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 Section 240.14a-11(c) or Section
240.14a-12
UNITED WISCONSIN SERVICES, INC.
- --------------------------------------------------------------------------------
(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:
------------------------------------------------------------------------
(2) Aggregate number 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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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[UWZ LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE HOLDERS OF COMMON STOCK OF
UNITED WISCONSIN SERVICES, INC.:
The Annual Meeting of the Shareholders (the "Meeting") of United Wisconsin
Services, Inc. (the "Company") will be held at the Hyatt Regency O'Hare located
at 9300 West Bryn Mawr, Rosemont, Illinois, on Wednesday, May 26, 1999 at 11:00
a.m. local time, for the following purposes:
1. To elect three directors of the Company for terms expiring at the 2002
Annual Meeting of Shareholders;
2. 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 16, 1999, 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 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,
Stephen E. Bablitch,
SECRETARY
Milwaukee, Wisconsin
April 26, 1999
[LOGO]
401 West Michigan Street
Milwaukee, Wisconsin 53203
(414) 226-6900
April 26, 1999
To All Shareholders:
You are cordially invited to attend the Company's 1999 Annual Meeting of
Shareholders on May 26, 1999, in Rosemont, Illinois.
The Annual Meeting will begin promptly at 11:00 a.m. at the Hyatt Regency
O'Hare located at 9300 West Bryn Mawr, Rosemont, Illinois.
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,
Thomas R. Hefty
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
[UWZ LOGO]
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of United Wisconsin Services, Inc. (the
"Company" or "UWS") for use at the first Annual Meeting of Shareholders (the
"Meeting") to be held at the Hyatt Regency O'Hare located at 9300 West Bryn
Mawr, Rosemont, Illinois on Wednesday, May 26, 1999, at 11:00 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 2002 Annual Meeting of Shareholders;
and (ii) such other business as may be properly brought before the Meeting.
This will be the Company's first annual meeting since the Company began
operating as an independent, publicly traded company. The Company was
incorporated in 1998 and became publicly held through the pro rata distribution
("Distribution") by American Medical Security Group, Inc. (formerly known as
United Wisconsin Services, Inc. and sometimes referred to in this Proxy
Statement as the "Predecessor Corporation") of all of the outstanding shares of
Common Stock of the Company to shareholders on September 25, 1998.
Only holders of record of shares of Common Stock at the close of business
on April 16, 1999, 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 March 31, 1999, there were issued and
outstanding 16,812,239 shares of Common Stock.
When you sign and return the enclosed appointment of proxy form, shares of
the Common Stock represented thereby will be voted FOR the nominees for
directors listed on page 3. The Board of Directors expects all nominees for
directors 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, 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. Abstentions will be included in the determination of shares
present and voting for purposes of determining whether a quorum exists. Broker
non-votes will not be so included. Neither abstentions nor broker non-votes are
counted in determining whether a proposal has been approved.
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, 1998, the
Notice of the Meeting, this Proxy Statement and the accompanying appointment of
proxy form were first mailed to shareholders on or about April 26, 1999.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of the
Common Stock as of March 31, 1999 by each shareholder known to the Company to
own beneficially more than five percent (5%) of the shares of the 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 appear in the
Summary Compensation Table below, and all directors and officers of the Company
as a group. Unless otherwise indicated, each shareholder listed below has sole
voting and dispositive power with respect to shares of the Common Stock
beneficially owned.
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED(2) CLASS
- ---- --------------------- -----
Blue Cross & Blue Shield United of Wisconsin (1) .......... 6,346,915 37.8%
Heartland Advisors, Inc. (1)............................... 1,653,600 9.8
Oppenheimer Capital........................................ 1,048,830 6.2
Ronald A. Weyers (1)....................................... 948,433 5.6
Wallace J. Hilliard (1).................................... 865,000 5.1
Thomas R. Hefty (3) (4).................................... 134,207 *
Stephen E. Bablitch........................................ 52,625 *
Roger A. Formisano (3) (4) (5)............................. 122,722 *
C. Edward Mordy (4)........................................ 70,618 *
Penny J. Siewert (4)....................................... 57,724 *
Richard A. Abdoo........................................... 8,426 *
Michael D. Dunham.......................................... 4,417 *
James L. Forbes............................................ 8,126 *
James C. Hickman........................................... 6,826 *
William R. Johnson......................................... 9,726 *
Eugene A. Menden........................................... 8,126 *
William C. Rupp, M.D. ..................................... 2,000 *
Carol N. Skornicka......................................... 4,717 *
All directors and executive officers as a group
(19 persons) (4)......................................... 660,309 3.5
- --------------------
* Amount represents less than 1% of the total shares of the Common Stock
issued and outstanding.
(1) Based on Schedules 13G filed with the Company pursuant to the Exchange
Act by such beneficial owner. Blue Cross & Blue Shield United of
Wisconsin's address is 1515 North River Center Drive, Milwaukee,
Wisconsin 53212; Mr. Hilliard's address is P.O. Box 12146, Green Bay,
Wisconsin 54307-2146; Mr. Weyer's address is 3100 AMS Boulevard,
Green Bay, Wisconsin 54313; Heartland Advisors, Incorporated's
address is 790 North Milwaukee Street, Milwaukee, Wisconsin 53202;
and Oppenheimer Capital's address is 800 Newport Center Drive, Suite
100, Newport Beach, California 92660.
(2) Includes the following number of shares covered under options
exercisable within 60 days of March 31, 1999: Mr. Hefty, 113,043; Mr.
Formisano, 117,666; Mr. Mordy 53,066; Ms. Siewert, 54,389; Mr.
Bablitch, 49,696; Mr. Abdoo, 6,626; Mr. Dunham, 4,417; Mr. Forbes,
6,626; Mr. Hickman, 6,626; Mr. Johnson, 6,626; Mr. Menden, 6,626; and
Ms. Skornicka, 4,417; and all directors and executive officers as a
group, 581,878
(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. Hefty, 5,000 shares; Mr. Formisano, 3,750 shares; and Mr.
Bablitch, 1,000 shares. Also includes the following shares owned
separately by such person's spouse or child, with respect to which
such person shares voting power and dispositive power: Mr. Hefty, 450
shares owned by spouse.
(4) Includes the following shares held under the Company's 401(k) plan, as
to which such person has dispositive power: Mr. Hefty, 3,414; Mr.
Formisano, 1,006; Mr. Mordy, 3,453; Ms. Siewert, 2,184; Mr. Bablitch,
429; and all directors and executive officers as a group, 17,853.
(5) Mr. Formisano's employment with the Company ceased on February 26,
1999.
-2-
Blue Cross & Blue Shield United of Wisconsin ("Blue Cross") owns 37.8% of
the issued and outstanding shares of the Common Stock. Three of the Company's
nine directors are also directors of Blue Cross. It is anticipated that Blue
Cross will vote its shares of the Common Stock in favor of each of the nominees.
-3-
ITEM 1 - ELECTION OF DIRECTORS
The Company's Bylaws fix the number of directors at nine. The Board of
Directors is divided into three classes, whose members each 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.
Dunham, Forbes, and Rupp are in the class of directors whose terms expire at the
Meeting. They have been nominated to serve as directors for terms expiring at
the Annual Meeting of Shareholders in 2002 and until their successors are
elected and qualified. The terms of Messrs. Abdoo, Johnson, and Menden will
expire at the Annual Meeting of Shareholders in 2000. The terms of Ms.
Skornicka and Messrs. Hefty and Hickman will expire at the Annual Meeting of the
Shareholders in 2001. 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. The name and age
as of March 31, 1999, and certain additional information, as to each such
nominee and each Director serving an unexpired term are as follows:
NOMINEES STANDING FOR ELECTION
NOMINEES FOR ELECTION AT THIS MEETING WITH TERMS EXPIRING IN 2002
Name and Age Principal Occupation During Past Five Years
- ------------ -------------------------------------------
Michael D. Dunham Director of the Company since 1998. Director of the Predecessor Corporation
Age: 53 from 1997 through 1998; President and a director of Effective Management
Systems, Inc., a developer of integrated manufacturing and business management
software, since its incorporation in 1978.
James L. Forbes Director of the Company since 1998. Director of the Predecessor Corporation
Age: 66 from 1991 through 1998; Director of Blue Cross since 1974; President and Chief
Executive Officer and Director of Badger Meter, Inc., a manufacturer of products
using flow measurement technology, since 1985; Director of Universal Foods
Corporation and Firstar Corporation.
William C. Rupp, M.D. Director of the Company since 1998. Director of the Predecessor Corporation
Age: 52 from 1997 through 1998; President and Chief Executive Officer of
Luther/Midelfort Mayo Health System since 1994; President of Midelfort Clinic
since 1991; practicing physician in oncology since 1982.
CONTINUING DIRECTORS
DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL 2000
Richard A. Abdoo Director of the Company since 1998. Director of the Predecessor Corporation
Age: 55 from 1991 through 1998; Chairman of the Board, President 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 since 1990; Director of Wisconsin Energy
Corporation since 1988; Director of Wisconsin Electric Power Company since
1989; Chairman of the Board and Chief Executive Officer of Wisconsin Natural
Gas Company from 1990 to 1995; Director of Wisconsin Natural Gas Company
from 1989 to 1995; Director of Marshall & Ilsley Corporation, a bank holding
company, Sundstrand Corporation, a manufacturer of aerospace and industrial
equipment, and Universal Foods Corporation, an ingredient manufacturer.
-4-
William R. Johnson Director of the Company since 1998. Director of the Predecessor Corporation
Age: 72 from 1993 through 1998; Director, American Medical Security Group, Inc.;
Chairman of Johansen Capital Investment and Financial Consulting since 1986;
President of Johansen Capital Associates, Inc., a financial and investment
consultant to corporations and individuals, since 1984; Chairman, President
and Chief Executive Officer of National Investment Services of America, Inc.,
an investment manager of pension, profit sharing, and other funds, from 1968
to 1984.
Eugene A. Menden Director of the Company since 1998. Director of the Predecessor Corporation
Age: 68 since 1991 through 1998; Director, American Medical Security Group, Inc. Prior
to retirement, Director of International Finance for Marquette Medical
Systems, Inc. (formerly Marquette Electronics, Inc.), a manufacturer of
medical electronic products. Served as Vice President of Finance for
Marquette Electronics, Inc. from 1970 to 1991, as Treasurer from 1970 to
1989, and as a director from 1972 until June 1996.
DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL 2001
Thomas R. Hefty Director of the Company since 1998. Director of the Predecessor Corporation
Age: 51 from 1983 through 1998; Chairman of the Board, President and Chief Executive
Officer of the Company since 1998; President of the Predecessor Corporation
from 1986 through 1998 and Chairman of the Board and Chief Executive Officer
of the Predecessor Corporation from 1991 through 1998; Chairman of the Board
and Director of Blue Cross since 1988; President of Blue Cross since 1982;
Deputy Insurance Commissioner for the Office of the Commissioner of Insurance
for the State of Wisconsin from 1979 to 1982; Director of Artisan Funds,
Inc., an investment company registered under the Investment Company Act of 1940,
as amended.
James C. Hickman Director of the Company since 1998. Director of the Predecessor Corporation
Age: 71 from 1991 through 1998; Director of Blue Cross since December 1986; Director,
Century Investment Management Company; Director, American Medical Security
Group, Inc.; Emeritus Professor and Emeritus Dean of the School of Business
of the University of Wisconsin-Madison ("UW School of Business") since July
1993; Professor in the UW School of Business from 1990 to 1993; Dean of the
UW School of Business from 1985 to 1990.
Carol N. Skornicka Director of the Company since 1998. Director of the Predecessor Corporation
Age: 57 from 1997 through 1998; Senior Vice President - Corporate Development,
Secretary and General Counsel of Midwest Express Holdings, Inc. and Midwest
Express Airlines, Inc. since February 1998; Vice President, Secretary and
General Counsel of Midwest Express Holdings, Inc. and Midwest Express
Airlines, Inc. since May 1996; Secretary of the Wisconsin Department of
Industry, Labor and Human Relations from 1991 to May 1996; Director of Astral
Aviation, Inc. since May 1996.
The affirmative vote of a plurality of the votes cast is required for the
election of directors. Unless otherwise specified, the shares of the Common
Stock represented by the proxies solicited hereby 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.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE NOMINEES FOR DIRECTORS.
-5-
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS
As previously mentioned, the Company was incorporated in 1998 and began
operations as an independent publicly traded company in September 1998. During
the time that the Company was a wholly owned subsidiary of the Predecessor
Corporation, the board acted by unanimous written consent and thereafter held
one meeting in 1998. The Board of Directors has standing Executive, Finance,
Management Review 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 did not hold any meetings during 1998. The members of the
Executive Committee are Messrs. Forbes (Chairman), Abdoo, Hefty and Hickman.
The Finance Committee approves investment policies and plans and approves
the investment of funds of the Company, 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 one meeting during 1998.
The members of the Finance Committee are Messrs. Hefty, Rupp, Johnson and Ms.
Skornicka.
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, acts as the
nominating committee for officers and directors and 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 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.
The Management Review Committee held two meetings during 1998. The members of
the Management Review Committee are Messrs. Forbes, Abdoo, Dunham and Hickman.
The Audit Committee reviews the scope and timing of the audit of the
Company's financial statements and reviews with the Company's independent public
accountants, the Company's management policies and procedures with respect to
auditing and accounting controls. The Audit Committee also reviews with the
independent public accountants the audited financial statements for the Company
and the auditors' reports and management letter. The Audit Committee selects
and engages the Company's independent public accountants and reviews and
approves all related party transactions. In addition, it reviews and evaluates
Conflict of Interest statements and discharges certain other responsibilities of
the Board of Directors when so instructed by the Board. The Audit Committee
held one meeting during 1998. The members of the Audit Committee are Messrs.
Menden, Abdoo, Dunham and Hickman.
COMPENSATION OF DIRECTORS
Directors who are officers or employees of the Company receive no
compensation as such for service as members of the Board of Directors or
Committees of the Board. A director who is not an officer or employee of the
Company receives a fee of $1,100 for each Board or Committee meeting attended,
and a monthly retainer of $750. In addition, each Committee Chairman receives a
monthly fee of $250. Also, pursuant to the United Wisconsin Services, Inc.
Equity Incentive Plan, each director is granted in connection with his or her
services 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. Options that were previously granted to directors of the Predecessor
Corporation under its Director Stock Option Plan who became directors of UWS
were converted into equivalent options to purchase shares of Common Stock. The
new options have the same difference of market value to exercise price as the
options they replaced.
-6-
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. Article II, Section 1(B) of the Company's Bylaws provides that
if a shareholder desires to make a nomination for the election of directors at
an annual meeting, 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
prior to the last Tuesday in May in the year of the applicable annual meeting.
The notice must set forth the shareholder's name and address as they appear on
the Company's books; the class and number of shares of Common Stock beneficially
owned by such shareholder; a representation that such shareholder is a holder of
record of shares entitled to vote at the meeting and intends to appear at the
meeting, in person or by proxy, to make the nomination; the name and residence
address of the nominee; a description of all arrangements or understandings
between the shareholder and the nominee (and any other person or persons)
pursuant to which the nomination is to be made; the written consent of the
nominee to serve if elected and certain other information. The notice must be
signed by the shareholder of record who intends to make the nomination (or his
or her duly authorized proxy or other representative) and must bear the date of
signature of such shareholder or representative. Article II, Section 2(B) 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 earlier
than 90 days and not later than the later of 60 days prior to the special
meeting or 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,
United Wisconsin Services, Inc., 401 West Michigan Street, Milwaukee, Wisconsin
53203, for further information.
EXECUTIVE COMPENSATION
Pursuant to the Service Agreement (as hereinafter described), certain
executive officers of the Company provide services to Blue Cross, and expenses
associated with those services are shared in accordance with the Service
Agreement. See "Certain Transactions." Compensation information includes total
compensation paid by the Company for services rendered to the Company and Blue
Cross. Also, the Predecessor Corporation had a similar Service Agreement with
Blue Cross. Information for 1998 reflects the annual and long-term compensation
for the Chief Executive Officer of the Company and the four other most-highly
compensated executive officers of the Company for services rendered in all
capacities to the Predecessor Corporation and Blue Cross and to the Company
and Blue Cross. Information for years prior to 1998 reflects the annual and
long-term compensation for the Chief Executive Officer of the Company and the
four other most-highly compensated executive officers of the Company at
December 31, 1998 for services rendered in all capacities to the Predecessor
Corporation and Blue Cross for the year ended December 31, 1997 and 1996.
Those executive officers performed substantially identical services for the
Predecessor Corporation and Blue Cross during those periods.
-7-
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------------------- -------------------------
AWARDS PAYOUTS
------ -------
SECURITIES
NAME AND PRINCIPAL UNDERLYING LTIP ALL OTHER
POSITION OTHER ANNUAL OPTIONS/SARS PAYOUTS COMPENSA-
YEAR SALARY(1) BONUS (1,2) COMPENSATION (3) (#)(4) (1)(5) TION (6)
Thomas R. Hefty 1998 $525,000 $154,350 $11,570 198,200 $64,985 $4,000
CHAIRMAN OF THE 1997 475,008 97,377 7,885 35,000 5,294 4,000
BOARD, PRESIDENT & 1996 410,028 177,542 9,355 30,000 -- 3,750
CHIEF EXECUTIVE
OFFICER
Roger A. Formisano (7) 1998 264,996 -- 3,817 112,304 35,164 4,000
FORMER EXECUTIVE 1997 244,536 22,008 55,217 2,894 4,000
VICE PRESIDENT & 1996 235,128 61,604 904 33,130 -- 3,750
CHIEF OPERATING 3,424
OFFICER; PRESIDENT OF
COMPCARE HEALTH
SERVICES INSURANCE
CORPORATION AND
MERIDIAN RESOURCE
CORPORATION
C. Edward Mordy 1998 211,080 39,261 3,555 70,000 28,095 4,000
VICE PRESIDENT & 1997 184,848 20,333 3,385 18,000 2,370 4,000
CHIEF FINANCIAL 1996 176,040 55,805 3,106 10,000 -- 3,750
OFFICER
Penny J. Siewert 1998 206,784 44,873 6,659 90,217 26,536 4,000
VICE PRESIDENT OF 1997 174,576 18,190 -- 33,130 2,061 4,000
REGIONAL SERVICES 1996 163,152 53,677 1,737 15,461 -- 3,017
Stephen E. Bablitch (8) 1998 184,044 36,073 -- 79,174 11,646 4,000
VICE PRESIDENT & 1997 166,416 21,634 615 33,130 -- 1,040
GENERAL COUNSEL 1996 40,002 20,000 -- 22,087 -- --
- --------------------
(1) Amounts include compensation earned and deferred at the election of
the named executive officer during the fiscal years indicated and paid
subsequently to the end of each fiscal year.
(2) Amounts represent bonuses earned under both the Predecessor
Corporation's and the Company's Profit Sharing Plan and Management
Incentive Plan.
(3) Amounts represent reimbursement for the payment of taxes and the
payout for unused personal days. The amounts indicated do not include
perquisites and the other personal benefits to the named executive
officers which for each such officer did not exceed the lesser of
$50,000 or 10% of the officer's total annual salary and bonus.
(4) Numbers reflect adjustments made in 1998 as a result of the
Distribution to the number of stock options granted by the Predecessor
Corporation prior to the Distribution.
(5) Amounts represent payments for the 1995-1997 LTIP Plan and prorata
payments for the 1996-1998 and 1997-1999 LTIP Plans which were
discontinued effective December 31, 1997.
(6) Amounts represent the Predecessor Corporation's and the Company's
matching contributions to the UWSI/BCBSUW 401(k) Plan.
(7) Mr. Formisano's employment with the Company ceased on February 26,
1999.
(8) Mr. Bablitch was hired by and named an executive officer of the
Predecessor Corporation on October 1, 1996.
-8-
The following table details the options granted to the executive officers listed
in the Summary Compensation Table:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------------------
# OF SECURITIES
UNDERLYING % OF TOTAL OPTION/
EXECUTIVE OPTIONS/ SARS GRANTED TO EXERCISE OR POTENTIAL REALIZABLE VALUE AT ASSUMED
SARS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ANNUAL RATES OF STOCK PRICE
(1)(2)(3)(4) FISCAL YEAR ($/SHARE) DATE APPRECIATION FOR OPTION TERM
5% ($) 10% ($)
-------------------------------------
Thomas R. Hefty 35,000 11.31 01/01/10 $ 315,040 $ 846,497
163,200 26.51% 7.19 09/27/10 933,864 2,509,249
Roger A. Formisano 77,304 11.72 01/01/10 721,048 1,937,422
35,000 15.02% 7.19 09/27/10 200,277 538,136
C. Edward Mordy 35,000 11.31 01/01/10 315,040 846,497
35,000 9.36% 7.19 09/27/10 200,277 538,136
Penny J. Siewert 55,217 11.72 01/01/10 515,033 1,383,869
35,000 12.07% 7.19 09/27/10 200,277 538,136
Stephen E. Bablitch 44,174 11.72 01/01/10 412,030 1,107,106
35,000 10.59% 7.19 09/27/10 200,277 538,136
- --------------------
(1) All options granted vest at the rate of 25% each year on the
anniversary of the grant date.
(2) The options with an expiration date of 01/01/10 were originally
granted on 01/02/98 by the Predecessor Corporation. The options with
an expiration date of 09/27/10 were granted by the Company on
09/28/98.
(3) Each option granted by the Predecessor Corporation with an expiration
date of 01/01/10 to Messrs. Hefty and Mordy was converted on September
25, 1998 into an option of one share of the Predecessor Corporation
Common Stock and one share of the Company Common Stock.
(4) The options granted by the Predecessor Corporation with an expiration
date of 01/01/10 to Messrs. Formisano and Bablitch and Ms. Siewert
were converted on September 25, 1998 into options of the Company
Common Stock and adjusted to provide equivalent value.
No Stock Appreciation Rights ("SARs") or options were exercised by any of the
executive officers listed in the Summary Compensation Table during 1998. The
number of unexercised SARs and options and the total value of unexercised
in-the-money SARs and options to purchase shares of UWS Common Stock at
December 31, 1998 are shown in the table below.
-9-
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT
OPTIONS/SARS AT FY-END (#) FY-END ($)
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
---- ---------------------------- -------------------------
Thomas R. Hefty 145,554 / 239,450 $ 285,419 / $ 244,392
Roger A. Formisano 92,817 / 170,282 71,354 / 52,413
C. Edward Mordy 70,446 / 88,500 142,707 / 52,413
Penny J. Siewert 28,438 / 126,935 -- / 52,413
Stephen E. Bablitch 19,327 / 115,064 -- / 52,413
- --------------------
(1) Options become immediately exercisable upon change in control of the
Company. 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 the Company's assets, or certain mergers,
consolidations or reorganizations.
DEFINED BENEFIT PENSION PLANS
The Company has provided a non-contributory defined benefit plan to its
employees pursuant to the UWSI/BCBSUW Pension Plan ("Pension Plan"). The
Pension Plan 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 credited monthly on the cash
balance account based on the yield on 10-year Treasury securities for the month
of October of the previous year. The Company has assumed sponsorship (with Blue
Cross) of the Pension Plan and the related trust and will continue to provide
benefits for all individuals who, immediately prior to the Effective Date of the
Distribution, were participants in the Pension Plan, taking into account all
service with the Predecessor Corporation.
In addition, the Company provides to executives defined benefits from the
UWSI/BCBSUW 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 per year of service (up to 30
years). The Company has assumed sponsorship of the SERP and all liabilities
with respect thereto. The approximate annual benefits for the following pay
classifications and years of service are expected to be as follows:
-10-
PENSION PLAN TABLE
YEARS OF SERVICE
---------------------------------------------------
REMUNERATION 15 20 25 30 or more
$125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000
150,000 45,000 60,000 75,000 90,000
175,000 52,500 70,000 87,500 105,000
200,000 60,000 80,000 100,000 120,000
225,000 67,500 90,000 112,500 135,000
250,000 75,000 100,000 125,000 150,000
275,000 82,500 110,000 137,500 165,000
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
The persons named in the Summary Compensation Table have the following years of
credited service which includes all years of service with the Predecessor
Corporation: Mr. Hefty, sixteen years; Mr. Formisano, seven years; Mr. Mordy,
thirteen years; Ms. Siewert, twenty-two years; and Mr. Bablitch, two years.
MANAGEMENT REVIEW COMMITTEE REPORT ON
EXECUTIVE COMPENSATION
INTRODUCTION
The Management Review Committee of the Board of Directors ("Committee") was
constituted in September 1998 shortly after the Distribution was completed and
met twice thereafter in 1998. At its August 26, 1998 meeting, the entire Board
of Directors approved compensation decisions for the Chief Executive Officer and
the next four most highly compensated executive officers for the remainder of
1998 in amounts equal to those that had been set by the Predecessor Corporation.
Accordingly, substantially all of the compensation decisions for the Chief
Executive Officer and the next four most highly compensated executive officers
were as the result of decisions made by the Predecessor Corporation's Management
Review Committee ("Predecessor Committee"), which performed similar functions to
those performed by the Company's Management Review Committee. The Predecessor
Corporation report on executive compensation is included here since it served as
the basis for the majority of compensation decisions, but the members of the
Committee are only signing this report with respect to compensation decisions
made after the Distribution. The Company's Management Review Committee did make
compensation decisions relating to 1998 annual incentive compensation paid in
1999 and special distribution related stock option awards. A brief Company's
Management Review Committee report on compensation is also included.
-11-
PREDECESSOR COMMITTEE REPORT
The Predecessor Committee, which was composed of four independent,
non-employee directors, established and directed the administration of all
programs under which executive benefits were provided and compensation was
paid or awarded to the Predecessor Corporation's executive officers. In
addition, the Predecessor Committee evaluated executive officer performance
and assessed the overall effectiveness of the Predecessor Corporation's
executive compensation programs.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Predecessor Corporation's executive compensation program was
designed to align closely executive compensation with corporate performance
and total return to shareholders. The Predecessor Corporation had developed
an overall compensation philosophy and implemented Plans that were designed
to tie a significant portion of executive compensation to the Predecessor
Corporation's success in meeting specified performance goals and appreciation
in the Common Stock price.
The overall objectives of this compensation philosophy were:
- - To attract and retain the executive talent required to attain the
Predecessor Corporation's goals;
- - To motivate these executives to achieve the goals of the Predecessor
Corporation's business strategy;
- - To link executive and shareholder financial interests through equity-based
long-term incentive plans; and
- - To provide a compensation package that recognizes individual contributions
and overall business results.
Each year the Predecessor Committee conducted a full review of the
Predecessor Corporation's executive compensation program to ensure that pay
opportunities were competitive with the current market and that there was
appropriate linkage between Predecessor Corporation's performance and executive
compensation. During 1998, this process included consultation with Hewitt
Associates ("Hewitt") throughout the year on such issues as base salaries, stock
option awards, and overall compensation. The Predecessor Committee's review
included a comparison of the Predecessor Corporation's executive compensation
against a peer group with which the Predecessor Corporation competes for
business and executive talent. The Predecessor Committee believed that the
Predecessor Corporation's competitors for executive talent included many types
of companies. Therefore, the Predecessor Committee evaluated all relevant
sources for executive talent in assessing overall competitiveness. Consequently,
the peer group used for the compensation analysis included, but extended beyond,
the companies noted in the Performance Graph included in this Proxy Statement.
In December 1997, in conjunction with Hewitt, the Predecessor Corporation
reviewed its compensation philosophies and compensation objectives. In addition,
the Predecessor Corporation undertook a thorough review of the Plans in order to
assess the most effective compensation tools for:
- - Linking pay programs to current and future business strategies and
performance; and
- - Attracting, retaining and motivating key executives in the intensely
competitive market for exceptional executive talent among managed care
employers specifically and all employers generally.
As a result of this review, the Predecessor Committee took particular note
that executive compensation had fallen below levels deemed appropriate by the
Predecessor Committee when compared to peer group compensation levels.
Accordingly, the Predecessor Committee decided to set compensation opportunities
at the 50th percentile of the market for comparable positions at comparable
companies. The Predecessor Corporation's compensation programs were then
designed to be dependent on performance, and individual pay delivered from these
programs would be higher or lower than the 50th percentile of the market
depending on that performance.
-12-
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
(exclusively nonqualified Common Stock options since the long-term cash
incentive plans were discontinued effective December 31, 1997). The Predecessor
Corporation's decisions, with respect to each of these elements are discussed
below. While the elements of compensation described in this Report are
considered separately, the Predecessor Committee took into account the full
compensation package afforded by the Predecessor Corporation to the individual,
including salary, incentive compensation, pension benefits, supplemental
retirement benefits, insurance and other benefits. In reviewing the individual
performance of the executives whose compensation is detailed in this Proxy
Statement, the Predecessor Committee took into account the views of Mr. Hefty,
the Predecessor Corporation's Chief Executive Officer, for positions other than
his own.
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits a
publicly held corporation's deductions for certain executive compensation in
excess of $1 million in taxable years beginning after December 31, 1993. Certain
performance-based compensation is exempted from the $1 million limitation. In
1998, none of the Predecessor Corporation's and the Company's executives
received compensation in excess of $1 million for purposes of Section 162 (m)
and all 1998 executive compensation is fully deductible. The Predecessor
Committee had, however, reviewed Section 162 (m) and considered its impact on
the Predecessor Corporation's future executive compensation Plans.
BASE SALARY
Base salaries for executive officers were determined initially by evaluating and
comparing the responsibilities of their positions and experiences relative to
the competitive marketplace for executive talent. Salary adjustments were
determined by evaluating the performance of the Predecessor Corporation 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, such unit's financial results were also a
major consideration. The Predecessor Committee, where appropriate, considered
non-financial performance measures such as increase in market share, gains in
administrative efficiency, improvements in product quality, and improvements
in relations with customers, suppliers, and employees.
In establishing 1998 base salaries for the Predecessor Corporations's
executives, the Predecessor Committee considered competitive data which
indicated that the base salaries of the Predecessor Corporation's executives
were below competitive levels. Accordingly, the executive officers, excluding
the CEO, received base salary increases of between 8.4% and 18.5%.
ANNUAL INCENTIVE COMPENSATION
PROFIT SHARING PROGRAM
The Predecessor Corporation had annually established a Profit Sharing Plan
for all employees who were employed with the Predecessor Corporation for the
entire calendar year. The United Wisconsin Services, Inc. 1998 Profit Sharing
Plan (the "Profit Sharing Plan") compensated employees based on corporate
profitability, on individual business unit or regional area profitability and on
the attainment of high levels of customer satisfaction, all measured against
targets set at the beginning of the year. The Profit Sharing Plan had been
established by the Predecessor Corporation but adopted by the Company.
Under the corporate profitability goal, the Profit Sharing Plan was
designed to pay each employee from 0% to 7% of base salary depending on the
attainment of specified profit levels. For employees to receive the 7% payout in
1998, the Predecessor Corporation and Blue Cross had to attain combined net
income, excluding net income or loss from extraordinary items, of $51.6 million
or more. 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.
-13-
Individual business unit or regional area financial performance also was
measured under the "Local Component" of the Plan, with employees eligible to
receive an additional payout of up to 7% of compensation on the "Local
Component." The Profit Sharing Plan also contained a customer satisfaction
component which enabled employees to earn up to an additional 7% of annual
compensation for achievement of high customer satisfaction levels, generally in
excess of 94.9%. In total, the Profit Sharing Plan paid the executives
described herein between 0% and 5.3% of annual compensation. This compensation
was paid in 1999.
MANAGEMENT INCENTIVE PLAN
The Predecessor Corporation's executive officers were eligible for an
annual performance bonus under the Management Incentive Plan. The Management
Incentive Plan had been established by the Predecessor Corporation but
adopted by the Company. The bonus paid from this Plan had two components:
the Corporate Component and the Individual Performance/Profit Sharing
Component. The Corporate Component was equal to one times the executive's
total payout from the Profit Sharing Plan (two times the Profit Sharing
payout for the CEO) as described above.
The Individual Performance/Profit Sharing Component had two parts. First,
individual performance objectives were established for each eligible executive,
including the CEO. These individual objectives could include both financial
and non-financial measures related to the performance of the business units or
corporate departments for which the executive was responsible.
The second part of the Individual Performance/Profit Sharing Component was
based on the executive's payout from the Local Component of the 1998 Profit
Sharing Plan. Bonus payments were made according to a schedule that correlates
percentages of base salary paid under the Local Component of the Profit Sharing
Plan with specific bonus amounts.
Bonus amounts could range from 0% to 39% of annual compensation for
executives other than the CEO (up to 21% from the Corporate Component and up to
18% from the Individual Performance/Profit Sharing Component) and from 0% to 72%
of annual compensation for the CEO (up to 42% from the Corporate Component and
up to 30% from the Individual Performance/Profit Sharing Component).
LONG-TERM INCENTIVE COMPENSATION
The Predecessor Corporation's executive compensation strategy is to provide
long-term compensation at a competitive level for the managed care market.
LONG-TERM INCENTIVE PLAN
The Predecessor Company had employed a Long-Term Incentive Plan ("LTIP")
for the executive officers of the Predecessor Corporation. The LTIP was based on
the achievement of certain growth objectives, including improved surplus and
premium revenue growth. Consistent with its review of total executive
compensation, the Predecessor Committee had decided to provide long-term
incentive opportunities solely through equity-based vehicles starting in 1998.
The remaining performance cycles, both 1996-1998 and 1997-1999, under the LTIP
were discontinued effective December 31, 1997 and pro rata payouts were made to
the executives. Payouts from the Predecessor Corporation's discontinued LTIPs
for executives other than the CEO ranged from $11,646 to $32,270.
STOCK OPTIONS
The Predecessor Committee was responsible for administering the
Predecessor Corporation's stock option program, which was designed to
motivate employees to maximize shareholder value and maintain a medium to
long-term perspective. Option grants were made at the fair market price 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.
-14-
As discussed previously, in December 1997 the Predecessor Corporation,
in conjunction with Hewitt, conducted a thorough review of all of its current
compensation programs. The results of this study demonstrated that UWS's
long-term incentive compensation was significantly below market levels. As a
result, the Predecessor Committee decided to increase grant sizes in 1998 in
order to make UWS's long-term incentive component of total compensation more
competitive when viewed relative to the market, and as mentioned previously,
to enhance links between the fortunes of UWS shareholders and key executives.
When determining the size of the option grants made to executives, the
Predecessor Committee considered the results of the competitive market
compensation survey performed by Hewitt which focused on the managed care and
Blue Cross markets. The Predecessor Committee also considers its own evaluation
of the executives' past and prospective contributions to the success of the
Company, anticipated performance requirements and contributions of each
executive officer, and historical option award data. Based on all of this
information, the Predecessor Committee awarded options on January 2, 1998
exercisable for 77,304 shares of the Predecessor Corporation's Common Stock to
Mr. Formisano and Mr. Mordy, 55,217 shares of the Predecessor Corporation's
Common Stock to Ms. Siewert and 44,174 shares of the Predecessor Corporation's
Common Stock to Mr. Bablitch. The options awarded to Mr. Mordy were
subsequently converted on September 25, 1998 into an equal number of options of
Predecessor Company Stock and Company Common Stock. The options awarded to
Messrs. Formisano and Bablitch, and Ms. Siewert were subsequently converted on
September 25, 1998 into options of Company Common Stock and adjusted in number
to provide equivalent value. The award to the CEO is discussed below.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Hefty's annual cash compensation for 1998 included base salary, profit
sharing, and management incentive bonus for a total of $679,350. Some elements
of Mr. Hefty's annual cash compensation were determined by the Predecessor
Committee and other elements were determined by the Company's Committee. The
following information discusses those elements determined by the Predecessor
Committee.
Mr. Hefty's base salary in 1997 was approximately 65% of the average base
salary for comparable positions, according to the previously mentioned Hewitt
compensation survey. Mr. Hefty's base salary for 1998 was increased to an
amount which represented approximately 72% of the December 1997 estimated market
value of his position.
In addition to base salary, Mr. Hefty received 4.8% of his base salary
under the Profit Sharing Plan based on the Predecessor Corporation's and Blue
Cross's return on equity of 5.9% and Customer Satisfaction levels.
In 1998, Mr. Hefty received a payout of $59,692 from the Predecessor
Corporation's discontinued 1996-1998 and 1997-1999 LTIPs and an option to
purchase 35,000 shares of the Predecessor Corporation's Common Stock on January
2, 1998.
COMPANY'S COMMITTEE REPORT
The Company's Committee is comprised of the same four independent,
non-employee directors as the Predecessor Committee. The Committee, like the
Predecessor Committee, establishes and directs the administration of all
programs under which executive benefits are provided and compensation is paid
or awarded to the Company's executive officers. Additionally, the Committee
evaluates executive officer performance and assesses the overall
effectiveness of the Company's executive compensation programs.
The Company's Committee expressly adopted the compensation philosophy and
objectives of the Predecessor Corporation. The Committee also expressly decided
to continue the process of conducting a full review of the Company's executive
compensation programs to ensure that pay opportunities are competitive with the
current market and that there is appropriate linkage between the Company's
performance and executive compensation, including consultation with Hewitt
throughout the year on such issues as base salaries, annual incentive
compensation, stock option awards, and overall compensation.
BASE SALARY
All base salary decisions for the Company's officers were essentially made
by the Predecessor Committee.
-15-
ANNUAL INCENTIVE COMPENSATION
PROFIT SHARING PROGRAM
As mentioned previously, the Profit Sharing Plan had been established by
the Predecessor Corporation but adopted by the Company. In total, the Profit
Sharing Plan paid the CEO and the next four most highly compensated officers
between 0% and 5.3% of annual compensation. This compensation was paid in 1999.
MANAGEMENT INCENTIVE PLAN
Similar to the Profit Sharing Plan, the Management Incentive Plan had been
established by the Predecessor Corporation but adopted by the Company. As
discussed previously, the bonus paid from this Plan has two components: the
Corporate Component and the Individual Performance/Profit Sharing Component.
This section will discuss the Individual Performance/Profit Sharing Component
since the Committee determined a significant portion of the bonus paid from this
Component.
The Individual Performance/Profit Sharing Component has two parts. First,
individual performance objectives are established for each eligible executive.
The Predecessor Committee, in conjunction with the CEO, established these
individual performance objectives. These individual objectives can include both
financial and non-financial measures related to the Performance of the business
units or corporate departments for which the executive is responsible. To
determine how well executives other than the CEO have performed on their
individual performance objectives, the Committee considers input from the CEO as
well as other relevant factors. Not all individual performance objectives are
quantifiable, and the Committee did not assign quantitative relative weights to
different factors or follow mathematical formulae. Therefore, the Committee
used discretion in evaluating the executives' achievements of their individual
performance objectives. Individual performance objectives were also established
for the CEO by the Predecessor Corporation. The Committee evaluates all
relevant data to determine to what extent Mr. Hefty has met his performance
expectations. Again, the Committee uses its discretion in making this
determination.
The second part of the Individual Performance/Profit Sharing Competent is
based on the executives' payout from the Local Component of the 1998 Profit
Sharing Plan. Bonus payments are made according to a schedule that correlates
percentages of base salary paid under the Local Component of the Profit Sharing
Plan with specific bonus amounts.
Bonus amounts can range from 0% to 39% of annual compensation for
executives other than the CEO (up to 21% from the Corporate Component and up to
18% from the Individual Performance/Profit Sharing Component) and from 0% to 72%
of annual compensation for the CEO (up to 42% from the Corporate Component and
up to 30% from the Individual Performance/Profit Sharing Component). For
executives to earn the maximum award, they must have achieved outstanding
results on each of their individual goals; the profitability of the business
unit or regional area to which they are assigned must have reached an
exceptional level; and the Predecessor Corporation and Blue Cross must have
achieved a combined return on equity, excluding net income or loss from
extraordinary items, of 22.0% or more. In 1998, the Predecessor Corporation and
Blue Cross's combined return on equity, as defined by the Plan documents, was
5.9%. 1998 performance bonus awards for the executives discussed herein, other
than the CEO, ranged from 0% to 14.8% of annual compensation. These awards were
paid in 1999.
-16-
LONG-TERM INCENTIVE COMPENSATION
STOCK OPTIONS
The Committee awarded special, one-time distribution related grants of
options exercisable for 35,000 shares of Common Stock to Mr. Formisano, Mr.
Mordy, Ms. Siewert, and Mr. Bablitch on September 28, 1998. The award to the
CEO is discussed below.
CHIEF EXECUTIVE OFFICER COMPENSATION
As previously disclosed, Mr. Hefty's annual cash compensation for 1998
included base salary, profit sharing, and management incentive bonus for a total
of $679,350. Those elements paid in 1999 based on 1998 performance are
discussed below.
With respect to annual incentive compensation, Mr. Hefty received 4.8%of
his base salary under the Profit Sharing Plan based on the Predecessor
Corporation's return on equity of 5.9% and Customer Satisfaction levels. Under
the Management Incentive Plan, Mr. Hefty was awarded 24.6% of his 1998 base
salary based on the Predecessor Corporation's and Blue Cross's financial results
and his achievement of individual performance goals set at the beginning of the
year.
In determining the individual performance portion of Mr. Hefty's annual
incentive award, the Committee considered several events which evidenced his
personal contributions to the Company and its operating performance. These
factors include an increase of nearly 20% in after-tax earnings for the Company,
with the notable increase in HMO earnings; an after-tax return on shareholder
equity of 28%; a successful distribution by American Medical Security Group,
Inc.; the acquisitions of four companies, two now within American Medical
Security Group and two now within the Company; and efforts undertaken to improve
investor relations and shareholder communications.
Mr. Hefty also received a special distribution related award of an option
to purchase 163,200 shares of Common Stock on September 28, 1998.
CONCLUSION
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 various 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. We will
continue to monitor the effectiveness of the Company's total compensation
program to meet the ongoing needs of the Company.
James L. Forbes, Chairman
Richard A. Abdoo
Michael D. Dunham
James C. Hickman
17
CERTAIN TRANSACTIONS
SERVICE AGREEMENT. The Company and Blue Cross have entered into the
Service Agreement with respect to the reciprocal provision of certain services,
including sales and marketing, rental of office space, computerized data
processing, claims processing, and legal, investment, actuarial and other
management services. The company receiving a service is obligated to pay the
provider thereof the approximate cost for the service which varies depending
upon the particular service rendered, determined on either an allocated cost
basis or based upon direct costs. If the recipient can obtain any of the
services under more favorable terms by performing the services itself or by
procuring them from a third party, it is not obligated to renew the Service
Agreement for those services if the provider is unwilling to substantially match
such terms. However, the Company agreed to purchase claims processing services
from Blue Cross pursuant to certain arrangements with Electronic Data Systems
Corporation ("EDS"). Pursuant to the Service Agreement, the Company received
net payments of $5.8 million, $5.3 million and $5.8 million from Blue Cross for
the years ended December 31, 1996, 1997 and 1998, respectively. The Service
Agreement is in effect until December 31, 1998 and automatically renews for a
period of one year on each succeeding January 1, subject to negotiation of the
services to be provided and the rates and allocations set forth therein.
Pursuant to Wisconsin law, the Service Agreement is filed with the Office of the
Commissioner of Insurance for the State of Wisconsin for its review to determine
whether the agreement is reasonable and fair to the interests of the insurance
companies which are parties to the agreement.
In 1984, Blue Cross entered into with Electronic Data Corporation ("EDS") a
servicing agreement (the "EDS Servicing Agreement") whereby EDS would develop
integrated processing systems, maintain computer hardware and software, and
provide data processing personnel. Key systems covered by this agreement
included claims, membership, actuarial, commission, general ledger, accounts
payable, and fixed assets. The term of the EDS Servicing Agreement runs through
December 31, 1999, with an option to terminate upon one year's prior written
notice, deliverable at any time. Blue Cross exercised its early termination
rights for the claims, actuarial, commission, general ledger, accounts payable,
and fixed assets. Blue Cross will continue to receive membership services from
EDS. All claims processing functions were converted to the computer system
operated by Blue Shield of South Carolina ("BSSC") effective September 30, 1998.
Blue Cross purchased software and began processing the general ledger, accounts
payable, and fixed asset systems on January 1, 1998. For the years ended
December 31, 1996, 1997, and 1998, the Company paid approximately $3.5 million,
$3.7 million, and $2.7 million, respectively, for services pursuant to the EDS
Servicing Agreement. The Company paid approximately $1.6 million for claims
processing services obtained from BSSC for the year-ended December 31, 1998.
HEALTH AND OTHER BENEFITS TO THE EMPLOYEES OF BLUE CROSS. Certain
subsidiaries of the Company provide health, life and other insurance benefits to
the employees of Blue Cross. Premium revenue received from Blue Cross for these
services totaled $4.4 million, $4.5 million and $4.5 million in 1996, 1997 and
1998, respectively. In addition, Blue Cross provides health insurance to
certain of the Company's employees.
BCBSUW LOAN. In connection with the Distribution, the Company assumed a
debt obligation of the Predecessor Corporation to Blue Cross in the principal
amount of $70.0 million. On October 30, 1996, the Predecessor Corporation
borrowed $70.0 million from Blue Cross to fund the cash portion of the merger
consideration in connection with the merger of American Medical Security, Inc.
into the Predecessor Corporation. The Predecessor Corporation pledged the
common stock of certain of its subsidiaries as collateral for the loan.
Interest only is payable quarterly at a rate equal to KOBOR plus 125 basis
points, adjusted quarterly. The entire principal balance is due October 30,
1999.
BCBSUW INTENDED PURCHASE OF ADDITIONAL SHARES OF COMMON STOCK. Blue Cross
owns 37.8% of the issued and outstanding shares of Common Stock. One of the
primary reasons for effectuating the Distribution was so that the managed care
business can use the Blue Cross and Blue Shield service marks in connection with
its products and services. In order to use the service marks, one of the
requirements is that a Blue Cross plan must "control" the company (meaning that
the plan must directly or indirectly own more than 50% of the stock of the
company and must have operational control over the company). Therefore, Blue
Cross intends to purchase additional shares of Common Stock to bring its overall
direct and indirect ownership of the Company to approximately 51%. The purchase
price for the shares of Common Stock to be purchased directly from the Company
will be based on the market price of the shares of Common Stock and an
independent third party valuation, and will be paid through the cancellation
of a
18
corresponding portion or all of the $70.0 million Company indebtedness to Blue
Cross or in cash. Blue Cross may purchase some of the shares of Common Stock in
the open market. The intended purchases are subject to the receipt of OCI
approval and may be subject to the receipt of the Company shareholder approval
as a result of certain New York Stock Exchange rules.
REGISTRATION RIGHTS. Pursuant to an agreement with the Company, Messrs.
Wallace J. Hilliard and Ronald A. Weyers have the following rights:
(i) Messrs. Hilliard and Weyers are entitled to make up to two
requests that the Company register at least 50% of the then
outstanding shares of Common Stock held by them, which the Company is
obligated to use its best efforts to do unless (a) the request comes
during the period 45 days prior to the estimated date of filing and
180 days following the effective date of the Company's own
registration of shares of Common Stock pertaining to an underwritten
public offering; (b) the Company has already effected two such
registrations pursuant to Messrs. Hilliard's and Weyers's requests;
(c) the filing of the registration statement could jeopardize or delay
a material transaction contemplated by the Company or would require
the disclosure of material information that the Company needs to
preserve as confidential; or (d) the Company is unable to comply with
the requirements of the Commission; and
(ii) Messrs. Hilliard and Weyers are entitled to make up to two
requests that the Company include Messrs. Hilliard's and Weyers's
shares of Common Stock in an offering of shares of Common Stock
otherwise being registered upon being notified by the Company that the
Company is registering shares of Common Stock in connection with a
public offering for case on a form that also would permit the
registration of Messrs. Hilliard's and Weyers's shares of Common
Stock.
These registration rights expire upon the earlier of April 1, 2001 or upon
the date on which Messrs. Hilliard and Weyers in the aggregate own less than
three percent of the outstanding shares of Common Stock.
Messrs. Hilliard and Weyers have also agreed that, until December 3, 2006,
they will not acquire, or propose to acquire (i) any Company securities (other
than pursuant to the exercise of stock options) with the power to vote for the
election of directors (the "Voting Securities"), or (ii) any rights or options
to acquire any Voting Securities, if any of such acquisitions would require
regulatory approval, application or notification other than as required by the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition,
Messrs. Hilliard and Weyers agreed that, until December 3, 1999, they will not
(i) make or participate in any solicitation of proxies (within the meaning of
Rule 14a-1 of the Exchange Act) or initiate any shareholder proposals with
respect to the Company; (ii) make any proposals with respect to a merger or
other business combination, sale or transfer of assets, liquidation or other
extraordinary corporate transaction of the Company; or (iii) for, join, or
participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange
Act) with respect to Company securities or seek to exercise control or influence
over management, the Board of Directors, or the corporate policies of the
Company. Finally, Messrs. Hilliard and Weyers agreed that, until December 3,
2006, they will vote their shares of Common Stock in accordance with Blue
Cross's directions on matters submitted to a shareholder vote which pertain to,
or are a result of, BlueCross BlueShield Association rules, regulations, or
marketing issues.
SECTION 16 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 and the exchange on which the Common
Stock is traded. 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, 1998, its
officers and directors and Blue Cross complied with all applicable Section 16(a)
filing requirements.
AUDITORS
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The Audit Committee of the Board of Directors has selected Ernst & Young
LLP as independent auditors for the Company for the year ending December 31,
1998. Ernst & Young has examined the accounts of the Company since 1988.
Representatives of Ernst & Young will be present at the Meeting, will be
available to respond to questions and may make a statement if they so desire.
OTHER MATTERS
The Company knows of no other matters to come before the Meeting. If any
other matters properly come before the Meeting, 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.
SHAREHOLDER PROPOSALS
Pursuant to Article II of the Company's Bylaws which provides procedures by
which shareholders may raise matters at annual meetings, proposals which
shareholders intend to present at the 2000 Annual Meeting of Shareholders must
be received by the Company between February 1, 2000 and March 2, 2000 to be
presented at that meeting. To be eligible for inclusion in the proxy material
for that meeting, shareholder proposals must be received by December 29, 1999.
UNITED WISCONSIN SERVICES, INC.
Stephen E. Bablitch
SECRETARY
Milwaukee, Wisconsin
April 26, 1999
A COPY (WITHOUT EXHIBITS) OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1998, WILL BE PROVIDED WITHOUT CHARGE TO EACH RECORD OR
BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK AS OF APRIL 16, 1999, ON THE
WRITTEN REQUEST OF SUCH PERSON DIRECTED TO: STEPHEN E. BABLITCH, SECRETARY,
UNITED WISCONSIN SERVICES, INC., 401 WEST MICHIGAN STREET, MILWAUKEE, WISCONSIN
53203.
20
UNITED WISCONSIN SERVICES, INC.
401 West Michigan Street, Milwaukee, WI 53203
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Thomas R. Hefty and C. Edward Mordy, and
each of them, proxies of the undersigned with power of substitution, to vote
all shares of the common stock the undersigned is entitled to vote at the
Annual Meeting of the Shareholders of United Wisconsin Services, Inc. to be
held on May 26, 1999 at 11:00 a.m., and at any adjournments thereof, as
indicated below.
The shares of common stock represented by this proxy will be voted as
directed. If no direction is specified, the shares of common stock will be
voted FOR Item 1.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY
-DETACH BELOW AND RETURN USING THE ENVELOPE PROVIDED-
UNITED WISCONSIN SERVICES, INC. 1999 ANNUAL MEETING
1. ELECTION OF DIRECTORS: (for term expiring in 2000)
1-Micheal D. Dunham
2-James L. Forbes
3-William C. Rupp, M.D.
/ / FOR all nominees listed to the left (except as specified below).
/ / WITHHOLD AUTHORITY to vote for all nominees listed to the left.
(Instructions: To withhold authority to vote for any indicated nominee, write
the numbers(s) of the nominee(s) in the box provided to the right / /
2. With discretionary power upon and all other business that may properly
come before the meeting and upon matters incident to the conduct of the
meeting.
The Board of Directors recommends a vote FOR the nominees as directors.
Check appropriate box Date_______________ NO. OF SHARES
indicate changes below:
Address Change? / / / /
Name Change? / /
Signature(s) in Box
Please sign exactly as your name appears on this proxy giving your full title
if signing as attorney or fiduciary. If shares are held jointly, each joint
owner should sign. If a corporation, please sign in full corporate name, by a
duly authorized officer. If a partnership, please sign in partnership name by
authorized person.