.24 "NONQUALIFIED STOCK OPTION" OR "NQSO" means an Option that does not
meet the requirements of Code Section 422.
2.25 "OPTION" means an Incentive Stock Option and/or a Nonqualified Stock
Option, as described in Article 6.
2.26 "OPTION PRICE" means the price at which a Share may be purchased by a
Participant pursuant to an Option.
2.27 "PARTICIPANT" means an Employee or Director who has been selected by
the Committee to receive an Award or any individual who holds an
outstanding Award (including, but not limited to, any individual who
inherits a Participant's Award following the Participant's death).
2.28 "PERFORMANCE-BASED COMPENSATION" means an Award that qualifies as
performance-based compensation under Code Section 162(m).
2.29 "PERFORMANCE MEASURES" means the measures as described in Article 11,
the attainment of which may determine the degree of payout, issuance
of Shares, and/or vesting with respect to Awards to Covered Employees
that qualify as Performance-Based Compensation
2.30 "PERFORMANCE PERIOD" means the period of time designated under an
Award during which performance goals must be met in order to determine
the degree of payout, issuance of Shares, and/or vesting with respect
to such Award.
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2.31 "PERFORMANCE SHARE" means an Award that grants to a Participant the
right to receive Shares to the extent performance goals are met, as
described in Article 9.
2.32 "PERFORMANCE UNIT" means an Award that grants to a Participant the
right to receive cash and/or Shares valued in relation to a unit that
has a designated dollar value or the value of which is equal to the
Fair Market Value (or increase in Fair Market Value) of one or more
Shares to the extent performance goals are met, as described in
Article 9.
2.33 "PERIOD OF RESTRICTION" means the period (based on the passage of
time, the achievement of performance goals, or the occurrence of other
events as determined by the Committee) when Restricted Stock or
Restricted Stock Units are subject to a substantial risk of forfeiture
and are nontransferable, as provided in Article 8.
2.34 "PERSON" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act as used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d).
2.35 "PRESIDING DIRECTOR" shall mean the Director, other than the Chairman
of the Board, appointed by the Board to preside over meetings held by
the Board, if any.
2.36 "RESTRICTED STOCK" means an Award of Shares that are subject to a
Period of Restriction, as described in Article 8.
2.37 "RESTRICTED STOCK UNIT" means an Award that grants to a Participant
the right to receive cash and/or Shares valued in relation to a unit
the value of which is equal to the Fair Market Value (or increase in
Fair Market Value) of one or more Shares, and that is subject to a
Period of Restriction, as described in Article 8.
2.38 "RETIREMENT" with respect to a Director means the earlier of 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.
2.39 "SHARE" means a Share of common stock of the Company, subject to
adjustment as provided in Section 4.3.
2.40 "STOCK APPRECIATION RIGHT" or "SAR" means an Award that grants to a
Participant the right to receive cash and/or Shares with a value equal
to the increase in the Fair Market Value of one or more Shares, as
described in Article 7.
2.41 "SUBSIDIARY" means any corporation, partnership, joint venture,
limited liability company, or other entity (other than the Company) in
an unbroken chain of entities beginning with the Company if, at the
time of the granting of an Award, each of the entities other than the
last entity in the unbroken chain owns at least fifty percent (50%) of
the total combined voting power in one of the other entities in such
chain.
2.42 "TANDEM SAR" means an SAR that is granted in connection with a related
Option pursuant to Article 7.
2.43 "WINDOW PERIOD" means the period beginning on the third (3rd) business
day following the date of public release of the Company's quarterly
sales and earnings information, and ending on the thirtieth (30th) day
following such date.
ARTICLE 3. ADMINISTRATION
3.1 GENERAL. The Plan shall be administered by the Committee; provided,
however, that if at any time the Committee shall not be in existence, the
functions of the Committee as specified in the Plan shall be exercised by a
committee consisting of those members of the Board of Directors who qualify as
nonemployee directors under Rule 16b-3 and as outside directors under Section
162(m)(4)(C) of the Code.
3.2 AUTHORITY OF THE COMMITTEE. Subject to the terms of the Plan and
without limitation by reason of enumeration, the Committee shall have full power
and authority to: (a) designate Participants;
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(b) determine the type or types of Awards to be granted to each Participant; (c)
determine the number of Shares to be covered by (or with respect to which
payments, rights, or other matters are to be calculated in connection with)
Awards; (d) determine the terms and conditions of any Award; (e) determine
whether, to what extent, and under what circumstances Awards may be settled or
exercised in cash, Shares, other securities, other Awards, or other property,
and the method or methods by which Awards may be settled, exercised, cancelled,
forfeited, or suspended; (f) determine whether, to what extent, and under what
circumstances cash, Shares, other Awards, and other amounts payable with respect
to an Award shall be deferred either automatically or at the election of the
holder thereof or of the Committee; (g) interpret and administer the Plan and
any instrument or agreement relating to, or Award made under, the Plan
(including, without limitation, any Award Agreement); (h) establish, amend,
suspend, or waive such rules and regulations and appoint such agents as it shall
deem appropriate for the proper administration of the Plan; and (i) make any
other determination and take any other action that the Committee deems necessary
or desirable for the administration of the Plan. Unless otherwise expressly
provided in the Plan, all designations, determinations, interpretations, and
other decisions made under or with respect to the Plan or any Award shall be
within the sole discretion of the Committee, may be made at any time, and shall
be final, conclusive, and binding upon all Persons, including the Company, any
Affiliate, any Participant, any Director, any shareholder, and any Employee. The
Committee's determinations need not be the same for each grant or for each
Participant.
3.3 DELEGATION. To the extent applicable law permits, the Board may
delegate to another committee of the Board or to one or more officers of the
Company any or all of the authority and responsibility of the Committee.
However, no such delegation is permitted with respect to Awards granted to
Insiders at the time any such delegated authority or responsibility is
exercised. The Board also may delegate to another committee of the Board
(consisting entirely of Directors who qualify as "non-employee directors for
purposes of Section 16" under Rule 16b-3) any or all of the authority and
responsibility of the Committee with respect to Awards granted to Insiders. If
the Board has made such a delegation, then all references to the Committee in
this Plan shall include such other committee or one or more officers to the
extent of such delegation.
ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1 NUMBER OF SHARES AVAILABLE FOR AWARDS. Subject to provisions of
Sections 4.2 and 4.3, the number of Shares hereby reserved for issuance to
Participants under the Plan shall be three million seven thousand seven hundred
ten (3,007,710), which number represents the unused reserve under the Prior
Plan; provided that no more than one million (1,000,000) Shares may be issued
pursuant to Incentive Stock Options. The number of Shares reserved for issuance
under the Plan shall be reduced only by the number of Shares delivered in
payment or settlement of Awards. If an Award (a) terminates by expiration,
forfeiture, cancellation, or otherwise without the issuance of all Shares
thereunder, (b) is settled in cash in lieu of Shares, or (c) is exchanged with
the Committee's approval for an Award or Awards not involving Shares, then the
Shares (or remaining Shares) subject to or reserved for such Award shall be
available again for grant under the Plan. If Shares are issued under any Award
and the Company subsequently reacquires them pursuant to rights reserved under
the issuance of the Shares, then the Shares subject to, reserved for or
delivered in payment in respect of such Award shall be available again for grant
under the Plan. The Shares of common stock available for issuance under the Plan
may be authorized and unissued Shares or treasury Shares.
All Awards granted to a Covered Employee shall be subject to the following
limits ("Award Limits"):
(a) OPTIONS AND TANDEM STOCK APPRECIATION RIGHTS: The maximum aggregate
number of Shares that may be subject to Options or Tandem Stock
Appreciation Rights granted in any one Fiscal Year to any one
Participant shall be one million (1,000,000).
(b) SARS: The maximum aggregate number of Shares that may be subject to
Freestanding Stock Appreciation Rights granted in any one Fiscal Year
to any one Participant shall be one million (1,000,000).
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(c) RESTRICTED STOCK/RESTRICTED STOCK UNITS: The maximum aggregate number
of Shares/units with respect to Awards of Restricted Stock/Restricted
Stock Units granted in any one Fiscal Year to any one Participant
shall be five hundred thousand (500,000).
(d) PERFORMANCE UNITS/PERFORMANCE SHARES: The maximum aggregate number of
Performance Units or Performance Shares that a Participant may
receive in any one Fiscal Year shall be five hundred thousand
(500,000) Shares, or cash and/or Shares equal to the value of five
hundred thousand (500,000) Shares determined as of the date each
Award becomes taxable to the Participant without regard to any
deferral election that may be made by the Participant.
(e) CASH-BASED AWARDS: The maximum aggregate amount that may be payable
under Cash-based Award(s) (except Awards granted pursuant to Articles
12 and 13, the limits of which are described below) granted to any
one Participant in any one Fiscal Year may not exceed five million
dollars ($5,000,000).
(f) ANNUAL MANAGEMENT INCENTIVE AWARDS: The maximum aggregate amount that
may be payable under Annual Management Incentive Award(s) granted to
any one Participant in any one Fiscal Year may not exceed five
million dollars ($5,000,000).
(g) ANNUAL PROFIT SHARING AWARDS: The maximum aggregate amount that may
be payable under Annual Profit Sharing Award(s) granted to any one
Participant in any one Fiscal Year may not exceed one million dollars
($1,000,000).
4.2 ADDITION OF SHARES FROM PRIOR PLAN. If any Shares subject to awards
granted under the Prior Plan would again become available for new grants under
the terms of such Prior Plan if the Prior Plan were still in effect after the
Effective Date, then those Shares shall be available for the purpose of granting
Awards under this Plan. In such event, the Shares carried over from such awards
under the Prior Plan shall increase the number of Shares available under this
Plan as determined under the first sentence of Section 4.1.
4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any corporate event
or transaction (including, but not limited to, a change in the Shares of the
Company or the capitalization of the Company) such as a merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, reverse stock
split, split up, spin-off, or other distribution of stock or property of the
Company, combination of shares, exchange of shares, dividend in kind, or other
like change in capital structure or distribution (other than normal cash
dividends) to shareholders of the Company, or any similar corporate event or
transaction, the Committee, in order to prevent dilution or enlargement of
Participants' rights under the Plan or any Award, may substitute or adjust, in
an equitable manner, as applicable, the number and kind of Shares that may be
issued under the Plan, the number and kind of Shares subject to outstanding
Awards, the Option Price or grant price applicable to outstanding Awards, the
Award Limits, and other value determinations applicable to outstanding Awards.
Appropriate adjustments may also be made by the Committee in the terms of
any Awards to reflect such changes or distributions and to modify any other
terms of outstanding Awards on an equitable basis, including modifications of
performance goals and changes in the length of Performance Periods.
Subject to the provisions of Article 17, without affecting the number of
Shares reserved or available hereunder, the Board may authorize under this Plan
the issuance or assumption of benefits in connection with any merger,
consolidation, acquisition of property or stock, or reorganization upon such
terms and conditions as it may deem appropriate.
ARTICLE 5. ELIGIBILITY
Individuals eligible to participate in this Plan include all Employees and
Directors, as selected by the Committee. In addition, Directors shall
automatically be Participants as described in Sections 6.10 and 8.9.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
the Committee may grant Options to Participants in such number, and upon such
terms, and at any time and from time to time as it
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shall determine; provided that, if so required by Code Section 422 in order to
obtain ISO treatment, ISOs shall not be granted to Directors or Employees who
are employed by noncorporate Subsidiaries or are employed by an Affiliate that
is not a corporate Subsidiary, and ISOs may not be granted following the ten-
year (10) anniversary of the Effective Date.
6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award
Agreement that shall specify, as determined by the Committee and subject to the
terms of the Plan: (a) the Option Price, (b) the duration of the Option, (c) the
number of Shares to which the Option pertains, (d) the conditions upon which an
Option shall become vested and exercisable, including the extent to which the
Participant may exercise the Option following termination of the Participant's
employment or directorship with the Company, its Affiliates, and/or its
Subsidiaries, as the case may be, and (e) such other provisions as the Committee
shall determine. The Award Agreement also shall specify whether the Option is
intended to be an ISO or an NQSO.
6.3 OPTION PRICE. Unless a higher Option Price is otherwise provided by
the Committee in an Award Agreement, the Option Price for each Option granted
under this Plan shall be one hundred percent (100%) of the Fair Market Value of
a Share on the date the Option is granted.
6.4 DURATION OF OPTIONS. Each NQSO shall expire and cease to be
exercisable on the twelfth (12th) anniversary date of its grant, and each ISO
shall expire and cease to be exercisable on the tenth (10th) anniversary date of
its grant, unless the Committee provides for a lesser term in the Award
Agreement.
6.5 EXERCISE OF OPTIONS. Options shall be exercisable at such times and
be subject to such restrictions and conditions as the Committee shall determine.
The Committee may restrict Option exercises during the Window Period as it deems
necessary.
6.6 PAYMENT. A Participant may exercise an Option by the delivery of
notice of exercise to an agent designated by the Company or by complying with
any alternative procedures which the Committee authorizes. The notice must set
forth the number of Shares with respect to which the Option is to be exercised,
and must be accompanied by full payment for the Shares either: (a) in cash or
its equivalent, (b) by tendering (either by actual delivery or, if approved by
the Committee, by attestation) previously acquired Shares having an aggregate
Fair Market Value at the time of exercise equal to the total Option Price
(provided, however, if the Company is accounting for the Options using APB
Opinion 25, the Shares that 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
have been purchased on the open market to the extent necessary to satisfy the
Option Price), (c) by a combination of (a) and (b), or (d) any other method the
Committee approves subject to applicable laws. The Committee also may allow a
cashless exercise as permitted under the Federal Reserve Board's Regulation T
(or any successor thereto), 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 laws.
Subject to any governing rules or regulations and the other provisions of
the Plan, as soon as practicable after receipt of notification of exercise and
full payment, the Company shall deliver to the Participant evidence of book
entry Shares, or upon the Participant's request, Share certificates for 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 as it
deems 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 TRANSFERABILITY OF OPTIONS.
(a) INCENTIVE STOCK 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, during a Participant's lifetime, all ISOs
shall be exercisable only by such Participant.
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(b) NONQUALIFIED STOCK OPTIONS. Except as determined by the Committee and
provided in a Participant's Award Agreement, no NQSO may be sold,
transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and
distribution. Further, except as otherwise provided in a
Participant's Award Agreement, during a Participant's lifetime, all
NQSOs shall be exercisable only by such Participant.
6.9 NOTIFICATION OF DISQUALIFYING DISPOSITION. If any Participant makes
any disposition of Shares issued pursuant to the exercise of an ISO under the
circumstances described in Section 421(b) of the Code (relating to certain
disqualifying dispositions), such Participant shall notify the Company of such
disposition in writing within ten (10) days thereof.
6.10 AUTOMATIC DIRECTOR GRANTS. Beginning in 2004, to the extent Shares
are available for grant under the Plan, each Director shall be granted during
each calendar year, an option to purchase four thousand (4,000) Shares, subject
to adjustment pursuant to Section 4.3 (the "Annual Director Option Grant"). The
date of the Annual Director Option Grants will be the first trading day of each
calendar year. For each Director who is first elected Director subsequent to the
Effective Date the grant date shall be the date of election as Director. In the
event that the number of Shares available for grant in any calendar year is
insufficient to make Annual Director Option Grants, then no Annual Director
Option Grants shall be made during such calendar year. The absence of Annual
Director Option Grants during a calendar year shall not affect the Annual
Director Option Grants in a subsequent calendar year.
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, each Option granted to a
Director shall vest annually at the rate of thirty-three and one third percent
(33 1/3%) of the aggregate number of Shares subject to such Option, 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 due to death, Disability or Retirement (as defined below) or
following a Change of Control, however, such Director's Options shall become
immediately exercisable as to one hundred (100%) of the Shares covered thereby
as of the Director's last day of service as a Director with the Company.
Once any portion of an Option issued to a Director becomes exercisable, it
shall remain exercisable for the shortest period of (a) twelve (12) years from
the date of grant, or (b) two (2) years following the date on which the Director
ceases to serve in such capacity for any reason other than removal for Cause (as
defined below). 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.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 GRANT OF SARS. Subject to the terms and conditions of the Plan, the
Committee may grant SARs to Participants at any time and from time to time as it
shall determine. The Committee may grant Freestanding SARs, Tandem SARs, or any
combination of these forms of SARs.
7.2 SAR AGREEMENT. Each SAR Award shall be evidenced by an Award
Agreement that shall specify, as determined by the Committee and subject to the
terms of the Plan: (a) the grant price, (b) the term of the SAR, (c) the number
of Shares to which the SAR pertains, (d) the conditions upon which the SAR shall
become vested and exercisable, including the extent to which the Participant
shall have the right to exercise the SAR following termination of the
Participant's employment or directorship with the Company, its Affiliates,
and/or its Subsidiaries, as the case may be, (e) the form of SAR payout, and (f)
such other provisions as the Committee shall determine.
7.3 GRANT PRICE. The grant price of a Freestanding SAR shall be the Fair
Market Value of a Share on the date of grant of the Freestanding SAR, unless the
Committee provides for a higher grant price in the Award Agreement. The grant
price of Tandem SARs shall equal the Option Price of the related Option.
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7.4 TERM OF SAR. Each Freestanding SAR shall expire and cease to be
exercisable on the twelfth (12th) anniversary date of its grant, unless the
Committee provides for a lesser term in the Award Agreement. Each Tandem SAR
shall have the same term as its related Option.
7.5 EXERCISE OF FREESTANDING SARS. A Participant may exercise
Freestanding SARs subject to whatever terms and conditions the Committee imposes
upon them.
7.6 EXERCISE OF TANDEM SARS. A Participant may exercise Tandem SARs 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
Participant may exercise a Tandem SAR only with respect to the Shares for which
its related Option is then exercisable.
7.7 PAYMENT OF SAR AMOUNT. Upon the exercise of an SAR, a Participant
shall be entitled to receive payment from the Company in an amount determined by
multiplying:
(a) The excess of 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.
Payment upon SAR exercise will be made in cash, unless the Committee
specifies that payment shall be made in Shares of equivalent value, in some
combination of cash and Shares, or in any other manner.
7.8 NONTRANSFERABILITY OF SARS. Except as the Committee shall otherwise
provide in a Participant's Award Agreement, 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, except
as the Committee shall otherwise provide in a Participant's Award Agreement, all
SARs granted to a Participant shall be exercisable during his or her lifetime
only by such Participant.
7.9 OTHER RESTRICTIONS. The Committee shall impose such other conditions
and/or restrictions on any Shares received upon exercise of a SAR granted
pursuant to the Plan as it may deem advisable. This includes, but is not limited
to, requiring the Participant to hold the Shares received upon exercise of an
SAR for a specified period of time.
7.10 SUBSTITUTING SARS. The Committee shall have the ability to
unilaterally substitute SARs for outstanding Options granted to a Participant;
provided, the terms of the substituted SARs and economic benefit of such
substituted SARs are equivalent.
ARTICLE 8. RESTRICTED STOCK AND RESTRICTED STOCK UNITS
8.1 GRANT OF RESTRICTED STOCK OR RESTRICTED STOCK UNITS. Subject to the
terms and provisions of the Plan, the Committee may grant Shares of Restricted
Stock and/or Restricted Stock Units at any time and from time to time as it
shall determine. Restricted Stock Units shall be similar to Restricted Stock
except that no Shares are actually awarded to the Participant on the date of
grant.
8.2 RESTRICTED STOCK OR RESTRICTED STOCK UNIT AGREEMENT. Each Restricted
Stock and/or Restricted Stock Unit grant shall be evidenced by an Award
Agreement that shall specify, as determined by the Committee and subject to the
terms of the Plan: (a) the Period(s) of Restriction, (b) the number of Shares of
Restricted Stock or the number of Restricted Stock Units granted, (c) the extent
to which the Participant shall have the right to retain Restricted Stock and/or
Restricted Stock Units following termination of the Participant's employment or
directorship with the Company, its Affiliates, and/or its Subsidiaries, as the
case may be, and (d) such other provisions as the Committee shall determine.
8.3 TRANSFERABILITY. Except as provided in this Article 8, the Shares of
Restricted Stock and/or Restricted Stock Units 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 Award Agreement (and in the case of Restricted Stock Units until the date of
delivery or other payment), or upon earlier satisfaction of any other
conditions, as specified by the Committee and set forth in the Award Agreement.
All rights with respect to the Restricted Stock and/or Restricted Stock Units
granted to a Participant under the Plan shall be available during his or her
lifetime only to such Participant.
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8.4 OTHER RESTRICTIONS. The Committee may impose such other conditions
and/or restrictions on any Shares of Restricted Stock or Restricted Stock Units
as it may deem advisable including, without limitation, a requirement that
Participants pay a stipulated purchase price for each Share of Restricted Stock
or each Restricted Stock Unit, restrictions that will lapse upon the achievement
of specific performance goals, time-based restrictions on vesting following the
attainment of the performance goals, time-based restrictions, and/or
restrictions under applicable laws.
Unless the Committee determines otherwise, the Company shall retain the
certificates representing Shares of Restricted Stock in its possession until
such time as all conditions and/or restrictions applicable to such Shares are
satisfied or lapse.
Except as otherwise provided in this Article 8 and subject to applicable
laws, the Participant may freely transfer Shares of Restricted Stock after all
conditions and restrictions applicable to such Shares are satisfied or lapse,
and Restricted Stock Units shall be paid in cash, Shares, or a combination of
cash and Shares as the Committee shall determine after all conditions and
restrictions applicable to such units are satisfied or lapse.
8.5 VOTING RIGHTS. To the extent permitted by law, the Committee may
require a Participant holding Shares of Restricted Stock to grant a proxy with
respect to the voting rights of such Shares. A Participant shall have no voting
rights with respect to any Restricted Stock Units granted hereunder.
8.6 DIVIDENDS AND OTHER DISTRIBUTIONS. To the extent permitted by law,
the Committee may require, during the Period of Restriction, that any dividends
paid with respect to Shares of Restricted Stock shall be held by the Company in
escrow, shall be subject to the same terms and conditions (including a risk of
forfeiture) as the underlying Shares to which they relate, and shall be paid at
such time as the Committee determines. During the Period of Restriction, unless
the Committee determines otherwise, Participants holding Restricted Stock Units
shall be credited with dividend equivalents in an amount equal to the dividends
that would have been paid had such Restricted Stock Units been Shares of
Restricted Stock, which dividend equivalents will be subject to the same terms
and conditions as apply to the Restricted Stock Units to which they relate. The
Committee may apply any other restrictions to, or conditions on, the dividends
or dividend equivalents that it deems appropriate. Payment of dividends or
dividend equivalents shall be made in cash, unless the Committee determines that
payment should be made in Shares, Restricted Stock, or Restricted Stock Units,
or any combination of cash and the foregoing.
8.7 SECTION 83(B) ELECTION. If a Participant makes an election pursuant
to Section 83(b) of the Code concerning a Restricted Stock Award, the
Participant shall be required to file promptly a copy of such election with the
Company.
8.8 AUTOMATIC DIRECTORS GRANTS. Beginning in 2004, to the extent Shares
are available for grant under the Plan, each Director shall be granted during
each calendar year, four thousand 4,000 Restricted Stock Units, subject to
adjustment pursuant to Section 4.3 (the "Annual Director Restricted Stock Unit
Grant"). The date of the Annual Director Restricted Stock Unit Grants will be
the first trading day of each calendar year. For each Director who is first
elected Director subsequent to the Effective Date (a "Subsequent Director") the
grant date shall be the date of election as Director. In the event that the
number of Shares available for grant in any calendar year is insufficient to
make Annual Director Restricted Stock Unit Grants, then no Annual Director
Restricted Stock Unit Grants shall be made during such calendar year. The
absence of Annual Director Restricted Stock Unit Grants during a calendar year
shall not affect the Annual Director Restricted Stock Unit Grants in a
subsequent calendar year.
Subject to acceleration as provided below, each Restricted Stock Units
granted to a Director shall vest annually at the rate of thirty-three and one
third percent (33 1/3%) of the aggregate number of units, 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 due to death, Disability or Retirement (as defined below) or
following a Change of Control, however, such Director's units shall immediately
vest as to one hundred (100%) of the units covered thereby as of the Director's
last day of service as a Director with the Company.
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If a Director is removed for Cause, all unvested units held by the Director
shall immediately be forfeited to the Company, and the right of the director to
receive Shares with respect to any vested units shall immediately be forfeited.
As soon as practicable following a Director's Retirement, Disability, or
other termination of service as a Director (other than as a result of removal
for Cause), the Company shall issue to the Director a number of Shares equal to
the number of vested units held by the Director at such time in payment and full
satisfaction of such vested units.
8.9 AUTOMATIC GRANTS TO THE PRESIDING DIRECTOR. To the extent Shares are
available for grant under the Plan, the Presiding Director shall be granted
during each calendar year, one thousand (1,000) Restricted Stock Units, subject
to adjustment pursuant to Section 4.3 (the "Annual Presiding Director Restricted
Stock Unit Grant"). The date of the initial grant to the Presiding Director is
the Effective Date. Beginning in 2004, the date of the Annual Presiding
Restricted Stock Unit Director Grant will be the first trading day of each
calendar year. For each Presiding Director who is first appointed subsequent to
the Effective Date, the first grant date shall be the date of appointment. In
the event that the number of Shares available for grant in any calendar year is
insufficient to make the Annual Presiding Director Restricted Stock Unit Grants,
then no such Grant shall be made during such calendar year. The absence of
Annual Presiding Director Restricted Stock Unit Grants during a calendar year
shall not affect the Annual Presiding Director Restricted Stock Unit Grants in a
subsequent calendar year.
Subject to acceleration as provided below, each Restricted Stock Units
granted to the Presiding Director shall vest over such period of time, as
determined by the Board and set forth in the Award Agreement, but in no event
shall such vesting period be longer than three (3) years. If a Director's tenure
ends during the applicable vesting period due to death, Disability or Retirement
(as defined below) or following a Change of Control, however, such Director's
units shall immediately vest as to one hundred (100%) of the units covered
thereby as of the Director's last day of service as a Director with the Company.
If the Presiding Director is removed for Cause, all unvested units held by
the Director shall immediately be forfeited to the Company.
ARTICLE 9. PERFORMANCE UNITS/PERFORMANCE SHARES
9.1 GRANT OF PERFORMANCE UNITS/PERFORMANCE SHARES. Subject to the terms
of the Plan, the Committee may grant Performance Units and/or Performance Shares
and at any time and from time to time as it shall determine.
9.2 PERFORMANCE SHARE/PERFORMANCE UNIT AGREEMENT. Each Performance Share
and/or Performance Unit grant shall be evidenced by an Award Agreement that
shall specify, as determined by the Committee and subject to the terms of the
Plan: (a) the Performance Period and performance goals, (b) the number of
Performance Shares or the number of Performance Units granted, (c) the initial
value of each Performance Share or Performance Unit, (d) the extent to which the
Participant shall have the right to retain Performance Shares and/or Performance
Units following termination of the Participant's employment or directorship with
the Company, its Affiliates, and/or its Subsidiaries, as the case may be, (e)
the form and timing of payout of earned Performance Shares or Performance Units,
and (f) such other provisions as the Committee shall determine.
The Committee shall establish an initial value for each Performance Unit 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 which, depending on the extent to which they are met, will
determine the value and/or number of Performance Units/Performance Shares that
will be paid out and/or issued to the Participant.
9.3 EARNING OF PERFORMANCE UNITS/PERFORMANCE SHARES. Subject to the terms
of this Plan, after the applicable Performance Period has ended, a Participant
holding Performance Units/Performance Shares shall be entitled to receive payout
on the value and number of Performance Units/Performance Shares earned over
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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/PERFORMANCE
SHARES. Payment of Performance Units shall be made in cash and payment of
Performance Shares shall be made in Shares, in an amount or number equal to the
Fair Market Value of the earned Performance Units/Performance Shares as of the
date of the close of the applicable Performance Period, unless the Committee
determines to make payment in any other form. If payment is made in the form of
Shares, the Committee may subject such Shares to any restrictions the Committee
deems appropriate.
9.5 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Performance Period,
unless the Committee determines otherwise, Participants holding an award of
Performance Shares shall be credited with dividend equivalents in an amount
equal to the dividends that would have been paid had such Performance Shares
been outstanding at such time, which dividend equivalents will be subject to the
same terms and conditions as apply to the Performance Shares to which they
relate. Payment of dividend equivalents shall be made in cash at the same time
and to the same extent as the related Performance Shares are issued (or paid),
unless the Committee determines that payment should be made in Shares, or any
combination of cash and Shares. The Committee may subject such dividend
equivalents to additional accrual, forfeiture, or payout restrictions.
9.6 NONTRANSFERABILITY. Except as otherwise provided in a Participant's
Award Agreement, Performance Units/Performance 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, except as
otherwise provided in a Participant's Award Agreement, a Participant's rights
under the Plan shall be exercisable during his or her lifetime only by such
Participant.
ARTICLE 10. CASH-BASED AWARDS
10.1 GRANT OF CASH-BASED AWARDS. Subject to the terms of the Plan, the
Committee may grant Cash-based Awards at any time and from time to time as it
shall determine.
10.2 CASH-BASED AWARD AGREEMENT. Each Cash-based Award grant shall be
evidenced by an Award Agreement that shall specify, as determined by the
Committee and subject to the terms of the Plan: (a) the amount potentially
payable under the Award, (b) whether payment will be based on performance goals,
in which event the Award shall specify the Performance Period and performance
goals, (c) the extent to which the Participant shall have the right to payment
under the Cash-based Award following termination of the Participant's employment
or directorship with the Company, its Affiliates, and/or its Subsidiaries, as
the case may be, (d) the form and timing of payout of amounts earned under the
Award, and (e) such other provisions as the Committee shall determine.
10.3 EARNING OF CASH-BASED AWARDS. Subject to the terms of this Plan, a
Participant holding a Cash-based Award shall be entitled to receive payout on
the number and value of Cash-based Awards earned by the Participant at the time
specified in the Participant's Award Agreement. If the amount of payout is a
function of the extent to which applicable performance goals are achieved, the
Committee shall determine the extent to which such goals were achieved.
10.4 FORM AND TIMING OF PAYMENT OF CASH-BASED AWARDS. The Committee shall
determine the timing of payment of earned Cash-based Awards. Payment of earned
Cash-based Awards shall be made in cash, unless the Committee determines that
payment be made in Shares (or in a combination of cash and Shares) that have an
aggregate Fair Market Value equal to the value of the earned Cash-based Awards.
If payment is made in the form of Shares, the Fair Market Value of the Shares
will be determined as of the last day of the performance period as specified in
the Participant's Award Agreement. The Committee may subject such Shares to any
restrictions it deems appropriate.
10.5 NONTRANSFERABILITY. Except as otherwise provided in a Participant's
Award Agreement, Cash-based Awards 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, except as otherwise provided in a
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Participant's Award Agreement, a Participant's rights under the Plan shall be
exercisable during the Participant's lifetime only by the Participant.
ARTICLE 11. PERFORMANCE MEASURES
Unless and until the Board proposes for shareholder vote and the
shareholders of the Company approve a change in the Performance Measures set
forth in this Article 11, the performance goals upon which the payment, vesting
or realization of an Award to a Covered Employee that is intended to qualify as
Performance-Based Compensation shall be limited to the following Performance
Measures:
(a) Net earnings;
(b) Earnings per share;
(c) Net sales growth;
(d) Net income (before or after taxes);
(e) Net operating profit;
(f) Return measures (including, but not limited to, return on assets,
capital, equity, or sales);
(g) Cash flow (including, but not limited to, operating cash flow and
free cash flow);
(h) Cash flow return on capital;
(i) Earnings before or after taxes, interest, depreciation, and/or
amortization;
(j) Gross or operating margins;
(k) Productivity ratios;
(l) Share price (including, but not limited to, growth measures and total
shareholder return);
(m) Expense targets;
(n) Margins;
(o) Operating efficiency;
(p) Customer satisfaction; and
(q) Working capital targets.
The Committee may use any Performance Measure(s) to measure the performance
of the Company, an Affiliate, and/or a Subsidiary as a whole, or any business
unit of such entity, or any combination thereof, or may provide that any of the
above Performance Measures will be compared to the performance of a group of
comparator companies, or published or special index, or the Committee may select
Performance Measure (l) above as compared to various stock market indices.
The Committee may provide in any such Award that any evaluation of
performance may include or exclude any of the following events that occurs
during a Performance Period: (a) asset write-downs, (b) litigation or claim
judgments or settlements, (c) the effect of changes in tax laws, accounting
principles, or other laws or provisions affecting reported results, (d) any
reorganization and restructuring programs, (e) extraordinary nonrecurring items
as described in Accounting Principles Board Opinion No. 30 and/or in
management's discussion and analysis of financial condition and results of
operations appearing in the Company's annual report to shareholders for the
applicable year, (f) acquisitions or divestitures, (g) foreign exchange gains
and losses, and (h) pension plan income/expense. In addition, if provided in the
Award Agreement, the Committee shall retain the discretion to adjust such Awards
downward. The Committee is not authorized to adjust any such Awards upward. The
Committee shall determine and set forth in writing to the extent to which the
Performance Measures for each such Award were met following the end of the
Performance Period for such Award.
B-15
In the event that applicable tax and/or securities laws change to permit
the Committee to alter the governing Performance Measures without obtaining
shareholder approval of such changes, the Committee may make such changes
without obtaining shareholder approval; otherwise, the Performance Measures
listed in this Article 11 must be reapproved by shareholders of the Company
every five (5) years in order for certain Awards granted after such date to
qualify as Performance-Based Compensation. In addition, in the event that the
Committee determines that it is advisable to grant Awards to a Covered Employee
that do not qualify as Performance-Based Compensation, the Committee may make
such grants without satisfying the requirements of Code Section 162(m).
ARTICLE 12. ANNUAL MANAGEMENT INCENTIVE AWARDS
The Committee may designate Company executive officers who are eligible to
receive a cash payment with respect to any Fiscal Year based on the attainment
of one or more Performance Measures, as detailed in Article 11, including, but
not limited to, specifying in the Award Agreement the manner in which
performance will be evaluated.
Each Annual Management Incentive Award grant shall be evidenced by an Award
Agreement that shall specify, as determined by the Committee and subject to the
terms of the Plan: (a) the amount potentially payable under the Award, (b) the
Performance Period and performance goals used for the award, (c) the extent to
which the Participant shall have the right to payment under the Annual
Management Incentive Award following termination of the Participant's employment
or directorship with the Company, its Affiliates, and/or its Subsidiaries, as
the case may be, (d) the form and timing of payout of amounts earned under the
Award, and (e) such other provisions as the Committee shall determine.
Subject to the terms of this Plan, a Participant holding an Annual
Management Incentive Award shall be entitled to receive payout on the Annual
Management Incentive Awards earned by the Participant at the time specified in
the Participant's Award Agreement. The Committee shall determine the extent to
which performance goals were achieved.
The Committee shall determine the timing of payment of earned Annual
Management Incentive Awards. Payment of earned Annual Management Incentive
Awards shall be made in cash, unless the Committee determines that payment be
made in Shares (or in a combination of cash and Shares) that have an aggregate
Fair Market Value equal to the value of the earned Annual Management Incentive
Awards. If payment is made in the form of Shares, the Fair Market Value of the
Shares will be determined as of the last day of the Performance Period as
specified in the Participant's Award Agreement. The Committee may subject such
Shares to any restrictions it deems appropriate.
ARTICLE 13. ANNUAL PROFIT SHARING AWARDS
The Committee may designate Company executive officers who are eligible to
receive a cash payment with respect to any Fiscal Year of no more than one
million dollars ($1,000,000) in any one Fiscal Year.
Each Annual Profit Sharing Award grant shall be evidenced by an Award
Agreement that shall specify, as determined by the Committee and subject to the
terms of the Plan: (a) the amount potentially payable under the Award, (b) the
Performance Period and Performance Measures (as described in Article 11), (c)
the extent to which the Participant shall have the right to payment under the
Annual Profit Sharing Award following termination of the Participant's
employment or directorship with the Company, its Affiliates, and/or its
Subsidiaries, as the case may be, (d) the form and timing of payout of amounts
earned under the Award, and (e) such other provisions as the Committee shall
determine.
As soon as possible after the Committee determines whether and the extent
to which the Performance Measures have been met, the Committee shall calculate
the amount to be paid to the Participant under his or her Award Agreement,
subject to downward adjustment by the Committee.
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ARTICLE 14. BENEFICIARY DESIGNATION
Any benefits that are payable or distributable following the Participant's
death as specified in an Award Agreement shall be paid to the Participant's
estate, unless the Committee determines and sets forth in a Participant's Award
Agreement, or the Committee otherwise establishes rules, that a Participant may
name a beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under an Award or the Plan is to be paid in
case or to whom an Award is to be transferred following the Participant's death,
if the Participant dies before he or she receives any or all of such benefit. If
permitted, each such designation shall revoke all prior designations by the same
Participant, shall be in a form prescribed by the Committee, and will be
effective only when filed by the Participant in writing with 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 15. DEFERRALS
Nothing in this Plan shall preclude a Participant from deferring 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 Restricted Stock
Units, or the satisfaction of any requirements or performance goals with respect
to Performance Shares, Performance Units, and Cash-Based Incentive Awards, if
deferral is otherwise permitted under the terms of any deferred compensation
plan established by the Company. Notwithstanding the foregoing, the Committee
may require the deferral of any payment or receipt of any Shares, without the
Participant's consent, if the Committee determines that such deferral is in the
best interests of the Company or is otherwise required by applicable law.
ARTICLE 16. RIGHTS OF PARTICIPANTS/EMPLOYMENT
16.1 EMPLOYMENT/DIRECTORSHIP. Nothing in the Plan or an Award Agreement
shall interfere with or limit in any way the right of the Company, its
Affiliates, and/or its Subsidiaries to terminate any Participant's employment or
other service relationship at any time, nor confer upon any Participant any
right to continue in the capacity in which he or she is employed or otherwise
serves the Company, its Affiliates, and/or its Subsidiaries.
Neither an Award nor any benefits arising under this Plan shall constitute
part of an employment contract with the Company, its Affiliates, and/or
Subsidiaries and, accordingly, subject to Article 3 and this Section, this Plan
and the benefits hereunder may be terminated at any time in the sole and
exclusive discretion of the Board without giving rise to liability on the part
of the Company, its Affiliates, and/or its Subsidiaries for severance payments.
16.2 PARTICIPATION. Except with respect to the Directors' formula grants
described in Sections 6.10 and 8.9, no Employee or Director 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.
16.3 RIGHTS AS A SHAREHOLDER. A Participant shall have none of the rights
of a shareholder with respect to Shares covered by any Award until the
Participant becomes the record holder of such Shares.
16.4 EMPLOYMENT STATUS. Unless the Committee provides otherwise in a
Participant's Award Agreement, if a Participant changes status from an Employee
to a Director, or vice versa, or directly transfers employment among the Company
or any of its Affiliate such that the Participant does not cease to be an
Employee as defined in this Plan, the Participant shall not be considered to
have terminated employment or service under the terms of this Plan or the
Participant's Award Agreement.
In the event that the Company sells a Subsidiary or an Affiliate or sells a
significant portion of a Subsidiary or Affiliate so that such entity no longer
meets the definition of an Affiliate, then a Participant who is employed at such
entity will no longer be considered an Employee and will be treated as having
been involuntarily terminated from employment under the Plan and Award Agreement
unless the Participant's Award Agreement or the Committee provide otherwise.
B-17
ARTICLE 17. CHANGE OF CONTROL
17.1 CHANGE OF CONTROL OF THE COMPANY. The Committee may specify in an
Award Agreement the effect of a Change of Control upon the Award subject to such
agreement. In addition, if a Participant is a party to an employment agreement
or other agreement with the Company, a Subsidiary or Affiliate that specifies
the effect of a Change of Control upon Awards held by the Participant at such
time, the provisions of such agreement shall apply to the Awards. In the absence
of any Change of Control provisions in an Award Agreement or any other agreement
with the Company to which a Participant is then subject, upon the occurrence of
a Change of Control, the following provisions shall supersede and override the
terms of any Award then outstanding unless otherwise specifically prohibited
under applicable laws, or by the rules and regulations of any governing
governmental agencies or national securities exchanges:
(a) Any and all Options and SARs shall become immediately exercisable;
additionally, if a Participant's employment or directorship is
terminated for any reason except Cause (as defined below) within
twelve (12) months after such Change of Control, the Participant
shall have until the earlier of: (i) twelve (12) months following
such termination date, or (ii) the expiration of the Option or SAR
term, to exercise any such Option or SAR.
For purposes of this Article 17, "Cause" shall mean (i) willful and
gross misconduct on the part of a Participant that is materially and
demonstrably detrimental to the Company, a Subsidiary or Affiliate;
or (ii) conviction of a felony under state or federal law. Cause
under either (i) or (ii) shall be determined in good faith by the
Committee In the event the Committee is not available to make such
decision, the Board of Directors at the surviving entity will have
the duty to make a good faith determination whether a termination for
"Cause" is warranted.
(b) Any Period of Restriction imposed on Restricted Stock or Restricted
Stock Units (that are not subject to performance goals) shall lapse.
(c) Subject to the provisions of paragraphs (i) and (ii) below, the
target payout opportunities attainable under all outstanding Awards
of performance-based Restricted Stock, performance-based Restricted
Stock Units, Performance Units, Performance Shares, and
performance-based Cash-Based Awards shall be deemed to have been
fully earned as of the effective date of the Change of Control.
(i) If an Award provides for settlement in Shares, there shall be
issued to Participants within thirty (30) days following the
effective date of the Change of Control, a pro rata number of
Shares based upon an assumed achievement of one hundred percent
(100%) of all relevant targeted performance goals and upon the
length of time (determined in days) from the first day of the
Performance Period to the Change of Control date. The Committee
has the authority to pay all or any portion of the value of the
Shares in cash in lieu of the issuance of such Shares.
(ii) If an Award provides for payment in cash, there shall be paid to
Participants within thirty (30) days following the effective date
of the Change of Control, a pro rata amount of cash based on an
assumed achievement of one hundred percent (100%) of all relevant
targeted performance goals and upon the length of time
(determined in days) from the first day of the Performance Period
to the Change of Control date.
ARTICLE 18. AMENDMENT, MODIFICATION, SUSPENSION, AND TERMINATION
18.1 AMENDMENT, MODIFICATION, SUSPENSION, AND TERMINATION. The Committee
or Board may, at any time and from time to time, alter, amend, modify, suspend,
or terminate the Plan in whole or in part. No amendment of the Plan shall be
made without shareholder approval if shareholder approval is required by law,
regulation, or stock exchange rule. Notwithstanding the foregoing, the authority
of the Committee to administer this Plan and modify or amend an Award, and the
authority of the Committee or Board to amend the Plan, shall extend beyond the
date of this Plan's termination for so long as any Award is outstanding.
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18.2 ADJUSTMENT OF AWARDS UPON THE OCCURRENCE OF CERTAIN UNUSUAL OR
NONRECURRING EVENTS. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, the events described in
Section 4.3 hereof) affecting the Company or the financial statements of the
Company or of changes in applicable laws, regulations, or accounting principles,
whenever the Committee determines that such adjustments are appropriate in order
to prevent unintended dilution or enlargement of the benefits or potential
benefits intended to be made available under the Plan; provided that the
Committee shall be precluded from exercising any such discretion with respect to
any Awards designed to comply as Performance-Based Compensation under Code
Section 162(m) if the exercise of such discretion would increase the amount of
compensation payable upon attainment of the performance goals specified in such
Award. The determination of the Committee as to the foregoing adjustments, if
any, shall be conclusive and binding on Participants under the Plan.
18.3 AWARDS PREVIOUSLY GRANTED. Notwithstanding any other provision of
the Plan to the contrary, no termination, amendment, suspension, 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. Specifically, termination of this Plan will not affect the rights of
Participants with respect to Awards previously granted to them, and all
unexpired Awards will continue in force and effect after termination of this
Plan except as they may lapse or be terminated by their own terms and
conditions.
ARTICLE 19. WITHHOLDING
19.1 TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, the
minimum statutory amount necessary to satisfy federal, state, local, domestic or
foreign taxes required by law or regulation to be withheld with respect to any
taxable event arising in connection with an Award.
19.2 SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock
and Restricted Stock Units, or upon the achievement of performance goals related
to Performance Shares, or any other taxable event arising in connection with an
Award, unless the Committee determines otherwise, Participants may elect 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 tax that could be imposed on the transaction, except
that if the Company is using APB Opinion 25 to account for equity awards in its
financial statements, the amount of tax shall not exceed the minimum statutory
total tax that could be imposed on the transaction. All such elections shall be
irrevocable, made in writing, and signed by the Participant, and shall be
subject to any restrictions or limitations that the Committee deems appropriate.
ARTICLE 20. INDEMNIFICATION
Each person who is or shall have been a member of the Board, or a committee
appointed by the Board (including but not limited to the Committee), or an
officer of the Company to whom authority was delegated in accordance with
Article 3 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
judgement 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, unless such loss, cost, liability, or expense is a result of
his or her own willful misconduct or except as expressly provided by statute.
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 Articles 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.
B-19
ARTICLE 21. SUCCESSORS
All obligations of the Company under the Plan with respect to Awards 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 22. GENERAL PROVISIONS
22.1 FORFEITURE EVENTS. The Committee may specify in an Award Agreement
that the Participant's rights, payments, and benefits with respect to an Award
shall be subject to reduction, cancellation, forfeiture, or recoupment upon the
occurrence of certain specified events, in addition to any otherwise applicable
vesting or performance conditions of an Award. Such events may include, but
shall not be limited to: termination of employment for cause; violation of
material Company, Affiliate, and/or Subsidiary policies; breach of
noncompetition, confidentiality, or other restrictive covenants that may apply
to the Participant; or other conduct by the Participant that is detrimental to
the business or reputation of the Company, its Affiliates, and/or its
Subsidiaries.
22.2 LEGEND. The Committee may require certificates for Shares to include
a legend to reflect any restrictions on the transfer of such Shares.
22.3 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.
22.4 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.
22.5 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, and to Company policies with respect to
Shares or other securities issued by the Company.
22.6 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successor under the Exchange Act.
22.7 DELIVERY OF TITLE. The Company shall have no obligation to issue or
deliver evidence of title for Shares issued under the Plan prior to:
(a) Obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and
(b) Completion of any registration or other qualification of the Shares
under any applicable national or foreign law or ruling of any
governmental body that the Company determines to be necessary or
advisable.
22.8 INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares or grants of Awards hereunder, shall relieve the Company of
any liability in respect of the failure to issue or sell such Shares or to pay
or otherwise provide benefits under any such Award as to which such requisite
authority shall not have been obtained.
22.9 UNCERTIFICATED SHARES. To the extent that the Plan provides for
issuance of certificates to reflect the transfer of Shares, the transfer of such
Shares may be effected on a noncertificated basis, to the extent not prohibited
by applicable law or the rules of any stock exchange.
22.10 UNFUNDED PLAN. Participants shall have no right, title, or interest
whatsoever in or to any investments that the Company may make to aid it in
meeting its obligations under the Plan. Nothing contained in the Plan, and no
action taken pursuant to its provisions, shall create or be construed to create
a
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trust of any kind, or a fiduciary relationship between the Company and any
Participant, beneficiary, legal representative, or any other person. To the
extent that any person acquires a right to receive payments from the Company
under the Plan, such right shall be no greater than the right of an unsecured
general creditor of the Company. All payments to be made hereunder shall be paid
from the general funds of the Company and no special or separate fund shall be
established and no segregation of assets shall be made to assure payment of such
amounts except as expressly set forth in the Plan. The Plan is not subject to
ERISA.
22.11 NO FRACTIONAL SHARES. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, Awards, or other property shall be issued or paid in lieu of
fractional Shares or whether such fractional Shares or any rights thereto shall
be forfeited or otherwise eliminated.
22.12 RETIREMENT AND WELFARE PLANS. The value of compensation paid under
this Plan will not be included as "compensation" for purposes of computing the
benefits payable to any Participant under the Company's retirement plans (both
qualified and nonqualified) or welfare benefit plans unless such other plan
expressly provides that such compensation shall be taken into account in
computing a Participant's benefit.
22.13 GOVERNING LAW. The Plan and each Award Agreement shall be governed
by the laws of the State of Wisconsin, excluding any conflicts or choice of law
rule or principle that might otherwise refer construction or interpretation of
the Plan to the substantive law of another jurisdiction.
ARTICLE 23. ARBITRATION
23.1 APPLICATION. Notwithstanding any employee agreement in effect
between a Participant and the Company, a Subsidiary or Affiliate, if a
Participant brings a claim that relates to benefits under this Plan, and
regardless of the basis of the claim (including but not limited to, actions
under Title VII, wrongful discharge, breach of employment agreement, etc.), such
claim shall be settled by final binding arbitration in accordance with the rules
of the American Arbitration Association ("AAA") and judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof.
23.2 INITIATION OF ACTION. Arbitration must be initiated by serving or
mailing a written notice of the complaint to the other party. Normally, such
written notice should be provided the other party within one year (365 days)
after the day the complaining party first knew or should have known of the
events giving rise to the complaint. However, this time frame may be extended if
the applicable statute of limitation provides for a longer period of time. If
the complaint is not properly submitted within the appropriate time frame, all
rights and claims that the complaining party has or may have against the other
party shall be waived and void. Any notice sent to the Company shall be
delivered to:
OFFICE OF GENERAL COUNSEL
401 West Michigan Street
Milwaukee, Wisconsin 53203
The notice must identify and describe the nature of all complaints asserted
and the facts upon which such complaints are based. Notice will be deemed given
according to the date of any postmark or the date of time of any personal
delivery.
23.3 COMPLIANCE WITH PERSONNEL POLICIES. Before proceeding to arbitration
on a complaint, the Participant must initiate and participate in any complaint
resolution procedure identified in the Company's, Subsidiary's or Affiliate's
personnel policies. If the claimant has not initiated the complaint resolution
procedure before initiating arbitration on a complaint, the initiation of the
arbitration shall be deemed to begin the complaint resolution procedure. No
arbitration hearing shall be held on a complaint until any applicable Company,
Subsidiary or Affiliate complaint resolution procedure has been completed.
23.4 RULES OF ARBITRATION. All arbitration will be conducted by a single
arbitrator according to the Employment Dispute Arbitration Rules of the AAA. The
arbitrator will have authority to award any remedy or relief that a court of
competent jurisdiction could order or grant including, without limitation,
specific performance of any obligation created under policy, the awarding of
punitive damages, the issuance of any
B-21
injunction, costs and attorney's fees to the extent permitted by law, or the
imposition of sanctions for abuse of the arbitration process. The arbitrator's
award must be rendered in a writing that sets forth the essential findings and
conclusions on which the arbitrator's award is based.
23.5 REPRESENTATION AND COSTS. Each party may be represented in the
arbitration by an attorney or other representative selected by the party. The
Company shall be responsible for its own costs, the AAA filing fee and all other
fees, costs and expenses of the arbitrator and AAA for administering the
arbitration. The claimant shall be responsible for his/her attorney's or
representative's fees, if any. However, if any party prevails on a statutory
claim which allows the prevailing party costs and/or attorneys' fees, the
arbitrator may award costs and reasonable attorneys' fees as provided by such
statute.
23.6 DISCOVERY; LOCATION; RULES OF EVIDENCE. Discovery will be allowed to
the same extent afforded under the Federal Rules of Civil Procedure. Arbitration
will be held at a location selected by the Company. AAA rules notwithstanding,
the admissibility of evidence offered at the arbitration shall be determined by
the arbitrator who shall be the judge of its materiality and relevance. Legal
rules of evidence will not be controlling, and the standard for admissibility of
evidence will generally be whether it is the type of information that
responsible people rely upon in making important decisions.
23.7 CONFIDENTIALITY. The existence, contents or results of any
arbitration may not be disclosed by a party or arbitrator without the prior
written consent of both parties. Witnesses who are not a party to the
arbitration shall be excluded from the hearing except to testify.
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PROXY
COBALT CORPORATION
401 WEST MICHIGAN STREET, MILWAUKEE, WI 53203
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Stephen E. Bablitch and Gail L. Hanson, and each
of them, proxies of the undersigned with power of substitution, to vote all
shares of the common stock the undersigned is entitled to vote at the Annual
Meeting of Shareholders of Cobalt Corporation to be held on June 4, 2003, at
10:15 a.m., and at any adjournments or postponements thereof, as indicated
below.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED AS
DIRECTED. IF NO DIRECTION IS SPECIFIED, THEN THE SHARES OF COMMON STOCK WILL BE
VOTED FOR ALL OF THE NOMINEES SPECIFIED IN ITEM 1 AND FOR ITEM 2 AND IN
ACCORDANCE WITH THE BEST JUDGMENT OF THE PROXIES NAMED HEREIN ON ANY OTHER
BUSINESS THAT MAY PROPERLY COME BEFORE THE MEETING.
<Table>
1. Election of Directors
(for terms expiring at the 2006 [ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY NOMINEES: 1-Richard A. Abdoo
Annual Meeting and until their to the right (except as to vote for all 2-Barry K. Allen
successors are duly elected specified below). nominees listed to 3-Michael S. Joyce
and qualified) the right.
(INSTRUCTIONS: To withhold
authority to vote for any
indicated nominee. write the
number(s) of the nominee(s)
in the space provided below).
------------------------------
</Table>
(Continued and to be signed and dated on the reverse side)
(CONTINUED FROM OTHER SIDE)
<Table>
FOR AGAINST ABSTAIN PLEASE MARK, SIGN, DATE AND RETURN
[ ] [ ] [ ] PROMPTLY USING THE ENCLOSED ENVELOPE.
2. APPROVAL OF 2003 INCENTIVE PLAN
With discretionary power upon all other business that may properly come CHECK APPROPRIATE BOX. [ ] ADDRESS CHANGE?
before the meeting and upon matters incident to the conduct of the meeting. [ ] NAME CHANGE?
The Board of Directors recommends a vote FOR all of the nominees specified INDICATE CHANGES BELOW.
in Item 1 and a vote FOR Item 2.
Dated: , 2003 NO. OF SHARES
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NOTE: PLEASE SIGN EXACTLY HOW YOUR NAME APPEARS
HEREON. WHEN SHARES ARE HELD BY JOINT TENANTS,
BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE
FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN
IN FULL CORPORATE NAME BY PRESIDENT OR OTHER
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY AN AUTHORIZED PERSON.
</Table>