<PAGE>
As filed with the Securities and Exchange Commission on October 2, 2000
Registration No. 333-34750
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------
RIGHTCHOICE MANAGED CARE, INC.
(Exact Name of Registrant as Specified in its Charter)
--------------
Delaware 6324 43-0303080*
(State or Other (Primary Standard (IRS Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
1831 Chestnut Street, St. Louis, Missouri 63103, (314) 923-4444
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------
John A. O'Rourke
Chairman, President and Chief Executive Officer
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, Missouri 63103
(314) 923-4444
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
--------------
Copies to:
Angela F. Braly, Esq. John J. Riffle, Esq. Meredith B.
Executive Vice President and Cross, Esq.
General Counsel
Lewis, Rice & Fingersh, L.C.
500 N. Broadway Wilmer, Cutler &
RightCHOICE Managed Care,St. Louis, Missouri 63102 Pickering
Inc. (314) 444-7600 2445 M Street,
1831 Chestnut Street N.W.
St. Louis, Missouri 63103 Washington, D.C.
(314) 923-4444 20037
-------------- (202) 663-6000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
* This is the current Internal Revenue Service Employer Identification Number
for Blue Cross and Blue Shield of Missouri and will be the Internal Revenue
Service Employer Identification Number of the Registrant upon consummation of
the reorganization described in this Registration Statement.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
[Letterhead of RightCHOICE Managed Care, Inc.]
October 4, 2000
Dear Shareholder:
You are invited to attend a special meeting of shareholders of RightCHOICE
Managed Care, Inc. to be held at 1831 Chestnut Street, St. Louis, Missouri, at
9 a.m., local time, on , 2000.
The purpose of the special meeting is to consider and vote upon the
reorganization of RightCHOICE. Your board of directors has approved the
reorganization and recommends that you vote in favor of it.
The reorganization will settle litigation with the State of Missouri related
to Blue Cross and Blue Shield of Missouri and its ownership of RightCHOICE.
This is important to you as a RightCHOICE shareholder because RightCHOICE's
business would be adversely affected if we do not settle this litigation or
otherwise resolve it on satisfactory terms.
Your participation in the special meeting, in person or by proxy, is
important. Whether or not you plan to attend the special meeting in person,
please complete, sign, date and return the enclosed proxy card promptly in the
accompanying postage paid envelope. If you do not vote, you will have
effectively voted against the reorganization.
This document includes detailed information about the reorganization. Please
read this document carefully, including the section describing risk factors
that begins on page 20.
I look forward to your support.
Sincerely,
John A. O'Rourke
Chairman of the Board, President and
Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the New RightCHOICE shares to be issued
in the reorganization or determined if this document is accurate or adequate.
Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated October 4, 2000 and was first
mailed to shareholders on or about October 12, 2000.
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
1831 Chestnut Street
St. Louis, Missouri 63103
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 2000
A special meeting of shareholders of RightCHOICE Managed Care, Inc., a
Missouri corporation, will be held on , 2000, at 9 a.m., local time, at
the headquarters of RightCHOICE at 1831 Chestnut Street, St. Louis, Missouri.
We will hold the special meeting:
1. To approve the plan of merger of RightCHOICE with and into RightCHOICE
Managed Care, Inc., a Delaware corporation, and the Agreement and Plan
of Reorganization, dated as of March 14, 2000, by and among Blue Cross
and Blue Shield of Missouri, RightCHOICE, The Missouri Foundation For
Health and RightCHOICE Managed Care, Inc., a Delaware corporation. In
the merger:
. Each share of class A common stock outstanding immediately prior to
the effective time of the merger will be converted into the right to
receive one share of common stock of RightCHOICE Managed Care, Inc.,
a Delaware corporation, and
. Each share of class B common stock outstanding immediately prior to
the effective time of the merger will be cancelled. The one share of
common stock of RightCHOICE Managed Care, Inc., a Delaware
corporation, outstanding immediately prior to the effective time of
the merger will be converted into the right to receive a number of
shares of common stock of RightCHOICE Managed Care, Inc., a Delaware
corporation, equal to the number of shares of class B common stock
issued and outstanding immediately prior to the effective time of the
merger.
2. To transact such other business as may properly come before the meeting.
The reorganization agreement is Appendix A to this document. Approval and
adoption of the merger and the reorganization agreement requires (1) the
affirmative vote of the owners of two-thirds of the issued and outstanding
shares of class A common stock and class B common stock voting together as a
single class, which will be met by the commitment of Blue Cross and Blue Shield
of Missouri to vote for the reorganization, and (2) the affirmative vote of the
owners of a majority of the issued and outstanding shares of class A common
stock, excluding any shares held by Blue Cross and Blue Shield of Missouri or
any executive officer or director of Blue Cross and Blue Shield of Missouri or
RightCHOICE.
We do not expect that any party will bring any business other than the
proposal described in this notice at the special meeting or any adjournment or
postponement of the special meeting. Shareholders of record as of the close of
business on October 4, 2000 will be entitled to notice of and to vote at the
special meeting or any adjournments or postponements of the special meeting.
Your board of directors recommends that you vote FOR approval and adoption
of the plan of merger and the reorganization agreement, as described in detail
in this document. Failure to vote will have the same effect as a vote against
the reorganization.
By Order of the Board of Directors,
Angela F. Braly
Executive Vice President, General
Counsel and Secretary
October 4, 2000
Whether or not you plan to attend the special meeting, please complete, sign
and date the enclosed proxy and promptly return it in the accompanying postage
paid envelope. You may revoke your proxy at any time before the vote by
delivering to the corporate secretary of RightCHOICE a subsequently executed
proxy or a written notice of revocation or by voting in person at the special
meeting.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE REORGANIZATION............................. 1
SUMMARY.................................................................... 2
RISK FACTORS............................................................... 20
Risks Resulting From the Reorganization.................................. 20
Risks Related to Litigation.............................................. 26
FORWARD LOOKING STATEMENTS................................................. 28
SPECIAL MEETING............................................................ 29
Purpose of Special Meeting............................................... 29
Matters to be Considered................................................. 29
Record Date.............................................................. 29
Voting and Revocability of Proxies....................................... 29
Quorum................................................................... 30
Solicitation of Proxies.................................................. 30
Vote Required............................................................ 30
PROPOSED REORGANIZATION.................................................... 31
Overview of Reorganization............................................... 31
Pre-Reorganization Steps................................................. 32
Reorganization Steps..................................................... 32
Post-Reorganization Ownership Structure.................................. 33
Effective Time of Reorganization......................................... 34
Exchange of Certificates................................................. 34
Background of Reorganization............................................. 34
Recommendation of Your Board of Directors................................ 47
Reasons for Reorganization............................................... 47
Opinion of Warburg Dillon Read........................................... 48
Interests of Certain Persons in Reorganization........................... 52
Material Federal Income Tax Consequences................................. 54
Regulatory and Other Approvals........................................... 60
New York Stock Exchange Listing.......................................... 60
Resale of New RightCHOICE Common Stock................................... 60
Dissenters' Rights....................................................... 61
Accounting Treatment..................................................... 62
TERMS OF REORGANIZATION AGREEMENT.......................................... 63
Purpose.................................................................. 63
Agreements Before Reorganization is Completed............................ 63
Agreements After Reorganization is Completed............................. 65
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Conditions to Reorganization............................................. 67
Termination.............................................................. 71
TERMS OF SETTLEMENT AGREEMENT.............................................. 72
General.................................................................. 72
Primary Purpose.......................................................... 72
Additional Purposes...................................................... 72
Termination of Litigation................................................ 72
Termination of Settlement Agreement...................................... 75
No Admission of Liability................................................ 75
Binding Effect........................................................... 75
Approval of Stock Purchases.............................................. 75
Representations.......................................................... 75
Related Settlements...................................................... 76
TERMS OF VOTING TRUST AND DIVESTITURE AGREEMENT............................ 77
Purpose.................................................................. 77
Deposit of Shares........................................................ 77
Withdrawal of Shares..................................................... 77
Voting of Shares Held in Voting Trust.................................... 77
Standstill............................................................... 78
Divestiture Requirements................................................. 79
Extension of Divestiture Deadlines....................................... 80
Failure to Meet Divestiture Deadlines.................................... 80
Dividends................................................................ 80
Trustee Compensation and Qualifications.................................. 81
Termination of Voting Trust and Divestiture Agreement.................... 81
Litigation............................................................... 81
Acquisition Proposals.................................................... 81
TERMS OF REGISTRATION RIGHTS AGREEMENT..................................... 83
Purpose.................................................................. 83
Demand Registration Rights............................................... 83
Piggy-Back Registration Rights........................................... 85
Continuing Option to Purchase Foundation Shares.......................... 85
Holdback................................................................. 86
Registration Expenses.................................................... 86
Rule 144................................................................. 86
Private Sales............................................................ 87
TERMS OF INDEMNIFICATION AGREEMENT......................................... 88
Income Tax Indemnity..................................................... 88
Non-Income Tax Indemnity................................................. 88
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Directors' and Officers' Liability Insurance............................ 90
Net Worth............................................................... 90
Termination of Indemnification Agreement................................ 90
PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS............... 91
INFORMATION ABOUT RIGHTCHOICE............................................. 102
Business................................................................ 102
Properties.............................................................. 116
Legal Proceedings....................................................... 116
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 116
INFORMATION ABOUT BLUE CROSS AND BLUE SHIELD OF MISSOURI.................. 138
Business................................................................ 138
Properties.............................................................. 139
Legal Proceedings....................................................... 140
Management's Discussions and Analysis of Financial Condition and Results
of Operations.......................................................... 140
INFORMATION ABOUT NEW RIGHTCHOICE......................................... 150
General................................................................. 150
Ownership of New RightCHOICE Common Stock............................... 150
Directors of New RightCHOICE............................................ 153
Committees of Board of Directors........................................ 155
Compensation of Board of Directors...................................... 155
Executive Officers...................................................... 157
Executive Compensation and Other Information............................ 158
Certain Relationships and Related Transactions.......................... 165
INFORMATION ABOUT THE MISSOURI FOUNDATION FOR HEALTH...................... 166
NEW RIGHTCHOICE CERTIFICATE OF INCORPORATION AND BYLAWS................... 167
Introduction............................................................ 167
Authorized Stock........................................................ 167
Classified Board........................................................ 167
Qualification of Directors.............................................. 168
Removal of Directors.................................................... 168
Special Meetings of Shareholders........................................ 169
Indemnification......................................................... 169
Limitation on Liability for Breach of Fiduciary Duty.................... 169
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Limitations on Ownership................................................. 170
Cumulative Voting........................................................ 172
Preemptive Rights........................................................ 172
Amendments to Certificate of Incorporation............................... 172
Amendments to Bylaws..................................................... 173
Qualified Candidates..................................................... 173
Meetings of Shareholders................................................. 173
COMPARISON OF RIGHTS OF SHAREHOLDERS OF RIGHTCHOICE AND NEW RIGHTCHOICE.... 174
Introduction............................................................. 174
Authorized Stock......................................................... 174
Board of Directors....................................................... 174
Amendment of Charter..................................................... 176
Amendment of Bylaws...................................................... 177
Rights Upon Liquidation.................................................. 177
Voting Rights............................................................ 177
Preemptive Rights........................................................ 178
Power to Call Special Shareholder Meetings............................... 178
Quorum................................................................... 178
Shareholder Approval of Certain Business Combinations.................... 178
Indemnification.......................................................... 179
Limitation of Liability.................................................. 180
Dividends and Repurchases of Shares...................................... 180
Shareholder Voting on Mergers or Consolidations.......................... 181
Shareholder Voting on Sale of Substantially All Assets................... 182
Interested Director Transactions......................................... 182
Dissenters' and Appraisal Rights......................................... 182
Dissolution.............................................................. 183
LEGAL MATTERS.............................................................. 183
EXPERTS.................................................................... 183
WHERE YOU CAN FIND MORE INFORMATION........................................ 184
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
RightCHOICE.............................................................. F-2
Blue Cross and Blue Shield of Missouri................................... F-46
New RightCHOICE.......................................................... F-80
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S>
APPENDICES
Appendix A: Agreement and Plan of Reorganization (without exhibits)
Appendix B: Amended and Restated Settlement Agreement (without exhibits)
Appendix C: Form of Voting Trust and Divestiture Agreement
Appendix D: Form of Registration Rights Agreement
Appendix E: Form of Indemnification Agreement
Appendix F: New RightCHOICE Certificate of Incorporation
Appendix G: New RightCHOICE Bylaws
Appendix H: Opinion of Warburg Dillon Read LLC
Appendix I: Missouri Dissenters' Rights Statute
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE REORGANIZATION
Q: When do you expect to complete the reorganization?
A: We hope to complete the reorganization before the end of the year 2000 and
are working on completing it as quickly as possible. In order to complete
the reorganization, we need to obtain shareholder approval and numerous
regulatory and other approvals.
Q: What do I need to do now?
A: Indicate your vote on your proxy card, sign the proxy card and mail it in
the enclosed return envelope as soon as possible. Your board of directors
recommends that you vote FOR the reorganization.
Q: What happens if I do not vote?
A: If you do not vote or if you abstain from voting, you will have effectively
voted AGAINST the reorganization. The owners of at least a majority of the
outstanding shares of class A common stock must vote in favor of the
reorganization for its approval. We will exclude any shares owned by Blue
Cross and Blue Shield of Missouri and by any executive officer or director
of Blue Cross and Blue Shield of Missouri or RightCHOICE from this vote of
class A shareholders.
Q: What happens if I return a blank proxy card?
A: If you sign and mail back your proxy card but do not indicate how you want
to vote, the proxy holders will vote your shares in favor of the
reorganization.
Q: May I attend the special meeting in person?
A: Yes, you may attend the special meeting and vote your shares in person
rather than voting, signing and mailing back your proxy card.
Q: Can I revoke my proxy after I mail it?
A: Yes, you may take back your proxy at any time before the vote by following
the directions on page 29 of this document. Then you can either sign and
deliver a new proxy card or attend the special meeting and vote in person.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: No, not unless you give your broker instructions on how to vote. Your broker
will send you directions on how you can instruct your broker to vote. You
should instruct your broker how to vote by following your broker's
directions. If you wish to vote in person, you should obtain appropriate
authorization from your broker.
Q: Should I send in my stock certificates now?
A: No, if we complete the reorganization, we will send you instructions on how
to exchange your shares of class A common stock for shares of New
RightCHOICE common stock.
Q: Who can answer my questions about the reorganization?
A: Please contact our investor relations department at (314) 923-4831, or 1831
Chestnut Street, St. Louis, Missouri 63103, Attention: Investor Relations
Department, or e-mail us at [email protected]. If you e-mail us, please
provide a telephone number so that we can call you back. Because of various
regulations, we cannot respond by e-mail.
1
<PAGE>
SUMMARY
This brief summary only highlights what we believe is the most important
information about the reorganization. You should carefully read the entire
document, including the appendices, for a complete understanding of the
reorganization.
Reasons for Reorganization
(see page 47)
The principal reason RightCHOICE proposes to reorganize is to resolve
litigation with the Missouri Attorney General and the Missouri Department of
Insurance over Blue Cross and Blue Shield of Missouri's operation of
RightCHOICE since the 1994 reorganization of Blue Cross and Blue Shield of
Missouri. In the litigation, the Missouri Attorney General and the Missouri
Department of Insurance have alleged that Blue Cross and Blue Shield of
Missouri's operation of RightCHOICE as a for-profit subsidiary violates Blue
Cross and Blue Shield of Missouri's non-profit purposes.
We also expect the reorganization will enhance shareholder value by:
. Combining the business and operations of RightCHOICE and Blue Cross and
Blue Shield of Missouri,
. Creating efficiencies by eliminating duplicative expenses,
. Maintaining and stabilizing the license agreements with the Blue Cross
and Blue Shield Association for the use of the Blue Cross and Blue Shield
names and service marks,
. Improving the public image of the new combined company by establishing a
large public benefit foundation, and
. Improving relations with Missouri regulatory officials by resolving the
litigation.
Parties to Reorganization
RightCHOICE Managed Care, Inc.
a Missouri corporation
("RightCHOICE")
(see page 102)
1831 Chestnut Street
St. Louis, Missouri 63103
(314) 923-4444
RightCHOICE is the largest provider of managed care benefits in Missouri in
terms of number of members. RightCHOICE conducts its business under the name
Alliance Blue Cross Blue Shield and is an independent affiliate licensee of
the Blue Cross and Blue Shield Association. It has the exclusive right to use
the Blue Cross and/or Blue Shield names and service marks for all of the
managed care products and services that it offers in the eighty-five Missouri
counties that comprise its service area. This service area includes St. Louis
but does not include Kansas City.
Blue Cross and Blue Shield of Missouri
(see page 138)
1831 Chestnut Street
St. Louis, Missouri 63103
(314) 923-4444
Blue Cross and Blue Shield of Missouri is a non-profit health services
corporation. It offers underwritten and self-funded insurance products using
the Blue Cross and Blue Shield names and service marks to approximately
164,000 members. Although it offers its services and products in all eighty-
five Missouri counties that comprise its service area, the majority of its
members reside in the St. Louis, Missouri metropolitan area. It owns all of
the outstanding shares of class B common stock, which represents approximately
80% of the equity and 97% of the voting power of RightCHOICE.
2
<PAGE>
The Missouri Foundation For Health
(see page 166)
P.O. Box 726
Jefferson City, Missouri 65102
The State of Missouri recently established The Missouri Foundation For
Health as a non-profit public benefit corporation as part of the settlement.
The Foundation will serve the needs of underinsured and uninsured Missourians
in Blue Cross and Blue Shield of Missouri's service area. We expect the
Foundation to fund its health care purposes with the approximately $13 million
in cash payments it will receive from the settlement and by selling in an
orderly fashion the New RightCHOICE common stock it will receive in the
reorganization.
RightCHOICE Managed Care, Inc.
a Delaware corporation
("New RightCHOICE")
(see page 150)
1831 Chestnut Street
St. Louis, Missouri 63103
(314) 923-4444
The Missouri Foundation For Health recently organized New RightCHOICE as a
Delaware corporation as part of the settlement.
If we complete the reorganization, you will become a shareholder of New
RightCHOICE, and RightCHOICE will no longer exist. At that time, New
RightCHOICE's business operations and assets and liabilities initially will
include:
. The combined business of RightCHOICE and the insurance and other business
of Blue Cross and Blue Shield of Missouri, and
. The combined assets and liabilities of RightCHOICE and Blue Cross and
Blue
Shield of Missouri, except for:
-- approximately $13 million Blue Cross and Blue Shield of Missouri and
New RightCHOICE will pay to The Missouri Foundation For Health as
part of the settlement, and
-- the shares of class B common stock, which New RightCHOICE will cancel
and the value of which New RightCHOICE will transfer to the
Foundation in the form of shares of New RightCHOICE common stock.
Reorganization Steps
(see page 32)
The reorganization consists of the following four steps that the parties
will complete in the following order on the same day:
. Blue Cross and Blue Shield of Missouri will transfer to a subsidiary of
RightCHOICE its insurance contracts and cash and receivables equal to the
liabilities assumed by the subsidiary under the insurance contracts and
the amount, if any, necessary to meet statutory reserve requirements,
. Blue Cross and Blue Shield of Missouri will convert from a Missouri non-
profit non-stock health services corporation to a Missouri for-profit
stock corporation,
. Blue Cross and Blue Shield of Missouri will reincorporate in Delaware by
merging with New RightCHOICE, and
. RightCHOICE will merge with New RightCHOICE.
Conversion of Stock
(see page 33)
As a result of RightCHOICE's merger with New RightCHOICE:
. New RightCHOICE will convert each share of class A common stock that you
own into one share of New RightCHOICE common stock, and
. New RightCHOICE will cancel each share of class B common stock and issue
to The Missouri Foundation For
3
<PAGE>
Health one share of New RightCHOICE common stock for each cancelled share
of class B common stock.
Ownership of New RightCHOICE Following Reorganization
(see page 33)
Once we complete the reorganization:
. The class A shareholders will own one share of New RightCHOICE common
stock for each share of class A common stock that they owned immediately
before the reorganization, equal in the aggregate to approximately 20% of
the equity of New RightCHOICE.
. The Missouri Foundation For Health will own 14,962,500 shares of New
RightCHOICE common stock, which is the same number of shares of class B
common stock owned by Blue Cross and Blue Shield of Missouri immediately
before the reorganization and approximately 80% of the equity of New
RightCHOICE.
. Unlike the class B common stock, which has ten votes per share, each
share of New RightCHOICE common stock has one vote per share. Therefore,
the former class A shareholders will own approximately 20% of the voting
power of New RightCHOICE, and The Missouri Foundation For Health will own
approximately 80% of the voting power of New RightCHOICE. The voting
rights of the Foundation will be subject to limits described in this
document.
Vote Required
(see page 30)
Approval of the reorganization requires the affirmative vote of the owners
of:
. Two-thirds of the outstanding shares of class A common stock and class B
common stock voting together as a single class, and
. A majority of the outstanding shares of class A common stock voting as a
class separate and apart from the class B common stock. We will exclude
from this vote any shares of class A common stock owned by Blue Cross and
Blue Shield of Missouri and by any executive officer or director of Blue
Cross and Blue Shield of Missouri or RightCHOICE.
At the special meeting, Blue Cross and Blue Shield of Missouri will vote all
of the shares of class B common stock in favor of the reorganization.
Based upon information as of October 2, 2000, the owners of shares of
class A common stock must vote in favor of the reorganization at the special
meeting for approval.
Failure to Complete Reorganization
(see page 26)
If we do not complete the reorganization before December 31, 2000 and the
parties do not extend this deadline or otherwise settle the litigation, the
Missouri Attorney General and the Missouri Department of Insurance may be able
to enforce the judgments the court previously entered against Blue Cross and
Blue Shield of Missouri which Blue Cross and Blue Shield of Missouri may no
longer appeal. If the Missouri Attorney General and Missouri Department of
Insurance successfully enforce these judgments, RightCHOICE could suffer the
following material adverse consequences:
. The court could order the dissolution of Blue Cross and Blue Shield of
Missouri,
. The Blue Cross and Blue Shield Association could terminate the valuable
licenses that provide RightCHOICE use of the Blue Cross and Blue Shield
names and service marks,
. The Blue Cross and Blue Shield Association could impose a significant
monetary penalty,
4
<PAGE>
. RightCHOICE could default under its major credit facility, or
. RightCHOICE could suffer other material adverse consequences.
If the court dissolves Blue Cross and Blue Shield of Missouri and liquidates
its assets, one or more third parties would acquire the 14,962,500 shares of
class B common stock, which could provide one of them with a majority of the
voting power of RightCHOICE. As a result, RightCHOICE would experience a change
of control which could result in significant changes in its management and
manner of conducting business.
Opinion of Warburg Dillon Read LLC
(see page 48)
Your board of directors and its business opportunities committee have
received a written opinion from Warburg Dillon Read LLC as to the fairness,
from a financial point of view, to the class A shareholders of the one-for-one
exchange ratio provided for in the merger of RightCHOICE into New RightCHOICE.
Appendix H contains the full text of Warburg Dillon Read's written opinion
dated January 31, 2000. We encourage you to read this opinion carefully in its
entirety for a description of the assumptions made, procedures followed,
matters considered and limitations on the review undertaken by Warburg Dillon
Read. Warburg Dillon Read addressed its opinion to your board of directors and
its business opportunities committee, and the opinion does not constitute a
recommendation to any shareholder with respect to any matters relating to the
reorganization.
Federal Income Tax Consequences
(see page 54)
Blue Cross and Blue Shield of Missouri has requested a private letter ruling
from the Internal Revenue Service that the transfer and assumption transaction
will be tax-free to RightCHOICE, Blue Cross and Blue Shield of Missouri and
you, as a class A shareholder, and that the charter conversion transaction will
be tax-free to Blue Cross and Blue Shield of Missouri and The Missouri
Foundation For Health. The Internal Revenue Service may not issue the private
letter ruling. If the Internal Revenue Service does not issue the private
letter ruling, the parties will rely on a tax opinion from
PricewaterhouseCoopers LLP.
PricewaterhouseCoopers LLP has issued a tax opinion to Blue Cross and Blue
Shield of Missouri, RightCHOICE and the Foundation on the federal income tax
aspects of each step of the reorganization. We expect that you will not
recognize any taxable income, gain or loss for federal income tax purposes as a
result of the reorganization.
Tax matters are very complicated, and the tax consequences of the
reorganization to you will depend on the facts of your own situation. We urge
you to consult your tax advisor for a full understanding of the tax
consequences of the reorganization to you.
Listing of New RightCHOICE common stock
(see page 60)
Like the class A common stock, the shares of New RightCHOICE common stock
you will receive in the reorganization will be listed for trading on the New
York Stock Exchange under the symbol "RIT."
Dissenters' Rights
(see page 61)
You are entitled to dissenters' rights in connection with the
reorganization. This means that if you file a written objection to the merger
of RightCHOICE with New RightCHOICE before the special meeting and otherwise
comply with the applicable procedures under Missouri law, you will be entitled
to receive the fair value of your shares of class A common stock in cash rather
than in New RightCHOICE common stock if we complete the merger.
5
<PAGE>
Agreements Governing New RightCHOICE after Reorganization
Upon completion of the reorganization, New RightCHOICE and The Missouri
Foundation For Health will be parties to the following three agreements:
Voting Trust and Divestiture Agreement
(see page 77)
Under the voting trust and divestiture agreement:
. The Foundation will deposit at least 95% of its shares of New
RightCHOICE common stock, which equals at least 76% of all of the
outstanding shares of New RightCHOICE common stock, into a voting trust.
These shares will remain subject to the voting trust until the
Foundation sells them or the trust terminates.
. The New RightCHOICE board of directors will direct the trustee of the
voting trust how to vote these shares, except that the Foundation will
direct the trustee how to vote these shares in the case of a proposed
business combination transaction involving New RightCHOICE in which the
then existing New RightCHOICE shareholders would own less than 50.1% of
the shares of the resulting company.
. The Foundation must sell the shares deposited in the voting trust so that
it:
-- owns less than 50% of the outstanding shares of New RightCHOICE
common stock within three years after the reorganization, subject to
a possible one-year extension, and
-- owns less than 20% of the outstanding shares of New RightCHOICE
common stock within five years after the reorganization, subject to a
possible two-year extension.
. The voting trust terminates when the Foundation owns less than 5% of the
issued and outstanding shares of New RightCHOICE common stock.
. New RightCHOICE and the Foundation must mutually agree on an
institutional trustee to serve as trustee under the voting trust.
Registration Rights Agreement
(see page 83)
In general, the registration rights agreement requires New RightCHOICE to
register with the Securities and Exchange Commission the Foundation's shares of
New RightCHOICE common stock for sale to the public over a period of time and
grants New RightCHOICE the right to buy the Foundation's shares of New
RightCHOICE common stock in some cases.
Under the registration rights agreement:
. New RightCHOICE will register with the Securities and Exchange Commission
the Foundation's shares of New RightCHOICE common stock for sale to the
public:
-- when requested by the Foundation, or
-- when New RightCHOICE registers the shares of New RightCHOICE common
stock for a public offering and the Foundation requests that its
shares be included in the registration.
. There are limits on New RightCHOICE's obligation to register the
Foundation's shares of New RightCHOICE common stock in order to minimize
the disruptive effect of these registrations on New RightCHOICE and the
market for its common stock.
. New RightCHOICE has the option to purchase the Foundation's shares of New
RightCHOICE common stock at a
6
<PAGE>
price based upon the market value of the stock at the time of purchase:
-- on an ongoing basis after the Foundation owns less than 50% of New
RightCHOICE's outstanding shares, or
-- whenever the Foundation exercises its registration rights.
. New RightCHOICE has a right of first refusal to purchase the Foundation's
shares of New RightCHOICE common stock at the price agreed to between the
Foundation and a qualified investor whenever the Foundation desires to
sell the shares in a private transaction to the qualified investor.
. The Foundation will, if required by New RightCHOICE, sell some of its
shares of New RightCHOICE common stock in an underwritten public offering
within six months after the reorganization if New RightCHOICE and the
Foundation agree on the number of shares the Foundation will sell and the
other terms of the offering.
Indemnification Agreement
(see page 88)
Under the indemnification agreement:
. The Foundation will indemnify New RightCHOICE and its affiliates from any
income tax liabilities that they may incur as a result of the
reorganization.
. The Foundation will indemnify the officers, directors and advisors of
Blue Cross and Blue Shield of Missouri and New RightCHOICE against claims
arising out of the reorganization or the events that gave rise to the
litigation between Blue Cross and Blue Shield of Missouri and the State
of Missouri.
Ownership Limitations Under New RightCHOICE Certificate of Incorporation
(see page 170)
New RightCHOICE's certificate of incorporation contains ownership
limitations required by the Blue Cross and Blue Shield Association for its for-
profit licensees. The Blue Cross and Blue Shield Association designed these
ownership limitations to protect the independence of its for-profit licensees
from any single shareholder. Under these ownership limitations:
. No institutional shareholder may own 10% or more of the voting power of
New RightCHOICE,
. No non-institutional shareholder may own 5% or more of the voting power
of New RightCHOICE, and
. No shareholder, institutional or non-institutional, may own 20% or more
of the total outstanding equity of New RightCHOICE.
If a shareholder exceeds the ownership limitations, an escrow agent will
sell the excess shares and return the proceeds, net of expenses, to the
shareholder, as discussed on page 171.
New RightCHOICE's certificate of incorporation exempts The Missouri
Foundation For Health from these ownership limitations because the Foundation
has agreed to sell its shares of New RightCHOICE common stock in accordance
with the divestiture deadlines described in this document and also has agreed
to comply with all other provisions of the voting trust and divestiture
agreement.
Management of New RightCHOICE
(see page 153 and page 157)
Upon completion of the reorganization, the initial directors and executive
officers of New RightCHOICE will be the directors and executive officers of
RightCHOICE immediately prior to the reorganization. After the reorganization,
we expect that New RightCHOICE will add additional individuals to its board of
directors.
Interests of Directors and Officers in Reorganization
(see page 52)
In considering your board of directors' recommendation that you vote in
favor of the
7
<PAGE>
reorganization, you should be aware that the directors and executive officers
of RightCHOICE have interests in the reorganization that are different from or
in addition to your interests.
Continued Positions
If we do not complete the reorganization and the court orders the
dissolution of Blue Cross and Blue Shield of Missouri, a new party could
acquire control of RightCHOICE from Blue Cross and Blue Shield of Missouri and
could eventually replace the current directors and executive officers of
RightCHOICE.
If we complete the reorganization, the initial directors of New RightCHOICE
will be the directors of RightCHOICE immediately prior to the reorganization.
Because of the voting limitations on The Missouri Foundation For Health's
shares of New RightCHOICE common stock, the New RightCHOICE board of directors
will be able to ensure their re-election and designate their successors for so
long as the Foundation owns a substantial number of New RightCHOICE's shares.
The New RightCHOICE board of directors will, in turn, appoint the officers of
New RightCHOICE.
Severance Agreements
The reorganization will constitute a change of control under executive
severance agreements that each executive officer of RightCHOICE, other than
its Chairman, President and Chief Executive Officer John A. O'Rourke, has with
RightCHOICE. The executive severance agreements provide that if (1) New
RightCHOICE terminates an executive officer's employment without cause within
two years after the reorganization, or (2) within two years after the
reorganization an executive officer terminates his or her employment within
three months of an event constituting good reason, then the executive officer
will receive severance benefits from New RightCHOICE, as successor to
RightCHOICE. The benefits include cash payments equal to the greater of
approximately two times the executive officer's total annual compensation or
three times his or her base pay plus the value of health care benefits.
John A. O'Rourke has an employment agreement but not a separate severance
agreement with RightCHOICE. The reorganization does not affect Mr. O'Rourke's
right to receive severance benefits under his employment agreement.
Stock Options
If we complete the reorganization, New RightCHOICE will assume all
outstanding options to purchase shares of class A common stock under
RightCHOICE's stock option plans, and, therefore, these options will become
options to purchase shares of New RightCHOICE common stock on the same terms
and conditions.
Indemnification and Liability Insurance
New RightCHOICE will assume all indemnification obligations now existing in
favor of the directors and officers of RightCHOICE and its subsidiaries. New
RightCHOICE also will purchase and keep in effect for a six-year period the
directors' and officers' liability insurance maintained by RightCHOICE and
Blue Cross and Blue Shield of Missouri.
The Missouri Foundation For Health will reimburse New RightCHOICE for the
premiums paid by New RightCHOICE to maintain the insurance previously
maintained by Blue Cross and Blue Shield of Missouri.
Conditions to Reorganization
(see page 67)
We will complete the reorganization only if the following conditions are
satisfied or waived, if waivable:
. RightCHOICE shareholders approve the reorganization,
8
<PAGE>
. We receive the necessary regulatory approvals from state authorities in
states where we do business,
. Blue Cross and Blue Shield of Missouri receives
-- a private letter ruling from the Internal Revenue Service regarding
the tax-free nature of the transfer and assumption transaction to the
class A shareholders, RightCHOICE and Blue Cross and Blue Shield of
Missouri and the tax-free nature of the charter conversion
transaction to Blue Cross and Blue Shield of Missouri and The
Missouri Foundation For Health, or
-- a tax opinion from PricewaterhouseCoopers LLP regarding the tax-free
nature of each step of the reorganization to the class A
shareholders, Blue Cross and Blue Shield of Missouri, The Missouri
Foundation For Health, and New RightCHOICE, as successor by merger to
RightCHOICE,
. The board of directors of Blue Cross and Blue Shield of Missouri receives
reaffirmation of a legal opinion it previously received from its special
counsel, Greensfelder, Hemker & Gale, P.C., to the effect that the
reorganization is lawful and that the authorization and approval of the
reorganization by Blue Cross and Blue Shield of Missouri's board of
directors is consistent with its fiduciary duties,
. The Missouri Foundation For Health receives a legal opinion to the effect
that the Foundation will receive shares of New RightCHOICE common stock
in the reorganization that are free and clear from subscriber claims, and
the Missouri Attorney General and the Missouri Department of Insurance
provide notice of the satisfaction or waiver of this condition. The
Foundation has advised that it does not expect to retain an attorney to
deliver this opinion and that it intends to waive this condition. The
Attorney General and the Department of Insurance have advised that they
intend to waive this condition if it is waived by the Foundation, and
. The Blue Cross and Blue Shield Association approves the reorganization
and issues new license agreements to New RightCHOICE and its controlled
affiliates.
Any party can waive any of these conditions that are for its benefit, except
any required regulatory approval or the satisfaction of any condition imposed
by law. We do not intend to waive the condition that we receive a tax opinion
from PricewaterhouseCoopers LLP regarding the tax-free nature of all aspects of
the reorganization except with respect to any one or more aspects as to which
Blue Cross and Blue Shield of Missouri has received a private letter ruling
from the Internal Revenue Service. If we do not receive a tax opinion or a
private letter ruling on each aspect of the reorganization and still decide to
proceed with the reorganization, we will revise and recirculate this document
and resolicit proxies from our shareholders.
9
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth selected historical financial data for
RightCHOICE and carve-out historical financial data for Blue Cross and Blue
Shield of Missouri for the periods indicated, and pro forma unaudited combined
condensed financial data giving effect to the reorganization. New RightCHOICE
was recently organized for the purpose of facilitating the reorganization, and,
therefore, New RightChoice has no financial history.
. We derived the selected financial data for RightCHOICE as of and for the
six months ended June 30, 2000 and 1999 from the unaudited historical
financial statements of RightCHOICE which we have included in this
document. We derived the selected financial data for RightCHOICE as of
December 31, 1999 and 1998 and for each of the three years ended December
31, 1999 from the historical consolidated financial statements of
RightCHOICE which PricewaterhouseCoopers LLP, independent accountants of
RightCHOICE, have audited and which we have included in this document. We
derived the selected financial data as of December 31, 1997, 1996 and
1995 and for each of the two years ended December 31, 1996 from the
historical consolidated financial statements of RightCHOICE which
PricewaterhouseCoopers LLP have audited and which we have not included in
this document. You should read the selected financial data for
RightCHOICE in conjunction with RightCHOICE's historical financial
statements, and notes thereto, beginning on page F-2 of this document and
the section of this document describing RightCHOICE under the heading
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" beginning on page 116 of this document.
. We derived the selected carve-out financial data for Blue Cross and Blue
Shield of Missouri as of and for the six months ended June 30, 2000 and
1999 from the unaudited historical carve-out financial statements of Blue
Cross and Blue Shield of Missouri which we have included in this
document. We derived the selected carve-out financial data for Blue Cross
and Blue Shield of Missouri as of December 31, 1999 and 1998 and for each
of the three years ended December 31, 1999 from the historical carve-out
financial statements of Blue Cross and Blue Shield of Missouri which
PricewaterhouseCoopers LLP, independent accountants of Blue Cross and
Blue Shield of Missouri, have audited and which we have included in this
document. We derived the selected financial data as of December 31, 1997,
1996 and 1995 and for each of the two years ended December 31, 1996 from
the historical carve-out financial statements of Blue Cross and Blue
Shield of Missouri which are not audited and which we have not included
in this document. You should read the selected carve-out financial data
for Blue Cross and Blue Shield of Missouri in conjunction with Blue Cross
and Blue Shield of Missouri's historical carve-out financial statements,
and notes thereto, beginning on page F-46 of this document and the
section of this document describing Blue Cross and Blue Shield of
Missouri under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 140 of
this document. We have presented the selected carve-out financial data
for Blue Cross and Blue Shield of Missouri exclusive of its investment in
the class B common stock. Also, we have not presented per share data for
Blue Cross and Blue Shield of Missouri because it is a non-profit health
services corporation with no stock outstanding.
. We provide the pro forma unaudited combined condensed financial
statements giving effect to the reorganization. We provide the pro forma
unaudited combined condensed financial statements for informational
purposes only. These statements are not necessarily indicative of actual
results if we had completed the reorganization at the beginning of the
earliest period presented or of future results. We derived the pro forma
unaudited combined condensed financial data from, and they should be read
in conjunction with, the pro forma unaudited combined condensed financial
statements beginning on page 91 of this document.
10
<PAGE>
RIGHTCHOICE HISTORICAL
<TABLE>
<CAPTION>
As of and for the six
months ended June 30, As of and for the years ended December 31,
----------------------- ------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
(unaudited) (unaudited)
----------- ----------- -------- -------- -------- -------- --------
(in thousands, except per share data and operating statistics)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
----------------------
Revenues:
Premium............... $404,210 $357,492 $732,151 $694,487 $654,267 $595,049 $538,422
Fees and other income. 48,376 41,732 84,761 73,025 65,144 58,326 53,458
-------- -------- -------- -------- -------- -------- --------
Total revenues...... 452,586 399,224 816,912 767,512 719,411 653,375 591,880
-------- -------- -------- -------- -------- -------- --------
Expenses:
Health care services.. 328,411 293,985 601,532 579,827 555,126 491,662 409,495
Commissions........... 17,828 15,367 32,462 31,394 29,302 26,808 19,405
General and
administrative....... 86,783 80,723 163,251 159,638 163,172 143,950 140,473
Charge for contract
loss reserves........ 29,510
Non-recurring
charges(/1/)......... 900 3,301 4,534 3,474
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses........... 433,022 390,075 797,245 771,759 780,411 666,954 572,847
-------- -------- -------- -------- -------- -------- --------
Operating income (loss). 19,564 9,149 19,667 (4,247) (61,000) (13,579) 19,033
-------- -------- -------- -------- -------- -------- --------
Investment income:
Interest and
dividends............ 6,904 6,711 13,367 14,737 15,916 14,241 14,832
Realized gains
(losses), net........ 1,065 (449) (516) 3,932 17,268 3,291 3,512
-------- -------- -------- -------- -------- -------- --------
Total investment
income, net........ 7,969 6,262 12,851 18,669 33,184 17,532 18,344
-------- -------- -------- -------- -------- -------- --------
Other:
Interest expense...... (1,978) (2,009) (4,344) (4,539) (4,681) (5,434) (2,930)
Other income
(expense), net....... 948 556 219 (379) (1,058) 114 (397)
-------- -------- -------- -------- -------- -------- --------
Total other, net.... (1,030) (1,453) (4,125) (4,918) (5,739) (5,320) (3,327)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision (benefit) for
income taxes........... 26,503 13,958 28,393 9,504 (33,555) (1,367) 34,050
Provision (benefit) for
income taxes........... 10,537 5,374 11,177 3,844 (9,521) 660 10,480
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 15,966 $ 8,584 $ 17,216 $ 5,660 $(24,034) $ (2,027) $ 23,570
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per share.............. $ 0.86 $ 0.46 $ 0.92 $ 0.30 $ (1.29) $ (0.11) $ 1.26
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share.............. $ 0.84 $ 0.46 $ 0.92 $ 0.30 $ (1.29) $ (0.11) $ 1.26
======== ======== ======== ======== ======== ======== ========
Operating
Statistics:(/2/)
Medical loss ratio.... 81.2% 82.2% 82.2% 83.5% 84.8% 82.6% 76.1%
General &
administrative
expense ratio........ 19.2% 20.2% 20.0% 20.8% 22.7% 22.0% 23.7%
</TABLE>
11
<PAGE>
RICHTCHOICE HISTORICAL
<TABLE>
<CAPTION>
As of and for the six
months ended June 30, As of and for the years ended December 31,
----------------------- --------------------------------------------
2000 1999 1999 1998 1997 1996 1995
(unaudited) (unaudited)
----------- ----------- -------- -------- -------- -------- --------
(in thousands, except per share data and operating statistics)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
-------------------
Cash and investments.... $258,149 $229,706 $246,326 $247,690 $250,844 $295,634 $284,515
Total assets............ 523,887 498,699 523,213 508,678 506,363 532,144 516,388
Medical claims payable.. 116,246 107,288 124,428 109,986 112,339 111,833 83,793
Long-term debt.......... 30,063 38,063 34,063 43,063 47,000 62,000 62,000
Shareholders' equity.... 173,669 150,586 157,543 145,874 140,865 172,954 173,221
Available cash and
investments(/3/)....... 10,388 12,177 9,085 12,494 8,279 48,472 56,753
Book value per share.... 9.30 8.06 8.44 7.81 7.54 9.26 9.27
Tangible book value per
share.................. 5.70 4.16 4.61 3.82 3.36 4.76 4.93
</TABLE>
------
(1) Non-recurring charges represent the following: for the year ended December
31, 1998, $0.9 million related to a planned reduction of approximately 7.5%
of the work force; for the years ended December 31, 1997 and 1996, $3.3
million and $4.5 million, respectively, for costs associated with the
moving of service operations; and for the year ended December 31, 1995,
$2.0 million related to the one-time cost of integration for the
acquisition of HealthLink and $1.5 million for the settlement of
litigation.
(2) We calculate operating statistics as health care services and general and
administrative expense divided by premium and total revenues, respectively.
(3) The amounts represent cash and investments available for general corporate
use without regulatory approval.
12
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
<TABLE>
<CAPTION>
As of and for the six
months ended June 30, As of and for the years ended December 31,
----------------------- -----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- -------- -------- -------- ----------- -----------
(in thousands, except per share data and operating statistics)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement
Data(/1/):
----------------
Revenues:
Premium............... $ 45,867 $ 41,544 $ 85,393 $ 80,672 $ 81,322 $67,325 $ 77,194
Fees and other income. 11,345 9,922 20,314 15,583 12,704 10,408 13,482
Related party rental
income............... 2,465 2,519 5,040 4,166 4,076 3,669 2,526
-------- -------- -------- -------- -------- ------- --------
Total revenues...... 59,677 53,985 110,747 100,421 98,102 81,402 93,202
-------- -------- -------- -------- -------- ------- --------
Expenses:
Health care services.. 41,233 36,239 73,070 71,007 74,777 58,659 70,173
Commissions........... 18 20 43 42 42 79 37
General and
administrative....... 13,644 12,582 25,475 26,804 27,317 30,733 27,238
Non-recurring
charges(/2/)......... 320 1,764 3,761 3,500
-------- -------- -------- -------- -------- ------- --------
Total operating
expenses........... 55,215 50,605 102,349 97,853 102,136 89,471 100,948
-------- -------- -------- -------- -------- ------- --------
Operating income (loss). 4,462 3,380 8,398 2,568 (4,034) (8,069) (7,746)
-------- -------- -------- -------- -------- ------- --------
Investment income:
Interest and
dividends............ 1,502 696 1,895 592 786 1,213 1,954
Realized (losses)
gains, net........... (5,200) (55) 2,338 145
-------- -------- -------- -------- -------- ------- --------
Total investment
income, net........ 1,502 696 1,895 (4,608) 731 3,551 2,099
Other (expense) income,
net.................... (137) 80 40 111 (44) (1,015) 98
-------- -------- -------- -------- -------- ------- --------
Income (loss) before
provision (benefit) for
income taxes and
accounting change...... 5,827 4,156 10,333 (1,929) (3,347) (5,533) (5,549)
Provision (benefit) for
income taxes........... 2,321 1,767 4,265 (663) (1,172) (1,902) (3,499)
-------- -------- -------- -------- -------- ------- --------
Income (loss) before
accounting change...... 3,506 2,389 6,068 (1,266) (2,175) (3,631) (2,050)
Cumulative effect of
accounting change...... 1,076 1,076
-------- -------- -------- -------- -------- ------- --------
Net income (loss)....... $ 3,506 $ 1,313 $ 4,992 $ (1,266) $ (2,175) $(3,631) $ (2,050)
======== ======== ======== ======== ======== ======= ========
Basic and diluted
earnings (loss) per
share.................. -- -- -- -- -- -- --
Operating
Statistics:(/3/)
Medical loss ratio.... 89.9% 87.2% 85.6% 88.0% 92.0% 87.1% 90.9%
General &
administrative
expense ratio........ 22.9% 23.3% 23.0% 26.7% 27.8% 37.8% 29.2%
</TABLE>
13
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
<TABLE>
<CAPTION>
As of and for the six
months ended June 30, As of and for the years ended December 31,
----------------------- -----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- -------- -------- ----------- ----------- -----------
(in thousands, except per share data and operating statistics)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data(/1/):
------------------------
Cash and investments.... $ 52,226 $ 32,955 $ 45,693 $ 16,065 $ 20,684 $ 22,055 $ 41,362
Total assets............ 165,928 145,624 164,113 139,916 136,223 134,552 157,419
Medical claims payable.. 22,855 11,136 16,609 12,238 15,010 11,984 13,917
Net assets representing
reserve for protection
of members............. 91,172 83,987 87,666 82,674 83,940 85,811 89,847
Book value per share.... -- -- -- -- -- -- --
Tangible book value per
share.................. -- -- -- -- -- -- --
</TABLE>
------
(1) We present this financial data excluding Blue Cross and Blue Shield of
Missouri's investment in the class B common stock. We did not present per
share data for Blue Cross and Blue Shield of Missouri because it is a non-
profit health services corporation with no stock outstanding.
(2) Non-recurring charges represent the following: for the six months ended
June 30, 2000 and 1999 and for the year ended December 31, 1999, charges of
$0.3 million, $1.8 million and $3.8 million, respectively, for litigation
and settlement related costs, including the organization of The Missouri
Foundation For Health; for the year ended December 31, 1995, charges of
$3.5 million related to the settlement of litigation.
(3) We calculate operating statistics as health care services and general and
administrative expense divided by premium and total revenues, respectively.
14
<PAGE>
NEW RIGHTCHOICE
PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL DATA
As of and for the six months ended June 30, 2000
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
BCBS
Missouri New Pro forma
RightCHOICE Historical RightCHOICE Combined
Historical Carve-Out Historical(/1/) Condensed(/2/)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Income Statement Data:
----------------------
Revenues:
Premium............... $ 404,210 $ 45,867 $-- $ 450,077
Fees and other income. 48,376 13,810 59,721
----------- -------- -----------
Total revenues...... 452,586 59,677 509,798
----------- -------- -----------
Operating expenses:
Health care services.. 328,411 41,233 369,644
Commissions........... 17,828 18 17,846
General and
administrative....... 86,783 13,964 99,408
----------- -------- -----------
Total operating
expenses........... 433,022 55,215 486,898
----------- -------- -----------
Operating income....... 19,564 4,462 22,900
----------- -------- -----------
Other income:
Interest and
dividends............ 6,904 1,502 8,017
Other income
(expense), net....... 35 (137) (102)
----------- -------- -----------
Total other, net.... 6,939 1,365 7,915
----------- -------- -----------
Income before provision
for income taxes...... 26,503 5,827 30,815
Provision for income
taxes................. 10,537 2,321 12,201
----------- -------- -----------
Net income............. $ 15,966 $ 3,506 $-- $ 18,614
=========== ======== ==== ===========
Weighted average common
shares outstanding.... 18,673,300 N/A 1 18,636,600
----------- -------- -----------
Basic earnings per
share................. $ 0.86 N/A $ 1.00
=========== ======== ===========
Diluted earnings per
share................. $ 0.84 N/A $ 0.99
=========== ======== ===========
Balance Sheet Data:
-------------------
Cash and investments... $ 258,149 $ 52,226 $ 1 $ 296,931
Total assets........... 523,887 165,928 1 661,775
Medical claims payable. 116,246 22,855 139,101
Long-term debt......... 30,063 30,063
Net assets representing
reserve for protection
of members............ 91,172
Shareholders' equity... 173,669 1 276,693
Book value per share... 9.30 1 14.85
Tangible book value per
share................. 5.70 1 9.84
</TABLE>
------
(1) The Missouri Foundation For Health incorporated New RightCHOICE on March
14, 2000. On March 14, 2000, New RightCHOICE issued one share of its common
stock to The Missouri Foundation For Health in exchange for $1.
(2) We describe the adjustments necessary to arrive at the pro forma unaudited
combined condensed financial data in the Notes to Historical Consolidated
and Pro Forma Unaudited Combined Condensed Financial Statements beginning
on page 96.
15
<PAGE>
NEW RIGHTCHOICE
PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL DATA
As of and for the year ended December 31, 1999
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
BCBS
Missouri New Pro forma
RightCHOICE Historical RightCHOICE Combined
Historical Carve-Out Historical(/1/) Condensed(/2/)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Income Statement Data:
----------------------
Revenues:
Premium............... $ 732,151 $ 85,393 $-- $ 817,544
Fees and other income. 84,761 25,354 105,075
----------- -------- -----------
Total revenues...... 816,912 110,747 922,619
----------- -------- -----------
Operating expenses:
Health care services.. 601,532 73,070 674,602
Commissions........... 32,462 43 32,505
General and
administrative....... 163,251 29,236 186,706
----------- -------- -----------
Total operating
expenses........... 797,245 102,349 893,813
----------- -------- -----------
Operating income....... 19,667 8,398 28,806
----------- -------- -----------
Other income:
Interest and
dividends............ 13,367 1,895 14,485
Other (expense)
income, net.......... (4,641) 40 (4,601)
----------- -------- -----------
Total other, net.... 8,726 1,935 9,884
----------- -------- -----------
Income before provision
for income taxes and
accounting change..... 28,393 10,333 38,690
Provision for income
taxes................. 11,177 4,265 15,347
----------- -------- -----------
Income before
accounting change..... 17,216 6,068 23,343
Cumulative effect of
accounting change..... 1,076
----------- -------- -----------
Net income............. $ 17,216 $ 4,992 $-- $ 23,343
=========== ======== ==== ===========
Weighted average common
shares outstanding.... 18,673,000 N/A 18,636,300
----------- -------- -----------
Basic and diluted
earnings per share.... $ 0.92 N/A $ 1.25
=========== ======== ===========
Balance Sheet Data:
-------------------
Cash and investments... $ 246,326 $ 45,693 $ 1 $ 278,575
Total assets........... 523,213 164,113 1 643,316
Medical claims payable. 124,428 16,609 141,037
Long-term debt......... 34,063 34,063
Net assets representing
reserve for protection
of members............ 87,666
Shareholders' equity... 157,543 1 257,061
Book value per share... 8.44 1 13.79
Tangible book value per
share................. 4.61 1 8.57
</TABLE>
------
(1) Although New RightCHOICE did not exist as of December 31, 1999, we have
included it to give effect to the reorganization. The Missouri Foundation
For Health incorporated New RightCHOICE on March 14, 2000. On March 14,
2000, New RightCHOICE issued one share of its common stock to The Missouri
Foundation For Health in exchange for $1.
(2) We describe the adjustments necessary to arrive at the pro forma unaudited
combined condensed financial data in the Notes to Historical Consolidated
and Pro Forma Unaudited Combined Condensed Financial Statements beginning
on page 96.
16
<PAGE>
PER SHARE DATA
The following table sets forth the book value per share as of June 30, 2000
and December 31, 1999 and earnings per share and cash dividends declared per
share for the six months ended June 30, 2000 and the year ended December 31,
1999 for historical RightCHOICE and pro forma New RightCHOICE giving effect to
the reorganization.
<TABLE>
<CAPTION>
Pro Forma
New RightCHOICE
(on an equivalent
share basis
RightCHOICE giving effect to the
Historical(/1/) reorganization)(/2/)
--------------- --------------------
<S> <C> <C>
Book value per common share outstanding:
June 30, 2000........................... $9.30 $14.85
December 31, 1999....................... $8.44 $13.79
Earnings per share:
For the six months ended June 30, 2000
(basic)................................ $0.86 $ 1.00
For the six months ended June 30, 2000
(diluted).............................. $0.84 $ 0.99
For the year ended December 31, 1999
(basic and diluted).................... $0.92 $ 1.25
Cash dividends declared per share:
For the six months ended June 30, 2000.. $ 0 $ 0
For the year ended December 31, 1999.... $ 0 $ 0
Common shares outstanding:
At June 30, 2000........................ 18,673,366 18,636,626
At December 31, 1999.................... 18,673,153 18,636,413
</TABLE>
--------
(1) We computed historical book value per share information for RightCHOICE as
of June 30, 2000 and December 31, 1999 by dividing the historical
shareholders' equity of $173.7 million and $157.5 million, respectively, as
of those dates by 18,673,366 and 18,673,153, respectively, the number of
shares outstanding as of those dates.
(2) We computed pro forma New RightCHOICE book value per share information as
of June 30, 2000 by dividing the pro forma combined shareholders' equity of
$277 million by 18,636,626, the number of assumed shares outstanding after
the reorganization. We computed pro forma New RightCHOICE book value per
share information as of December 31, 1999 by dividing the pro forma
combined shareholders' equity of $257 million by 18,636,413, the number of
assumed shares outstanding after the reorganization.
17
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
RightCHOICE
The following table sets forth for the calendar quarters indicated the high
and low sales prices of the class A common stock, which trades on the New York
Stock Exchange under the symbol "RIT."
<TABLE>
<CAPTION>
High Low
--------- --------
<C> <S> <C> <C>
1998 First Quarter.................................... $10 7/8 $ 8 3/8
Second Quarter................................... 12 11/16 8 3/8
Third Quarter.................................... 13 1/8 8 1/2
Fourth Quarter................................... 12 8 9/16
1999 First Quarter.................................... $13 $10 1/4
Second Quarter................................... 12 1/8 10 3/4
Third Quarter.................................... 11 5/8 10 3/8
Fourth Quarter................................... 12 9 1/2
2000 First Quarter.................................... $15 1/2 $11 1/2
Second Quarter .................................. 18 7/16 12 1/8
Third Quarter ................................... 24 1/4 15 7/8
Fourth Quarter (through October 4, 2000).........
</TABLE>
On January 6, 2000, the day before the first public announcement of the
settlement of the litigation with the Missouri Attorney General and the
Missouri Department of Insurance, the last reported sale price per share of
class A common stock was $13 3/8. On October 4, 2000, the last reported sale
price per share of class A common stock was $ .
On October 4, 2000, RightCHOICE had holders of record of class A common
stock, and Blue Cross and Blue Shield of Missouri was the only holder of record
of the class B common stock.
Although RightCHOICE's board of directors has discretion over whether and
when to pay dividends, RightCHOICE has never paid a dividend on its class A
common stock or its class B common stock and does not intend to declare or pay
any dividends before the reorganization. Limitations on RightCHOICE's ability
to pay dividends include limitations under its credit agreement as described in
Note 10 of its financial statements included on page F-16 of this document.
RightCHOICE is a holding company and its ability to pay dividends depends on
distributions received from its subsidiaries. RightCHOICE's subsidiaries are
subject to regulatory surplus requirements and additional regulatory
requirements which may restrict their ability to declare and pay dividends or
distributions to RightCHOICE.
Blue Cross and Blue Shield of Missouri
Blue Cross and Blue Shield of Missouri is a non-stock corporation with no
shareholders and no stock trades to report.
New RightCHOICE
New RightCHOICE's common stock will be traded on the New York Stock Exchange
under the symbol "RIT" upon completion of the reorganization.
New RightCHOICE has no plans to pay dividends on the New RightCHOICE common
stock for the foreseeable future following the reorganization. New RightCHOICE
expects that as part of the reorganization it will assume the obligations of
RightCHOICE under RightCHOICE's credit
18
<PAGE>
agreement and, as a result, will be restricted in its ability to pay cash
dividends to the same extent that RightCHOICE currently is restricted as
described in Note 10 of RightCHOICE's financial statements included on page F-
16 of this document. New RightCHOICE, like RightCHOICE, will be a holding
company, and its ability to pay dividends will depend on distributions it
receives from its subsidiaries. New RightCHOICE's subsidiaries will be subject
to regulatory surplus requirements and additional regulatory requirements and
Blue Cross and Blue Shield Association capital standards which may restrict
their ability to declare and pay dividends or distributions to New RightCHOICE.
New RightCHOICE's board of directors has discretion whether to pay any
dividends, and its decision will depend on New RightCHOICE's earnings,
financial position, regulatory and Blue Cross and Blue Shield Association
capital requirements and other factors that it deems relevant.
Nothing contained in this document should be construed to suggest that the
trading price of the class A common stock at any point in time may be used as a
substitute for the trading price of New RightCHOICE common stock after the
reorganization. We cannot assure you that shares of New RightCHOICE common
stock will trade at a price reflecting the earnings per share or other
attributes of the class A common stock.
19
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should carefully
consider the following factors when deciding how to vote on the
reorganization. The terms "we," "our" and "us" used in this section refer to
New RightCHOICE following the reorganization.
Risks Resulting From the Reorganization
Trading volume for the class A common stock has been very limited and
significant sales of our common stock by the Foundation, coupled with the
expectation of these sales, could cause our stock price to fall after the
reorganization.
Based upon the current number of shares of RightCHOICE stock outstanding,
The Missouri Foundation For Health must sell about 5.63 million shares of our
common stock within the first three, or possibly four, years after the
reorganization, and it must sell a total of about 11.23 million shares of our
common stock within the first five, or possibly seven, years after the
reorganization. Given the very limited trading volume for the class A common
stock, significant sales of our common stock by the Foundation, and the
expectation of these sales, could cause our stock price to fall after the
reorganization. If the Foundation fails to meet these divestiture
requirements, we will arrange for the sale of the Foundation's shares as
described under "Terms of the Voting Trust and Divestiture Agreement"
beginning on page 77.
On average, 7,356 shares of class A common stock traded per day in 1999,
and investors traded a total of 1,853,000 shares for the year. In the first
half of 2000, 9,461 shares of class A common stock traded per day on average,
and investors traded a total of 1,182,600 shares. Although we do not expect
that the Foundation will sell our shares every day or in equal amounts, for
purposes of illustration only, the average daily volume equivalent of selling
5.63 million shares in three years is about 7,506 shares per day, or 1,876,700
shares per year, and the average daily volume equivalent of selling 11.23
million shares in five years is about 8,984 shares per day, or 2,246,000
shares per year.
We cannot predict how the market will value our company. The market value
of our common stock may vary from the current market value of the class A
common stock, and our stock price could be lower.
The Foundation's rights may make it difficult for us to raise additional
funds through equity offerings which could restrict our future growth,
inhibit our ability to make required investments and adversely affect our
ability to compete.
Our industry is in a state of change, and, in order to take advantage of
acquisition and other investment opportunities that may arise in the future,
we may desire the flexibility to raise funds quickly by selling our stock in
the equity markets. The registration rights agreement with The Missouri
Foundation For Health could limit or make more difficult our ability to raise
funds through equity offerings after the reorganization upon terms that we
desire or at times when we may require funds.
Our failure to raise additional equity capital when required could:
. Restrict our future growth, both internally and through acquisitions,
. Inhibit our ability to invest in technology and other products and
services that we may need, and
. Adversely affect our ability to compete in our markets.
We can issue our common stock as consideration to buy another company. If,
however, we want to buy a business for cash and we need to raise money for the
acquisition by selling our common
20
<PAGE>
stock, the restrictions in the registration rights agreement described above
may limit our flexibility. We may not be able to sell our stock at the most
opportune times. None of our agreements with the Foundation, however, will
prevent us from borrowing money to buy a business.
Provisions in our charter documents will keep us from being sold to a third
party unless our board of directors approves the sale and may limit or even
eliminate increases in our stock price based on "takeover" speculation.
Our charter documents include provisions required by the Blue Cross and Blue
Shield Association for its for-profit licensees which the Association designed
to protect the independence of its for-profit licensees from any single
shareholder. These provisions, which RightCHOICE does not have in its charter
documents, include the following:
. We have ownership limitations that prohibit institutional investors from
owning 10% or more of our voting securities and other investors from
owning 5% or more of our voting securities, and
. At least 80% of our directors must be independent directors who are not
affiliated or associated with The Missouri Foundation For Health or any
shareholder that owns our shares in excess of the ownership limits.
These provisions will make it more difficult for a third party to acquire us
in a transaction that our board of directors has not negotiated or approved but
in which our shareholders may receive a premium for their shares. Also, these
provisions will deter a party from acquiring a significant ownership position
in our company prior to submitting an offer to our board of directors, and, as
a result, our stock may trade at lower prices relative to other companies that
do not have similar ownership limitations in their charter documents.
Claims by subscribers and litigation which we could be subject to after the
reorganization may discourage potential acquirors from making a proposal to
buy us.
We may be subject to claims and litigation after we complete the
reorganization. These claims and litigation are described in the risk factor
"We will be defendants in lawsuits pending against Blue Cross and Blue Shield
of Missouri and RightCHOICE, including a class action" on page 26 and in the
risk factor "If the court finds that Blue Cross and Blue Shield of Missouri is
a mutual benefit corporation, a court could cancel the reorganization, or, if
already completed, a court could undo the reorganization or compel New
RightCHOICE to pay substantial damages to the Blue Cross and Blue Shield of
Missouri and RightCHOICE subscribers" on page 27. A judgment against us in the
class action involving premiums could subject us to substantial damages. A
judgment against us in the class action involving Blue Cross and Blue Shield of
Missouri's corporate status could subject us to substantial damages, loss of
our licenses from the Blue Cross and Blue Shield Association or the undoing of
the reorganization. This litigation, or the threat of this litigation in the
future, may:
. Discourage potential acquirors from making an acquisition proposal for
our company or cause them to reduce the amount they otherwise would offer
to pay for our company,
. Depress our stock price after the reorganization if investors believe
that we are not an acquisition candidate as a result of this potential
litigation risk, or
. Depress our stock price because of the fear of the potential adverse
effects of litigation including legal expenses or the distraction of
management's attention.
Our directors will be able to control the outcome of all matters other than
change of control proposals that are submitted to our shareholders for a vote
as long as the Foundation owns a substantial number of our shares.
The Missouri Foundation For Health will own approximately 80% of our
outstanding shares immediately after the reorganization. The Foundation must
place at least 95% of its shares, equal to
21
<PAGE>
at least 76% of all of our outstanding shares as of the closing date for the
reorganization, in a voting trust for a trustee to vote and dispose of under
the terms of the voting trust and divestiture agreement described in this
document.
The trustee of the voting trust must, as a general matter, vote all of the
Foundation's shares held in the voting trust as directed by a majority of our
independent directors and a majority of all of our directors on all proposals
or matters that may come before our shareholders, except for matters relating
to proposed merger and sale transactions if our shareholders will not own a
majority of the shares of the resulting company. Thus, for so long as the
Foundation owns a significant number of our shares, our board of directors will
be able to control the outcome of most matters brought before our shareholders
for a vote, including amendments to our certificate of incorporation and bylaws
and the election and removal of our directors.
We will not be able to sell or merge without the approval of the Foundation as
long as the Foundation owns 50% or more of our outstanding shares.
The Missouri Foundation For Health will own approximately 80% of our
outstanding shares immediately after the reorganization, and it is not required
to reduce its ownership to less than 50% of our outstanding shares until at
least three, and possibly four, years after the reorganization.
The acquisition of our company by means of a merger or consolidation will
require the approval of our board of directors and the holders of a majority of
the shares of our common stock. As long as the Foundation owns more than 50% of
our shares, it will be able--by itself--to vote down a sale of our company even
if our board of directors and other shareholders would otherwise favor the
transaction. In addition, for so long as the Foundation owns at least 20% of
our outstanding shares, we must consult with the Foundation prior to
soliciting, or upon receiving, a business combination proposal which, if
consummated, would result in our then existing shareholders owning less than a
majority of the outstanding shares of the resulting company.
The Foundation may have interests in our company that differ from your
interests as a public shareholder.
The Foundation is a non-profit corporation with health care purposes to
benefit the uninsured and underinsured in specified counties in the State of
Missouri. You should expect the Foundation to vote its shares of our stock on
proposed merger and sale transactions based upon its best interests. The
interests of the Foundation in a merger or sale transaction may be different
than your interests. For example, your primary interests may be to receive the
maximum possible price for your shares. The Foundation, on the other hand, may
be interested in price, but may also be interested in how the transaction will
impact the availability of health care to the uninsured and underinsured in the
Foundation's service area.
In addition, the Missouri Attorney General must approve any sale of all or
substantially all of the Foundation's assets. Therefore, as long as the
Foundation owns 50% or more of our shares and the shares owned by the
Foundation constitute all or substantially all of the Foundation's assets, the
Missouri Attorney General will also have the right to approve the acquisition
of our company by a third party. The Missouri Attorney General may have
interests that differ from your interests in any acquisition proposal involving
our company.
Our directors will be able to ensure their re-election and designate their
successors as long as the Foundation owns a substantial number of our shares.
Our directors are elected by plurality vote, and our shareholders do not
have cumulative voting rights. In any election of directors, the trustee of the
voting trust must vote The Missouri Foundation
22
<PAGE>
For Health's shares in favor of each nominee approved by a majority of our
independent directors and a majority of all of our directors. Also, our
directors may be removed from office only for cause as described in our
certificate of incorporation and then only if the holders of 75% or more of our
outstanding shares vote for removal. The trustee of the voting trust will vote
all of the Foundation's shares held in the voting trust against the removal of
a director unless a majority of our independent directors and a majority of all
of our directors initiate or consent to the removal. As a result, our directors
will be able to ensure their re-election and designate their successors for as
long as the Foundation owns a substantial number of our shares.
The indemnification obligation of the Foundation could fail to fully indemnify
us against the risks of the reorganization.
Under the indemnification agreement, The Missouri Foundation For Health must
indemnify us against various potential liabilities arising from the
reorganization, including tax liabilities. We describe the indemnification
agreement under "Terms of Indemnification Agreement" beginning on page 88.
Risks inherent in the indemnification agreement are the following:
. The net worth of the Foundation at the time it is called upon to honor an
indemnification obligation might not be sufficient to permit it to honor
that obligation. The Foundation has agreed to maintain a minimum net
worth for the six years after Blue Cross and Blue Shield of Missouri
files its federal income tax return for the year in which we complete the
reorganization. The Foundation's net worth must not be less than an
amount equal to the potential tax liability on the difference between the
tax basis of the class B common stock owned by Blue Cross and Blue Shield
of Missouri and the fair market value of that stock on the date we
complete the reorganization. For illustrative purposes only, based upon
the market price of the class A common stock at the close of business on
September 30, 2000, that amount would be approximately $ million. We
cannot determine the actual minimum net worth amount until the closing of
the reorganization, and it could differ materially from the amount
determined as of September 30, 2000,
. The Foundation's assets may not be sufficiently liquid at the time it is
called upon to honor an indemnification obligation to permit it to honor
that obligation in a timely fashion and without requiring it to sell its
shares of New RightCHOICE common stock at prices and in amounts which
could reduce our stock price, and
. The Foundation might contend that its indemnification obligation is not
valid under law, and our attempt to enforce the indemnification
obligation by judicial action might be unsuccessful.
The Internal Revenue Service may not issue the private letter ruling requested
by Blue Cross and Blue Shield of Missouri regarding the reorganization, and
the Internal Revenue Service may be more likely to challenge the conclusions
of a tax opinion than a private letter ruling.
On May 17, 2000, Blue Cross and Blue Shield of Missouri requested a private
letter ruling from the Internal Revenue Service with respect to two elements of
the reorganization: (1) the transfer and assumption transaction, and (2) the
charter conversion transaction, both of which we describe beginning on page 32
of this document. Blue Cross and Blue Shield of Missouri requested the Internal
Revenue Service to rule (1) that the transfer and assumption transaction will
be tax-free to RightCHOICE, Blue Cross and Blue Shield of Missouri and you, as
a class A shareholder, and (2) that the charter conversion transaction will be
tax-free to Blue Cross and Blue Shield of Missouri and The Missouri Foundation
For Health. No one requested a ruling with respect to you, as a class A
shareholder, in connection with the charter conversion transaction because you
are not a participant in that transaction.
23
<PAGE>
The Internal Revenue Service generally issues private letter rulings within
four to six months after receiving the request, although it could take longer
in complex transactions such as the reorganization. The Internal Revenue
Service may not issue the private letter ruling for several reasons. We do not
know if, or when, the Internal Revenue Service will issue the private letter
ruling. The Internal Revenue Service may issue the private letter ruling after
the date of the special meeting. If the Internal Revenue Service issues the
private letter ruling, it may not address all of the matters requested.
Blue Cross and Blue Shield of Missouri did not request a ruling on the other
elements of the reorganization because the Internal Revenue Service believes
that sufficient guidance exists to ascertain the tax consequences of these
types of transactions and, in these instances, it ordinarily will not rule.
If Blue Cross and Blue Shield of Missouri does not receive the private
letter ruling, the parties will rely on a tax opinion from
PricewaterhouseCoopers LLP covering generally the same matters Blue Cross and
Blue Shield of Missouri requested the Internal Revenue Service to rule on in
the private letter ruling and the other steps of the reorganization.
PricewaterhouseCoopers LLP has issued its tax opinion generally to the effect
that, among other things, you and the other class A shareholders will not
recognize any income, gain or loss for federal income tax purposes as a result
of the reorganization. PricewaterhouseCoopers LLP based its opinion upon
several important assumptions and representations. Tax opinions, however,
represent only the best judgment of the firm giving the opinion on the matters
addressed in the opinion and have no binding effect or official status of any
kind. The Internal Revenue Service may not agree with PricewaterhouseCoopers
LLP's tax opinion, particularly on those matters Blue Cross and Blue Shield of
Missouri requested the Internal Revenue Service to rule on if it did not so
rule. We describe PricewaterhouseCoopers LLP's tax opinion, together with the
important assumptions and representations that it relied upon in giving the
opinion, under "Proposed Reorganization--Material Federal Income Tax
Consequences" beginning on page 54.
You could recognize taxable gain or income as a result of the
reorganization.
The Internal Revenue Service could take the position that you, as a class A
shareholder, must report taxable income as a result of the transfer and
assumption transaction if the fair market value of the assets Blue Cross and
Blue Shield of Missouri transferred to Healthy Alliance Life Insurance Company
exceeds the associated liabilities assumed by Healthy Alliance Life Insurance
Company. If the Internal Revenue Service succeeded in that position, you could
be required to report taxable income in an amount equal to the percentage of
the outstanding class A common stock you own on the date we complete the
reorganization multiplied by the amount by which the value of the assets
transferred exceeds the liabilities assumed. We cannot determine with any
certainty the amount of taxable income that you might have to report.
If the merger of RightCHOICE and New RightCHOICE is not treated as a tax-
free reorganization, you would have to report gain or loss in an amount equal
to the difference between the value of our common stock you receive in the
reorganization and your tax basis in the class A common stock you exchange in
the reorganization. Moreover, even if the merger is treated as a tax-free
reorganization, if the Internal Revenue Service determines that the value of
our common stock you receive in the reorganization is higher than the value of
the class A common stock you exchange in the reorganization, you could
recognize taxable income in the amount of the difference. We cannot determine
with any certainty the amount of taxable gain or loss you might have to report.
The Missouri Foundation For Health does not have any obligation to indemnify
you or any other class A shareholder for any tax liabilities you may incur as a
result of the reorganization. Therefore, you will have to pay any tax resulting
from the reorganization.
24
<PAGE>
As successor to Blue Cross and Blue Shield of Missouri and RightCHOICE, we
could recognize taxable gain as a result of the reorganization.
The Internal Revenue Service could take the position that our company must
recognize taxable gain as a result of the transfer and assumption transaction
to the extent the fair market value of any asset Blue Cross and Blue Shield of
Missouri transfers to Healthy Alliance Life Insurance Company exceeds that
asset's adjusted basis. PricewaterhouseCoopers LLP's tax opinion also states
that this could be the case. In addition, the Internal Revenue Service could
take the position that the value of the assets transferred exceeds the
liabilities assumed and that our company, as successor to Blue Cross and Blue
Shield of Missouri, should recognize gain. We cannot determine with any
certainty the amount of any gain that our company might have to report as a
result of the transfer and assumption transaction.
The Internal Revenue Service could also take the position that as a result
of the charter conversion transaction our company is subject to federal income
tax on an amount equal to the difference between the fair market value of each
asset of Blue Cross and Blue Shield of Missouri and the tax basis of those
assets. The Internal Revenue Service could take this position if the court
determines that Blue Cross and Blue Shield of Missouri is a mutual benefit
type non-profit corporation under Missouri law rather than a public benefit
type non-profit corporation. This could subject us to a material federal
income tax liability.
Finally, the Internal Revenue Service could take the position that the
merger of RightCHOICE and New RightCHOICE is a taxable transaction to
RightCHOICE and us and not a tax-free reorganization or tax-free liquidation
of RightCHOICE. If so, RightCHOICE would have taxable gain or loss in an
amount equal to the difference between the value of each asset RightCHOICE
transferred to us and the tax basis of that asset. We could also have taxable
gain or loss in an amount equal to the difference between the value of the
assets we received and our basis in our RightCHOICE stock. This could subject
us to a material federal income tax liability.
Although The Missouri Foundation For Health is obligated to indemnify us
for tax liabilities we may incur as a result of the reorganization, this
indemnification may not be sufficient to reimburse us for all of the taxes we
may be obligated to pay. If that happens, we will have to pay these tax
liabilities ourselves.
The Missouri Foundation For Health may not be able to meet its obligations
to us under the indemnification agreement if it recognizes taxable gain as
a result of the reorganization.
If the Internal Revenue Service does not issue the requested private letter
ruling, then the parties must rely solely upon the tax opinion of
PricewaterhouseCoopers LLP. PricewaterhouseCoopers LLP's tax opinion is that
the charter conversion transaction "should," rather than "will," be treated as
a tax-free recapitalization and that The Missouri Foundation For Health
"should," rather than "will," not recognize gain or loss in that transaction.
PricewaterhouseCoopers LLP qualified its tax opinion because of the lack of
direct legislative, judicial or administrative authority, which gives rise to
an increased level of uncertainty.
The Internal Revenue Service could successfully take the position that the
charter conversion transaction does not constitute a tax-free reorganization.
If so, the Foundation could be subject to tax on an amount equal to the value
of the Blue Cross and Blue Shield of Missouri stock that the Foundation
received in the charter conversion transaction. This material federal income
tax liability could prevent the Foundation from meeting its obligations under
the indemnification agreement. To
25
<PAGE>
satisfy its tax liabilities, the Foundation probably would have to sell a
substantial amount of our common stock that it owns, which could lower the
market price for our stock.
We will be defendants in lawsuits pending against Blue Cross and Blue Shield
of Missouri and RightCHOICE, including a class action.
Blue Cross and Blue Shield of Missouri is presently a party to lawsuits
relating to its business. In one of these lawsuits, which was brought against
both Blue Cross and Blue Shield of Missouri and RightCHOICE, pending in St.
Louis City Circuit Court, the plaintiffs were subscribers to Medicare
supplement policies that Blue Cross and Blue Shield of Missouri issued from
July 1, 1992 through August 10, 1994. The two named plaintiffs who brought the
lawsuits seek to represent a class of all subscribers during those years. They
claim that during those three years Blue Cross and Blue Shield of Missouri
collected premiums on Medicare supplement policies that were in excess of the
premiums that had been approved by the Missouri Department of Insurance. They
contend that this action breached the contracts between Blue Cross and Blue
Shield of Missouri and its members. The plaintiffs also claim that Blue Cross
and Blue Shield of Missouri made fraudulent representations about these
premium increases. The plaintiffs claim that Blue Cross and Blue Shield of
Missouri collected allegedly unauthorized premiums totaling more than $29
million. They seek recovery of at least that amount as damages, plus
prejudgment interest and punitive damages. In December 2000, the circuit court
is scheduled to conduct a hearing on the plaintiffs' motion for class
certification. The parties are now engaged in additional discovery. Blue Cross
and Blue Shield of Missouri and RightCHOICE intend to continue to vigorously
defend this lawsuit. We cannot determine the extent or amount of liability, if
any, that Blue Cross and Blue Shield of Missouri or RightCHOICE may have to
the plaintiffs in this case. As the successor to Blue Cross and Blue Shield of
Missouri and RightCHOICE, we will succeed to any liability that they may have
to the plaintiffs in this case, and an adverse decision in this lawsuit could
subject us to substantial damages.
Risks Related to Litigation
If we do not complete the reorganization, the State of Missouri could enforce
judgments previously entered against Blue Cross and Blue Shield of Missouri
which could lead to the dissolution of Blue Cross and Blue Shield of Missouri
and materially adversely affect RightCHOICE.
On December 30, 1996, the circuit court of Cole County, Missouri entered
judgments in favor of the Missouri Department of Insurance and the Missouri
Attorney General declaring that Blue Cross and Blue Shield of Missouri, a non-
profit corporation, violated the Missouri Health Services Corporation Law and
the Missouri Non-Profit Corporation Law by operating RightCHOICE as a for-
profit subsidiary. These judgments are now final, without right of further
appeal.
If we do not complete the reorganization by December 31, 2000 or the
parties do not extend the deadline or otherwise settle the litigation, the
Attorney General and the Department of Insurance could seek:
. Further judicial relief, including the possible dissolution of Blue Cross
and Blue Shield of Missouri and the possible termination of Blue Cross
and Blue Shield of Missouri's certificate of authority to engage in the
health insurance business, and
. Monetary relief arising from the 1994 reorganization of Blue Cross and
Blue Shield of Missouri and the subsequent operations of Blue Cross and
Blue Shield of Missouri and RightCHOICE.
26
<PAGE>
Any one or more of these actions would have a material adverse effect on
RightCHOICE because:
. The Missouri Attorney General and the Missouri Department of Insurance
would be free to assert claims directly against RightCHOICE arising from
the 1994 reorganization of Blue Cross and Blue Shield of Missouri and
RightCHOICE's subsequent operation, and
. The Blue Cross and Blue Shield Association might take the position that
the assertion of these claims automatically terminates the respective
licenses of Blue Cross and Blue Shield of Missouri, RightCHOICE and
RightCHOICE's subsidiaries to use the Blue Cross and Blue Shield names
and service marks.
If the court finds that Blue Cross and Blue Shield of Missouri is a mutual
benefit corporation, a court could cancel the reorganization, or, if already
completed, a court could undo the reorganization or compel New RightCHOICE to
pay substantial damages to the Blue Cross and Blue Shield of Missouri and
RightCHOICE subscribers.
A certified subscriber class action is pending against Blue Cross and Blue
Shield of Missouri in the circuit court of Cole County, Missouri in which the
subscriber class seeks a declaratory judgment that:
. Blue Cross and Blue Shield of Missouri is a mutual benefit non-profit
corporation--meaning that Blue Cross and Blue Shield of Missouri holds
its assets for the benefit of a limited class of persons who are
subscribers of Blue Cross and Blue Shield of Missouri and RightCHOICE
rather than for the benefit of the public as a whole, and
. It is unlawful for Blue Cross and Blue Shield of Missouri to transfer its
assets to a "charitable trust."
While Blue Cross and Blue Shield of Missouri contests these claims, the
circuit court could award the subscriber class the relief they seek. A
judgment in favor of the subscriber class could have several adverse effects:
. It could prohibit the reorganization, if the court enters the judgment
before completion of the reorganization.
. It could require us to pay substantial money damages, if the court enters
the judgment after we complete the reorganization. It is also possible,
although we believe unlikely, that a court could order that the
reorganization be undone.
. It could cause the charter conversion transaction to be a taxable
transaction to New RightCHOICE.
. It could cause the Blue Cross and Blue Shield Association to terminate
our licenses for use of the Blue Cross and Blue Shield names and service
marks.
Although The Missouri Foundation For Health will indemnify us against
claims asserted in this litigation that arise out of the reorganization and
relate to the corporate status of Blue Cross and Blue Shield of Missouri, this
indemnification may not be sufficient to reimburse us for all of the damages
we could suffer.
Someone might bring an action seeking an injunction against completion of the
reorganization.
We are not required to complete the reorganization if a court has issued a
temporary restraining order or injunction against completing the
reorganization or if someone files an action seeking a restraining order or
injunction and that action has not been dismissed. If someone brings an
action, or a court enters a restraining order or injunction, in connection
with any of the litigation or potential litigation described above or in any
other litigation, any party may choose not to complete the reorganization. If
this occurs, the parties will be subject to the risks described in the risk
factor "If we do not complete the reorganization, the State of Missouri could
enforce judgments previously entered against Blue Cross and Blue Shield of
Missouri which could lead to the dissolution of Blue Cross and Blue Shield of
Missouri and materially adversely affect RightCHOICE" on page 26.
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FORWARD LOOKING STATEMENTS
This document includes forward-looking statements relating to, among other
things, future results of operations, the impact of sales of New RightCHOICE
common stock by The Missouri Foundation For Health, the outcome of litigation,
tax consequences of the reorganization and the effects of regulation of New
RightCHOICE's business. We use words such as believe, expect, anticipate,
could, plan, project, may, future, intend, should and similar expressions to
identify forward-looking statements.
We have based these forward-looking statements on our current expectations
about future events. These forward-looking statements are subject to a number
of risks, uncertainties and assumptions, including those we describe in the
"Risk Factors" section of this document beginning on page 20. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in
this document might not occur. You should not view the forward-looking
statements as guarantees of future performance.
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SPECIAL MEETING
Purpose of Special Meeting
The purpose of the special meeting is to vote on the reorganization.
Matters to be Considered
At the special meeting, RightCHOICE shareholders will consider and vote upon
the merger of RightCHOICE into New RightCHOICE and the reorganization agreement
among Blue Cross and Blue Shield of Missouri, RightCHOICE, The Missouri
Foundation For Health and New RightCHOICE.
RightCHOICE shareholders may also consider and vote upon other matters that
a party properly brings before the special meeting, including a proposal to
adjourn the special meeting to permit the board of directors time to solicit
additional proxies in the event that the board of directors has not received
enough votes to approve the merger of RightCHOICE into New RightCHOICE and the
reorganization agreement. A proxy voted against the merger of RightCHOICE into
New RightCHOICE and the reorganization agreement may not be voted in favor of
adjournment to solicit further proxies.
As of the date of this document, the board of directors does not know of any
other business that a party will present for consideration at the special
meeting, other than the matters described in this document.
Record Date
Only RightCHOICE shareholders of record as of October 4, 2000 are entitled
to notice of and to vote at the special meeting. On October 4, 2000,
shares of class A common stock and 14,962,500 shares of class B common stock
were outstanding and entitled to vote at the special meeting.
Voting and Revocability of Proxies
If you execute a proxy, you retain the right to revoke it at any time before
the vote. Unless revoked, the proxyholders will vote the shares represented by
your proxy at the special meeting and all postponements and adjournments
thereof. You may revoke your proxy by:
. Sending written notice to the Corporate Secretary, RightCHOICE Managed
Care, Inc., 1831 Chestnut Street, St. Louis, Missouri 63103,
. Filing a later dated proxy prior to a vote being taken on a particular
proposal at the special meeting, or
. Attending the special meeting and voting in person.
Proxyholders will vote proxies solicited by the board of directors in
accordance with the directions given on the proxy card. If you return your
proxy card but do not indicate your vote on the proxy card, the proxy holder
will vote your proxy FOR approval of the reorganization.
The proxies confer discretionary authority on the proxy holders to vote the
shares of class A common stock represented by the proxy on matters incident to
the conduct of the special meeting. If a party presents any other business at
the special meeting, the proxy holders will vote the proxies in their
discretion.
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Proxies marked as abstentions will have the same effect as a vote AGAINST
the reorganization. If you do not return your proxy card or do not vote at the
special meeting, you will have effectively voted AGAINST the reorganization.
Your board of directors recommends that you vote for the reorganization.
Quorum
A quorum at the special meeting requires the presence, in person or by
proxy, of a majority of the total number of outstanding shares of class A
common stock and class B common stock taken together as one class, and taken
separately as two different classes. For purposes of determining a quorum, we
will count shares of common stock present at the special meeting but not
voting, and shares of common stock present by proxy at the special meeting but
electing to abstain, as present in determining if we have a quorum.
Solicitation of Proxies
Directors, officers and employees of RightCHOICE will solicit proxies by
mail and personal contact without additional compensation. Blue Cross and Blue
Shield of Missouri will pay all of the costs of soliciting proxies and
preparing this document. RightCHOICE will pay for the expenses of mailing this
document and will reimburse brokerage firms and other custodians, nominees and
fiduciaries for their reasonable expenses incurred in sending proxy materials
to the beneficial owners of class A common stock. RightCHOICE may retain a
proxy solicitation firm if it deems it necessary.
Vote Required
Approval and adoption of the reorganization requires the approval of the
owners of:
. Two-thirds of the outstanding shares of class A common stock and class B
common stock voting together as a single class, and
. A majority of the outstanding shares of class A common stock voting as a
class separate and apart from the class B common stock, but excluding any
shares of class A common stock owned by Blue Cross and Blue Shield of
Missouri and by any executive officer or director of Blue Cross and Blue
Shield of Missouri or RightCHOICE.
Blue Cross and Blue Shield of Missouri has agreed in the reorganization
agreement to vote all of the shares of class B common stock in favor of the
reorganization at the special meeting. Based upon information as of October 2,
2000, the owners of shares of class A common stock must vote in
favor of the reorganization at the special meeting for approval.
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PROPOSED REORGANIZATION
The following is a summary of the material terms of the reorganization. We
urge you to read the reorganization agreement, which is Appendix A and is
summarized beginning on page 63.
Overview of Reorganization
The reorganization is part of a settlement agreement entered into by
RightCHOICE, Blue Cross and Blue Shield of Missouri, the Missouri Attorney
General and the Missouri Department of Insurance. As part of the settlement,
Blue Cross and Blue Shield of Missouri will pay $12.78 million to The Missouri
Foundation For Health, transfer its insurance contracts and cash and
receivables to a subsidiary of RightCHOICE, convert to a stock entity and then
merge with RightCHOICE. The Foundation will receive approximately 80% of the
stock of the resulting entity. We expect the Foundation to fund its charitable
activities with the cash it receives from Blue Cross and Blue Shield of
Missouri and New RightCHOICE and with the proceeds it receives through an
orderly sale of the New RightCHOICE common stock received in the
reorganization. The reorganization will not happen unless RightCHOICE
shareholders approve it at the special meeting.
The parties will accomplish the reorganization in several separate steps
described below. One of the steps of the reorganization is the merger of
RightCHOICE into a newly-created Delaware corporation also named RightCHOICE
Managed Care, Inc., which is referred to as New RightCHOICE in this document.
In the merger with New RightCHOICE:
. You and the other class A shareholders will receive one share of New
RightCHOICE common stock for each share of class A common stock you own,
representing in the aggregate approximately 20% of the equity and 20% of
the voting power of New RightCHOICE, which is the same ownership
interest, but an increased voting interest, that the class A shareholders
currently have in RightCHOICE, and
. The Missouri Foundation For Health will receive 14,962,500 shares of New
RightCHOICE common stock, representing approximately 80% of the equity
and 80% of the voting power of New RightCHOICE, which is the same
ownership interest, but a decreased voting interest, that Blue Cross and
Blue Shield of Missouri currently has in RightCHOICE.
After the reorganization, you will be a shareholder of New RightCHOICE
instead of RightCHOICE, and RightCHOICE will no longer exist as a separate
company. New RightCHOICE's business operations and assets and liabilities
initially will include:
. The combined business of RightCHOICE and the insurance and other business
of Blue Cross and Blue Shield of Missouri, and
. The combined assets and liabilities of RightCHOICE and Blue Cross and
Blue Shield of Missouri, except for:
-- approximately $13 million Blue Cross and Blue Shield of Missouri and
New RightCHOICE will pay to The Missouri Foundation For Health as
part of the settlement, and
-- the shares of class B common stock, which New RightCHOICE will cancel
and the value of which it will transfer to The Missouri Foundation
For Health in the form of shares of New RightCHOICE common stock.
The Pro Forma Unaudited Combined Condensed Financial Statements beginning on
page 91 of this document include historical amounts for RightCHOICE, the Blue
Cross and Blue Shield carve-out and New RightCHOICE, as well as adjustments
necessary to reflect the reorganization.
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Pre-Reorganization Steps
The following steps have been, or will be, taken prior to the
reorganization.
Creation of Foundation
The State of Missouri established The Missouri Foundation For Health as a
Missouri non-profit public benefit corporation as part of the settlement. We
expect The Missouri Foundation For Health to use the assets it receives in the
reorganization to benefit uninsured and underinsured Missourians in Blue Cross
and Blue Shield of Missouri's service area. On July 18, 2000, the Internal
Revenue Service determined that the Foundation is exempt from federal income
tax as a social welfare organization pursuant to Section 501(c)(4) of the
Internal Revenue Code.
Creation of New RightCHOICE
The Missouri Foundation For Health organized New RightCHOICE under the
settlement agreement for the sole purpose of facilitating the reorganization.
Upon its incorporation, New RightCHOICE issued one share of its common stock to
The Missouri Foundation For Health.
$12.78 Million Cash Payment
Immediately prior to and separate from the reorganization, Blue Cross and
Blue Shield of Missouri will pay $12.78 million to The Missouri Foundation For
Health in partial satisfaction of claims by various parties, including the
Missouri Attorney General, the Missouri Department of Insurance and public
interest advocacy groups, that Blue Cross and Blue Shield of Missouri has a
public purpose obligation. We expect that the Foundation will use the payment
to benefit uninsured and underinsured Missourians.
Reorganization Steps
The reorganization consists of the following four steps, which the parties
will complete in the following order on the closing date of the reorganization:
Transfer and Assumption Transaction
First, Blue Cross and Blue Shield of Missouri will transfer, and Healthy
Alliance Life Insurance Company, a wholly-owned subsidiary of RightCHOICE, will
assume, all of Blue Cross and Blue Shield of Missouri's insurance contracts and
associated liabilities. Blue Cross and Blue Shield of Missouri will also
transfer to Healthy Alliance Life Insurance Company cash and receivables equal
to the liabilities assumed by Healthy Alliance Life Insurance Company under the
transferred insurance contracts and the amount, if any, necessary to meet
statutory reserve requirements. The transfer and assumption transaction must
occur before the charter conversion transaction because Blue Cross and Blue
Shield of Missouri will no longer have the authority under its charter to
engage in the health insurance business under Missouri law once it converts to
a Missouri for-profit corporation. Although this specific step does not require
the approval of the RightCHOICE shareholders, it will not occur unless the
RightCHOICE shareholders approve the reorganization at the special meeting.
Charter Conversion Transaction
Second, Blue Cross and Blue Shield of Missouri will convert from a Missouri
non-profit non-stock health services corporation to a Missouri for-profit stock
corporation by amending its charter documents. As part of this transaction,
Blue Cross and Blue Shield of Missouri will issue one share of its common stock
to The Missouri Foundation For Health, which then will own 100% of Blue
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Cross and Blue Shield of Missouri. Although this specific step does not require
the approval of the RightCHOICE shareholders, it will not occur unless the
RightCHOICE shareholders approve the reorganization at the special meeting.
Reincorporation Merger Transaction
Third, Blue Cross and Blue Shield of Missouri will reincorporate as a
Delaware corporation by merging with New RightCHOICE, which The Missouri
Foundation For Health will own at that time. In this reincorporation merger
transaction, the one share of New RightCHOICE common stock owned by the
Foundation will remain outstanding, and the one share of Blue Cross and Blue
Shield of Missouri stock owned by the Foundation will be cancelled. This step
requires the approval of the shareholders of Blue Cross and Blue Shield of
Missouri and New RightCHOICE. Although the Foundation, as the only shareholder
of each of these companies immediately prior to this merger, has agreed in the
reorganization agreement to vote in favor of this merger, this merger will not
occur unless the RightCHOICE shareholders approve the reorganization at the
special meeting. Following this step, the Foundation will continue to own the
only outstanding share of New RightCHOICE common stock.
RightCHOICE/New RightCHOICE Merger Transaction
Finally, RightCHOICE will merge with New RightCHOICE. New RightCHOICE will
be the surviving corporation in this merger. In this transaction:
. You and the other class A shareholders will receive one share of New
RightCHOICE common stock for each share of class A common stock you own,
. Each outstanding share of class B common stock, which New RightCHOICE
will own immediately prior to this transaction, will be cancelled, and
. The one outstanding share of New RightCHOICE common stock owned by The
Missouri Foundation For Health will be converted into 14,962,500 shares
of New RightCHOICE common stock, which is equal to the number of shares
of class B common stock cancelled in this merger.
This step requires the approval of the shareholders of RightCHOICE as set
forth on page 30 of this document and the approval of The Missouri Foundation
For Health as the sole shareholder of New RightCHOICE. The Foundation has
agreed in the reorganization agreement to vote in favor of this merger.
New RightCHOICE Payment
Immediately upon completion of the reorganization, New RightCHOICE will pay
$175,000 to The Missouri Foundation For Health in partial satisfaction of any
obligation Blue Cross and Blue Shield of Missouri may have had under Missouri
law resulting from its conversion from a non-profit non-stock health services
corporation to a for-profit stock corporation in the charter conversion
transaction.
Post-Reorganization Ownership Structure
Following completion of the reorganization, the current class A shareholders
will own approximately 20% of the outstanding shares of New RightCHOICE common
stock, and The Missouri Foundation For Health will own approximately 80% of the
outstanding shares of New
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RightCHOICE common stock. Unlike the class B common stock, which has ten votes
per share, each share of New RightCHOICE common stock has one vote per share.
Therefore, the public shareholders of New RightCHOICE will have approximately
20% of the voting power of New RightCHOICE, and the Foundation will have
approximately 80% of the voting power of New RightCHOICE, although a voting
trust will hold at least 95% of the Foundation's shares of New RightCHOICE
common stock until the Foundation sells the shares as required by the voting
trust and divestiture agreement.
[REORGANIZATION CHART]
Effective Time of Reorganization
We expect the reorganization to occur promptly after the parties satisfy or
waive, if waivable, the last of the preconditions to the reorganization. We
currently anticipate that we will complete the reorganization before December
31, 2000, although we cannot assure you that we will meet this deadline. Any
party to the reorganization agreement may terminate the reorganization
agreement if we do not complete the reorganization by December 31, 2000.
Exchange of Certificates
After we complete the reorganization, your rights as a shareholder of
RightCHOICE will cease, and you will be a shareholder of New RightCHOICE. As
soon as reasonably practicable after we complete the reorganization, a bank or
trust company designated by RightCHOICE as the exchange agent will mail to you
a letter of transmittal and instructions on how to exchange your class A common
stock certificates for New RightCHOICE common stock certificates. Upon
surrender of your certificates for cancellation together with a duly executed
letter of transmittal and other documents that may be required by the exchange
agent, you will receive certificates for those shares of New RightCHOICE common
stock to which you are entitled. You should not submit your stock certificates
until you have received written instructions to do so. At the effective time of
the reorganization, RightCHOICE will close its stock transfer books and will
not permit any further transfers of RightCHOICE common stock.
Background of Reorganization
RightCHOICE proposes the reorganization as a result of the settlement
agreement. The rest of this section describes the background of the settlement
agreement.
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The events leading to the reorganization began with the 1994 reorganization
of Blue Cross and Blue Shield of Missouri. Blue Cross and Blue Shield of
Missouri is a Missouri non-profit health services corporation. On April 4,
1994, the board of directors of Blue Cross and Blue Shield of Missouri approved
the creation of RightCHOICE as a for-profit subsidiary. The board of directors
decided to transfer the managed care business of Blue Cross and Blue Shield of
Missouri to RightCHOICE and to various subsidiaries of RightCHOICE. The board
of directors made its decision on the advice of professional advisors so that
Blue Cross and Blue Shield of Missouri would have access to public equity
markets through RightCHOICE and could raise necessary capital for its
operations and possible acquisitions.
To create RightCHOICE, Blue Cross and Blue Shield of Missouri transferred
its managed care business to RightCHOICE in exchange for all of the class B
common stock, which then represented 100% of the outstanding capital stock of
RightCHOICE. RightCHOICE then conducted an initial public offering of its class
A common stock. The shares of class A common stock sold in the initial public
offering, and currently outstanding, represent approximately 20% of the
outstanding equity of RightCHOICE and approximately 3% of the voting power of
RightCHOICE. Blue Cross and Blue Shield of Missouri retained, and still owns,
all of the outstanding class B common stock which represents the remaining 80%
of the outstanding equity of RightCHOICE and, by virtue of having ten votes per
share, approximately 97% of the voting power of RightCHOICE.
In connection with the 1994 reorganization, RightCHOICE and two of its
subsidiaries obtained affiliate licenses to use the names and service marks
"Blue Cross" and "Blue Shield" in connection with the managed care business in
eighty-five Missouri counties, including St. Louis County and the City of St.
Louis, and Blue Cross and Blue Shield of Missouri agreed not to engage in the
managed care business in that territory. The Blue Cross and Blue Shield
Association, a national association of health care plans, owns and controls the
use of those names and service marks. Blue Cross and Blue Shield of Missouri
remained the primary Blue Cross and Blue Shield licensee for this same area and
uses the names and service marks in connection with the non-managed care
insurance business that it retained.
On April 14, 1994, the Missouri Department of Insurance approved both the
1994 reorganization and the initial public offering of the class A common
stock, finding those actions to be in accordance with Missouri insurance laws
and regulations. On August 8, 1994, Blue Cross and Blue Shield of Missouri
carried out the 1994 reorganization as planned. RightCHOICE carried out its
initial public offering and sold 3,737,500 shares of class A common stock to
the public for $11.00 per share.
Despite its prior approval of the reorganization, starting in 1995, the
Director of the Missouri Department of Insurance claimed that Blue Cross and
Blue Shield of Missouri violated state laws when it consummated the 1994
reorganization. The Director claimed that Blue Cross and Blue Shield of
Missouri is a public benefit corporation--with obligations to the public--
rather than a mutual benefit corporation--with obligations solely to its
subscribers. The Director further stated that through its ownership of
RightCHOICE, Blue Cross and Blue Shield of Missouri engaged primarily in a for-
profit business in violation of the state health services corporation law. The
Director claimed that Blue Cross and Blue Shield of Missouri had engaged in a
de facto conversion to a for-profit corporation and must transfer all of its
assets, including all of its RightCHOICE stock, to the State of Missouri.
Counsel for the Governor of Missouri asserted that Blue Cross and Blue
Shield of Missouri might not be in compliance with the Missouri health services
corporation law because it was "engaged in business activity for profit." He
suggested that the Missouri Department of Insurance might commence proceedings
to terminate the certificate of authority of Blue Cross and Blue Shield of
Missouri to engage in the health insurance business in the State of Missouri.
Termination of the
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certificate of authority would have led the Blue Cross and Blue Shield
Association to terminate the licenses of RightCHOICE and of Blue Cross and Blue
Shield of Missouri to use the Blue Cross and Blue Shield names and service
marks and would have had other adverse consequences.
Attempts to resolve these disputes with the state officials were
unsuccessful. On May 13, 1996, Blue Cross and Blue Shield of Missouri filed a
declaratory judgment action in the circuit court of Cole County, Missouri
against the Missouri Department of Insurance and the Missouri Attorney General.
The Attorney General, as the officer charged with enforcing Missouri's non-
profit corporation law, was a necessary party. Blue Cross and Blue Shield of
Missouri sought a declaratory judgment that it had followed all applicable laws
and regulations in completing the 1994 reorganization and a permanent
injunction prohibiting the Department of Insurance from refusing to renew its
certificate of authority to engage in the health insurance business. Blue Cross
and Blue Shield of Missouri also sought to enjoin the Department of Insurance
from taking any other administrative action against it to force it into paying
a "toll charge" or "charitable asset assessment" or any other fee as a result
of the 1994 reorganization.
The Missouri Department of Insurance and the Missouri Attorney General both
filed answers and counterclaims. The Department of Insurance claimed that Blue
Cross and Blue Shield of Missouri had made fraudulent statements or omissions
in the application for approval of the 1994 reorganization. The Department of
Insurance also claimed that Blue Cross and Blue Shield of Missouri had
concealed its intention to have a RightCHOICE subsidiary reinsure the Medicare
Supplement business of Blue Cross and Blue Shield of Missouri and had concealed
changes in its articles of incorporation.
In its counterclaim, the Missouri Department of Insurance sought a number of
forms of equitable relief on the theory that Blue Cross and Blue Shield of
Missouri had violated various provisions of Missouri law by completing the 1994
reorganization and by its subsequent operations, including reinsuring of the
Medicare Supplement business without the approval of the Department. Among
other claims, the Department of Insurance asserted that Blue Cross and Blue
Shield of Missouri had improperly converted to a mutual benefit corporation or
a for-profit corporation. In an amended counterclaim, the Department of
Insurance added to its allegations that the post-reorganization operations of
Blue Cross and Blue Shield of Missouri violated Missouri law and filed a claim
seeking to take control of Blue Cross and Blue Shield of Missouri under the
Missouri insurance laws that give the Department the authority to
"rehabilitate" insurers.
The Missouri Attorney General filed an answer denying that the court should
grant any relief to Blue Cross and Blue Shield of Missouri. In his
counterclaim, the Attorney General alleged that Blue Cross and Blue Shield of
Missouri continued to abuse or exceed its authority as a Missouri non-profit
corporation. The Attorney General asked the court to consider alternative forms
of relief permissible under Missouri law, which included the dissolution of
Blue Cross and Blue Shield of Missouri. In a later amended counterclaim, the
Attorney General also sought a declaration that Blue Cross and Blue Shield of
Missouri was a public benefit non-profit corporation, not a mutual benefit non-
profit corporation. He sought an order requiring Blue Cross and Blue Shield of
Missouri to amend its articles of incorporation accordingly.
Blue Cross and Blue Shield of Missouri filed motions for summary judgment.
On September 9, 1996, the Cole County circuit court granted summary judgment to
Blue Cross and Blue Shield of Missouri on its claims against the Missouri
Department of Insurance. The court found the fraud arguments of the Department
of Insurance to be without merit. It issued a permanent injunction against the
Department of Insurance. The court declared that under Missouri law the
Department of Insurance lacked the authority to demand Blue Cross and Blue
Shield of Missouri to make a payment as a result of the transfer of its managed
care business to RightCHOICE. The court also held that the Department of
Insurance lacked the jurisdiction to take any action the practical effect of
which would be to amend, modify or reverse the Department's approval of the
1994 reorganization.
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In the September 9, 1996 order, the Cole County circuit court also held that
the Missouri Department of Insurance lacked jurisdiction to take any
administrative action, including, but not limited to, revoking, suspending or
refusing to renew Blue Cross and Blue Shield of Missouri's certificate of
authority for refusing to make the payment the Missouri Department of Insurance
had demanded. The court held that the Missouri laws applicable to non-profit
health services corporations authorized the 1994 reorganization.
All the parties filed additional motions for summary judgment, which the
Cole County circuit court decided on December 30, 1996. The court concluded in
the December 30 orders that the operations of Blue Cross and Blue Shield of
Missouri after the 1994 reorganization constituted the carrying on of business
for profit in violation of both the Missouri non-profit corporation law and the
Missouri health services corporation law and that Blue Cross and Blue Shield of
Missouri had continued to exceed or abuse the authority conferred upon it by
law in violation of both the non-profit corporation law and the health services
corporation law. Nothing in the December 30 orders expressly modified the
court's conclusion, expressed on September 9, 1996, that the laws applicable to
non-profit health services corporations authorized the 1994 reorganization and
public offering of the class A common stock.
In the December 30, 1996 orders, the court further stated that Blue Cross
and Blue Shield of Missouri was subject to judicial dissolution proceedings but
that prior to ordering dissolution the court would consider whether
alternatives to dissolution existed. The court also directed that its orders be
entered as final judgments under Missouri law to permit an immediate appeal. It
stayed any further proceedings pending appeal.
The pendency of this litigation had an adverse effect on the Blue Cross and
Blue Shield Association's continued licensure of RightCHOICE and Blue Cross and
Blue Shield of Missouri. In early January 1997, the Association notified Blue
Cross and Blue Shield of Missouri that the licenses had automatically
terminated as a result of the continued pendency of an action in which it could
be dissolved or rehabilitated. Blue Cross and Blue Shield of Missouri disputed
the Association's position. The Association resolved the dispute by giving Blue
Cross and Blue Shield of Missouri and RightCHOICE new temporary licenses. These
temporary licenses gave Blue Cross and Blue Shield of Missouri and RightCHOICE
the right to continue to use the Blue Cross and Blue Shield names and service
marks until the expiration or termination of the stay of further proceedings
entered as part of the December 30, 1996 orders.
Blue Cross and Blue Shield of Missouri appealed to the Missouri Court of
Appeals from the judgments of December 30, 1996 against it. The Missouri
Department of Insurance cross-appealed from the disallowance of its fraud
arguments and from the circuit court's holding that it lacked standing to
assert several claims.
In February 1997, the board of directors of RightCHOICE offered the position
of Chairman and Chief Executive Officer to John A. O'Rourke. In March 1997, the
RightCHOICE board of directors appointed Mr. O'Rourke President of RightCHOICE,
and the Blue Cross and Blue Shield of Missouri board of director's appointed
him President and Chief Executive Officer of Blue Cross and Blue Shield of
Missouri. Both boards of directors assigned Mr. O'Rourke certain objectives,
including resolving the litigation with the State of Missouri.
From April 1997 through the end of October 1997, Mr. O'Rourke and his legal
advisors met a number of times with both the Missouri Attorney General's office
and the Missouri Department of Insurance in an attempt to settle the
litigation. On May 2, 1997, Blue Cross and Blue Shield of Missouri sent to the
Attorney General's office a written framework for future discussions. Under
this framework, Blue Cross and Blue Shield of Missouri would continue in
existence as a Missouri health services corporation and would retain voting
control of RightCHOICE. The State would create a new
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tax-exempt foundation with health care purposes and with a governing body
selected with equal input from Blue Cross and Blue Shield of Missouri and the
Attorney General. The State would fund the foundation with at least 10,000,000
shares of RightCHOICE stock owned by Blue Cross and Blue Shield of Missouri.
The foundation would agree to restrictions on resale of the stock necessary to
avoid any adverse impact on the market price of the RightCHOICE stock and to
meet Blue Cross and Blue Shield Association requirements. RightCHOICE would
have a right of first refusal to purchase the shares from the foundation.
The Missouri Attorney General rejected this framework when Blue Cross and
Blue Shield of Missouri insisted that, as part of the settlement, the State
declare Blue Cross and Blue Shield of Missouri a mutual benefit corporation
with no charitable trust obligation. The Attorney General would only consent to
the designation of Blue Cross and Blue Shield of Missouri as a mutual benefit
corporation as part of a settlement if Blue Cross and Blue Shield of Missouri
transferred assets equal to the full fair market value of Blue Cross and Blue
Shield of Missouri, less only an appropriate discount for litigation risk, to a
public benefit foundation. The Attorney General stated that the 10,000,000
shares of RightCHOICE stock offered by Blue Cross and Blue Shield of Missouri
did not satisfy this requirement.
The Missouri Attorney General also rejected the suggested method for
appointing the governing board of the foundation. The Attorney General's office
took the position that the board of the foundation had to be completely
independent of Blue Cross and Blue Shield of Missouri to avoid conflicts of
interest.
In May 1997 and February 1998, another Blue Cross and Blue Shield plan
contacted Blue Cross and Blue Shield of Missouri about a possible business
combination that would have involved the acquisition of the outstanding shares
of RightCHOICE stock held by the public, so that Blue Cross and Blue Shield of
Missouri would own 100% of the outstanding shares of RightCHOICE stock, and the
merger of Blue Cross and Blue Shield of Missouri into the other plan. The plan
did not propose a specific purchase price for the publicly held RightCHOICE
shares. After discussing the possible business combination with the other plan
and consulting with its financial and other advisors, Blue Cross and Blue
Shield of Missouri ultimately determined to terminate discussions with the
other plan in early 1998. It based its decision, in part, upon its
consideration that the state regulators, as a condition to granting their
approval of any transaction involving Blue Cross and Blue Shield of Missouri,
would require a payment in satisfaction of Blue Cross and Blue Shield of
Missouri's alleged public benefit obligation equal to the full value of Blue
Cross and Blue Shield of Missouri. Blue Cross and Blue Shield of Missouri had
been advised that the other plan was not interested in making such a payment.
The board of directors of Blue Cross and Blue Shield of Missouri was concerned
that absent such a payment the transaction may not have received the necessary
regulatory approvals. The board concluded that the better course of action was
to finalize a strategic plan for resolving the litigation so that Blue Cross
and Blue Shield of Missouri and its subsidiaries would be in a better position
to thereafter consider other strategic alternatives.
Blue Cross and Blue Shield of Missouri, the Missouri Attorney General and
the Missouri Department of Insurance continued to discuss settlement options.
In July 1997, lawyers from the Missouri Attorney General's office expressed
willingness to consider a settlement if Blue Cross and Blue Shield of Missouri
purchased the class A common stock owned by the public shareholders and merged
RightCHOICE back into Blue Cross and Blue Shield of Missouri. They suggested
that this transaction would moot the lawsuit by putting an end to the alleged
abuse of Blue Cross and Blue Shield of Missouri's non-profit purposes. In
addition to undoing the creation of RightCHOICE, the Attorney General continued
to expect payment of a penalty for any diminution in the value of Blue Cross
and Blue Shield of Missouri attributable to the creation and operation of
RightCHOICE since the consummation of the 1994 reorganization.
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In August 1997, representatives of Blue Cross and Blue Shield of Missouri
met with representatives from the Missouri Department of Insurance, including
the Director. The Director indicated that if Blue Cross and Blue Shield of
Missouri wanted to settle the litigation, it had to either (1) revert to a
fully non-profit corporation by purchasing the class A common stock and merging
back into Blue Cross and Blue Shield of Missouri, or (2) fully convert Blue
Cross and Blue Shield of Missouri to for-profit status while contributing the
full value of the assets of Blue Cross and Blue Shield of Missouri to a public
benefit foundation. The parties came to refer to these two options,
respectively, as the "privatization" option and the "foundation" option. The
Director expressed his preference for the foundation option.
At the direction of the boards of directors of Blue Cross and Blue Shield of
Missouri and RightCHOICE, the management of each company undertook a
comprehensive strategic planning process that began at the end of 1997 and
continued into the early months of 1998. In that strategic planning process,
officers of the companies analyzed the effects of the ongoing litigation on the
operations of the two companies. They identified duplicate costs resulting from
the dual structure of the two companies. They analyzed the advantages and
disadvantages of the two settlement options as well as litigation options.
As a result of the strategic planning process, both boards concluded that
the companies should settle the litigation and that either settlement option
suggested by the Missouri Attorney General and the Missouri Department of
Insurance, the fully non-profit alternative or the fully for-profit
alternative, would be preferable to a complete victory in the litigation, which
would leave the dual structure in place and both companies in an adversarial
relationship with their regulators.
On February 9, 1998, the Missouri Attorney General filed a lawsuit against
Blue Cross and Blue Shield of Missouri seeking restitution and the imposition
of fines for alleged violations of the Merchandising Practices Act. On February
11, 1998, the Missouri Department of Insurance filed administrative proceedings
seeking administrative relief for alleged violations discovered in a market
conduct examination of Blue Cross and Blue Shield of Missouri, RightCHOICE and
their subsidiaries.
On February 23, 1998, the board of directors of RightCHOICE appointed an
independent committee of the board which it identified as the RightCHOICE
business opportunities committee. This committee initially was comprised of
Roger B. Porter, Ph.D., Chairman, William H.T. Bush and Edward Gomes. Mr. Gomes
resigned from the RightCHOICE board of directors and the committee on October
26, 1998. The board of directors added Ronald G. Evens, M.D. as a committee
member on December 7, 1998 and added Earle H. Harbison, Jr. as a committee
member on March 1, 1999. Dr. Evens resigned from the RightCHOICE board of
directors and the committee on October 22, 1999. The board of directors added
Gloria W. White as a committee member on June 28, 1999. This committee had the
duty of, among other things, representing the interests of RightCHOICE's public
shareholders in connection with this litigation and any settlement of this
litigation. Each member of this committee was a director who had no position
with Blue Cross and Blue Shield of Missouri and who was neither an officer nor
an employee of RightCHOICE. On March 17, 1998, the committee engaged the law
firm of Thompson Coburn as its special counsel.
On January 27, 1998, the board of directors of Blue Cross and Blue Shield of
Missouri appointed an independent committee of the board which it identified as
the Blue Cross and Blue Shield of Missouri pines ad hoc committee. The Blue
Cross and Blue Shield of Missouri board of directors later changed the name of
the committee to the Blue Cross and Blue Shield of Missouri business
opportunities committee. This committee initially was comprised of William J.
Schicker, Chairman, D. Keith Adams, Robert J. Kelley, and Joseph Lammers. On
August 11, 1998, the Blue Cross and Blue Shield of Missouri board of directors
added Daniel J. McVey as a member of this committee. Among other things, this
committee represented the interests of Blue Cross and Blue
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Shield of Missouri in connection with this litigation and any settlement of
this litigation. Each member of this committee was a director who had no
position with RightCHOICE and who was neither an officer nor an employee of
Blue Cross and Blue Shield of Missouri. On March 15, 1999, the committee
engaged the law firm of Greensfelder, Hemker & Gale, P.C. as its special
counsel.
The only person who served on the board of directors of both Blue Cross and
Blue Shield of Missouri and RightCHOICE during this period was Norman J. Tice.
In addition, Mr. O'Rourke is the President and Chief Executive Officer of Blue
Cross and Blue Shield of Missouri and the Chairman, President and Chief
Executive Officer of RightCHOICE.
The business opportunities committee and entire board of directors of Blue
Cross and Blue Shield of Missouri fully explored both settlement options--the
privatization option and the foundation option. They considered the impact that
each option would have on the subscribers of Blue Cross and Blue Shield of
Missouri and RightCHOICE, the public shareholders of RightCHOICE, and other
interested parties. Initially, the Blue Cross and Blue Shield of Missouri board
of directors favored the privatization option. However, after a meeting with
the Missouri Attorney General in early March 1998 in which he expressed a
strong preference for the foundation option and identified a number of
obstacles to the implementation of the privatization option, Blue Cross and
Blue Shield of Missouri decided to pursue the foundation option. The Missouri
Department of Insurance also expressed a strong preference for that option. The
parties favored the foundation option because it would separate the dual roles
of Blue Cross and Blue Shield of Missouri into separate, independent entities--
the publicly traded for-profit health insurance and managed care company would
continue to offer competitive health benefit plans, and the new foundation
would pursue the social mission of addressing public health needs often unmet
in the commercial health insurance market.
Once Blue Cross and Blue Shield of Missouri, the Missouri Attorney General
and the Missouri Department of Insurance had agreed to pursue the foundation
option, they moved rapidly to reach agreement on basic settlement terms. They
engaged in arms-length negotiations over all issues. All parties desired to
resolve all litigation pending between them, preserve the Blue Cross and Blue
Shield licenses, provide for favorable tax treatment, separate the non-profit
and for-profit entities, create a health care foundation funded primarily with
stock in the surviving for-profit insurance company, resolve the pending
subscriber litigation, protect the subscribers and financial viability of
RightCHOICE and avoid dissolution of Blue Cross and Blue Shield of Missouri.
A document entitled "Proposed Resolution Terms" contained the basic terms
negotiated by legal counsel. On April 20, 1998, the Missouri Attorney General
and the Missouri Department of Insurance formally proposed the Proposed
Resolution Terms as the terms of a settlement that would resolve the
outstanding litigation. On April 21, 1998, the board of directors of Blue Cross
and Blue Shield of Missouri and the board of directors of RightCHOICE
considered and approved the Proposed Resolution Terms.
The parties publicly announced the contents of the Proposed Resolution Terms
on April 22, 1998. The parties announced that they would create a public
benefit foundation through a series of transactions in which Blue Cross and
Blue Shield of Missouri would contribute to the foundation its approximately
15,000,000 shares of RightCHOICE stock. The foundation would fund its
activities through the orderly divestiture of the RightCHOICE stock. The shares
held by the foundation would be subject to a voting agreement that would
effectively vest voting control in the board of directors of RightCHOICE and
the owners of the remaining shares of RightCHOICE stock. RightCHOICE would
absorb the remaining health insurance business and other assets and liabilities
of Blue Cross and Blue Shield of Missouri and become a consolidated, fully for-
profit, direct licensee for the Blue Cross and Blue Shield names and service
marks. Implementing the settlement transactions outlined in
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the Proposed Resolution Terms required satisfaction of a number of conditions,
including finalizing a definitive settlement agreement and related documents,
as well as judicial, shareholder, regulatory, and Blue Cross and Blue Shield
Association approvals.
The parties proceeded to negotiate a definitive agreement. As they were
doing so, on August 4, 1998, the Missouri Court of Appeals rendered an opinion
in the appeals from the orders of December 30, 1996 in which the circuit court
had concluded, among other things, that Blue Cross and Blue Shield of Missouri
was operating in violation of Missouri non-profit law. The Court of Appeals
affirmed those judgments. The parties intended to effect the settlement
regardless of the outcome of the litigation in the appellate courts.
On September 11, 1998, Blue Cross and Blue Shield of Kansas City submitted a
proposal to Blue Cross and Blue Shield of Missouri and RightCHOICE that would
have involved the acquisition of the outstanding shares of RightCHOICE stock
held by the public for $13.50 per share and the merger of Blue Cross and Blue
Shield of Missouri with the Kansas City plan. The proposal contained a number
of contingencies, including financing and the resolution of the pending
litigation. After a thorough evaluation of the proposal, with the assistance of
their financial and other advisors, the boards of directors of both RightCHOICE
and Blue Cross and Blue Shield of Missouri, acting through their respective
independent committees, decided not to enter into discussions with the Kansas
City plan because the boards believed that (1) the proposal was not
sufficiently compelling to cause RightCHOICE or Blue Cross and Blue Shield of
Missouri to abandon their respective strategic plans of reorganizing pursuant
to the settlement, (2) the proposed transaction may not receive the necessary
regulatory approvals, and (3) implementation of the settlement agreement would
likely offer greater value to the foundation and the class A shareholders.
On September 20, 1998, Blue Cross and Blue Shield of Missouri, RightCHOICE,
the Missouri Attorney General and the Missouri Department of Insurance
finalized and signed a settlement agreement substantially in conformance with
the Proposed Resolution Terms. The settlement agreement was considered and
approved by the business opportunities committee of Blue Cross and Blue Shield
of Missouri on September 8, 1998, by the business opportunities committee of
RightCHOICE on September 8, 1998, by the board of directors of RightCHOICE on
September 10, 1998, and by the board of directors of Blue Cross and Blue Shield
of Missouri on September 14, 1998. At those meetings, the RightCHOICE business
opportunities committee and the full RightCHOICE board of directors received an
opinion from RightCHOICE's financial advisor at the time as to the fairness,
from a financial point of view, to the class A shareholders of the one-for-one
exchange ratio provided for in the merger contemplated by the settlement
agreement.
The parties to the litigation furnished courtesy copies of the settlement
agreement to the circuit court of Cole County but did not move for court
approval of the settlement agreement at that time.
Also on September 20, 1998, the parties agreed to separate settlements of
other disputes among them, including the lawsuit that the Missouri Attorney
General had filed on February 9, 1998 relating to alleged violations of the
Merchandising Practices Act, the administrative market conduct proceedings
instituted by the Missouri Department of Insurance and an appeal by Healthy
Alliance Life Insurance Company, a subsidiary of RightCHOICE, from the
disallowance of a claim for refund of premium taxes. The parties conditioned
these settlements on court approval of the principal settlement agreement. The
Attorney General dismissed the Merchandising Practices Act lawsuit without
prejudice, and the Department of Insurance stayed the market conduct
proceedings pending satisfaction of the court approval contingency.
On October 29, 1998, without notice to the parties, the circuit court
appointed Robert G. Russell receiver/custodian of the shares of RightCHOICE
stock owned by Blue Cross and Blue Shield of Missouri. The circuit court took
up the settlement agreement "on the court's own motion." In its
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order taking these actions, the court enunciated a number of "concerns" about
the settlement agreement, including concerns about the motives of the parties
in entering it, alleged conflicts of interest and the restrictions on the
shares of RightCHOICE common stock the foundation would hold.
Because of the circuit court's appointment of a receiver/custodian, the Blue
Cross and Blue Shield Association, acting pursuant to automatic termination
provisions of the license agreements, immediately declared Blue Cross and Blue
Shield of Missouri's and RightCHOICE's respective licenses to be terminated,
filed suit to enforce the termination and demanded an accounting of a penalty
claimed to be due under the applicable license agreements. Blue Cross and Blue
Shield of Missouri moved in the circuit court of Cole County for a declaration
that the receivership/custodianship was void from the beginning. On November 4,
1998, the circuit court declared the receivership/custodianship void. The
circuit court of Cole County appointed Mr. Russell special master for the
purpose of gathering information for the court concerning the settlement
agreement. The circuit court also appointed counsel to assist him. At the
November 4, 1999 hearing, the circuit court sought and received the commitment
of Blue Cross and Blue Shield of Missouri that it would not sell its shares of
RightCHOICE stock without the court's consent.
Although Blue Cross and Blue Shield of Missouri contested the automatic
termination of the licenses, Blue Cross and Blue Shield of Missouri reached
agreement with the Blue Cross and Blue Shield Association to reinstate its
licenses and those of RightCHOICE for use of the Blue Cross and Blue Shield
names and service marks. The Association insisted, however, as a condition for
reinstatement of the licenses that they be amended to provide additional
protections to the Association, including that they be reinstated on a "board
to board" basis--meaning that the licenses automatically terminate on the date
of each meeting of the board of directors of the Association, unless the board
takes action to extend the licenses until the next meeting.
The special master conducted hearings on December 4, 1998, December 16,
1998, December 22, 1998, and February 4, 1999. At those hearings, Blue Cross
and Blue Shield of Missouri offered evidence designed to show that the
reorganization contemplated by the settlement agreement was fair, reasonable
and in the public interest and met all applicable statutory requirements for
conversion of a non-profit corporation under Missouri law. Counsel for the
special master offered evidence intended to show the inadequacy of the value
the foundation would receive under the settlement agreement and that the
settlement agreement contained other deficiencies.
At the public hearing on December 16, 1998, representatives of Blue Cross
and Blue Shield of Kansas City presented their proposed "alternative" to the
settlement agreement. They testified that the Kansas City plan would purchase
all of the outstanding stock of RightCHOICE, including the shares owned by Blue
Cross and Blue Shield of Missouri, and all of the other assets of Blue Cross
and Blue Shield of Missouri. They proposed to pay $13.50 in cash for each share
of RightCHOICE stock owned by the public and $15.25 in cash for each share of
RightCHOICE stock owned by Blue Cross and Blue Shield of Missouri. Their
purchase alternative included a number of contingencies, including financing,
regulatory approval and resolution of the pending litigation against Blue Cross
and Blue Shield of Missouri. The Kansas City plan never formally communicated
its plan to the board of directors of either Blue Cross and Blue Shield of
Missouri or RightCHOICE.
In early 1999, Blue Cross and Blue Shield of Kansas City, together with the
other Blue Cross and Blue Shield plan that had previously expressed interest in
Blue Cross and Blue Shield of Missouri, jointly proposed a business combination
involving the acquisition of the outstanding shares of RightCHOICE stock held
by the public for $15.25 per share and the merger of the two plans and Blue
Cross and Blue Shield of Missouri. While this proposal did not include a
financing contingency, it was subject to the resolution of the pending
litigation. After a thorough evaluation of the proposal,
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with the assistance of their financial and other advisors, the business
opportunities committees and boards of directors of both companies declined to
engage in active discussions covering the proposal. The committees and boards
concluded that the better course of action was to follow their strategic plan
of implementing the settlement and that, after implementation of the
settlement, the resulting company would be in a better position to consider its
strategic alternatives.
On February 10, 1999, the special master issued his report. The report found
Blue Cross and Blue Shield of Missouri to be a charitable trust. The report
stated that the parties were therefore not free to settle their case without
court approval. The report stated that the disposition of the assets of Blue
Cross and Blue Shield of Missouri was "within the exclusive power of the
Court." The special master also stated that because of his charitable trust
finding the settlement agreement was "not a contract" because "the Attorney
General has no authority to bargain away any public benefit, charitable assets
whose disposition is within the exclusive power of the Court." The special
master stated that the parties were not really settling their case but rather
were nominating the foundation as a beneficiary for the court's consideration,
which the court was free to accept or reject as the court saw fit.
The special master reported that he had "serious concerns" about the
settlement agreement that prevented him from recommending its approval. Among
his expressed concerns were: (1) whether the public health foundation that the
parties would create if they implemented the settlement would receive the full
value of the pre-settlement assets of Blue Cross and Blue Shield of Missouri,
(2) whether a contemplated method of divestiture of the RightCHOICE shares to
be held by the foundation--sale of the shares over time pursuant to a
divestiture agreement and registration rights agreement--would yield full value
for the shares, (3) whether the proposed provisions for governance of the
foundation were reasonable, and (4) whether the non-profit purposes of the
foundation agreed upon by the parties were justified.
Despite his concerns, the special master did not recommend that the parties
stop the process of attempted settlement. Rather, he recommended that the
parties, along with certain public interest groups who had participated in the
litigation, meet and confer and engage in a good faith effort to address the
concerns noted in the report.
The parties and the public interest groups engaged in negotiations. On March
12, 1999, they reached agreement on changes to be made in the settlement
agreement. Under those amendments, Blue Cross and Blue Shield of Missouri
agreed to pay an additional $12.78 million to the foundation the parties would
create if they implemented the settlement agreement. In addition, the parties
made changes in the qualifications and manner of selecting the foundation's
initial directors. The parties also made changes in the manner and time in
which the foundation would be required to sell the shares of New RightCHOICE
common stock that it would own if the parties implemented the settlement
agreement. The changes empowered the foundation, which had no right to vote its
shares under the original agreement except on change of control proposals
submitted to it by the board of directors of New RightCHOICE, to vote up to,
but not including, 5% of the shares of New RightCHOICE common stock that it
would own outside of the voting trust that the parties would establish. The
changes also clarified that the foundation would not be prohibited from
interacting with the Missouri legislature on matters within the foundation's
purposes or expertise. The business opportunities committees and the full
boards of directors of RightCHOICE and Blue Cross and Blue Shield of Missouri
approved the amendments. RightCHOICE's financial advisor at the time attended
the meetings of the business opportunities committee and full board of
directors of RightCHOICE and orally confirmed that it had reviewed the
amendments and saw no reason why its prior opinion should be modified in any
material respect or withdrawn as a result of the amendments.
Also on March 12, 1999, the parties jointly moved for circuit court approval
of the settlement agreement as modified. At a hearing on March 15, 1999, the
circuit court judge made statements on
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the record indicating that he had continued concerns with the modified
settlement agreement filed on March 12, 1999. He stated, in effect, that in his
view the parties could not settle the case without his consent. The judge's
comments did not constitute an approval or denial of the modified settlement
agreement. The court did not indicate when a formal ruling would be issued and
stated that it had not yet completed its review of the modified settlement
agreement and supporting documents. The court expressed concern about a number
of issues, including whether the modified agreement produced full and fair
value to the resulting foundation in light of the voting and other restrictions
that would apply to its shares. The judge suggested that the only way to obtain
full value for the foundation was a block sale of the RightCHOICE shares owned
by Blue Cross and Blue Shield of Missouri. He also expressed particular concern
about the process by which the Missouri Attorney General would select members
to serve on the foundation board.
On March 19, 1999, the parties further amended the settlement agreement by
removing a provision that gave the Missouri Attorney General the authority to
appoint five members of the foundation's board. Under the settlement agreement
as amended on March 19, 1999, the Governor of Missouri would appoint all
members of the foundation board from among nominees proposed by a committee of
public interest group representatives. The parties later agreed to reinstate
the Attorney General's appointment rights.
After March 19, 1999, the special master undertook the role of a mediator
and sought to obtain the parties' agreement to further amendments to the
settlement agreement that he could recommend to the circuit court. Those
efforts continued through the summer of 1999 but were unsuccessful.
On April 26, 1999, RightCHOICE retained Warburg Dillon Read as its financial
advisor, having already terminated the engagement of its previous financial
advisor because the key personnel then working on the matter for RightCHOICE
had joined Warburg Dillon Read. In connection with its engagement, RightCHOICE
requested that Warburg Dillon Read render an opinion to its business
opportunities committee and full board of directors with respect to the one-
for-one exchange ratio provided for in the settlement agreement.
While the special master and the circuit court considered the settlement,
Blue Cross and Blue Shield of Missouri continued to pursue its appeal. On
November 24, 1998, the Supreme Court of Missouri granted the application of
Blue Cross and Blue Shield of Missouri that it accept transfer of the appeals
from the judgments of December 30, 1996.
Initially, at the request of the parties who were then engaged in settlement
proceedings, the Supreme Court of Missouri delayed further proceedings in the
appeals. Then, at the request of the Missouri Attorney General, the Supreme
Court set a briefing schedule that led to argument of the appeals in the
Supreme Court on September 8, 1999. At that argument, judges of the Supreme
Court asked the parties about the status of the settlement agreement. The
parties informed the Supreme Court that the circuit court had not yet ruled on
the settlement agreement. On September 9, 1999, the Supreme Court directed the
circuit court to "finally dispose of" the parties' joint motion for approval of
the settlement agreement by December 8, 1999.
Further proceedings in the circuit court followed this order. The special
master conducted another hearing on October 4, 1999 and issued a second report
on October 8, 1999. The second report recommended that the court not approve
the settlement agreement. The special master based his recommendation primarily
on value issues. Specifically, the special master found that the foundation
would receive insufficient value under the amended settlement agreement because
the amended settlement agreement did not give the foundation the right to force
a sale of RightCHOICE.
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On October 29, 1999, the circuit court entered its order disapproving the
settlement agreement as amended. The circuit court found that the amount set
aside for public purposes under the settlement agreement, even as amended in
March 1999, did not meet any applicable legal test for value.
On November 9, 1999, the parties appealed to the Missouri Court of Appeals
from the October 29, 1999 order. They also asked the Supreme Court of Missouri
to conduct further proceedings on the settlement agreement and to accept
immediate transfer of the new appeal from the Court of Appeals. The Supreme
Court granted the application for transfer and directed that the parties file
briefs related to the settlement issues on an expedited basis. Counsel for the
special master appeared in the Supreme Court as representatives charged with
defending the judgment of the circuit court in rejecting the settlement
agreement.
The parties argued the issues related to the amended settlement agreement on
December 8, 1999. On December 9, the Supreme Court entered an order. It stated
that the parties had "failed to establish that court approval is required or
authorized by law or that any such determination would be other than advisory."
The Supreme Court stayed all proceedings in the circuit court until February 8,
2000 to permit the parties to dismiss the lawsuit and appeals.
The action of the Supreme Court of Missouri made it necessary for the
parties to the litigation and RightCHOICE to decide whether to proceed with the
settlement agreement under circumstances in which it was clear that court
approval was not possible. The alternatives available were to proceed with the
settlement agreement without court approval or to terminate the settlement
agreement and proceed with the pending appeals.
Among the considerations in favor of proceeding with the settlement
agreement that the business opportunities committees and full boards of
directors of Blue Cross and Blue Shield of Missouri and RightCHOICE considered
were:
. The strong desire of the Missouri Attorney General and Missouri
Department of Insurance to proceed with the settlement and the possible
adverse effects on relationships with the Department of Insurance and the
Attorney General if the companies abandoned the settlement agreement and
pursued the litigation,
. The risks of continuing the litigation which, if unsuccessful, could have
led to termination of the certificate of authority of Blue Cross and Blue
Shield of Missouri to engage in the health insurance business,
dissolution of Blue Cross and Blue Shield of Missouri, loss of the right
of Blue Cross and Blue Shield of Missouri and RightCHOICE to use the Blue
Cross and Blue Shield names and service marks, and other material adverse
consequences,
. The benefit to the subscribers of both Blue Cross and Blue Shield of
Missouri and RightCHOICE that would result if the continued existence of
Blue Cross and Blue Shield of Missouri and the status of the Blue Cross
and Blue Shield licenses of both entities were made more certain, and
. The fact that, even if the parties achieved success in the litigation,
RightCHOICE would not reap the benefits expected to be derived from
combining Blue Cross and Blue Shield of Missouri with RightCHOICE.
Among the considerations against proceeding with the settlement agreement
that the business opportunities committees and full boards of directors of Blue
Cross and Blue Shield of Missouri and RightCHOICE considered were the facts
that:
. Doing so would make it necessary to abandon the appeals from the
judgments of December 30, 1996 that Blue Cross and Blue Shield of
Missouri's operations violated its non-profit purposes and Missouri law
so that those judgments would become final, and
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. The reorganization might go forward absent any judicial determination as
to its lawfulness and particularly any judicial determination that the
reorganization is lawful as to the subscribers of Blue Cross and Blue
Shield of Missouri and RightCHOICE, which would have reduced the risk of
subscriber claims.
In separate meetings on December 13, 1999, on recommendation of the business
opportunities committee of each board of directors, the full boards of
directors of RightCHOICE and Blue Cross and Blue Shield of Missouri decided to
proceed with the settlement agreement. The parties would proceed by dismissing
the claims that remained pending in the principal litigation in the Cole County
circuit court, amending the settlement agreement to eliminate the court
approval conditions, dismissing the appeals pending in the Supreme Court of
Missouri and implementing the corporate reorganization contemplated by the
settlement agreement.
Before the parties dismissed the litigation, they agreed to further
amendments to the settlement agreement negotiated by Blue Cross and Blue Shield
of Missouri and RightCHOICE with the Missouri Department of Insurance, the
Missouri Attorney General and the public advocacy groups who had participated
in the litigation. The amendments removed conditions precedent to signing and
closing the reorganization agreement based on court approval of the settlement
agreement and a judicial determination that the settlement is lawful as to the
subscribers of Blue Cross and Blue Shield of Missouri. They also added as
conditions precedent to closing the reorganization the delivery of a
satisfactory legal opinion to the Blue Cross and Blue Shield board of directors
as to the lawfulness of the reorganization and the delivery of a legal opinion
by counsel to the foundation satisfactory to all parties to the reorganization
agreement to the effect that the foundation will receive its shares of New
RightCHOICE common stock in the reorganization free and clear of subscriber
claims.
On January 6, 2000, the boards of directors of Blue Cross and Blue Shield of
Missouri and RightCHOICE authorized the execution of the amended settlement
agreement and the reorganization agreement and the taking of all steps
necessary to complete the reorganization. The board of directors of RightCHOICE
conditioned its authorization to execute the reorganization agreement upon the
satisfaction or waiver of all conditions set forth in the amended settlement
agreement and the receipt of Warburg Dillon Read's financial opinion. Messrs.
Tice and O'Rourke abstained from voting at the RightCHOICE board of directors
meeting because of their dual roles with Blue Cross and Blue Shield of Missouri
and RightCHOICE. In reaching this decision, the boards of directors considered
the advice of joint transaction and litigation counsel for both entities and
independent legal counsel to each board, as well as the recommendations of the
business opportunities committees of each board of directors. On January 6,
2000, the parties signed an amended and restated settlement agreement.
On January 6, 2000, the parties also dismissed without prejudice the claims
that remained pending in the principal litigation in the circuit court of Cole
County.
Under the reorganization agreement, a number of other conditions precedent
to closing the reorganization remain. The parties to the amended settlement
agreement agreed that while the settlement agreement remains in effect, no
party would prosecute the claims that have been dismissed. If for any reason
the parties do not complete the reorganization by December 31, 2000 or if a
party fails to use its best efforts to close the reorganization before that
date, any party could terminate the settlement agreement, and the Missouri
Attorney General and the Missouri Department of Insurance could pursue the
claims they dismissed.
On January 6, 2000, the parties agreed to delete the court approval
conditions precedent to completion of the settlements of the Merchandising
Practices Act claim that the Missouri Attorney General had filed in February
1998 and dismissed without prejudice in September 1998, the
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administrative market conduct proceedings and the appeal of Healthy Alliance
Life Insurance Company from the disallowance of its claim for refunds of
premium taxes paid. The parties have completed all of these settlements.
On January 31, 2000, the board of directors and business opportunities
committee of RightCHOICE met with RightCHOICE's legal and financial advisors
with respect to matters relating to the reorganization. At this meeting,
Warburg Dillon Read delivered its oral opinion to the effect that, as of that
date and subject to various assumptions, matters considered and limitations
described in the opinion, the one-for-one exchange ratio provided for in the
merger of RightCHOICE into New RightCHOICE was fair, from a financial point of
view, to the class A shareholders. Warburg Dillon Read confirmed its oral
opinion by delivering a written opinion dated January 31, 2000.
On February 8, 2000, the parties moved in the Supreme Court of Missouri for
dismissal of the appeals in that litigation. On February 9, 2000, the Supreme
Court dismissed the appeal.
On March 9, 2000, the board of directors of the Blue Cross and Blue Shield
Association unanimously voted to fully reinstate Blue Cross and Blue Shield of
Missouri's and RightCHOICE's respective licenses to use the Blue Cross and Blue
Shield names and service marks so that extensions on a "board to board" basis
would no longer be required. On March 14, 2000, Blue Cross and Blue Shield of
Missouri, RightCHOICE, New RightCHOICE and The Missouri Foundation For Health
signed the reorganization agreement.
On September 25, 2000, the board of directors of RightCHOICE received an
update from the executive officers and legal counsel for RightCHOICE on recent
developments in litigation involving Blue Cross and Blue Shield of Missouri and
RightCHOICE. The board, executive officers and legal counsel discussed the
possible effect that an adverse determination in the litigation could have on
the financial condition and results of operations of New RightCHOICE. The board
was informed that Warburg Dillon Read was also analyzing these new
developments. Warburg Dillon Read analyzed these developments and has not
withdrawn or adversely modified its opinion as of the date RightCHOICE mailed
this document to its shareholders.
Recommendation of Your Board of Directors
The RightCHOICE business opportunities committee, consisting entirely of
independent, non-employee directors, unanimously approved the reorganization
and recommended approval of the reorganization to the full board of directors.
The board of directors unanimously approved the reorganization with the
exception of directors John A. O'Rourke and Norman J. Tice who, because of
their positions with Blue Cross and Blue Shield of Missouri, abstained from
voting. Your board of directors believes that the reorganization is in your
best interests and the best interests of RightCHOICE.
Your board of directors recommends that you vote FOR the reorganization.
Reasons for Reorganization
The merger of RightCHOICE into New RightCHOICE is part of the overall
reorganization. The principal reason RightCHOICE is proposing to reorganize is
to resolve the litigation with the Missouri Attorney General and the Missouri
Department of Insurance. RightCHOICE would suffer material adverse consequences
if the Missouri Attorney General and the Missouri Department of Insurance
successfully enforced judgments entered against Blue Cross and Blue Shield of
Missouri in the litigation. The reorganization also is expected to enhance
shareholder value by:
. Combining the business and operations of RightCHOICE and Blue Cross and
Blue Shield of Missouri,
. Creating efficiencies by eliminating duplicative expenses,
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. Maintaining and stabilizing the license agreements with the Blue Cross
and Blue Shield Association for the use of the Blue Cross and Blue Shield
names and service marks,
. Improving the public image of the new combined company by establishing a
large public benefit foundation, and
. Improving relations with Missouri regulatory officials by resolving the
litigation.
The business opportunities committee and the board of directors, in reaching
their respective decisions and in making their respective determinations and
recommendations, considered the following factors:
. Information concerning the financial condition, results of operations,
prospects and businesses of each of RightCHOICE and Blue Cross and Blue
Shield of Missouri,
. Consummation of the merger, as part of the reorganization, should allow
the management of New RightCHOICE to focus its attention on the
operations of its business,
. The terms and conditions of the merger, including the provisions
requiring approval of the merger of RightCHOICE into New RightCHOICE by a
majority of the class A shareholders,
. The intention of New RightCHOICE to obtain direct licenses to use the
Blue Cross and Blue Shield names and service marks in eighty-five of the
115 counties in Missouri, which is RightCHOICE's and Blue Cross and Blue
Shield of Missouri's current exclusive service area,
. RightCHOICE's alternatives, including continuation of the litigation
involving Blue Cross and Blue Shield of Missouri which would have exposed
RightCHOICE to the risk of material adverse consequences if Blue Cross
and Blue Shield of Missouri did not prevail,
. The opinion of Warburg Dillon Read as to the fairness, from a financial
point of view, to the class A shareholders of the one-for-one exchange
ratio provided for in the merger of RightCHOICE into New RightCHOICE.
Opinion of Warburg Dillon Read
General
On January 31, 2000, at a meeting of the RightCHOICE board of directors and
business opportunities committee to review matters relating to the
reorganization, Warburg Dillon Read rendered an oral opinion to the board of
directors and business opportunities committee, which it confirmed by delivery
of a written opinion dated January 31, 2000, to the effect that, as of that
date and based on and subject to various assumptions, matters considered and
limitations described in the opinion, the one-for-one exchange ratio provided
for in the merger of RightCHOICE into New RightCHOICE was fair, from a
financial point of view, to the class A shareholders.
The full text of Warburg Dillon Read's opinion describes, among other
things, the assumptions made, procedures followed, matters considered and
limitations on the review undertaken by Warburg Dillon Read. This opinion is
contained in Appendix H to this document and is incorporated into this document
by reference. Warburg Dillon Read's opinion is directed only to the fairness,
from a financial point of view, to the class A shareholders of the one-for-one
exchange ratio provided for in the merger. The opinion does not address
RightCHOICE's underlying business decision to effect the reorganization or
constitute a recommendation to any class A shareholder as to how to vote with
respect to any matter relating to the proposed reorganization. We encourage
class A shareholders to read this opinion carefully in its entirety. The
summary of Warburg Dillon Read's opinion described below is qualified in its
entirety by reference to the full text of its opinion.
In arriving at its opinion, Warburg Dillon Read, among other things:
. Reviewed publicly available business and historical financial information
relating to RightCHOICE and available business and historical financial
information relating to the assets
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Blue Cross and Blue Shield of Missouri will transfer to New RightCHOICE's
subsidiary, Healthy Alliance Life Insurance Company, in the transfer and
assumption transaction,
. Reviewed internal financial information and other data relating to the
businesses and financial prospects of RightCHOICE and the transferred
assets, including estimates and financial forecasts prepared by the
managements of RightCHOICE and Blue Cross and Blue Shield of Missouri,
that RightCHOICE and Blue Cross and Blue Shield of Missouri provided to
Warburg Dillon Read and that were not publicly available,
. Conducted discussions with members of the senior managements of
RightCHOICE and Blue Cross and Blue Shield of Missouri with respect to
the operations, financial condition, history and prospects of RightCHOICE
and the transferred assets,
. Reviewed historical prices and trading volumes for the class A common
stock,
. Reviewed publicly available financial and stock market data with respect
to other companies in lines of business that Warburg Dillon Read believed
to be generally comparable to those of RightCHOICE and the transferred
assets,
. Compared the financial terms of the reorganization with the publicly
available financial terms of other transactions that Warburg Dillon Read
believed to be generally relevant,
. Evaluated the potential pro forma financial impact of the reorganization
on New RightCHOICE,
. Reviewed drafts dated January 5, 2000 of the reorganization agreement and
related documents attached as exhibits to the amended and restated
settlement agreement dated January 6, 2000, and
. Conducted other financial studies, analyses and investigations, and
considered other information, as Warburg Dillon Read deemed necessary or
appropriate.
In connection with its review, Warburg Dillon Read, with RightCHOICE's
consent, did not assume any responsibility for independent verification of any
of the information provided to or reviewed by Warburg Dillon Read for the
purpose of its opinion, and Warburg Dillon Read, with RightCHOICE's consent,
relied on that information being complete and accurate in all material
respects.
At RightCHOICE's direction, Warburg Dillon Read did not make an independent
evaluation or appraisal of the assets Blue Cross and Blue Shield of Missouri
will transfer to Healthy Alliance Life Insurance Company in the transfer and
assumption transaction or any of the assets or liabilities, contingent or
otherwise, of RightCHOICE, and neither RightCHOICE nor Blue Cross and Blue
Shield of Missouri furnished Warburg Dillon Read with any evaluation or
appraisal. The managements of RightCHOICE and Blue Cross and Blue Shield of
Missouri advised Warburg Dillon Read, and at RightCHOICE's direction Warburg
Dillon Read assumed, that there were no material liabilities associated with
the transferred assets other than those reflected in the financial statements
of Blue Cross and Blue Shield of Missouri that the managements of RightCHOICE
and Blue Cross and Blue Shield of Missouri provided to or discussed with
Warburg Dillon Read. The managements of RightCHOICE and Blue Cross and Blue
Shield of Missouri also advised Warburg Dillon Read, and at RightCHOICE's
direction Warburg Dillon Read also assumed, that The Missouri Foundation For
Health will fully indemnify Healthy Alliance Life Insurance Company and New
RightCHOICE against other contingent liabilities as specified in agreements to
be entered into in connection with the reorganization.
With respect to the financial forecasts and estimates that it reviewed,
Warburg Dillon Read assumed, at RightCHOICE's direction, that the managements
of RightCHOICE and Blue Cross and Blue Shield of Missouri reasonably prepared
them on a basis reflecting their best currently available
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estimates and judgments as to the future financial performance of RightCHOICE
and the transferred assets and that the companies will realize the forecasts in
the amounts and at the times contemplated.
Warburg Dillon Read also assumed, with RightCHOICE's consent, that the
transfer and assumption transaction will qualify as a tax-free transfer and
that the charter conversion transaction, the reincorporation merger transaction
and the RightCHOICE/New RightCHOICE merger transaction will be treated as tax-
free reorganizations for federal income tax purposes. In addition, Warburg
Dillon Read assumed, at RightCHOICE's direction, that the final terms of the
reorganization will not vary materially from those set forth in the drafts of
the reorganization agreement and related documents reviewed by Warburg Dillon
Read. Warburg Dillon Read's opinion is necessarily based on economic, monetary,
market and other conditions existing, and information available to Warburg
Dillon Read, on the date of its opinion.
In connection with its engagement, RightCHOICE did not ask Warburg Dillon
Read to provide, and Warburg Dillon Read did not offer, any opinion as to the
material terms of, or the obligations under, the reorganization agreement or
the form of the reorganization. Warburg Dillon Read expressed no opinion as to
the value of the New RightCHOICE common stock when issued in the
RightCHOICE/New RightCHOICE merger transaction or the price at which the New
RightCHOICE common stock will trade or otherwise be transferable after the
merger. In rendering its opinion, Warburg Dillon Read assumed, with
RightCHOICE's consent, that each of RightCHOICE, Blue Cross and Blue Shield of
Missouri, The Missouri Foundation For Health and New RightCHOICE would comply
with all material terms of the reorganization agreement and that they would
validly consummate the reorganization in accordance with its terms. In
connection with its engagement, RightCHOICE did not ask Warburg Dillon Read to,
and Warburg Dillon Read did not, participate in the negotiation or structuring
of the reorganization or solicit third party indications of interest with
respect to the acquisition of all or a part of RightCHOICE. RightCHOICE imposed
no other instructions or limitations upon Warburg Dillon Read with respect to
the investigations it made or the procedures it followed in rendering its
opinion.
In connection with rendering its opinion to the board of directors and
business opportunities committee, Warburg Dillon Read performed a variety of
financial analyses which are summarized below. The following summary is not a
complete description of all of the analyses performed and factors considered by
Warburg Dillon Read in connection with its opinion. The preparation of a
fairness opinion is a complex process involving subjective judgments and is not
necessarily susceptible to partial analysis or summary description. With
respect to the analysis of selected publicly traded companies summarized below,
no company used as a comparison is either identical or directly comparable to
Blue Cross and Blue Shield of Missouri. These analyses necessarily involve
complex considerations and judgments concerning financial, non-financial and
operating characteristics and other factors that could affect the public
trading values of the companies concerned.
Warburg Dillon Read believes that its analyses and the summary below must be
considered as a whole and that selecting portions of its analyses and factors,
without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying Warburg Dillon Read's analyses and
opinion. Warburg Dillon Read did not assign any of the analyses it performed a
greater significance than any other. Warburg Dillon Read arrived at its
ultimate opinion based on the results of all of its analyses assessed as a
whole. Warburg Dillon Read did not draw, in isolation, conclusions from or with
regard to any one factor or method of analysis.
The estimates of future performance of RightCHOICE and the transferred
assets provided by the managements of RightCHOICE and Blue Cross and Blue
Shield of Missouri in or underlying Warburg Dillon Read's analyses are not
necessarily indicative of future results or values, which may
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be significantly more or less favorable than those estimates. In performing its
analyses, Warburg Dillon Read considered industry performance, general business
and economic conditions and other matters, many of which RightCHOICE and Blue
Cross and Blue Shield of Missouri cannot control. Estimates of the financial
value of the companies do not purport to be appraisals or necessarily reflect
the prices at which the companies actually may be sold.
RightCHOICE, Blue Cross and Blue Shield of Missouri and the other parties to
the settlement agreement determined the exchange ratio in the merger through
negotiation, and the board of directors and business opportunities committee
solely made the decision to enter into the reorganization. The board of
directors and business opportunities committee considered Warburg Dillon Read's
opinion and financial analyses as only one of many factors in their evaluation
of the reorganization, and Warburg Dillon Read's opinion and financial analyses
should not be viewed as determinative of the views of the board of directors,
business opportunities committee or management with respect to the
reorganization or the consideration payable in the merger.
The following is a brief summary of the material financial analyses
performed by Warburg Dillon Read and reviewed with the board of directors and
the business opportunities committee in connection with its opinion dated
January 31, 2000:
Discounted Cash Flow Analysis
Warburg Dillon Read performed a discounted cash flow analysis of Blue Cross
and Blue Shield of Missouri to estimate the present value of the cash available
after operating expenses, taxes, capital expenditures and changes in working
capital that Blue Cross and Blue Shield of Missouri could generate over
calendar years 2000 through 2003, based on internal estimates of Blue Cross and
Blue Shield of Missouri's management.
Warburg Dillon Read calculated the range of estimated terminal values for
Blue Cross and Blue Shield of Missouri, excluding its real estate holdings, by
applying terminal value multiples of 6.0x to 8.0x to Blue Cross and Blue Shield
of Missouri's projected fiscal year 2003 earnings before income taxes,
depreciation and amortization. Warburg Dillon Read calculated the range of
estimated terminal values for Blue Cross and Blue Shield of Missouri's primary
real estate asset by applying capitalization rates of 9.0% to 11.0% to the
projected fiscal year 2003 real estate cash flows generated by that asset.
Warburg Dillon Read calculated the present value of Blue Cross and Blue Shield
of Missouri's non-real estate cash flows and the present value of Blue Cross
and Blue Shield of Missouri's real estate cash flows using discount rates of
10.0% to 14.0%. The results of the discounted cash flow analysis suggested that
Blue Cross and Blue Shield of Missouri would contribute net positive assets to
New RightCHOICE in the merger.
Accretion/Dilution Analysis
Warburg Dillon Read analyzed the potential pro forma financial effects
resulting from the merger, including the impact of the merger on the estimated
earnings per share, commonly known as EPS, of New RightCHOICE relative to
RightCHOICE's estimated EPS on a stand-alone basis for calendar years 2000
through 2003. Estimated EPS data for New RightCHOICE and RightCHOICE were based
on internal estimates of the managements of RightCHOICE and Blue Cross and Blue
Shield of Missouri after giving effect to potential synergies anticipated by
the management of RightCHOICE to result from the merger. The results of this
pro forma merger analysis suggested that the merger is expected to be
accretive, or represent an addition, to New RightCHOICE's estimated EPS
relative to RightCHOICE's estimated EPS on a stand-alone basis in projected
calendar years 2000 through 2003. The actual results achieved by New
RightCHOICE may vary from projected results and the variations may be material.
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Other Factors
In rendering its opinion, Warburg Dillon Read also reviewed and considered
other factors, including:
. The relationship between movements in the class A common stock, movements
in an index comprised of the common stock of selected companies in the
managed care industry and movements in the common stock of the S&P 500
index,
. A review of the trading multiples of selected publicly held companies in
the managed care services industry based on various financial statistics
as applied to corresponding financial statistics for Blue Cross and Blue
Shield of Missouri, and
. The increase in the voting power of the class A shareholders upon
consummation of the merger.
RightCHOICE has paid Warburg Dillon Read an aggregate fee of $600,000 for
its services in connection with its opinion. In addition, RightCHOICE has
agreed to reimburse Warburg Dillon Read for its reasonable expenses, including
reasonable fees and disbursements of its counsel, and to indemnify Warburg
Dillon Read and related parties against liabilities, including liabilities
under federal securities laws, relating to, or arising out of, its engagement.
RightCHOICE selected Warburg Dillon Read to render an opinion in connection
with the reorganization because Warburg Dillon Read is an internationally
recognized investment banking firm with substantial experience in similar
transactions and RightCHOICE had a prior relationship with key personnel at
Warburg Dillon Read. Warburg Dillon Read is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive bids,
secondary distributions of listed and unlisted securities and private
placements.
Warburg Dillon Read has in the past provided services to RightCHOICE and its
affiliates with respect to matters related to the reorganization, and may
provide services to New RightCHOICE and The Missouri Foundation For Health in
the future, for which Warburg Dillon Read has received and would receive
compensation. In the ordinary course of business, Warburg Dillon Read, its
successors and affiliates may actively trade the securities of RightCHOICE
and/or New RightCHOICE for their own accounts and the accounts of their
customers and, accordingly, may at any time hold a long or short position in
these securities.
Interests of Certain Persons in Reorganization
Upon completion of the reorganization, New RightCHOICE will convert each
share of class A common stock held by or for the benefit of directors and
executive officers of RightCHOICE into one share of New RightCHOICE common
stock just as it will convert your shares of class A common stock into shares
of New RightCHOICE common stock. However, directors and executive officers of
RightCHOICE may be deemed to have the following interests in the reorganization
that are different from or in addition to your interests and the interests of
other class A shareholders.
Continued Positions of Management
Upon completion of the reorganization, the initial directors and executive
officers of New RightCHOICE will be the directors and executive officers of
RightCHOICE immediately prior to the reorganization. If the parties do not
complete the reorganization on or before December 31, 2000 and do not agree to
extend the deadline or otherwise settle the litigation, the Missouri Attorney
General and the Missouri Department of Insurance could attempt to enforce
judgments previously entered by the circuit court against Blue Cross and Blue
Shield of Missouri. In enforcing the judgments, the
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court may order the dissolution of Blue Cross and Blue Shield of Missouri. In
that event, another company or companies would acquire the shares of class B
common stock currently owned by Blue Cross and Blue Shield of Missouri and, as
a result, would acquire control of RightCHOICE.
If it desired to do so, the new majority shareholder could eventually
replace the current directors of RightCHOICE through elections or extraordinary
business combinations. In turn, the newly appointed directors of RightCHOICE
could replace the current executive officers of RightCHOICE. Therefore, the
current directors and executive officers of RightCHOICE could lose their
positions if a court orders the dissolution of Blue Cross and Blue Shield of
Missouri because we did not complete the reorganization.
In addition, the trustee of the voting trust must vote The Missouri
Foundation For Health's shares of New RightCHOICE common stock held in the
trust in favor of each nominee approved by a majority of New RightCHOICE's
independent directors and a majority of all of its directors. Therefore, the
directors of New RightCHOICE will be able to ensure their re-election and
designate their successors for so long as the Foundation owns a substantial
number of shares of New RightCHOICE common stock. The New RightCHOICE board of
directors will, in turn, appoint the officers of New RightCHOICE.
Severance Agreements
RightCHOICE has entered into executive severance agreements with its
executive officers, other than its Chairman, President and Chief Executive
Officer, John A. O'Rourke. Upon completion of the reorganization, New
RightCHOICE will assume these agreements. The agreements provide that an
executive officer will receive severance benefits from New RightCHOICE: (1) if
New RightCHOICE terminates the executive officer's employment without cause
within two years after a change in control of New RightCHOICE or (2) if within
two years following a change in control of New RightCHOICE, the executive
officer terminates his or her employment within three months of an event
constituting good reason. The reorganization will constitute a change of
control under the executive severance agreements. Events that constitute "good
reason" include any one of the following if it occurs within twenty-four months
after the reorganization:
. An adverse change in the executive officer's duties or responsibilities,
. A reduction in the executive officer's annual base salary or incentive
formulas,
. The relocation of the executive officer's principal place of business
more than seventy-five miles from his or her previous principal place of
business,
. A reduction in the executive officer's eligible benefits, or
. The termination of the severance agreement by New RightCHOICE.
The benefits include outplacement services and cash payments equal to the
greater of (1) three times the executive officer's base pay plus an amount
equal to the premiums for health, dental, vision and life insurance for thirty
months or (2) two times the executive officer's annual compensation. If these
amounts become payable, New RightCHOICE will reduce the amount of these
severance payments to the extent necessary so that they do not constitute
"excess parachute payments" under the Internal Revenue Code. In the event of
the death or disability of an officer, the executive severance agreements
reduce amounts payable by any benefits paid to the officer or the officer's
representatives under the life insurance program or long-term disability plan
maintained by New RightCHOICE.
The executive severance agreements pay benefits in twenty-four monthly
installments or thirty-six monthly installments, depending on the applicable
multiple of base pay or annual compensation. If the officer finds other
employment prior to the payment of the last monthly installment, New
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RightCHOICE may pay the remaining severance benefit in a lump-sum and cease
benefits for outplacement services and insurance premiums. Each executive
severance agreement contains a confidentiality agreement, a covenant not to
compete and a binding arbitration provision and provides for reimbursement of
legal fees and other fees and expenses incurred by an officer to protect his or
her benefits under the executive severance agreement as well as payments for
additional taxes incurred with respect to the reimbursement of fees and
expenses.
John A. O'Rourke has entered into an employment agreement but not a separate
executive severance agreement with RightCHOICE. The reorganization does not
affect Mr. O'Rourke's right to receive severance benefits under his employment
agreement. We discuss Mr. O'Rourke's employment agreement beginning on page 162
of this document.
Stock Options
Upon completion of the reorganization, each outstanding option to purchase
shares of class A common stock RightCHOICE granted under one of its stock
option plans, whether or not exercisable or vested, will become an option to
purchase shares of New RightCHOICE common stock with the same terms and
conditions that the option to purchase shares of class A common stock had.
Indemnification and Liability Insurance
New RightCHOICE will assume the obligations of RightCHOICE and Blue Cross
and Blue Shield of Missouri under their respective articles of incorporation,
bylaws and indemnification agreements to indemnify, for the applicable statute
of limitations period, the present and former officers, directors, employees
and agents of RightCHOICE and Blue Cross and Blue Shield of Missouri and their
respective subsidiaries against liabilities arising out of actions or omissions
occurring on or prior to the effective time of the reorganization. Although New
RightCHOICE is obligated to indemnify any present or former officer, director,
employee or agent of Blue Cross and Blue Shield of Missouri against these
liabilities, The Missouri Foundation For Health has agreed in the
indemnification agreement described in this document to indemnify and reimburse
New RightCHOICE against liabilities New RightCHOICE may incur in this regard.
In addition, for a period of six years after the reorganization, New
RightCHOICE will keep in effect the current policies of directors and officers
liability insurance maintained by Blue Cross and Blue Shield of Missouri and
RightCHOICE or substitute policies of comparable coverage from companies
reasonably acceptable to the Foundation. Under the indemnification agreement,
the Foundation has agreed to reimburse New RightCHOICE for the cost of
continuing the Blue Cross and Blue Shield of Missouri policies.
Material Federal Income Tax Consequences
General
The following discussion describes the material federal income tax
consequences of the reorganization to you, as a class A shareholder, and New
RightCHOICE, as successor to both Blue Cross and Blue Shield of Missouri and
RightCHOICE. This discussion is not a comprehensive description of all of the
tax consequences that may be relevant to you and does not include tax
consequences that arise from rules of general application to all taxpayers or
to some classes of taxpayers that we assume investors generally know. This
discussion does not address the tax consequences that may be relevant to
particular taxpayers in light of their personal circumstances such as insurance
companies, financial institutions, dealers in securities, tax-exempt
organizations, foreign corporations, foreign partnerships, or other foreign
entities and individuals who are not citizens or residents of the United
States. We do not provide any information in this document with
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respect to the tax consequences, if any, of the reorganization under applicable
state, local, foreign, and other tax laws.
The following discussion is based upon the provisions of the Internal
Revenue Code, currently applicable regulations promulgated under the Internal
Revenue Code, current published administrative positions of the Internal
Revenue Service such as revenue rulings and revenue procedures, and existing
judicial decisions as in effect as of the date of this document, all of which
are subject to change either prospectively or retroactively. There may be
future legislative, administrative, or judicial changes or interpretations, and
these changes or interpretations may affect the accuracy of the statements or
conclusions set forth below. Any change could apply retroactively and could
affect the accuracy of this discussion.
The parties structured the transfer and assumption transaction, the charter
conversion transaction, the reincorporation merger transaction and the merger
of RightCHOICE with New RightCHOICE with the intent that they be tax-free and
that no gain or loss will be recognized by any party, or by you, as a class A
shareholder. Blue Cross and Blue Shield of Missouri has requested a private
letter ruling from the Internal Revenue Service that the transfer and
assumption transaction will be tax-free to RightCHOICE, Blue Cross and Blue
Shield of Missouri and you, as a class A shareholder, and that the charter
conversion transaction will be tax-free to Blue Cross and Blue Shield of
Missouri and The Missouri Foundation For Health. Blue Cross and Blue Shield of
Missouri did not request a ruling on the other elements of the reorganization
because the Internal Revenue Service believes that sufficient guidance exists
to ascertain the tax consequences of these types of transactions and, in these
instances, ordinarily will not rule.
The Internal Revenue Service may not issue the private letter ruling.
Accordingly, PricewaterhouseCoopers LLP, special tax advisor to RightCHOICE,
Blue Cross and Blue Shield of Missouri and New RightCHOICE, has issued a tax
opinion generally to that effect with respect to all of the relevant steps of
the reorganization. We intend this discussion to serve only as a general
summary of that opinion, which we filed as an exhibit to our registration
statement.
PricewaterhouseCoopers LLP's opinion, which is based upon various facts,
representations and assumptions set forth or referenced in its opinion,
generally is that gain or loss will not be recognized by you, as a class A
shareholder, or by New RightCHOICE, the successor to both Blue Cross and Blue
Shield of Missouri and RightCHOICE, as a result of the reorganization.
Accordingly, you will have the same tax basis in your shares of New RightCHOICE
common stock as you have in your shares of class A common stock, and the
holding period of the shares of New RightCHOICE common stock you receive in the
reorganization will include the holding period of your shares of class A common
stock.
A taxpayer ordinarily may rely on a private letter ruling issued by the
Internal Revenue Service, unless the Internal Revenue Service revokes or
modifies it. Generally, the Internal Revenue Service will not revoke or modify
a private letter ruling unless it determines the private letter ruling to be in
error or not in accord with the current views of the Internal Revenue Service.
Except in rare or unusual circumstances, the Internal Revenue Service will not
revoke or modify a private letter ruling retroactively.
Tax opinions only represent the best judgment of the firm issuing the
opinion on the matters addressed in the opinion and have no binding effect or
official status of any kind. The Internal Revenue Service or a court
considering the issue may take positions contrary to those taken by
PricewaterhouseCoopers LLP.
Transfer and Assumption Transaction
Blue Cross and Blue Shield of Missouri has requested a private letter ruling
from the Internal Revenue Service that the transfer and assumption transaction
constitutes a tax-free transaction and
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that neither Blue Cross and Blue Shield of Missouri, RightCHOICE, Healthy
Alliance Life Insurance Company, New RightCHOICE, The Missouri Foundation For
Health nor you, as a class A shareholder, will recognize income, gain or loss
for federal income tax purposes as a result of the transfer and assumption
transaction.
PricewaterhouseCoopers LLP's opinion is that Blue Cross and Blue Shield of
Missouri, RightCHOICE, Healthy Alliance Life Insurance Company, New
RightCHOICE, The Missouri Foundation For Health and you, as a class A
shareholder, will not recognize gain or loss for federal income tax purposes as
a result of the transfer and assumption transaction, except that Blue Cross and
Blue Shield of Missouri could recognize gain to the extent its basis in any
asset is less than that asset's fair market value on the date of the transfer.
Any such gain, however, would be deferred under the Internal Revenue Service
consolidated income tax return regulations. Generally, this means the
recognition of any gain would be postponed until the occurrence of certain
events such as Blue Cross and Blue Shield of Missouri (or its successor, New
RightCHOICE), Healthy Alliance Life Insurance Company or the transferred assets
leaving the consolidated return group.
PricewaterhouseCoopers LLP's opinion as to the tax consequences of the
transfer and assumption transaction with respect to both you, as a class A
shareholder, and Blue Cross and Blue Shield of Missouri, is based upon the
crucial assumption that the value of the assets, contracts and agreements Blue
Cross and Blue Shield of Missouri will transfer to Healthy Alliance Life
Insurance Company net of liabilities is zero. Management of RightCHOICE
believes that this assumption is reasonable given their familiarity with the
assets, contracts, agreements and liabilities involved in the transfer and
assumption transaction and the limitations on the transfer of substantially all
of these contracts imposed by the Blue Cross and Blue Shield Association. The
contracts Blue Cross and Blue Shield of Missouri will transfer include those
related to the participation of Blue Cross and Blue Shield of Missouri in
programs sponsored by the Blue Cross and Blue Shield Association. As a result,
Blue Cross and Blue Shield of Missouri cannot transfer these contracts to a
third party except in connection with the transfer of Blue Cross and Blue
Shield of Missouri's license to use the Blue Cross and Blue Shield names and
service marks in its service area, which would require the prior approval of
the Blue Cross and Blue Shield Association. In addition, Blue Cross and Blue
Shield of Missouri will report for federal income tax purposes that the value
of these assets will equal the liabilities assumed under the transferred
contracts. However, no one has sought an independent appraisal of these assets
and liabilities in connection with the reorganization.
If the Internal Revenue Service does not issue a private letter ruling to
the effect that no income, gain or loss will be recognized by Blue Cross and
Blue Shield of Missouri and you, as a class A shareholder, in the transfer and
assumption transaction, it could take the position that the value of the assets
transferred exceeds the liabilities assumed and, as discussed above, that the
value of the assets transferred exceeds their adjusted basis. If the Internal
Revenue Service successfully takes the position that the value of the assets
transferred exceeds the liabilities assumed, it may treat the transaction as a
hypothetical transfer of assets to the class A shareholders in the amount of
such excess and assert that (1) you, as a class A shareholder, should recognize
taxable income in an amount equal to the percentage of the outstanding class A
common stock you own on the date we complete the reorganization multiplied by
the amount, if any, by which the value of the assets transferred exceeds the
liabilities assumed, and (2) Blue Cross and Blue Shield of Missouri should
recognize gain in an amount equal to the taxable income recognized by the class
A shareholders (as described above) minus Blue Cross and Blue Shield of
Missouri's basis in the hypothetical assets that the Internal Revenue Service
may deem Blue Cross and Blue Shield of Missouri to have transferred to the
class A shareholders. In the event the Internal Revenue Service successfully
asserts that the value of the assets transferred exceeds the liabilities
assumed, one could argue that neither you, as a class A shareholder, nor Blue
Cross and Blue Shield of Missouri should recognize income because the
transaction is one in which income recognition is inappropriate. For example,
one could assert that the transaction should not be taxable because the class A
common stock is publicly traded, the
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transaction arose in the ordinary course of business, the class A shareholders
did not participate in the negotiation of the reorganization, and the class A
shareholders did not receive mutual consideration of any kind. We cannot
determine with any certainty the amount of gain that you, as a class A
shareholder, or Blue Cross and Blue Shield of Missouri might have to recognize
if the Internal Revenue Service successfully takes this position.
Charter Conversion Transaction
Blue Cross and Blue Shield of Missouri has requested a private letter ruling
from the Internal Revenue Service that the charter conversion transaction
constitutes a tax-free reorganization, known as a recapitalization, and that
Blue Cross and Blue Shield of Missouri and The Missouri Foundation For Health
will not recognize gain or loss as a result of the charter conversion
transaction.
PricewaterhouseCoopers LLP's opinion is that the charter conversion
transaction should constitute a tax-free reorganization, called a
recapitalization, and that Blue Cross and Blue Shield of Missouri will not, and
The Missouri Foundation For Health should not, recognize gain or loss as a
result of the charter conversion transaction. The charter conversion
transaction will not affect Blue Cross and Blue Shield of Missouri's basis in
its assets and its holding period for its assets. PricewaterhouseCoopers LLP's
opinion states that the charter conversion transaction "should," rather than
"will," be treated as a tax-free recapitalization and that the Foundation
"should," rather than "will," not recognize gain or loss in the transaction.
PricewaterhouseCoopers LLP has qualified its opinion because of the lack of
direct legislative, judicial or administrative authority, thus raising the
level of uncertainty. If the Internal Revenue Service does not issue a private
letter ruling that the charter conversion transaction is a tax-free
transaction, PricewaterhouseCoopers LLP believes that it is possible, but
unlikely, that the Internal Revenue Service would take the position that the
charter conversion transaction does not constitute a tax-free reorganization.
If the Internal Revenue Service successfully takes the position that the
charter conversion transaction is not tax-free, it is possible, but
PricewaterhouseCoopers LLP believes unlikely, that New RightCHOICE, as
successor to Blue Cross and Blue Shield of Missouri, could be subject to
federal income tax on an amount equal to the difference between the fair market
value of each of Blue Cross and Blue Shield of Missouri's assets at the time of
the charter conversion transaction and the tax basis of those assets at the
time of the charter conversion transaction.
Reincorporation Merger Transaction
PricewaterhouseCoopers LLP's opinion is that the reincorporation merger
transaction will constitute a tax-free reorganization under the Internal
Revenue Code. The parties structured the reincorporation merger transaction to
constitute a mere change in place of organization of Blue Cross and Blue Shield
of Missouri. Blue Cross and Blue Shield of Missouri and New RightCHOICE will
not recognize any gain or loss upon the implementation of the reincorporation
merger transaction. The basis of each asset of Blue Cross and Blue Shield of
Missouri in the hands of New RightCHOICE will be the same as the basis of that
asset in the hands of Blue Cross and Blue Shield of Missouri immediately before
the reincorporation merger transaction. The holding period of each asset of
Blue Cross and Blue Shield of Missouri acquired by New RightCHOICE will include
the period Blue Cross and Blue Shield held the asset immediately before the
reincorporation merger transaction.
RightCHOICE/New RightCHOICE Merger Transaction
PricewaterhouseCoopers LLP's opinion is that the merger of RightCHOICE into
New RightCHOICE will be treated as a tax-free distribution by RightCHOICE in
complete liquidation of RightCHOICE, a more than 80% owned subsidiary of New
RightCHOICE, and as a tax-free reorganization, called a statutory merger. None
of the shareholders of RightCHOICE or New
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RightCHOICE who receive shares of New RightCHOICE common stock in connection
with the merger of RightCHOICE into New RightCHOICE will recognize gain or
loss. The shares of New RightCHOICE common stock received by the class A
shareholders will have the same basis as the tax basis of the shares of class A
common stock that they exchanged. The shares of New RightCHOICE common stock
received by the class A shareholders will include the holding period of the
shares of class A common stock that they exchanged provided that they held the
shares as capital assets as of the completion of the merger of RightCHOICE into
New RightCHOICE.
If the merger of RightCHOICE into New RightCHOICE is not treated as a tax-
free reorganization, called a statutory merger, under the Internal Revenue
Code, you, as a class A shareholder, would recognize gain or loss in an amount
equal to the difference between the value of New RightCHOICE common stock
received in the transaction and your tax basis in the class A common stock
surrendered in the transaction. Moreover, even if the merger is treated as a
tax-free reorganization, if the Internal Revenue Service determines that the
value of the New RightCHOICE common stock you receive in exchange for your
class A common stock is higher than the value of the class A common stock
surrendered, you could recognize taxable income in the amount of the
difference. Although RightCHOICE has represented to PricewaterhouseCoopers LLP,
among other things, that it anticipates that the fair market value of the New
RightCHOICE common stock received by the class A shareholders will
approximately equal the fair market value of the class A common stock
surrendered in the merger, the Internal Revenue Service may take a contrary
position, and it may be successful.
In the merger of RightCHOICE into New RightCHOICE, RightCHOICE will not
recognize any gain or loss on the distribution of its assets to New RightCHOICE
and the assumption of its liabilities by New RightCHOICE, and New RightCHOICE
will not recognize any gain or loss on receipt of the assets of RightCHOICE and
the assumption of liabilities by New RightCHOICE. Each asset received by New
RightCHOICE from RightCHOICE will have the same basis as the basis of that
asset in the hands of RightCHOICE, and each asset received by New RightCHOICE
from RightCHOICE will include the holding period during which RightCHOICE held
that asset immediately before the merger of RightCHOICE into New RightCHOICE.
If the merger of RightCHOICE into New RightCHOICE is not treated as either a
tax-free reorganization under the Internal Revenue Code or a tax-free
liquidation of RightCHOICE, the merger would be treated as a taxable sale of
assets by RightCHOICE to New RightCHOICE, in dissolution of RightCHOICE, and a
taxable sale of RightCHOICE stock by New RightCHOICE in exchange for the assets
of RightCHOICE. The taxable sale by RightCHOICE would give rise to taxable gain
or loss to RightCHOICE, and ultimately to New RightCHOICE as successor to
RightCHOICE, on an amount equal to the difference between the value of each
asset transferred by RightCHOICE to New RightCHOICE and the tax basis of that
asset. New RightCHOICE could also recognize taxable gain in an amount equal to
the difference between the value of the assets it receives and New
RightCHOICE's basis in its RightCHOICE stock. This would result in a material
federal income tax liability that could have a material adverse effect on New
RightCHOICE following the merger.
If you, as a class A shareholder, exercise your dissenters' rights in the
merger of RightCHOICE into New RightCHOICE and receive cash in exchange for
your shares of class A common stock as described under "Proposed
Reorganization--Dissenters' Rights" on page 61, you will be treated as having
received the payment in redemption of your shares. In general, if you hold your
shares of class A common stock as capital assets when the parties complete the
merger of RightCHOICE into New RightCHOICE and you do not constructively own
any other RightCHOICE stock, you will recognize capital gain or loss measured
by the difference between the amount of cash received and your adjusted tax
basis for the shares. If, however, you own, actually or constructively, other
RightCHOICE stock, the payment for dissenting shares could be treated as
dividend income. In
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general, under the constructive ownership rules of the Internal Revenue Code,
a person may be considered to own stock that is owned, and in some cases
constructively owned, by various related individuals or entities, as well as
stock that the person, or related individuals or entities, has the right to
acquire by exercising an option or converting a convertible security. Each
person who contemplates exercising dissenters' rights should consult with his
or her own tax advisor as to the possibility that any payment to that person
will be treated as dividend income.
Generally, a liquidating corporation that distributes its assets to its
parent corporation does not recognize any gain or loss. The general rule does
not apply, however, when the recipient corporation is an organization exempt
from federal income tax. The Internal Revenue Service has recently issued
regulations interpreting the general rule and the exceptions to it. Generally,
in the context of the reorganization, the regulations provide that if the
Internal Revenue Service makes a determination that Blue Cross and Blue Shield
of Missouri has transferred its assets to The Missouri Foundation For Health
or has changed its status to a tax-exempt entity, and that determination is
upheld, the reorganization could be taxable. Blue Cross and Blue Shield of
Missouri has requested a private letter ruling from the Internal Revenue
Service that it will not recognize any gain or loss as a result of the
exception to the general rule. Moreover, PricewaterhouseCoopers LLP's opinion
is that none of the reorganization transactions will cause Blue Cross and Blue
Shield of Missouri, RightCHOICE, New RightCHOICE, the shareholders of any of
these entities or the Foundation to recognize any gain as a result of the
exception to the general rule.
Indemnification Agreement
The Missouri Foundation For Health will indemnify, defend and hold harmless
New RightCHOICE, as the successor by merger with Blue Cross and Blue Shield of
Missouri, all subsidiaries and affiliates of New RightCHOICE and all
directors, officers, agents and employees of New RightCHOICE and any of its
subsidiaries and affiliates from any tax liabilities, and penalties, interest,
fines, additions to tax, costs and expenses and professional fees incurred in
connection with the defense of these liabilities, they may incur if the
Internal Revenue Service or any other taxing authority determines that any
part of the reorganization constitutes a taxable transaction for federal,
state or local income tax purposes. The indemnification agreement does not,
however, apply to the tax liabilities that class A shareholders may incur in
connection with the reorganization. The indemnification agreement provides
that the Foundation will maintain a minimum net worth for the six years
following the filing by Blue Cross and Blue Shield of Missouri of its federal
income tax return for the year in which the parties complete the
reorganization. The Foundation must maintain a net worth not less than an
amount equal to the potential tax liability on the difference between the tax
basis of the class B common stock owned by Blue Cross and Blue Shield of
Missouri and the fair market value of that stock on the date the parties
complete the reorganization.
In addition to the income tax indemnity, the Foundation has an obligation
to indemnify New RightCHOICE for various non-tax matters as described under
"Terms of Indemnification Agreement" beginning on page 88 of this document.
The minimum net worth that the Foundation must maintain may be used to satisfy
both the tax and non-tax indemnification obligations of the Foundation under
the indemnification agreement. Therefore, the net worth that the Foundation
must maintain may not be sufficient in amount or even available to satisfy all
of the liabilities that New RightCHOICE may have as a result of the
reorganization. It is also possible that the taxes may be due by New
RightCHOICE on a date after the Foundation is no longer required to maintain a
particular net worth. In addition, it is possible that (1) the Foundation will
not have sufficient assets to satisfy all of the tax liabilities in full, (2)
the assets of the Foundation will not be sufficiently liquid to permit it to
honor the obligation in a timely fashion and without material adverse effect
on New RightCHOICE or the price of its stock, or (3) the Foundation will
contend that its indemnification obligation is not valid under law and that an
attempt to enforce the obligation will be unsuccessful. If
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any of the foregoing occurs, New RightCHOICE may have to bear the cost of any
tax liabilities and that could have a material adverse effect on its financial
condition.
Because the tax consequences of the reorganization may vary depending upon
the particular circumstances of each taxpayer and other factors, you are urged
to consult with your own tax advisor as to the specific tax consequences of the
reorganization to you, including the application and effect of state and local
income and other tax laws.
Regulatory and Other Approvals
The Missouri Attorney General and the Missouri Department of Insurance have
both approved the reorganization as a means of settling the litigation. Various
state and federal authorities regulate various operations and businesses of
Blue Cross and Blue Shield of Missouri, RightCHOICE and their affiliates. In
connection with this regulation, the companies must make numerous filings and
receive approvals from federal authorities and the regulatory authorities in
the states where they conduct business. To date, the companies have obtained
some of the approvals required from the Missouri Department of Insurance.
However, they must still make additional filings and obtain additional
approvals. In order to complete each phase of the reorganization, the parties
must make all of the regulatory filings and obtain all required approvals.
We will not complete the reorganization unless the Blue Cross and Blue
Shield Association grants new license agreements to New RightCHOICE and its
controlled affiliates authorizing the use of the Blue Cross and Blue Shield
names and service marks in Blue Cross and Blue Shield of Missouri's and
RightCHOICE's eighty-five Missiouri county service area. The Association and
its member Blue Cross and Blue Shield plans have approved granting new licenses
to New RightCHOICE and its controlled affiliates, provided that the parties
satisfy various conditions and complete the reorganization before the currently
scheduled meeting of the Association board on November 18, 2000, unless the
Association extends this date. The parties have substantially satisfied the
conditions imposed by the Association, and the Association has given assurances
to RightCHOICE and Blue Cross and Blue Shield of Missouri that the Association
will grant the new licenses as long as New RightCHOICE meets all of the
Association's standard membership requirements, the terms of the reorganization
agreement do not change, and the Association is satisfied that all members of
the board of directors of The Missouri Foundation For Health meet the
qualifications specified in the Foundation's charter documents.
The closing of the reorganization also is contingent upon approval from the
banks under RightCHOICE's credit facility agreement. RightCHOICE has obtained
this approval.
New York Stock Exchange Listing
New RightCHOICE common stock will be traded on the New York Stock Exchange
under the symbol "RIT" beginning on the day we complete the reorganization.
Resale of New RightCHOICE Common Stock
New RightCHOICE is registering the shares of New RightCHOICE common stock
the class A shareholders will receive in the reorganization under the
Securities Act of 1933, and the shares will be freely transferable under the
Securities Act, except for shares issued to any class A shareholder that the
law may deem to be an "affiliate" of New RightCHOICE, RightCHOICE, Blue Cross
and Blue Shield of Missouri and The Missouri Foundation For Health at the time
of the special meeting. Generally, affiliates include persons who control, are
controlled by or who are under common control with a particular party for which
affiliate status is being determined, and usually include directors, executive
officers and 10% or more shareholders of the particular party. Any subsequent
transfer by
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an affiliate of any party to the reorganization must be one permitted by the
resale provisions of Rule 145 promulgated under the Securities Act (or Rule 144
promulgated under the Securities Act, in the case of persons who become
affiliates of New RightCHOICE after the reorganization) or as otherwise
permitted under the Securities Act.
Rule 145 under the Securities Act restricts the public sale of New
RightCHOICE common stock received in the reorganization by affiliates of any
party to the reorganization. Rule 145 provides that during the first year
following the completion of the reorganization, affiliates of any party to the
reorganization who do not become affiliates of New RightCHOICE may publicly
resell the shares of New RightCHOICE common stock that they receive in the
reorganization only upon compliance with the following conditions:
. New RightCHOICE must have satisfied its reporting requirements under the
Securities Exchange Act of 1934, which will not have occurred until the
91st day after the reorganization,
. The number of shares sold by the affiliate in any three month period may
not exceed the greater of 1% of the outstanding shares of New RightCHOICE
common stock, or the average weekly trading volume for New RightCHOICE
common stock during the four calendar weeks preceding the first sale, and
. A broker must sell the shares in a routine open market transaction that
does not involve the solicitation of orders for purchase.
After the one-year period, affiliates of any party to the reorganization who
are not affiliates of New RightCHOICE may resell their shares publicly without
regard to the volume limitation or manner of sale requirement so long as New
RightCHOICE has satisfied its reporting requirements under the Securities
Exchange Act.
Dissenters' Rights
Under Missouri law, if you object to the merger of RightCHOICE with New
RightCHOICE, you are entitled to demand fair value for your shares in cash
rather than shares of New RightCHOICE common stock. The following summary of
your rights is not intended to be a complete statement of your rights. We
encourage you to read the full text of the governing Missouri statute which is
Appendix I to this document. If you have a beneficial interest in shares of
class A common stock that are held of record in the name of another person,
such as a bank, broker or other nominee, you must act promptly to cause the
record holder to follow the steps summarized below in a timely manner if you
wish to perfect any dissenters' rights that you may have. Failure to strictly
comply with any of the procedural requirements of Missouri law may result in a
termination or waiver of your dissenters' rights.
You will be entitled to receive the fair value of your shares of class A
common stock in cash upon surrender of your certificates for the shares if you:
. File with RightCHOICE a written objection to the merger of RightCHOICE
with New RightCHOICE prior to or at the special meeting,
. Do not vote in favor of the merger of RightCHOICE with New RightCHOICE,
and
. Within twenty days after completion of the merger of RightCHOICE with New
RightCHOICE make a written demand on New RightCHOICE for payment of the
fair value of your shares of class A common stock as of the day prior to
the date of the special meeting.
If you file a written objection to the merger of RightCHOICE with New
RightCHOICE but fail to make demand within the twenty-day period, you will be
conclusively presumed to have consented to the merger and will be bound by the
terms of the reorganization agreement. Accordingly, the
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shares of class A common stock that you own will be converted into shares of
New RightCHOICE common stock in the reorganization. A vote against the merger
of RightCHOICE with New RightCHOICE is not, by itself, sufficient to meet the
written objection and demand requirements.
If, within thirty days after the completion of the merger of RightCHOICE
with New RightCHOICE, you and New RightCHOICE agree upon the fair value of your
shares of class A common stock, New RightCHOICE will pay you for your shares
within ninety days after the completion of the merger upon the surrender of
your stock certificate(s) representing your shares. Upon your receipt of
payment, you will cease to have any interest in your shares of class A common
stock or in New RightCHOICE.
If you and New RightCHOICE do not agree on the value of your shares of class
A common stock within the thirty-day period, then you may, within sixty days
after the expiration of the thirty-day period, file a petition in St. Louis
City circuit court asking for a determination of the fair value of your shares.
You will be entitled to judgment against New RightCHOICE for the amount of the
fair value of your shares as of the day prior to the date of the special
meeting, including interest on that amount to the date of the judgment. New
RightCHOICE will pay the judgment to you simultaneously with the surrender of
the certificate(s) representing your shares of class A common stock to New
RightCHOICE. Upon New RightCHOICE's payment of the judgment, you will cease to
have any interest in your shares of class A common stock or in New RightCHOICE.
Unless you file the required petition within the sixty-day time period, you
will be conclusively presumed to have approved and ratified the merger of
RightCHOICE with New RightCHOICE, and the shares of class A common stock that
you own will be treated as though such shares had been exchanged in the merger.
We discuss the tax consequences to you if you exercise your dissenter's
rights under "Material Federal Income Tax Consequences--RightCHOICE/New
RightCHOICE Merger Transaction" beginning on page 57 of this document.
Accounting Treatment
New RightCHOICE will account for the reorganization in a manner similar to a
pooling of interests transaction except for (1) the class A shareholders'
exchange of their minority ownership of class A common stock for New
RightCHOICE common stock and (2) the exchange of options to purchase shares of
class A common stock for options to purchase shares of New RightCHOICE common
stock. New RightCHOICE will account for these exchanges of shares and options
as a purchase.
Except for the exchange of shares and options, New RightCHOICE will account
for the transaction in a manner similar to a pooling of interests because all
of the companies are under common control. Under the pooling-of-interests
method of accounting, the companies are treated as if they had always been one
company, with the exception described above for the minority class A
shareholders and option holders. In contrast, under the purchase method of
accounting for the minority class A shareholders' ownership of class A common
stock, New RightCHOICE will record as additional goodwill and intangible assets
and corresponding additional paid-in capital the difference between the fair
market value of the class A common stock as of January 6, 2000, the date the
parties executed the settlement agreement, and the book value of the class A
common stock on that date. We determined fair market value to be the closing
price of the class A common stock on the New York Stock Exchange on January 6,
2000. For the options to purchase shares of class A common stock, New
RightCHOICE will record the amount calculated using the Black-Scholes option
pricing model. We show this accounting within the accompanying pro forma
unaudited combined condensed balance sheet beginning on page 92 and pro forma
adjustment footnote number 7 beginning on page 98.
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TERMS OF REORGANIZATION AGREEMENT
The following is a summary of the reorganization agreement which is Appendix
A to this document and is incorporated by reference into this document. The
reorganization agreement is a complex document that is not easily summarized.
We urge you to read the reorganization agreement in its entirety.
Purpose
The purpose of the reorganization agreement is to set forth the terms and
method of effecting the reorganization. The principal reason RightCHOICE is
proposing to reorganize under the reorganization agreement is to resolve the
litigation with the Missouri Attorney General and the Missouri Department of
Insurance. The loss of this litigation would have material adverse consequences
for RightCHOICE.
In addition to setting forth the structure of the reorganization and what
you will receive upon completion of the reorganization, the reorganization
agreement also sets forth:
. Agreements that the parties have reached concerning what actions each of
them must take before they can complete the reorganization,
. What events must occur before the parties can complete the
reorganization, and
. Under what circumstances a party may terminate the reorganization
agreement.
Agreements Before Reorganization is Completed
The parties to the reorganization agreement have each agreed that they will
take specified action to complete the reorganization, and that they will use
their best efforts to perform all of their obligations under the reorganization
agreement.
Specifically, the parties to the reorganization agreement have agreed to do
the following:
RightCHOICE
Hold Special Meeting. RightCHOICE has agreed to hold the special meeting and
to present the merger of RightCHOICE with New RightCHOICE and the
reorganization agreement at the special meeting for approval of the RightCHOICE
shareholders. RightCHOICE must hold the special meeting so that you can vote on
the merger of RightCHOICE with New RightCHOICE.
Complete the Reorganization. RightCHOICE has agreed to use its best efforts
to effect the reorganization and not to take any action that would prevent the
parties from completing the reorganization.
Obtain Consents. RightCHOICE has agreed to use its best efforts to obtain
all necessary consents and approvals concerning all interests of RightCHOICE
and its subsidiaries in the Blue Cross and Blue Shield names and service marks
and any other material contract which requires the consent of another person
for its transfer or assumption pursuant to the reorganization. RightCHOICE must
obtain these consents and approvals so that New RightCHOICE will not be in
default under these licenses and material contracts as a result of the
reorganization.
Due Diligence. RightCHOICE and Blue Cross and Blue Shield of Missouri have
made representations and warranties to The Missouri Foundation For Health
concerning their respective capital structures, regulatory rights, and
financial condition. The Foundation may desire to confirm the representations
and warranties made by RightCHOICE and Blue Cross and Blue Shield of Missouri.
RightCHOICE has agreed that the Foundation may conduct a reasonable due
diligence
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investigation of Blue Cross and Blue Shield of Missouri and RightCHOICE until
fifteen days prior to the closing date of the reorganization in order to verify
the accuracy of the representations and warranties made by Blue Cross and Blue
Shield of Missouri and RightCHOICE in the reorganization agreement.
Blue Cross and Blue Shield of Missouri
Vote in Favor. Blue Cross and Blue Shield of Missouri has agreed to vote all
of the shares of class B common stock in favor of the merger of RightCHOICE
with New RightCHOICE at the special meeting. This vote is required for the
parties to complete the reorganization.
Complete the Reorganization. Blue Cross and Blue Shield of Missouri has
agreed to use its best efforts to effect the reorganization and not to take any
actions that would prevent the parties from completing the reorganization.
Obtain Consents. Blue Cross and Blue Shield of Missouri has agreed to use
its best efforts to obtain all necessary consents and approvals concerning all
interests of Blue Cross and Blue Shield of Missouri and its subsidiaries in the
Blue Cross and Blue Shield names and service marks and any other material
contract which requires the consent of another person for its transfer or
assumption as part of the reorganization.
New RightCHOICE
Refrain From Specified Acts. New RightCHOICE has agreed not to take any
action unless the reorganization agreement expressly permits the action.
Complete the Reorganization. New RightCHOICE has agreed to use its best
efforts to effect the reorganization and not to take any actions that would
prevent the parties from completing the reorganization.
Make Filings. New RightCHOICE has agreed to file all documents required by
federal and state securities laws as a result of the reorganization. Because
New RightCHOICE is offering securities in the reorganization, the parties have
or will make various filings, including this document, with the Securities and
Exchange Commission.
List New RightCHOICE Stock on NYSE. New RightCHOICE has agreed to cause the
New RightCHOICE common stock to be listed for trading on the New York Stock
Exchange, which it has done.
Execute Other Agreements. New RightCHOICE has agreed to execute the voting
trust and divestiture agreement, the registration rights agreement and the
indemnification agreement. We discuss each of these agreements in the pages
that follow.
The Missouri Foundation For Health
Hold Blue Cross and Blue Shield of Missouri Stock. The Missouri Foundation
For Health has agreed not to sell or otherwise affect its ownership in the
stock of Blue Cross and Blue Shield of Missouri that it will receive upon the
conversion of Blue Cross and Blue Shield of Missouri into a for-profit
corporation. The Foundation must hold the stock to ensure that Blue Cross and
Blue Shield of Missouri may merge into New RightCHOICE in the reincorporation
merger transaction.
Hold New RightCHOICE Stock. The Missouri Foundation For Health has agreed
not to sell or otherwise affect its ownership in any of the New RightCHOICE
common stock that it will own prior to completion of the reorganization. The
Foundation must hold the New RightCHOICE common stock to ensure that
RightCHOICE may merge with New RightCHOICE.
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Complete the Reorganization. The Missouri Foundation For Health has agreed
to use its best efforts to effect the reorganization and not to take any
actions that would prevent the parties from completing the reorganization.
Vote in Favor of Reincorporation Merger. The Missouri Foundation For Health
has agreed to vote in favor of the merger of Blue Cross and Blue Shield of
Missouri into New RightCHOICE in its capacity as the sole shareholder of Blue
Cross and Blue Shield of Missouri and New RightCHOICE immediately prior to this
merger. Missouri law and Delaware law require this vote for the merger of Blue
Cross and Blue Shield of Missouri into New RightCHOICE to be effective.
Vote in Favor of the RightCHOICE Merger. The Missouri Foundation For Health
has agreed to vote in favor of the merger of RightCHOICE into New RightCHOICE
in its capacity as the sole shareholder of New RightCHOICE immediately prior to
this merger. Missouri law and Delaware law require this vote, together with the
approval of RightCHOICE shareholders, for the merger of RightCHOICE with New
RightCHOICE to be effective.
Obtain Tax Opinions. The Missouri Foundation For Health has agreed to use
its best efforts to obtain a tax opinion identical to the tax opinion delivered
to RightCHOICE in the event that PricewaterhouseCoopers LLP's tax opinion is
not delivered to the Foundation. We expect that the Foundation will receive the
same tax opinion that RightCHOICE and Blue Cross and Blue Shield of Missouri
receive from PricewaterhouseCoopers LLP.
Execute Other Agreements. The Missouri Foundation For Health has agreed to
execute the voting trust and divestiture agreement, the registration rights
agreement and the indemnification agreement. We discuss each of these
agreements in the pages that follow.
Agreements After Reorganization is Completed
The parties to the reorganization agreement have also agreed on the
following items that will be on-going obligations after they complete the
reorganization.
Foundation Status Quo
In order to ensure that The Missouri Foundation For Health will not change
its governance structure while it is a substantial shareholder of New
RightCHOICE, the Foundation has agreed that no governmental authority will
increase its control over the Foundation. Specifically, the Foundation has
agreed not to take any action to change any provision of its articles of
incorporation, bylaws or other charter documents that would increase the
influence or control that any governmental authority has over the governance of
the Foundation for so long as the voting trust and divestiture agreement is in
effect.
Possible Public Offering of New RightCHOICE Stock
If requested by New RightCHOICE, the Missouri Foundation For Health will
take all actions necessary to complete a public offering of its shares of New
RightCHOICE common stock on a date within six months following the completion
of the reorganization. If and when New RightCHOICE asks the Foundation to make
this sale, the Foundation and New RightCHOICE will have to agree on the terms
of the sale, including the amount of stock the Foundation will sell.
Payment for Charter Conversion Transaction
Missouri law provides that when a non-profit public benefit corporation
converts to a for-profit corporation, it must pay the fair value of its assets
to another non-profit public benefit corporation. In partial satisfaction of
any obligation of Blue Cross and Blue Shield of Missouri under Missouri law
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resulting from the conversion of Blue Cross and Blue Shield of Missouri to a
for-profit corporation, New RightCHOICE will pay The Missouri Foundation For
Health $175,000 following completion of the reorganization.
Stock Options
RightCHOICE has issued stock options to its directors, officers and various
key employees to purchase shares of class A common stock. Each outstanding
option to purchase shares of class A common stock whether or not exercisable or
vested will be converted into an option to acquire shares of New RightCHOICE
common stock under the same terms and conditions as the option to purchase
shares of class A common stock, and New RightCHOICE will assume all obligations
of RightCHOICE under its stock option plans.
In addition, Blue Cross and Blue Shield of Missouri had previously issued to
its directors options to purchase shares of class A common stock. Blue Cross
and Blue Shield of Missouri subsequently exchanged each option for cash based
on the value of class A common stock the day before the parties executed the
settlement agreement, and, therefore, New RightCHOICE will not assume any of
these options.
Indemnification
Currently, both RightCHOICE and Blue Cross and Blue Shield of Missouri
provide indemnification to their directors, officers and employees in their
articles of incorporation, bylaws or indemnification agreements. Upon
completion of the reorganization, New RightCHOICE will become the successor to
RightCHOICE and Blue Cross and Blue Shield of Missouri.
Accordingly, New RightCHOICE will indemnify, defend and hold harmless the
present and former officers, directors, employees and agents of RightCHOICE and
Blue Cross and Blue Shield of Missouri and their respective subsidiaries
against all losses, expenses, claims, damages or liabilities arising out of
actions or omissions occurring on or prior to the effective time of the
reorganization (including, without limitation, the transactions contemplated by
the reorganization agreement and the other agreements referred to in this
document) for the applicable statute of limitations period and to the full
extent provided under the respective articles of incorporation, bylaws and
indemnification agreements of RightCHOICE and Blue Cross and Blue Shield of
Missouri. The obligations of RightCHOICE to indemnify any present or former
officer, director, employee or agent of Blue Cross and Blue Shield of Missouri
is passed through to The Missouri Foundation For Health for various claims
pursuant to the indemnification agreement as described in this document.
Directors and Officers Liability Insurance
Currently, both RightCHOICE and Blue Cross and Blue Shield of Missouri carry
directors' and officers' liability insurance policies which provide coverage
for the directors and officers of RightCHOICE and Blue Cross and Blue Shield of
Missouri, respectively, in the event they are subject to claims or litigation
brought against them in their capacity as directors and officers. Most large or
publicly traded companies in the United States have directors' and officers'
liability insurance policies for their officers and directors.
New RightCHOICE will maintain in effect for a period of six years after the
effective time of the reorganization the current policies of directors' and
officers' liability insurance maintained by Blue Cross and Blue Shield of
Missouri and RightCHOICE, or New RightCHOICE will substitute policies of
comparable coverage from companies reasonably acceptable to The Missouri
Foundation For Health with respect to acts or omissions occurring before the
effective time of the reorganization. The Foundation has agreed to reimburse
New RightCHOICE for the cost of maintaining the Blue Cross and Blue Shield
policies for the six-year period.
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Fees and Expenses
Each of the parties have had advisors assisting them in connection with the
negotiation and execution of the documents related to the settlement and the
reorganization. Each of the parties will pay their own expenses, including the
fees and expenses of their own advisors, incurred in connection with the
reorganization, except that RightCHOICE has paid the filing, printing and
mailing expenses incurred with respect to this document.
Conditions to Reorganization
The reorganization agreement includes a list of conditions which the parties
must satisfy before a party is obligated to complete the reorganization. Set
forth below is (1) a list of conditions that must be resolved to the
satisfaction of all parties, or waived by each party, if waivable, before the
parties can complete the reorganization, and (2) a list of conditions that must
be resolved to the satisfaction of a particular party or waived by that party.
The parties may waive each of the conditions listed below, except for the
absence of a restraining order, injunction or prohibition preventing completion
of the reorganization, receipt of required regulatory approvals, receipt of
shareholder approvals, and the effectiveness of the registration statement
concerning this document. Although we are permitted to do so, we do not intend
to waive any of the conditions described below. We will not waive the receipt
of a tax opinion from PricewaterhouseCoopers LLP without first recirculating
revised proxy materials and resoliciting the vote of our shareholders unless we
have received the private letter ruling with respect to those aspects of the
reorganization for which the tax opinion is waived.
All Parties
No party to the reorganization agreement is required to complete the
reorganization unless the following conditions are either satisfied or waived,
if waivable, by the party:
. The lawsuit filed as a class action by private parties challenging the
1994 reorganization of Blue Cross and Blue Shield of Missouri, the
related formation of RightCHOICE and other activities on the grounds that
these actions were wrongful to the subscribers of Blue Cross and Blue
Shield of Missouri is resolved to the satisfaction of each party, so that
the parties will know whether New RightCHOICE would succeed to any
liability asserted against it in that lawsuit as the successor to Blue
Cross and Blue Shield of Missouri and RightCHOICE. This lawsuit was
dismissed and is over so this condition has been satisfied,
. No court or other body issues an effective or pending temporary
restraining order, preliminary or permanent injunction or other
prohibition preventing the parties from completing the reorganization, so
that the parties may lawfully complete the reorganization,
. The parties receive all necessary regulatory approvals, so that the
parties may lawfully complete the reorganization,
. The parties receive all necessary shareholder approvals, so that the
parties may lawfully complete the reorganization,
. The registration statement of which this document forms a part continues
to be effective so that the parties may lawfully complete the
reorganization,
. The Missouri Foundation For Health receives a determination letter from
the Internal Revenue Service that it is a tax exempt entity under Section
501(c)(4) of the Internal Revenue Code. The Internal Revenue Service has
determined that the Foundation is a tax exempt entity under
Section 501(c)(4) of the Internal Revenue Code so this condition has been
satisfied,
. The New York Stock Exchange approves for listing the shares of New
RightCHOICE common stock issuable in the reorganization, so that shares
of New RightCHOICE common
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stock may be traded on the New York Stock Exchange immediately after the
reorganization is completed. The New York Stock Exchange has approved the
listing of the shares of New RightCHOICE common stock so this condition
has been satisfied,
. The representations and warranties made by each of the other parties in
the reorganization agreement continue to be true and correct, so that the
parties may have assurances that the condition and status of the parties
has not changed materially between the date of the reorganization
agreement and the closing of the reorganization,
. The other parties perform their respective obligations and agreements
contained in the reorganization agreement,
. Each party receives all documents it should receive in satisfactory form
and substance, and
. Each party to the reorganization agreement receives a legal opinion from
counsel to the other parties to the reorganization agreement to the
effect that the party properly authorized, executed and delivered the
reorganization agreement, so that the parties have assurance that they
may lawfully complete the reorganization.
RightCHOICE
In addition to the conditions listed above that must be satisfied,
RightCHOICE does not have to complete the reorganization unless:
. It receives all necessary consents and approvals required under law or by
contract as a result of the reorganization, except where the failure to
obtain the consents and approvals would not have a material adverse
effect on RightCHOICE, New RightCHOICE or The Missouri Foundation For
Health, so that New RightCHOICE can conduct its business after the
reorganization in substantially the same manner as RightCHOICE and Blue
Cross and Blue Shield of Missouri conducted their businesses before the
reorganization,
. It receives a copy of the private letter ruling from the Internal Revenue
Service to Blue Cross and Blue Shield of Missouri regarding the tax-free
nature of the reorganization and that ruling remains in effect and, if
Blue Cross and Blue Shield of Missouri does not receive the private
letter ruling in whole or in part, then RightCHOICE receives an opinion
from PricewaterhouseCoopers LLP with respect to all matters not included
in the private letter ruling. Blue Cross and Blue Shield of Missouri has
requested a private letter ruling from the Internal Revenue Service with
respect to two specific elements of the reorganization--the transfer and
assumption transaction and the charter conversion transaction,
. It and its affiliates execute new license agreements with the Blue Cross
and Blue Shield Association providing for New RightCHOICE and its
affiliates to use the Blue Cross and Blue Shield name and service marks
after the parties complete the reorganization, so that New RightCHOICE
may continue to enjoy the recognition, quality and other benefits of the
Blue Cross and Blue Shield names and service marks,
. Warburg Dillon Read does not withdraw or adversely modify its opinion,
which is contained as Appendix H to this document, as of the date
RightCHOICE mails this document to its shareholders, so that the
RightCHOICE business opportunities committee and board of directors may
have assurance that events occurring between the date Warburg Dillon Read
delivered its opinion and the date RightCHOICE mailed this document will
not have materially altered the conclusion reached in that opinion,
Warburg Dillon Read has not withdrawn or adversely modified its opinion
as of the date RightCHOICE mailed this document to its shareholders so
this condition has been satisfied,
. It receives all consents or approvals required under any credit facility
or other financing agreement as a result of the reorganization, so that
New RightCHOICE is not in default under any of these agreements as a
result of the completion of the reorganization. RightCHOICE
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has received the requisite approval of the lenders under its credit
agreement so this condition has been satisfied,
. It receives written notice from the Missouri Attorney General and the
Missouri Department of Insurance that the following conditions to The
Missouri Foundation For Health's obligations to close the reorganization
have been satisfied or waived:
-- the satisfactory final resolution of a lawsuit filed as a class
action by private parties challenging the 1994 reorganization of
Blue Cross and Blue Shield of Missouri, the related formation of
RightCHOICE and other activities on the grounds that these actions
were wrongful to the subscribers of Blue Cross and Blue Shield of
Missouri. This lawsuit was dismissed and is over so this condition
has been satisfied,
-- the receipt of a legal opinion from counsel for The Missouri
Foundation For Health to the effect that the shares of New
RightCHOICE common stock New RightCHOICE will issue to the
Foundation in the reorganization will be free and clear of all
claims that have been asserted or may in the future be asserted
arising out of or related to the reorganization and arising out of
or related to either the status of Blue Cross and Blue Shield of
Missouri as a mutual benefit or a public benefit corporation under
Missouri law, or the ownership, beneficial ownership, or rights to
the assets, surplus or equity of Blue Cross and Blue Shield of
Missouri and any of its subsidiaries or affiliates. The Foundation
has advised that it does not expect to retain an attorney to deliver
this opinion and that it intends to waive this condition. The
Attorney General and the Department of Insurance have advised that
they intend to waive this condition if it is waived by the
Foundation.
Blue Cross and Blue Shield of Missouri
In addition to the closing conditions applicable to all parties, Blue Cross
and Blue Shield of Missouri does not have to complete the reorganization
unless:
. It receives all necessary consents and approvals required under law or by
contract as a result of the reorganization, except where the failure to
obtain such consents and approvals would not have a material adverse
effect on RightCHOICE, New RightCHOICE or The Missouri Foundation For
Health, so that New RightCHOICE can conduct its business after the
reorganization in substantially the same manner as RightCHOICE and Blue
Cross and Blue Shield of Missouri conducted their business before the
reorganization,
. It receives the private letter ruling from the Internal Revenue Service
regarding the tax-free nature of the reorganization and such ruling
remains in effect and, if it does not receive the private letter ruling
in whole or in part, then it receives an opinion from
PricewaterhouseCoopers LLP with respect to all matters not included in
the private letter ruling. Blue Cross and Blue Shield of Missouri has
requested a private letter ruling from the Internal Revenue Service with
respect to two specific elements of the reorganization--the transfer and
assumption transaction and the charter conversion transaction,
. All parties dispose of the pending litigation between Blue Cross and Blue
Shield of Missouri and the State of Missouri concerning the 1994
reorganization of Blue Cross and Blue Shield of Missouri as required by
the settlement agreement. This condition has been satisfied as described
in this document,
. Its board of directors receives the reaffirmation of a legal opinion from
its special counsel, Greensfelder, Hemker & Gale, P.C., to the effect
that
-- the authorization and approval of the reorganization agreement by
the board of directors of Blue Cross and Blue Shield of Missouri is
consistent with its fiduciary duties,
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-- the reorganization complies with Missouri law, and
-- the indemnification agreement is enforceable against The Missouri
Foundation For Health in accordance with its terms,
. It receives written notice from the Missouri Attorney General and the
Missouri Department of Insurance that the following conditions to The
Missouri Foundation For Health's obligations to close the reorganization
have been satisfied or waived:
-- the satisfactory final resolution of a lawsuit filed as a class
action by private parties challenging the 1994 reorganization of
Blue Cross and Blue Shield of Missouri, the related formation of
RightCHOICE and other activities on the grounds that these actions
were wrongful to the subscribers of Blue Cross and Blue Shield of
Missouri. This lawsuit was dismissed and is over so this condition
has been satisfied,
-- the receipt of a legal opinion from counsel for The Missouri
Foundation For Health to the effect that the shares of New
RightCHOICE common stock New RightCHOICE will issue to the
Foundation in the reorganization will be free and clear of all
claims that have been asserted or may in the future be asserted
arising out of or related to the reorganization and arising out of
or related to either the status of Blue Cross and Blue Shield of
Missouri as a mutual benefit or public benefit corporation under
Missouri law or the ownership, beneficial ownership or rights to the
assets, surplus or equity of Blue Cross and Blue Shield of Missouri
and any of its subsidiaries or affiliates. The Foundation has
advised that it does not expect to retain an attorney to deliver
this opinion and that it intends to waive this condition. The
Attorney General and the Department of Insurance have advised that
they intend to waive this condition if it is waived by the
Foundation.
The Missouri Foundation For Health
In addition to the closing conditions applicable to all parties, The
Missouri Foundation For Health does not have to complete the reorganization
unless:
. It receives all other necessary consents and approvals required under law
or by contract as a result of the reorganization, except where the
failure to obtain such consents and approvals would not have a material
adverse effect on New RightCHOICE or the Foundation,
. It receives a copy of the private letter ruling from the Internal Revenue
Service to Blue Cross and Blue Shield of Missouri regarding the tax-free
nature of the reorganization and such ruling remains in effect and, if
Blue Cross and Blue Shield of Missouri does not receive the private
letter ruling in whole or in part, then the Foundation receives an
opinion from PricewaterhouseCoopers LLP with respect to all matters not
included in the private letter ruling. Blue Cross and Blue Shield of
Missouri has requested a private letter ruling from the Internal Revenue
Service with respect to two specific elements of the reorganization--the
transfer and assumption transaction and the charter conversion
transaction,
. It receives an opinion from its counsel to the effect that the shares of
New RightCHOICE common stock New RightCHOICE will issue to it in the
reorganization will be free and clear of all claims that have been
asserted or may in the future be asserted arising out of or related to
the reorganization and arising out of or related to the status of Blue
Cross and Blue Shield of Missouri as a mutual or a public benefit
corporation under Missouri law or the ownership, beneficial ownership or
rights to the assets, surplus or equity of Blue Cross and Blue Shield of
Missouri or any of its subsidiaries or affiliates. The Foundation has
advised that it does not expect to retain an attorney to deliver this
opinion and that it intends to waive this condition. The Attorney General
and the Department of Insurance have advised that they intend to waive
this condition if it is waived by the Foundation.
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Termination
Although the parties have executed the reorganization agreement, they may
terminate the reorganization agreement before they complete the reorganization.
Specifically, any party to the reorganization agreement may terminate the
reorganization agreement at any time before the parties complete the
reorganization, even if the RightCHOICE shareholders have previously approved
the reorganization:
. Upon the mutual written consent of all parties, including the RightCHOICE
business opportunities committee,
. By giving notice to all other parties if an authority permanently enjoins
or restrains the reorganization, or
. By giving notice to all other parties if any of the conditions to the
notifying party's obligations are not satisfied, or waived, where
permissible, on or before December 31, 2000.
In addition, RightCHOICE also may terminate the reorganization agreement by
giving notice to all other parties if its legal counsel advises that it should
terminate the reorganization agreement in order to satisfy the fiduciary duties
of either its board of directors or its business opportunities committee.
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TERMS OF SETTLEMENT AGREEMENT
We propose the reorganization pursuant to the settlement agreement which is
Appendix B to this document. The settlement agreement is a complex document
that is not easily summarized. The following is a summary of the settlement
agreement. We urge you to read the settlement agreement in its entirety.
General
The settlement agreement, dated January 6, 2000, amends and restates a
settlement agreement dated September 20, 1998, as amended. The settlement
agreement is among RightCHOICE, Blue Cross and Blue Shield of Missouri, the
Missouri Attorney General and the Missouri Department of Insurance.
Primary Purpose
The settlement agreement's primary purpose is to resolve the litigation
between Blue Cross and Blue Shield of Missouri and the State of Missouri
concerning Blue Cross and Blue Shield of Missouri's operation of RightCHOICE as
a for-profit subsidiary since the 1994 reorganization of Blue Cross and Blue
Shield of Missouri. The settlement agreement does not resolve the certified
subscriber class action for declaratory relief concerning Blue Cross and Blue
Shield of Missouri's status as a mutual benefit or public benefit corporation.
Please refer to the discussion in the risk factor "We will be defendants in
lawsuits pending against Blue Cross and Blue Shield of Missouri and
RightCHOICE, including a class action" on page 26 and in the risk factor "If
the court finds that Blue Cross and Blue Shield of Missouri is a mutual benefit
corporation, a court could cancel the reorganization, or, if already completed,
a court could undo the reorganization or compel New RightCHOICE to pay
substantial damages to the Blue Cross and Blue Shield of Missouri and
RightCHOICE subscribers" on page 27 for a description of the litigation that
will remain outstanding against New RightCHOICE, as the successor to Blue Cross
and Blue Shield of Missouri and RightCHOICE, even if we complete the
reorganization.
Additional Purposes
The settlement agreement also has the following additional purposes:
. To provide that the State of Missouri will use Blue Cross and Blue Shield
of Missouri's assets in a manner consistent with Missouri law and the
history and past purposes of Blue Cross and Blue Shield of Missouri,
. To protect the interests of Blue Cross and Blue Shield of Missouri's
subscribers,
. To provide for New RightCHOICE to continue as a licensee of the Blue
Cross and Blue Shield Association following the reorganization,
. To enable Blue Cross and Blue Shield of Missouri and RightCHOICE and each
of their respective officers and directors to fulfill all of their
fiduciary duties, and
. To provide for the reorganization.
Termination of Litigation
The settlement agreement provides for the parties to settle the litigation
involving Blue Cross and Blue Shield of Missouri's operation of RightCHOICE as
a for-profit subsidiary by:
. Dismissing the litigation,
. Completing the reorganization,
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. Blue Cross and Blue Shield of Missouri paying $12.78 million to The
Missouri Foundation For Health, and
. Granting mutual releases to be effective upon completion of the
reorganization.
Dismissal of Litigation
Pursuant to the settlement agreement, Blue Cross and Blue Shield of
Missouri, the Missouri Attorney General and the Missouri Department of
Insurance filed with the circuit court of Cole County a joint notice of
dismissal of all pending claims in the litigation. In addition, on February 8,
2000, Blue Cross and Blue Shield of Missouri, the Missouri Attorney General and
the Missouri Department of Insurance filed a joint motion in the Supreme Court
of Missouri for dismissal of all appeals pending in the litigation. On February
9, 2000, the Supreme Court dismissed the appeal.
Completion of Reorganization
Once the parties dismissed the litigation, the State of Missouri
incorporated The Missouri Foundation For Health, and the Foundation
incorporated New RightCHOICE. On March 14, 2000, RightCHOICE, Blue Cross and
Blue Shield of Missouri, the Foundation and New RightCHOICE signed the
reorganization agreement. The parties will not complete the reorganization
unless RightCHOICE shareholders approve it and the parties satisfy the
conditions to the reorganization described in the preceding discussions of the
reorganization agreement.
$12.78 Million Payment
On the closing date of the reorganization, but prior to and separate from
the implementation of the reorganization agreement, Blue Cross and Blue Shield
of Missouri will pay $12.78 million to The Missouri Foundation For Health in
partial satisfaction of claims by various parties, including the Missouri
Attorney General, the Missouri Department of Insurance and public advocacy
groups, that Blue Cross and Blue Shield has a public purpose obligation. We
expect the Foundation to use the payment to carry out its stated purposes.
Mutual Releases
The parties will grant the following releases if the parties complete the
reorganization. These releases will have the effect of permanently ending the
litigation pending between Blue Cross and Blue Shield of Missouri and the
Missouri Attorney General and Missouri Department of Insurance over Blue Cross
and Blue Shield of Missouri's operation of RightCHOICE as a for-profit
subsidiary.
The Missouri Attorney General and Missouri Department of Insurance Release
Effective upon completion of the reorganization, the Missouri Attorney
General and the Missouri Department of Insurance will release RightCHOICE, Blue
Cross and Blue Shield of Missouri and each of their respective present and past
affiliated corporations, successors and assigns, and directors, officers,
agents, employees and independent contractors from:
. Any and all claims, causes of action, liabilities and judgments that the
parties asserted or might have asserted in the litigation between Blue
Cross and Blue Shield of Missouri and the State of Missouri over Blue
Cross and Blue Shield of Missouri's ownership and operation of
RightCHOICE as a for-profit subsidiary since the 1994 reorganization of
Blue Cross and Blue Shield of Missouri,
. Any and all claims, causes of action, liabilities and judgments arising
out of matters occurring through April 20, 1998, the date the parties
entered into the proposed resolution terms for the settlement, that do
not arise out of or are not related to the settled litigation,
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. Any and all claims, causes of action, liabilities and judgments arising
from or related to the execution and performance of the settlement
agreement, the reorganization agreement or completion of the
reorganization,
. Any and all claims, causes of action, judgments, disputes,
investigations, audits or complaints relating to issues raised in
financial examinations of Blue Cross and Blue Shield of Missouri and
RightCHOICE's subsidiaries completed September 30, 1997,
. Any and all claims, causes of action, judgments, disputes,
investigations, audits or complaints arising out of or relating to
HealthLink HMO's certification of compliance with reporting of non-
compliance with rating restrictions, and
. Any and all claims, causes of action, judgments, disputes,
investigations, audits or complaints arising out of or relating to
possible violations of the Missouri Unfair Merchandising Practices Act
for undue delays in payments to providers of certain health maintenance
organization and preferred provider organization products.
However, the Missouri Attorney General's and the Missouri Department of
Insurance's respective releases do not include the following:
. Claims by consumers lodged with the Missouri Department of Insurance and
the Missouri Attorney General,
. Claims of criminal liability of any kind,
. Claims of liability from or on account of any conduct which is finally
adjudged to have been knowingly fraudulent, deliberately dishonest or
willful misconduct,
. Any claim for breach of the settlement agreement, the reorganization
agreement or any other agreement executed in connection with the
reorganization, and
. Claims relating to the operations of Blue Cross and Blue Shield of
Missouri after April 20, 1998 that do not arise out of or relate to the
settled litigation.
RightCHOICE and Blue Cross and Blue Shield of Missouri Release
Upon completion of the reorganization, RightCHOICE and Blue Cross and Blue
Shield of Missouri, and their respective affiliated corporations, successors
and assigns, will release the State of Missouri, the Missouri Attorney General,
the Missouri Department of Insurance, and their respective present and past
officers, agents, employees, independent contractors, affiliates, successors
and assigns from:
. Any and all claims, causes of action, liabilities and judgments arising
out of or relating to actions taken or statements made by the Missouri
Attorney General or the Missouri Department of Insurance or their
respective past and present agents, employees or independent contractors
in connection with Blue Cross and Blue Shield of Missouri's operation of
RightCHOICE as a for-profit subsidiary since the 1994 reorganization of
Blue Cross and Blue Shield of Missouri,
. Any and all claims, causes of action, liabilities and judgments that the
parties asserted or might have asserted in the litigation, or
. Any and all claims, causes of action, liabilities and judgments arising
out of or relating to the settlement agreement, the reorganization
agreement or completion of the reorganization.
RightCHOICE's and Blue Cross and Blue Shield of Missouri's respective
releases do not include:
. Claims of liability from or on account of conduct which is finally
adjudged to have been knowingly fraudulent, deliberately dishonest or
willful misconduct, and
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. Any claim for breach of the settlement agreement, the reorganization
agreement or any agreement executed in connection with the
reorganization.
Termination of Settlement Agreement
Any party to the settlement agreement may terminate the settlement agreement
if the parties do not complete the reorganization on or before December 31,
2000 or if another party fails to use its best efforts to consummate the
reorganization.
No Admission of Liability
By executing the settlement agreement, none of the parties have admitted any
fault or liability with respect to any matter subject to the settlement
agreement or reorganization agreement.
Binding Effect
The settlement agreement is binding upon all of the parties that signed it.
If either the Missouri Attorney General or the Missouri Department of Insurance
later assert that their respective undertakings under the settlement agreement
are not fully valid and enforceable, then RightCHOICE, Blue Cross and Blue
Shield of Missouri or their successors may declare the settlement agreement and
the reorganization agreement to be void and of no effect.
Approval of Stock Purchases
As discussed below, the registration rights agreement provides that New
RightCHOICE may purchase shares of New RightCHOICE common stock from time to
time from The Missouri Foundation For Health. Depending upon the exact terms of
the transaction, the purchase may require the prior approval of the Missouri
Department of Insurance. The settlement agreement provides that the Missouri
Department of Insurance will not disapprove of New RightCHOICE's purchase of
New RightCHOICE common stock from the Foundation under the registration rights
agreement unless:
. New RightCHOICE or one of its subsidiaries fails to meet regulatory
capital and reserve requirements after completion of the purchase, or
. New RightCHOICE fails to satisfy any other objective criteria required to
be satisfied under Missouri law as a condition to obtaining the Missouri
Department of Insurance's approval.
Representations
In order to provide assurance to Blue Cross and Blue Shield of Missouri and
RightCHOICE that no threat of additional litigation with the State of Missouri
exists, the Missouri Attorney General and the Missouri Department of Insurance
represented in the settlement agreement that they did not have any claims
pending or threatened against RightCHOICE or Blue Cross and Blue Shield of
Missouri on the date the parties announced the proposed resolution terms of the
settlement in April 1998.
Similarly, in order to provide the Missouri Attorney General and the
Missouri Department of Insurance with information about the potential liability
of The Missouri Foundation For Health under the indemnification agreement,
RightCHOICE and Blue Cross and Blue Shield of Missouri represented in the
settlement agreement that they did not have any claims pending or threatened
against them as of September 20, 1998 that might be subject to indemnity
pursuant to the indemnification agreement, except for (1) the certified
subscriber class action for declaratory relief concerning Blue Cross and Blue
Shield of Missouri's status as a public benefit or mutual benefit corporation,
and (2) the lawsuit filed as a class action by private parties challenging the
1994 reorganization of Blue Cross and Blue Shield of Missouri, the related
formation of RightCHOICE
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and other activities on the grounds that these actions were wrongful to the
subscribers of Blue Cross and Blue Shield of Missouri. The lawsuit described in
clause (2) above was dismissed and is over.
Related Settlements
As part of the settlement agreement originally entered into by the parties
on September 20, 1998, the parties agreed to separate settlements of:
. A lawsuit that the Missouri Attorney General had filed against Blue Cross
and Blue Shield of Missouri on February 9, 1998 relating to alleged
violations of the Merchandising Practices Act,
. The administrative market conduct proceedings instituted by the Missouri
Department of Insurance on February 11, 1998 against Blue Cross and Blue
Shield of Missouri, RightCHOICE, and their subsidiaries, and
. An appeal by Healthy Alliance Life Insurance Company, a subsidiary of
RightCHOICE, from the disallowance of a claim for refund of premium
taxes.
The parties conditioned these settlements on obtaining court approval of the
principal settlement agreement.
On January 6, 2000, as part of the signing of the amended and restated
settlement agreement, the parties agreed to delete the court approval
contingency and complete these three settlements. The parties have completed
these three settlements.
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TERMS OF VOTING TRUST AND DIVESTITURE AGREEMENT
The following is a summary of the voting trust and divestiture agreement
which is Appendix C to this document. The voting trust and divestiture
agreement is a complex document that is not easily summarized. We urge you to
read the voting trust and divestiture agreement in its entirety.
Purpose
The Blue Cross and Blue Shield Association will grant to New RightCHOICE
licenses to use the Blue Cross and Blue Shield names and service marks
following completion of the reorganization only if The Missouri Foundation For
Health deposits at least 95% of its shares of New RightCHOICE common stock in a
voting trust and sells those shares within prescribed time periods. New
RightCHOICE's compliance with the terms of the voting trust and divestiture
agreement will satisfy these conditions. The Blue Cross and Blue Shield
Association designed this condition to preserve New RightCHOICE's independence
from The Missouri Foundation For Health.
Deposit of Shares
The Missouri Foundation For Health will deposit into a voting trust at least
95%, or at least 14,214,375 shares, of the 14,962,500 shares of New RightCHOICE
common stock that it will receive in the reorganization. The terms of the
voting trust will 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 may dispose of those shares only in a manner
that would not violate the ownership requirements contained in New
RightCHOICE's certificate of incorporation and any other agreement to which the
Foundation will be a party.
Withdrawal of Shares
As described below, The Missouri Foundation For Health must sell its shares
of New RightCHOICE common stock within prescribed periods of time. In order to
sell these shares, the Foundation will need to withdraw shares from the voting
trust from time to time. In order to ensure that the Foundation is selling
shares in a permitted manner, the Foundation may withdraw shares from the
voting trust only in order to sell such shares and then only if:
. New RightCHOICE registers the shares in the name of the purchaser before
the Foundation withdraws them from the voting trust, so that the
Foundation may not keep ownership of those shares,
. The Foundation does not sell the shares to an affiliate of the
Foundation, so that the Foundation may not keep indirect ownership of
those shares,
. The Foundation does not sell the shares to a person or entity that
already owns shares of New RightCHOICE common stock in excess of the
ownership limits contained in New RightCHOICE's certificate of
incorporation, so that the ownership limits are not violated,
. The sale would not result in a person or entity owning shares of New
RightCHOICE common stock in excess of the ownership limits contained in
New RightCHOICE's certificate of incorporation, so that the ownership
limits are not violated, and
. The voting trust and divestiture agreement, the registration rights
agreement and New RightCHOICE's certificate of incorporation and bylaws
permit the sale.
Voting of Shares Held in Voting Trust
In general, in order to maintain New RightCHOICE's independence from The
Missouri Foundation For Health, the trustee of the voting trust will vote the
shares of New RightCHOICE
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common stock owned by the Foundation and held in the voting trust as directed
by the directors of New RightCHOICE, except that the Foundation will decide how
to vote these shares on a merger or similar business combination proposal which
would result in the then existing shareholders of New RightCHOICE owning less
than 50.1% of the resulting company. Specifically, the trustee of the voting
trust will vote all of the Foundation's shares of New RightCHOICE common stock
held in the voting trust in the following manner:
. If the matter is the election of directors of New RightCHOICE, the
trustee will vote the shares in favor of each nominee whose nomination
has been approved by (1) a majority of the members of the New RightCHOICE
board of directors who were not nominated at the initiative of the
Foundation or a person or entity owning shares of New RightCHOICE common
stock in excess of the ownership limits contained in New RightCHOICE's
certificate of incorporation, and (2) a majority of the entire New
RightCHOICE board of directors,
. Against the removal of any director of New RightCHOICE unless (1) a
majority of the members of the New RightCHOICE board of directors who
were not nominated at the initiative of the Foundation or a person or
entity owning shares of New RightCHOICE common stock in excess of the
ownership limits contained in New RightCHOICE's certificate of
incorporation, and (2) a majority of the entire New RightCHOICE board of
directors, initiates or consents to the removal action,
. Against any change to New RightCHOICE's certificate of incorporation or
bylaws unless (1) a majority of the members of the New RightCHOICE board
of directors who were not nominated at the initiative of the Foundation
or a person or entity owning shares of New RightCHOICE common stock in
excess of the ownership limits contained in New RightCHOICE's certificate
of incorporation, and (2) a majority of the entire New RightCHOICE board
of directors, initiates or consents to the action,
. As directed by the Foundation, on any proposed business combination
transaction that if consummated would result in the then existing New
RightCHOICE shareholders, including the Foundation, owning less than
50.1% of the outstanding voting securities of the resulting entity, and
. On any other action, in accordance with the recommendation of the New
RightCHOICE board of directors.
In addition, unless (1) a majority of the members of the New RightCHOICE
board of directors who were not nominated at the initiative of the Foundation
or a person or entity owning shares of New RightCHOICE common stock in excess
of the ownership limits contained in New RightCHOICE's certificate of
incorporation, and (2) a majority of the entire New RightCHOICE 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 New RightCHOICE board
of directors,
. Call any special meeting of New RightCHOICE shareholders, or
. Take any action that would be inconsistent with the voting requirements
contained in the voting trust and divestiture agreement.
Standstill
As the largest shareholder of New RightCHOICE following the reorganization,
The Missouri Foundation For Health would ordinarily enjoy the benefits of
control typically held by majority shareholders. However, in order to maintain
New RightCHOICE's independence from the Foundation, as required by the Blue
Cross and Blue Shield Association, the Foundation has agreed
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not to take actions that a shareholder of a corporation ordinarily could take
in its capacity as a shareholder. Specifically, the voting trust and
divestiture agreement provides that the Foundation may not:
. Individually, or as part of a group, acquire the right to vote or dispose
of any shares of New RightCHOICE common stock or options to purchase
shares of New RightCHOICE common stock other than those shares issued to
it in the reorganization, unless it receives the shares in a stock split
or other similar transaction,
. Enter into any agreement with any person or entity to sell shares of New
RightCHOICE common stock, except in accordance with the voting trust and
divestiture agreement and the registration rights agreement,
. Sell any of its shares of New RightCHOICE common stock to a person or
entity if the person or entity already owns, or would own as a result of
the sale transaction, New RightCHOICE common stock in excess of the
ownership limit for the person or entity included in New RightCHOICE's
certificate of incorporation,
. Nominate any candidate to the New RightCHOICE board of directors, or
. Appoint any individual to fill a vacancy on the New RightCHOICE board of
directors.
Divestiture Requirements
The Blue Cross and Blue Shield Association requires its for-profit licensees
to have limitations on the ownership of their stock in order to maintain
independence from the control of any single shareholder or group of
shareholders. The Missouri Foundation For Health's ownership of approximately
80% of the outstanding shares of New RightCHOICE common stock following
completion of the reorganization would ordinarily exceed the ownership
limitations required by the Blue Cross and Blue Shield Association. The Blue
Cross and Blue Shield Association has agreed to waive the ownership limitations
for the Foundation provided the Foundation satisfies a number of conditions,
including selling the shares of New RightCHOICE common stock that it owns in
the manner and within the time periods described below.
Three Year Divestiture Deadline
The Missouri Foundation For Health must sell its shares of New RightCHOICE
common stock so that it owns less than 50% of the outstanding shares of New
RightCHOICE common stock within three years following completion of the
reorganization. This three-year period is extended day for day, up to a maximum
of 365 days, for each day that the Foundation does not require New RightCHOICE
to register the Foundation's shares of New RightCHOICE common stock under a
demand registration because New RightCHOICE had recently effected a
registration of New RightCHOICE common stock.
Five Year Divestiture Deadline
In addition to meeting the three year divestiture deadline, The Missouri
Foundation For Health must sell its shares of New RightCHOICE common stock so
that it owns less than 20% of the outstanding shares of New RightCHOICE common
stock within five years following completion of the reorganization. This five-
year period is extended day for day, up to a maximum of 730 days, for each day
that the Foundation does not require New RightCHOICE to register the
Foundation's shares of New RightCHOICE common stock under a demand registration
because New RightCHOICE had previously recently effected a registration of New
RightCHOICE common stock.
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Extension of Divestiture Deadlines
Extension Sought by The Missouri Foundation For Health
In the event that The Missouri Foundation For Health cannot meet the
divestiture deadlines, it may be able to obtain an extension if it receives
Blue Cross and Blue Shield Association approval. Specifically, New RightCHOICE
must extend the divestiture deadlines if:
. The Foundation makes a good faith and reasonable determination that
compliance with the divestiture deadlines would have a material adverse
effect on the Foundation,
. The Foundation advises New RightCHOICE of its determination and the
reasons for the determination and makes a reasonable request for an
extension of the pending divestiture deadline, and
. New RightCHOICE receives written confirmation from the Blue Cross and
Blue Shield Association that the Foundation's request for an extension of
the divestiture deadline would not cause a violation of the license
agreement between New RightCHOICE and the Blue Cross and Blue Shield
Association.
Extension Sought by New RightCHOICE
Similarly, New RightCHOICE can extend the divestiture deadline for The
Missouri Foundation For Health without a prior request by the Foundation. But
again, the Blue Cross and Blue Shield Association must approve the extension.
Specifically, New RightCHOICE will extend the divestiture deadlines if:
. New RightCHOICE makes a good faith determination that compliance with the
divestiture deadlines would have a material adverse effect on New
RightCHOICE or any of its shareholders, other than the Foundation, and
. New RightCHOICE receives written confirmation from the Blue Cross and
Blue Shield Association that the extension of the divestiture deadline
requested by New RightCHOICE would not cause a violation of the license
agreement between New RightCHOICE and the Blue Cross and Blue Shield
Association.
Failure to Meet Divestiture Deadlines
The Missouri Foundation For Health may not be able to meet the divestiture
deadlines. If the Foundation fails to meet a divestiture deadline, New
RightCHOICE will arrange for the sale of those shares of New RightCHOICE common
stock that the agreement required the Foundation to sell in a commercially
reasonable manner under the circumstances and pay the proceeds received in the
sale to the Foundation, after deducting the expenses incurred by New
RightCHOICE. The sale of these shares would likely require registration with
the Securities and Exchange Commission. Registration is a time consuming and
expensive process. Thus, the sale of these shares may take considerable time to
complete. The Foundation will pay the expenses of the sale. Until sold, the
trustee of the voting trust will vote these shares of New RightCHOICE common
stock in the manner required under the voting trust and divestiture agreement
as described in this document, except that the trustee will vote these shares
in the exact proportion New RightCHOICE shareholders vote all shares of New
RightCHOICE common stock not held in the voting trust on any change of control
proposal approved by New RightCHOICE's board of directors and submitted to
shareholders for approval.
Dividends
In the future, New RightCHOICE may declare and pay dividends on the
outstanding shares of New RightCHOICE common stock, although it has no current
intention to do so. The Missouri Foundation For Health will be entitled to
receive all cash dividends paid on the shares of New
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RightCHOICE common stock held in the voting trust, after the trustee deducts
its fees and expenses. Any stock dividends paid on the shares of New
RightCHOICE common stock held in the voting trust will be subject to the voting
trust as if originally deposited in the voting trust.
Trustee Compensation and Qualifications
New RightCHOICE and The Missouri Foundation For Health will each pay one-
half of the trustee's annual fee which the parties will agree upon prior to the
closing of the reorganization.
At all times, the trustee must:
. Be authorized to act as a trustee under Delaware law,
. Have stockholders' equity of at least $500,000,000 either on a standalone
basis or together with its subsidiaries,
. Own not more than 1% of New RightCHOICE's outstanding stock, and
. Not have any director or officer that serves as a director or officer of
New RightCHOICE.
Termination of Voting Trust and Divestiture Agreement
The voting trust and divestiture agreement will terminate once the trustee
receives notice from New RightCHOICE and The Missouri Foundation For Health
that the Foundation owns less than 5% of the outstanding shares of New
RightCHOICE common stock. At that point, the restrictions and deadlines in the
voting trust and divestiture agreement will no longer apply, and the Foundation
will have satisfied the divestiture deadlines.
Litigation
In order to further ensure that New RightCHOICE will remain independent from
The Missouri Foundation For Health after the reorganization, the Foundation may
not participate in litigation against New RightCHOICE that challenges the
ownership limitations and other provisions required by the Blue Cross and Blue
Shield Association for its for-profit licensees. Specifically, the Foundation
has agreed not to join as a party in any litigation that alleges that:
. A party may not enforce any provisions of the voting trust and
divestiture agreement or New RightCHOICE's certificate of incorporation
or bylaws in accordance with their terms,
. The New RightCHOICE board of directors should not enforce the provisions
of New RightCHOICE's certificate of incorporation or bylaws in any
particular case or circumstances, or
. The New RightCHOICE board of directors should approve or abandon any
proposal concerning an extraordinary business combination involving New
RightCHOICE.
The Missouri Foundation For Health may, however, participate in any
litigation that alleges that the New RightCHOICE board of directors should
solicit proposals from third parties or initiate a bidding process for the
acquisition of New RightCHOICE.
Acquisition Proposals
The voting trust and divestiture agreement provides that The Missouri
Foundation For Health may not solicit or encourage inquires or proposals with
respect to, or provide any confidential information to or have any discussions,
meetings or other communications with, a person relating to
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a merger, tender offer or other business combination, involving New
RightCHOICE. However, the Foundation may:
. Have discussions with the counter-party to a business combination
transaction after the New RightCHOICE board of directors submits the
transaction to the New RightCHOICE shareholders for approval, and
. Have discussions with any person or entity concerning the sale of New
RightCHOICE common stock as permitted by the voting trust and divestiture
agreement and the registration rights agreement.
In addition, under the voting trust and divestiture agreement, for so long
as The Missouri Foundation For Health owns at least 20% of the outstanding
shares of New RightCHOICE common stock, New RightCHOICE must consult with the
Foundation before soliciting, or upon receiving, a business combination
proposal in which the then existing New RightCHOICE shareholders including the
Foundation will own less than a majority of the outstanding shares of the
resulting entity. These requirements apply to any proposal in which the
Foundation may direct the trustee how to vote.
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TERMS OF REGISTRATION RIGHTS AGREEMENT
The following is a summary of the registration rights agreement which is
Appendix D to this document. The registration rights agreement is a complex
document which is not easily summarized. We urge you to read the registration
rights agreement in its entirety.
Purpose
The registration rights agreement gives The Missouri Foundation For Health
the right to require New RightCHOICE to register with the Securities and
Exchange Commission the Foundation's shares of New RightCHOICE common stock for
sale so that the Foundation may satisfy the divestiture deadlines contained in
the voting trust and divestiture agreement without having to rely on private or
other nonregistered sales. As discussed below, the registration rights
agreement also gives New RightCHOICE the option to purchase shares of New
RightCHOICE common stock from the Foundation.
Demand Registration Rights
Under federal securities laws, every offer and sale of securities must be
either registered with the Securities and Exchange Commission or exempt from
registration. The registration rights agreement gives the Foundation the right
to "demand" that New RightCHOICE effect a registration with the Securities and
Exchange Commission of some or all of the shares of New RightCHOICE common
stock owned by the Foundation. This right lasts for as long as the Foundation
owns shares of New RightCHOICE common stock. However, New RightCHOICE's
obligations to effect a demand registration are subject to the limitations
described below.
Purchase Option
If The Missouri Foundation For Health requests a demand registration, New
RightCHOICE has the option to purchase any or all of the shares of New
RightCHOICE common stock that the Foundation requests registration of before it
must take any action. New RightCHOICE does not have the option to purchase less
than all of the shares if the market value of the shares New RightCHOICE elects
not to purchase is less than $30 million. The purchase price per share for the
shares New RightCHOICE elects to purchase will be the average closing sale
price per share of New RightCHOICE common stock on the New York Stock Exchange
during the ten consecutive trading days ending on the second trading day
immediately preceding the date the Foundation requests the demand registration.
If New RightCHOICE does not exercise this option, or if New RightCHOICE does
not purchase all of the shares of New RightCHOICE common stock that the
Foundation requested registration of, New RightCHOICE must file a registration
statement for those shares of New RightCHOICE common stock and cause the
registration statement to become effective, subject to the exceptions described
below.
No Obligation to Effect Demand Registration Under Certain Circumstances
If The Missouri Foundation For Health requests a demand registration and New
RightCHOICE does not elect to exercise its demand purchase option, New
RightCHOICE will still not be required to file a registration statement for the
shares the Foundation desires to sell if:
. It previously registered shares of New RightCHOICE common stock at the
request of the Foundation at any time during the immediately preceding
180-day period,
. It previously registered shares of New RightCHOICE common stock at the
request of the Foundation at any time during the calendar year in which
the Foundation made a demand,
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. It previously effected a registration of shares of New RightCHOICE common
stock for sale by New RightCHOICE during the preceding 120 days, other
than shares registered pursuant to acquisitions or dividend reinvestment
or similar employee plans,
. The amount of New RightCHOICE common stock the Foundation seeks to
register has a market value of less than $30 million, unless the shares
are all of the remaining shares of New RightCHOICE common stock the
Foundation owns,
. It determines in good faith that a demand registration would materially
interfere with a previously announced business combination transaction in
which New RightCHOICE intends to issue shares of New RightCHOICE common
stock, or would result in the premature disclosure of any pending
development involving New RightCHOICE, in which case the agreement does
not require New RightCHOICE to file a demand registration for a 120-day
period.
Failed Demand Registrations
A requested demand registration will not be deemed to count as a demand
registration for purposes of determining whether and when New RightCHOICE must
effect another demand registration under the circumstances set forth above if:
. The Securities and Exchange Commission does not declare the demanded
registration effective,
. After becoming effective, any order or requirement of a regulatory
authority or court for reasons not attributable to the Foundation
interferes with the demanded registration and the demanded registration
does not become effective later,
. The parties do not satisfy or waive the closing conditions specified in
the underwriting agreement, if any, due to a failure on the part of New
RightCHOICE, or
. The Foundation decides not to pursue the registration prior to the filing
of a registration statement, provided that it reimburses New RightCHOICE
for all of its out-of-pocket expenses incurred in connection with the
demand registration.
If a registration statement filed as the result of a demand registration
does not become effective because:
. The Foundation fails to perform its obligations under the registration
rights agreement,
. The Foundation fails to reach an agreement with the underwriters on price
or other customary terms for the transaction, or
. The Foundation determines to withdraw its demand,
the requested demand registration will count as a demand registration for
purposes of determining whether and when New RightCHOICE must effect another
demand registration at the Foundation's request, unless the Foundation
reimburses New RightCHOICE for all of the expenses that it incurred in
connection with the demand registration.
Inclusion of New RightCHOICE Shares
If The Missouri Foundation For Health requests a demand registration and as
a result of its request New RightCHOICE must file a registration statement, New
RightCHOICE may include any number of shares of New RightCHOICE common stock
that it desires to sell under the registration statement, subject to possible
reduction as described below.
Reduction in Shares Registered in Demand Registration
It is possible that an underwriter might conduct an offering of New
RightCHOICE common stock owned by the Foundation made pursuant to a demand
registration. If, in that situation, the lead
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managing underwriter concludes that marketing or other factors require a
reduction of the number of shares of New RightCHOICE common stock that the
Foundation can sell in the offering within a price range acceptable to the
Foundation, and if New RightCHOICE desires to register any shares of New
RightCHOICE common stock to sell in the offering, then New RightCHOICE must
reduce the number of shares it desires to sell in the offering until the total
number of shares of New RightCHOICE common stock being sold equals the number
of shares New RightCHOICE common stock that the parties may sell at a price
range acceptable to the Foundation.
In the event that (1) New RightCHOICE does not desire to register any shares
of New RightCHOICE common stock to sell in the demand registration offering, or
(2) the reduction in the number of shares New RightCHOICE would register still
does not result in a total number of shares that the parties may sell at a
price range acceptable to the Foundation, then the Foundation must reduce the
number of shares of New RightCHOICE common stock that it desires to sell in the
offering.
The sale will constitute a demand registration for purposes of New
RightCHOICE's obligations to make additional demand registrations only if the
Foundation receives at least $10 million in gross sale proceeds in the
offering.
Piggy-Back Registration Rights
In addition to granting The Missouri Foundation For Health the right to
demand registration of its sales of shares, the registration rights agreement
also permits the Foundation to "piggy-back" on any registrations made by New
RightCHOICE. Specifically, the registration rights agreement provides that
whenever New RightCHOICE proposes to file a registration statement for a public
offering of shares of New RightCHOICE common stock, the Foundation has the
right (1) to have any or all of the shares of New RightCHOICE common stock that
it owns included among the securities New RightCHOICE will register, and (2)
until it owns less than 50% of the issued and outstanding shares of New
RightCHOICE common stock, to have any or all of its shares of New RightCHOICE
common stock included among the securities New RightCHOICE will register so
that the Foundation is entitled to receive up to 50% of the proceeds from the
offering.
If the lead managing underwriter for an offering for which The Missouri
Foundation For Health requests piggy-back registration rights determines that
marketing or other factors require a limitation on the number of shares of New
RightCHOICE common stock the parties can sell in the offering, then New
RightCHOICE will have priority over the Foundation unless the Foundation owns
more than 50% of the issued and outstanding shares of New RightCHOICE common
stock at the time of the offering and has elected to exercise its right, as
described above, to sell shares sufficient to receive up to 50% of the
proceeds.
Continuing Option to Purchase Foundation Shares
In addition to the demand purchase option described above, beginning on the
date that The Missouri Foundation For Health owns less than 50% of the
outstanding shares of New RightCHOICE common stock, New RightCHOICE may
purchase from the Foundation any or all of the shares of New RightCHOICE common
stock owned by the Foundation at a price equal to (1) the average sale price of
New RightCHOICE common stock on the New York Stock Exchange over a prescribed
period of time, or (2) the sale price received in a private placement if the
Foundation has not yet exercised its demand or piggy-back registration rights.
If New RightCHOICE purchases shares of New RightCHOICE common stock from the
Foundation pursuant to this option, it must hold the shares for forty-five days
before reselling them in a public or private transaction.
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Holdback
It is possible that The Missouri Foundation For Health may desire to sell
its shares of New RightCHOICE common stock at a time when New RightCHOICE is
planning to sell additional shares for its own benefit. In such a case, the
Foundation may not sell any shares of New RightCHOICE common stock that it owns
for a ninety day period following its receipt of notice from New RightCHOICE
that New RightCHOICE has filed a registration statement and:
. The Foundation's sale of New RightCHOICE common stock would adversely
affect New RightCHOICE's offering, or
. The managing underwriter in the case of an underwritten offering advises
New RightCHOICE that the Foundation's sale of New RightCHOICE common
stock would adversely affect New RightCHOICE's offering.
Similarly, it is possible that New RightCHOICE may desire to sell shares of
New RightCHOICE common stock for its own benefit at a time when The Missouri
Foundation For Health desires to make a demand registration. In such a case,
New RightCHOICE may not file a registration statement for New RightCHOICE
common stock or securities convertible into New RightCHOICE common stock during
the thirty-day period commencing on the effective date of a registration
statement filed on behalf of the Foundation under a demand registration.
Once the parties complete the reorganization, The Missouri Foundation For
Health may desire to quickly sell its shares of New RightCHOICE common stock.
As a result, the registration rights agreement provides that New RightCHOICE
will not file a registration statement with the Securities and Exchange
Commission for a public offering of New RightCHOICE common stock for the 180-
day period after completion of the reorganization without the Foundation's
consent, and the Foundation agrees not to unreasonably withhold its consent.
Under the reorganization agreement, New RightCHOICE may request the Foundation
to make a public offering of its shares of New RightCHOICE common stock within
six months after the parties complete the reorganization on terms and
conditions mutually agreeable to the Foundation and New RightCHOICE.
Registration Expenses
The registration process can be expensive because it involves lawyers,
accountants, investment bankers, and other professionals. New RightCHOICE will
pay all registration expenses in connection with a demand registration or a
piggy-back registration by The Missouri Foundation For Health except for the
Foundation's legal fees and any underwriting discounts or commissions or
transfer taxes.
Rule 144
The registration rights agreement provides that The Missouri Foundation For
Health may not sell any shares of New RightCHOICE common stock that it owns
pursuant to Rule 144 under the Securities Act until the Foundation has sold at
least $50 million of New RightCHOICE common stock to purchasers that are not
affiliates of the Foundation. Thereafter, the Foundation may sell shares of New
RightCHOICE common stock that it owns pursuant to Rule 144 under the Securities
Act if:
. The intended sale would not be to a person or entity that already owns
shares of New RightCHOICE common stock in excess of the ownership limit
for that person or entity contained in New RightCHOICE's certificate of
incorporation,
. The intended sale would not cause a person or entity to own shares of New
RightCHOICE common stock in excess of the ownership limits for that
person or entity contained in New RightCHOICE's certificate of
incorporation, and
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. The intended sale would not otherwise violate the registration rights
agreement, the voting trust and divestiture agreement and New
RightCHOICE's certificate of incorporation or bylaws.
Under Rule 144, the amount of stock that a party can sell in any three month
period is limited, and the party can sell the stock only in specified
unsolicited broker transactions or transactions with a market maker. Because
the Foundation will receive unregistered shares of New RightCHOICE common stock
in the reorganization, it cannot sell any of those shares under Rule 144 until
the first anniversary of the closing of the reorganization.
Private Sales
If The Missouri Foundation For Health desires to sell any or all of its
shares of New RightCHOICE common stock in a private sale transaction to
qualified investors, New RightCHOICE has the right of first refusal to purchase
the shares of New RightCHOICE common stock from the Foundation upon the same
terms and conditions as the Foundation proposes to sell the shares in the
private sale.
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TERMS OF INDEMNIFICATION AGREEMENT
The following is a summary of the indemnification agreement which is
Appendix E to this document. The indemnification agreement is a complex
document that is not easily summarized. We urge you to read the indemnification
agreement in its entirety.
Income Tax Indemnity
The Missouri Foundation For Health has agreed to indemnify New RightCHOICE
if New RightCHOICE becomes subject to federal income tax as a result of the
reorganization.
Specifically, the indemnification agreement provides that The Missouri
Foundation For Health must indemnify, defend and hold harmless (1) New
RightCHOICE, (2) all subsidiaries and affiliates of New RightCHOICE and (3) all
directors, officers, agents and employees of New RightCHOICE and any of its
subsidiaries and affiliates from any tax liabilities and interest and penalties
and professional fees incurred in connection with the defense of any
liabilities they may incur if the Internal Revenue Service or any other taxing
authority determines that any part of the reorganization constitutes a taxable
transaction or results in the recognition of gain under applicable tax law.
Non-Income Tax Indemnity
In addition to indemnification for tax matters, The Missouri Foundation For
Health must indemnify New RightCHOICE and its affiliates and affiliates of Blue
Cross and Blue Shield of Missouri against the non-tax matters described below.
Indemnification of Affiliates of Blue Cross and Blue Shield of Missouri
As part of the settlement, the parties agreed that The Missouri Foundation
For Health would provide indemnification for claims arising out of (1) the
reorganization, (2) the lawsuit filed as a class action by private parties
challenging the 1994 reorganization of Blue Cross and Blue Shield of Missouri,
the related formation of RightCHOICE and other activities on the grounds that
these actions were wrongful to the subscribers of Blue Cross and Blue Shield of
Missouri, and (3) the certified subscriber class action for declaratory relief
concerning Blue Cross and Blue Shield's status as a public benefit or mutual
benefit corporation. The lawsuit described in clause (2) above has been
dismissed, and it is over. Specifically, the indemnification agreement provides
that the Foundation must indemnify, defend and hold harmless each and every
past and present director, officer, agent, employee and independent contractor
of Blue Cross and Blue Shield of Missouri against:
. Any claims arising out of or related to the reorganization to the same
extent that Blue Cross and Blue Shield of Missouri was required to
provide indemnity against such claims to such parties under its articles
of incorporation and bylaws as in effect on April 20, 1998, the date the
parties entered into the conceptual framework for the settlement, and
. Any claims that have been or may be asserted:
-- in the lawsuit filed as a class action by private parties
challenging the 1994 reorganization of Blue Cross and Blue Shield of
Missouri, the related formation of RightCHOICE and other activities
on the grounds that these actions were wrongful to the subscribers
of Blue Cross and Blue Shield of Missouri, or
-- both arising out of or related to either (1) Blue Cross and Blue
Shield of Missouri's transfer of its managed care business to
RightCHOICE, or (2) the reorganization, and arising out of or
related to either (a) Blue Cross and Blue Shield of Missouri's
status as a mutual benefit or public benefit corporation, or (b) the
ownership of Blue Cross and Blue Shield of Missouri's assets.
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However, the Foundation is not obligated to provide the indemnification if:
. An appropriate court finally determines a potential indemnitee's conduct
to have been knowingly fraudulent or deliberately dishonest or willful
misconduct,
. New RightCHOICE asserts the claim, or
. A potential indemnitee is a law firm, accounting firm or other
professional that served as an independent contractor to Blue Cross and
Blue Shield of Missouri and the underlying claim arises out of an opinion
or advice they gave in connection with the reorganization.
Indemnification of New RightCHOICE
In addition, The Missouri Foundation For Health must indemnify, defend and
hold harmless New RightCHOICE and all of New RightCHOICE's subsidiaries and
affiliates, and each and every past and present director, officer, agent,
employee and independent contractor of New RightCHOICE or of any of its
subsidiaries and affiliates from and against:
. Any claims that have been or may be asserted:
-- in the lawsuit filed as a class action by private parties
challenging the 1994 reorganization of Blue Cross and Blue Shield of
Missouri, the related formation of RightCHOICE and other activities
on the grounds that these actions were wrongful to the subscribers
of Blue Cross and Blue Shield of Missouri, or
-- both arising out of or related to either (1) Blue Cross and Blue
Shield of Missouri's transfer of its managed care business to
RightCHOICE, or (2) the reorganization, and arising out of or
related to either (a) Blue Cross and Blue Shield of Missouri's
status as a mutual benefit or public benefit corporation, or (b) the
ownership of Blue Cross and Blue Shield of Missouri's assets, and
. Any claims or demands asserted by any previous director, officer, agent
employee or independent contractor of Blue Cross and Blue Shield of
Missouri, or any subsidiary of Blue Cross and Blue Shield of Missouri
(except for RightCHOICE and subsidiaries of RightCHOICE) seeking
indemnity from New RightCHOICE for any matter for which the Foundation is
obligated to provide indemnification.
However, the Foundation is not obligated to indemnify:
. Any past or present director, officer, agent, employee or independent
contractor of New RightCHOICE or of any of its subsidiaries and
affiliates from any conduct that an appropriate court finally determines
to have been knowingly fraudulent or deliberately dishonest or willful
misconduct, or
. Law firms, accounting firms and other professionals engaged by New
RightCHOICE as independent contractors against any claims that have been
or may be asserted:
-- in the lawsuit filed as a class action by private parties
challenging the 1994 reorganization of Blue Cross and Blue Shield of
Missouri, the related formation of RightCHOICE and other activities
on the grounds that these actions were wrongful to the subscribers
of Blue Cross and Blue Shield of Missouri, or
-- both arising out of or related to either (1) Blue Cross and Blue
Shield of Missouri's transfer of its managed care business to
RightCHOICE, or (2) the reorganization, and arising out of or
related to either (a) Blue Cross and Blue Shield of Missouri's
status as a mutual benefit or public benefit corporation, or (b) the
ownership of Blue Cross and Blue Shield of Missouri's assets.
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Directors' and Officers' Liability Insurance
As described under the description of the reorganization agreement, New
RightCHOICE must keep the directors' and officers' liability insurance
maintained by Blue Cross and Blue Shield of Missouri and RightCHOICE, or
comparable substitutes acceptable to the Foundation, in place for a period of
six years. Under the indemnification agreement, The Missouri Foundation For
Health must reimburse New RightCHOICE promptly upon request for the premiums
paid by New RightCHOICE to maintain the required insurance related to Blue
Cross and Blue Shield of Missouri in effect.
In addition, The Missouri Foundation For Health has the right, but not the
obligation, to pay the premiums necessary to maintain the required insurance
policies in force and effect if New RightCHOICE fails to do so, in which event
New RightCHOICE must promptly reimburse the Foundation upon its request for any
penalties or interest attributable to the late premium payment. If New
RightCHOICE fails to maintain the insurance policies as required, the
Foundation will not be obligated to indemnify against losses that the insurance
policies would have otherwise covered.
Net Worth
In order to ensure that The Missouri Foundation For Health will have assets
available to satisfy any of its indemnification obligations that may arise, the
indemnification agreement requires that for six years following the filing by
Blue Cross and Blue Shield of Missouri of its federal income tax return for the
year in which the parties complete the reorganization, the Foundation must
maintain a net worth of not less than the estimated potential tax liability
based upon the difference between the tax basis of the class B common stock
owned by Blue Cross and Blue Shield of Missouri on the date the reorganization
closes and the market price of the class A common stock on that same date. We
discuss this in greater detail in the risk factor "The indemnification
obligation of the Foundation could fail to fully indemnify us against the risks
of the reorganization" on page 23 of this document.
Termination of Indemnification Agreement
The indemnification agreement lasts for as long as the applicable statutes
of limitation related to matters for which the Foundation has agreed to provide
indemnification last. Until the indemnification agreement terminates, the
Foundation must maintain its status as a tax-exempt organization under Section
501(c)(4) of the Internal Revenue Code and may not take any action, or refrain
from taking any action, that would cause it to qualify as a "private
foundation" as defined under Section 509(a) of the Internal Revenue Code.
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PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
Following is (1) a pro forma unaudited combined condensed balance sheet for
New RightCHOICE giving effect to the reorganization as of June 30, 2000, (2) a
pro forma unaudited combined condensed income statement for New RightCHOICE for
the six months ended June 30, 2000 giving effect to the reorganization as of
January 1, 1999 and (3) a pro forma unaudited combined condensed income
statement for New RightCHOICE for the year ended December 31, 1999 giving
effect to the reorganization as of January 1, 1999. These pro forma unaudited
combined condensed financial statements include historical amounts for
RightCHOICE, the Blue Cross and Blue Shield of Missouri carve-out and New
RightCHOICE as well as adjustments necessary to reflect the reorganization on a
pro forma basis. The notes to the pro forma unaudited combined condensed
financial statements discuss the transaction. We are presenting the carve-out
financial statements for Blue Cross and Blue Shield of Missouri exclusive of
its investment in the class B common stock. Also, we are not presenting any per
share data for Blue Cross and Blue Shield of Missouri because it is a non-
profit health services corporation with no stock outstanding.
We have condensed or omitted certain data and notes normally included in
financial statements prepared in accordance with generally accepted accounting
principles. The pro forma unaudited combined condensed financial statements do
not purport to present the financial condition and results of operations of New
RightCHOICE had the parties completed the reorganization as of the dates
indicated. In addition, the pro forma unaudited combined condensed financial
statements are not necessarily indicative of future results of operations of
New RightCHOICE. You should read the accompanying pro forma unaudited combined
condensed financial statements and notes thereto in conjunction with the
RightCHOICE financial statements beginning on page F-2 of this document, Blue
Cross and Blue Shield of Missouri carve-out financial statements beginning on
page F-46 of this document, and the New RightCHOICE financial statements
beginning on page F-80 of this document.
91
<PAGE>
NEW RIGHTCHOICE
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
June 30, 2000
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
BCBS
Missouri New Pro forma
RightCHOICE Historical RightCHOICE Pro forma Note Combined
Historical Carve-Out Historical Adjustments(/1/) Ref Condensed
----------- ---------- ----------- ---------------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents........... $ 43,147 $ 25,008 $ 1 $(12,955) 2 $ 55,201
Investments available
for sale, at market
value................. 215,002 27,218 (490) 12 241,730
Receivables from
members............... 86,912 17,277 104,189
Receivables from
related parties....... 17,403 22,489 (39,892) 9
Property and
equipment, net........ 50,528 60,889 111,417
Goodwill and
intangible assets,
net................... 67,320 25,296 7 92,616
Other assets........... 43,575 13,047 56,622
-------- -------- ----- -------- --------
Total assets......... $523,887 $165,928 $ 1 $(28,041) $661,775
======== ======== ===== ======== ========
Liabilities:
Medical claims
payable............... $116,246 $ 22,855 $139,101
Unearned premiums...... 66,422 532 66,954
Accounts payable and
accrued expenses...... 60,604 13,641 74,245
Long-term debt......... 30,063 30,063
Payables to related
parties............... 22,390 17,502 $(39,892) 8
Income taxes payable... 13,428 13,201 26,629
Other liabilities...... 41,065 7,025 48,090
-------- -------- ----- -------- --------
Total liabilities.... 350,218 74,756 (39,892) 385,082
</TABLE>
92
<PAGE>
NEW RIGHTCHOICE
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
June 30, 2000
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
BCBS
Missouri New Pro forma
RightCHOICE Historical RightCHOICE Pro forma Note Combined
Historical Carve-Out Historical Adjustments(/1/) Ref Condensed
----------- ---------- ----------- ---------------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Equity:
Preferred stock(/2/)...
Common stock(/3/)...... 187 187
Additional paid-in
capital............... 132,634 1 103,308 11 235,943
Retained earnings...... 45,495 (175) 3 45,320
Net assets
representing reserve
for protection of
members............... 91,172 (91,172) 11
Treasury stock......... (377) (110) 10 (487)
Accumulated other
comprehensive loss.... (4,270) (4,270)
-------- -------- ----- -------- --------
Total equity......... 173,669 91,172 1 11,851 276,693
-------- -------- ----- -------- --------
Total liabilities and
equity.............. $523,887 $165,928 $ 1 $(28,041) $661,775
======== ======== ===== ======== ========
</TABLE>
--------
(1) We describe the adjustments necessary to arrive at the pro forma unaudited
combined condensed financial data in the Notes to Historical Consolidated
and Pro Forma Unaudited Combined Condensed Financial Statements beginning
on page 96.
(2) RightCHOICE Historical preferred stock: $0.01 par, 25,000,000 shares
authorized, no shares issued and outstanding. Pro forma Combined Condensed
preferred stock: $0.01 par, 25,000,000 shares authorized, no shares issued
and outstanding.
(3) RightCHOICE Historical common stock: class A, $0.01 par, 125,000,000 shares
authorized, 3,737,500 shares issued, 3,710,866 shares outstanding; class B,
convertible, $0.01 par, 100,000,000 shares authorized, 14,962,500 shares
issued and outstanding. Pro forma Combined Condensed common stock: $0.01
par, 225,000,000 shares authorized, 18,636,626 shares issued and
outstanding.
See Accompanying Notes
93
<PAGE>
NEW RIGHTCHOICE
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
For the Six Months Ended June 30, 2000
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
BCBS
Missouri New Pro forma
RightCHOICE Historical RightCHOICE Pro forma Note Combined
Historical Carve-Out Historical Adjustments(/1/) Ref Condensed
----------- ---------- ----------- ---------------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Premium............... $ 404,210 $45,867 $-- $ 450,077
Fees and other income. 48,376 13,810 $(2,465) 5 59,721
---------- ------- ------- ----------
Total revenues...... 452,586 59,677 (2,465) 509,798
---------- ------- ------- ----------
Operating expenses:
Health care services.. 328,411 41,233 369,644
Commissions........... 17,828 18 17,846
General and
administrative....... 86,783 13,964 (1,339) 6 99,408
---------- ------- ------- ----------
Total operating
expenses........... 433,022 55,215 (1,339) 486,898
---------- ------- ------- ----------
Operating income (loss). 19,564 4,462 (1,126) 22,900
---------- ------- ------- ----------
Other income:
Interest and
dividends............ 6,904 1,502 (389) 4 8,017
Other income
(expense), net....... 35 (137) (102)
---------- ------- ------- ----------
Total other, net.... 6,939 1,365 (389) 7,915
---------- ------- ------- ----------
Income (loss) before
provision (benefit) for
income taxes........... 26,503 5,827 (1,515) 13 30,815
Provision (benefit) for
income taxes........... 10,537 2,321 (657) 13 12,201
---------- ------- ------- ----------
Net income (loss)....... $ 15,966 $ 3,506 $-- $ (858) $ 18,614
========== ======= ==== ======= ==========
Weighted average common
shares outstanding..... 18,673,300 -- 1 (36,701) 14 18,636,600
========== ======= ==== ======= ==========
Basic earnings (loss)
per share.............. $ 0.86 -- $ (0.05) $ 1.00
========== ======= ==== ======= ==========
Diluted earnings (loss)
per share.............. $ 0.84 -- $ (0.05) $ 0.99
========== ======= ==== ======= ==========
</TABLE>
--------
(1) We describe the adjustments necessary to arrive at the pro forma unaudited
combined condensed financial data in the Notes to Historical Consolidated
and Pro Forma Unaudited Combined Condensed Financial Statements beginning
on page 96.
See Accompanying Notes
94
<PAGE>
NEW RIGHTCHOICE
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
For the Year Ended December 31, 1999
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
BCBS
Missouri New Pro forma
RightCHOICE Historical RightCHOICE Pro forma Note Combined
Historical Carve-Out Historical Adjustments(/1/) Ref Condensed
----------- ---------- ----------- ---------------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Premium............... $ 732,151 $ 85,393 $-- $ 817,544
Fees and other income. 84,761 25,354 $(5,040) 5 105,075
---------- -------- ------- ----------
Total revenues...... 816,912 110,747 (5,040) 922,619
---------- -------- ------- ----------
Operating expenses:
Health care services.. 601,532 73,070 674,602
Commissions........... 32,462 43 32,505
General and
administrative....... 163,251 29,236 (5,781) 6 186,706
---------- -------- ------- ----------
Total operating
expenses........... 797,245 102,349 (5,781) 893,813
---------- -------- ------- ----------
Operating income........ 19,667 8,398 741 28,806
---------- -------- ------- ----------
Other income:
Interest and
dividends............ 13,367 1,895 (777) 4 14,485
Other (expense)
income, net.......... (4,641) 40 (4,601)
---------- -------- ------- ----------
Total other, net.... 8,726 1,935 (777) 9,884
---------- -------- ------- ----------
Income (loss) before
provision (benefit) for
income taxes and
accounting change...... 28,393 10,333 (36) 13 38,690
Provision (benefit) for
income taxes........... 11,177 4,265 (95) 13 15,347
---------- -------- ------- ----------
Income before accounting
change................. 17,216 6,068 59 23,343
Cumulative effect of
accounting change...... 1,076 (1,076) 6
---------- -------- ------- ----------
Net income.............. $ 17,216 $ 4,992 $-- $ 1,135 $ 23,343
========== ======== ==== ======= ==========
Weighted average common
shares outstanding..... 18,673,000 -- 1 (36,701) 14 18,636,300
========== ======== ==== ======= ==========
Basic and diluted
earnings per share..... $ 0.92 -- $ 0.06 $ 1.25
========== ======== ==== ======= === ==========
</TABLE>
--------
(1) We describe the adjustments necessary to arrive at the pro forma unaudited
combined condensed financial data in the Notes to Historical Consolidated
and Pro Forma Unaudited Combined Condensed Financial Statements beginning
on page 96.
See Accompanying Notes
95
<PAGE>
Notes to Historical Consolidated and Pro Forma Unaudited
Combined Condensed Financial Statements
(1) General
The pro forma unaudited combined condensed financial statements give effect
to the merger of RightCHOICE, Blue Cross and Blue Shield of Missouri and New
RightCHOICE. New RightCHOICE will account for this merger in a manner similar
to a pooling of interests because all of the companies are under common
control, except for the exchange of the class A common stock held by the
minority class A shareholders and the exchange of outstanding options to
purchase shares of class A common stock for options to purchase the same number
of shares of New RightCHOICE common stock. New RightCHOICE will account for
these exchanges as a purchase.
The pro forma unaudited combined condensed balance sheet presents the
combined financial position of RightCHOICE, Blue Cross and Blue Shield of
Missouri and New RightCHOICE assuming the parties completed the proposed merger
as of June 30, 2000. The pro forma information is based upon the historical
balance sheet data of RightCHOICE, Blue Cross and Blue Shield of Missouri and
New RightCHOICE as of that date as further explained below. The pro forma
unaudited combined condensed statements of income give effect to the proposed
merger of RightCHOICE, Blue Cross and Blue Shield of Missouri and New
RightCHOICE by combining the results of operations of RightCHOICE and Blue
Cross and Blue Shield of Missouri for the six months ended June 30, 2000 and
the year ended December 31, 1999, respectively, in a manner similar to a
pooling assuming the transaction occurred on January 1, 1999. New RightCHOICE
is a newly formed entity which The Missouri Foundation For Health incorporated
on March 14, 2000 and thus did not have operations in 1999. In addition, New
RightCHOICE did not have operations in 2000 after its incorporation. New
RightCHOICE is expected to recognize certain synergies related to reduced
financial reporting requirements and the elimination of duplicate
responsibilities such as board oversight and various management functions. We
have not given effect in the pro forma unaudited combined condensed statement
of income for operating and synergistic benefits that may result from the
merger as any potential significant synergies are not factually supportable at
this time.
Blue Cross and Blue Shield of Missouri currently owns all of the class B
common stock. For purposes of the pro forma combined condensed balance sheet,
we have eliminated this investment because we show the balance sheet data for
RightCHOICE separately. Similarly, we have eliminated the income resulting from
the investment in RightCHOICE because we also present the statement of income
for RightCHOICE. Thus, we refer to the Blue Cross and Blue Shield of Missouri
financial data for both the combined condensed balance sheet and statements of
income as "Historical Carve-Out" data because we have "carved out" the
investment in RightCHOICE and income from that investment from the historical
Blue Cross and Blue Shield of Missouri financial statements.
Under the terms of the settlement agreement, Blue Cross and Blue Shield of
Missouri will transfer its insurance contracts and certain assets and
liabilities to Healthy Alliance Life Insurance Company, a wholly-owned
subsidiary of RightCHOICE. The class B common stock will be cancelled, and The
Missouri Foundation For Health will receive one share of New RightCHOICE common
stock for each cancelled share of class B common stock. Finally, the real
estate and remaining assets and liabilities of Blue Cross and Blue Shield of
Missouri will be combined with RightCHOICE.
Upon completion of the reorganization, New RightCHOICE's assets and
liabilities will initially consist of the combined assets and liabilities of
RightCHOICE and Blue Cross and Blue Shield of Missouri immediately prior to the
reorganization, except for approximately $13.0 million paid to the Foundation
(see Note 2), approximately $25.3 million of goodwill and intangible assets
related to the minority class A shareholders and outstanding options (see Note
7), and the class B common stock
96
<PAGE>
Notes to Historical Consolidated and Pro Forma Unaudited
Combined Condensed Financial Statements--(Continued)
owned by Blue Cross and Blue Shield of Missouri that will, in effect, be
transferred to the Foundation.
These pro forma unaudited combined condensed financial statements should be
read in conjunction with the RightCHOICE historical financial statements and
notes thereto beginning on page F-2 of this document, the Blue Cross and Blue
Shield of Missouri carve-out financial statements beginning on page F-46 of
this document and the New RightCHOICE financial statements beginning on page F-
80 of this document.
(2) Cash and cash equivalents
As part of the settlement agreement, both New RightCHOICE and Blue Cross and
Blue Shield of Missouri are required to make cash payments to The Missouri
Foundation For Health. Blue Cross and Blue Shield of Missouri must pay $12.78
million and New RightCHOICE must pay $175,000. Pro forma adjustments to cash
and cash equivalents, resulting from the above consist of the following:
<TABLE>
<CAPTION>
(in
000's)
--------
<S> <C>
Blue Cross and Blue Shield of Missouri payment to The Missouri
Foundation For Health......................................... $(12,780)
New RightCHOICE payment to The Missouri Foundation For Health
per the reorganization agreement.............................. (175)
--------
$(12,955)
========
</TABLE>
(3) Retained Earnings
Pro forma adjustment to retained earnings consists of the following:
<TABLE>
<CAPTION>
(in 000's)
----------
<S> <C>
New RightCHOICE payment to The Missouri Foundation For Health
per the reorganization agreement (Note 2)................... $(175)
=====
</TABLE>
(4) Interest Income
Pro forma adjustments to interest income consist of the following:
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 2000 December 31, 1999
---------------- -----------------
(in 000's)
----------
<S> <C> <C>
Interest income reduction from $12.78
million and $175,000 payments to The
Missouri Foundation For Health,
calculated at 6%
(Note 2)............................ $(389) $(777)
===== =====
</TABLE>
(5) Fees and Other Income
RightCHOICE rents office space from Blue Cross and Blue Shield of Missouri
for its corporate headquarters. This related party transaction is eliminated in
the pro forma financial statements. Monthly rental income/expense was
approximately $411,000 and $420,000 during the six months
97
<PAGE>
Notes to Historical Consolidated and Pro Forma Unaudited
Combined Condensed Financial Statements--(Continued)
ended June 30, 2000 and the year ended December 31, 1999, respectively. Pro
forma adjustments to fees and other income consist of the following:
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 2000 December 31, 1999
---------------- -----------------
(in 000's)
----------
<S> <C> <C>
Elimination of intercompany rent between
RightCHOICE and Blue Cross and Blue Shield
of Missouri............................... $(2,465) $(5,040)
======= =======
</TABLE>
(6) General and Administrative Expense
As a result of the reorganization, RightCHOICE will assume all insurance
operations of Blue Cross and Blue Shield of Missouri. A significant amount of
Blue Cross and Blue Shield of Missouri's premium revenue will be subject to
state premium tax as a result of this assumption. The state premium tax rate is
2% and total premium subject to tax is $33.2 million and $72.8 million for the
six months ended June 30, 2000 and the year ended December 31, 1999,
respectively. Pro forma adjustments to general and administrative expense
consist of the following:
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 2000 December 31, 1999
---------------- -----------------
(in 000's)
----------
<S> <C> <C>
Elimination of intercompany rent between
RightCHOICE and Blue Cross and Blue Shield
of Missouri (Note 5)....................... $(2,465) $(5,040)
Goodwill and intangible asset amortization
related to minority shareholders and stock
options (Note 7)........................... 782 1,564
State premium tax expense for underwritten
business assumed by RightCHOICE which was
not subject to state premium tax when
written by Blue Cross and Blue Shield of
Missouri................................... 664 1,456
Cost of litigation, consultation and support
related to the settlement agreement, which
are currently included in the historical
audited financial statements of Blue Cross
and Blue Shield of Missouri and have been
eliminated as these are non-recurring
charges resulting directly from the
transaction (Note 2)....................... (320) (3,761)
------- -------
$(1,339) $(5,781)
======= =======
Cumulative effect of accounting change for
start-up costs related to settlement
agreement and reorganization costs that
were capitalized in 1998 by Blue Cross and
Blue Shield of Missouri and written off in
the first quarter of 1999, net of tax...... $(1,076)
=======
</TABLE>
(7) Goodwill and Intangible Assets, net
Pro forma adjustments for goodwill and intangible assets result from
application of the purchase method of accounting for the minority interest in
RightCHOICE and outstanding stock options. The difference between the quoted
closing market value of the class A common stock on the New York Stock Exchange
on January 6, 2000, the date the parties signed the settlement agreement, and
the book value of the shares as of December 31, 1999 is $4.94. The fair value
of the outstanding stock
98
<PAGE>
Notes to Historical Consolidated and Pro Forma Unaudited
Combined Condensed Financial Statements--(Continued)
options was calculated using the Black-Scholes option pricing model. The fair
value of the stock and options was calculated utilizing 3.7 million shares
outstanding (representing the minority shareholders' ownership of RightCHOICE)
at $4.94 per share and options outstanding for 1.3 million shares at $5.43 per
share. This total value of approximately $25.3 million was allocated to
goodwill and intangible assets based on RightCHOICE's independent valuation of
intangible assets and their estimated remaining useful lives. The total value
of each identified intangible asset was multiplied by 25% in order to determine
the value related to the minority interest represented by RightCHOICE's
shareholders and option holders as they have a 25% combined ownership interest
in RightCHOICE. As identified tangible assets and liabilities of RightCHOICE
are carried at current net realized value, no allocation of purchase price to
these tangible items was necessary. A summary of the allocation of this total
value and the estimated remaining useful lives established for each intangible
asset is as follows:
<TABLE>
<CAPTION>
Assigned Value
(in 000's) Life in years
-------------- -------------
<S> <C> <C>
Blue Cross and Blue Shield names and service
marks........................................ $ 6,512 40
Subscriber relationships...................... 12,522 14
Assembled workforce........................... 2,755 8
Provider relationships........................ 2,004 23
Goodwill...................................... 1,503 20
-------
$25,296
=======
</TABLE>
The assigned value of the Blue Cross and Blue Shield names and service marks
relates to RightCHOICE's exclusive right to use the Blue Cross and/or Blue
Shield names and service marks for all of the managed care products and
services that it offers in the 85 Missouri counties that comprise its service
area. This service area includes St. Louis but does not include Kansas City.
The value of the subscriber relationships relates to RightCHOICE's current
employer and individual client base. The value of the assembled workforce
relates to the estimated costs to hire and train RightCHOICE's approximately
2,000 employees. The value of the provider relationships relates to the costs
necessary to identify and contract with qualified physicians and hospital
organizations in RightCHOICE's service areas. The value of the goodwill was
determined based on the calculated total value as described above less the
value placed on the specific intangible assets that have been described above.
(8) Payables to Related Parties
Pro forma adjustments to payables to related parties consist of the
following:
<TABLE>
<CAPTION>
(in
000's)
--------
<S> <C>
Elimination of related party payables between RightCHOICE and
Blue Cross and Blue Shield of Missouri....................... $(39,892)
========
</TABLE>
(9) Receivables from Related Parties
Pro forma adjustments to receivables to related parties consist of the
following:
<TABLE>
<CAPTION>
(in
000's)
--------
<S> <C>
Elimination of related party receivables between RightCHOICE
and Blue Cross and Blue Shield of Missouri................... $(39,892)
========
</TABLE>
99
<PAGE>
Notes to Historical Consolidated and Pro Forma Unaudited
Combined Condensed Financial Statements--(Continued)
(10) Treasury Stock
RightCHOICE's treasury stock will be cancelled and the class A common stock
owned by Blue Cross and Blue Shield of Missouri will be converted to treasury
stock, pursuant to the reorganization agreement. Pro forma adjustments to
treasury stock consist of the following:
<TABLE>
<CAPTION>
(in 000's)
----------
<S> <C>
Cancel RightCHOICE treasury stock............................. $ 380
Convert class A common stock owned by Blue Cross and Blue
Shield of Missouri to treasury stock......................... (490)
-----
$(110)
=====
</TABLE>
(11) Additional Paid In Capital
The net assets representing reserve for protection of members of Blue Cross
and Blue Shield of Missouri will be consolidated with the shareholders' equity
of RightCHOICE. As part of the settlement agreement, Blue Cross and Blue Shield
of Missouri is required to make a $12.78 million cash payment to the Missouri
Foundation For Health. This payment will be made and recorded by Blue Cross and
Blue Shield of Missouri and will occur immediately prior to and separate from
the reorganization and will ultimately result in a reduction of the overall
additional paid in capital to be transferred to RightCHOICE as part of the
reorganization. Blue Cross and Blue Shield of Missouri has not recorded this
payment as a liability as of June 30, 2000 as significant conditions and
contingencies related to the settlement have not been resolved. Pro forma
adjustments to additional paid in capital consist of the following:
<TABLE>
<CAPTION>
(in
000's)
------
<S> <C>
Payment from Blue Cross and Blue Shield of Missouri to The
Missouri Foundation For Health (Note 2)....................... $(12,780)
Transfer existing net assets representing reserve for
protection of members to additional paid-in capital........... 91,172
Goodwill and intangible assets associated with the minority
shareholders' ownership and outstanding stock options,
utilizing 3.7 million shares outstanding at $4.94 per share
and options for 1.3 million shares at $5.43 per share,
respectively (Note 7)......................................... 25,296
Cancel RightCHOICE treasury stock (Note 10).................... (380)
--------
$103,308
========
Transfer existing net assets representing reserve for
protection of members to additional paid in capital........... $(91,172)
========
</TABLE>
(12) Investments available for sale, at market value
The pro forma adjustments to investments available for sale consist of the
following:
<TABLE>
<CAPTION>
(in 000's)
----------
<S> <C>
Conversion of class A common stock owned by Blue Cross and
Blue Shield of Missouri to treasury stock (Note 10).......... $(490)
=====
</TABLE>
100
<PAGE>
Notes to Historical Consolidated and Pro Forma Unaudited
Combined Condensed Financial Statements--(Continued)
(13) Income Tax Provision
We calculated the tax impact of the pro forma adjustments by eliminating the
permanent differences and calculating the balance using a 40% tax rate. Pro
forma adjustments to the income tax provision consist of the following (in
000's):
<TABLE>
<CAPTION>
40% Permanent
For the six months ended June Pro Forma Tax Permanent Difference Tax
30, 2000 Adjustments Effect Difference Adjustment Impact
----------------------------- ----------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Six months of goodwill and
intangible asset amortization
related to minority
shareholders (Note 6)........ $ (782) $ (313) $ 782 $313 $
State premium tax expense for
business which was not
subject to state premium tax
at Blue Cross and Blue Shield
of Missouri (Note 6)......... (664) (266) (266)
Elimination of cost of
litigation, consultation and
support related to the
settlement agreement (Note
6)........................... 320 128 (908) (363) (235)
Interest income reduction from
payments of $12.78 million
and $175 (Note 4)............ (389) (156) (156)
------- ------ ------- ---- -----
Pro forma adjustment totals... $(1,515) $ (607) $ (126) $(50) $(657)
======= ====== ======= ==== =====
<CAPTION>
40% Permanent
For the year ended December Pro Forma Tax Permanent Difference Tax
31, 1999 Adjustments Effect Difference Adjustment Impact
--------------------------- ----------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
One year of goodwill and
intangible asset amortization
related to minority
shareholders (Note 6)........ $(1,564) $ (626) $ 1,564 $626 $
State premium tax expense for
business which was not
subject to state premium tax
at Blue Cross and Blue Shield
of Missouri (Note 6)......... (1,456) (582) (582)
Interest income reduction from
payments of $12.78 million
and $175 (Note 4)............ (777) (311) (311)
------- ------ ------- ---- -----
Pro forma adjustment totals... $ (36) $ (15) $ (201) $(80) $ (95)
======= ====== ======= ==== =====
</TABLE>
Elimination of cost of
litigation, consultation and
support related to the
settlement agreement (Note
6)........................... 3,761 1,504 (1,765) (706) 798
(14) Weighted Average Shares Outstanding
The one outstanding share of New RightCHOICE common stock owned by The
Missouri Foundation For Health prior to the reorganization will be converted
into 14,962,500 shares of New RightCHOICE common stock as part of the merger of
RightCHOICE into New RightCHOICE. Also, the 36,700 shares of class A common
stock owned by Blue Cross and Blue Shield of Missouri will be converted into
treasury stock pursuant to the reorganization agreement (Note 10).
101
<PAGE>
INFORMATION ABOUT RIGHTCHOICE
Business
General Description of Business
RightCHOICE is the largest provider of managed health care benefits in
Missouri in terms of number of members. As of December 31, 1999, RightCHOICE
served approximately 2.3 million members, a large proportion of whom reside in
metropolitan St. Louis, Missouri. RightCHOICE offers a comprehensive array of
managed health care products and services that it segregates into two distinct
segments: underwritten and self-funded. Note 14 "Segment information" of
RightCHOICE's financial statements included on page F-37 of this document
contains financial information relating to RightCHOICE's segments.
RightCHOICE's underwritten segment includes preferred provider organization
(PPO), point of service (POS), health maintenance organization (HMO), Medicare
supplement, specialty managed care, and managed indemnity benefit plans.
RightCHOICE's self-funded segment includes third-party administrator services,
administrative services only for self-insured organizations, network rental
services for self-insured organizations, insurance companies and other
organizations, and life insurance agency services. The types of benefits
provided by the products and services include:
. Hospital care,
. Ambulatory and outpatient care,
. Physician services,
. Pharmacy,
. Dental care,
. Vision care,
. Behavioral health care,
. Health education, and
. Access to life insurance products through non-affiliated life insurance
carriers.
RightCHOICE's subsidiaries receive premium revenue in exchange for the
assumption of both medical and administrative risks for their PPO, POS, HMO,
Medicare supplement, specialty managed care and managed indemnity underwritten
benefit plans. With respect to the third-party administrator services,
administrative services only, and network rental services, RightCHOICE
generally assumes no responsibility for medical costs and receives compensation
for providing administrative services. For the year ended December 31, 1999,
approximately 62% of RightCHOICE's revenues were derived from sales by its
subsidiaries to insured employer groups, typically those with fewer than 100
employees; approximately 28% of RightCHOICE's revenues were derived from
underwritten sales by its subsidiaries to individuals; and approximately 10% of
RightCHOICE's revenues were from fees paid by self-funded employer groups,
typically those with more than 100 employees.
RightCHOICE was organized to own and operate all of the managed health care
business of Blue Cross and Blue Shield of Missouri. Blue Cross and Blue Shield
of Missouri is the sole holder of the class B common stock. The holders of
class A common stock have one vote per share, and Blue Cross and Blue Shield of
Missouri, the only holder of class B common stock, has ten votes per share.
Blue Cross and Blue Shield of Missouri and the holders of the class A common
stock have control over approximately 97.6% and 2.4%, respectively, of the
combined voting power of both classes of common stock.
RightCHOICE is a licensee of the Blue Cross and Blue Shield Association, the
national trade association of Blue Cross and Blue Shield licensees. Each
licensee holds the exclusive right to use the Blue Cross and Blue Shield names
and service marks in specific geographic areas. Each licensee
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is an independent legal organization and is not responsible for the obligations
of other Blue Cross and Blue Shield Association licensees.
Pursuant to affiliate licenses from the Blue Cross and Blue Shield
Association, RightCHOICE has the exclusive right to do business under the name
Alliance Blue Cross Blue Shield and to use the Blue Cross and Blue Shield names
and service marks for all of the managed health care products and services it
offers in its service area, which consists of eighty-five of the 115 counties
in Missouri. This service area has a population of approximately 4.0 million
and includes four of the five largest cities in Missouri, but does not include
Kansas City. RightCHOICE cannot use the Blue Cross or Blue Shield names or
service marks outside its licensed service area. RightCHOICE does business
outside of its service area through its subsidiaries HealthLink, Healthy
Alliance Life Insurance Company and RightCHOICE Insurance Company. If Blue
Cross and Blue Shield of Missouri, as the primary licensee, were to lose its
right to use the Blue Cross and Blue Shield names and service marks,
RightCHOICE would also lose the use of these names and service marks. Note 13
"Contingencies--Status of Blue Cross and Blue Shield licenses" of RightCHOICE's
financial statements included on page F-24 of this document contains
information describing litigation uncertainties with respect to RightCHOICE's
continued use of these names and service marks.
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Managed Care Products and Services
RightCHOICE's established provider networks, substantial membership base and
extensive administrative and processing capabilities enable RightCHOICE to
offer health care products and services tailored to meet the full spectrum of
customer needs and preferences for balancing cost and flexibility. The
following chart depicts the spectrum of products offered under the Blue Cross
and Blue Shield names and service marks.
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"Blue" Branded Product Portfolio
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HMO products Open access PPO products
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Coordinator of care model
BlueCHOICE HMO
Coordinator of care POS
BlueCHOICE POS
Open access PPO/POS
AllianceCHOICE POS
BlueCard (R) PPO
Standard PPO
Alliance PPO
BlueCard (R) PPO
--------------------------------------------------------------------------
"Blue Horizons" products
--------------------------------------------------------------------------
Medicare HMO Medicare Supplement
--------------------------------------------------------------------------
Pharmacy/Dental/Vision/Behavioral Health/Health Education Products
--------------------------------------------------------------------------
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Definitions
HMO-a health maintenance organization (HMO) is an organized method of
providing access to health care through a broad range of comprehensive health
services to a member population which is encouraged to seek their health care
through the members' chosen "coordinator of care" physician. Preventive health
care is stressed through the utilization of the coordinator of care.
POS-a point of service (POS) option in either an HMO or PPO environment
provides health benefits to members who elect to seek health care from a
provider who is not necessarily a part of the health plan's provider network,
generally at higher costs to the member.
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PPO-a preferred provider organization (PPO) is an organized method of
providing access to health care through a broad range of comprehensive health
services to a member population. Members may elect to seek health care services
from any provider who is part of the health plan's broad network.
Blue Horizons Medicare HMO-an HMO designed specifically to meet the needs of
those individuals eligible to enroll in Medicare. These plans are regulated by
the Health Care Financing Administration of the United States Department of
Health and Human Services.
Medicare Supplement-a health care plan which provides supplemental health
care coverage to individuals eligible to enroll in Medicare for coverage of
health care expenses in excess of the coverage limitations of Medicare.
Coordinator of care-the physician in an HMO who usually offers basic health
care services and is the initial point of contact for an HMO member to access
the health care system.
Underwritten Products
Preferred Provider Organization product group
Alliance PPO
RightCHOICE's Alliance PPO is one of the largest PPOs in Missouri in terms
of number of members and, as of December 31, 1999, offers services to
approximately 173,400 members, including approximately 42,700 members on a
self-funded basis. RightCHOICE believes that the Alliance PPO network also has
the most extensive geographic coverage in Missouri, servicing eighty-five of
the 115 counties in the state with 8,200 physicians and ninety-nine hospitals
as of December 31, 1999. In the St. Louis metropolitan area, the Alliance PPO
network includes approximately 97% of all hospital beds.
RightCHOICE's Alliance PPO products incorporate many managed care
characteristics, including per diem hospital rates, large case management, pre-
admission certification, concurrent review of hospital admissions and
retrospective claims review. Higher deductibles, coinsurance and out-of-pocket
maximums and other financial incentives encourage members to use network
provider services. Alliance benefit plans also include mental health and
chemical dependency programs, optional well-child care, optional physician
office copayments, pharmacy benefit options such as three-tier copayments and
vision services. This broad range of Alliance benefit plans enables the
subscriber or employer group to choose the mix of benefits that is suited to
the member's or employer's needs.
For several years, RightCHOICE offered to groups and individuals in
southeast Missouri a PPO product called HealthNet Blue. RightCHOICE is
currently in the process of transitioning the members enrolled in its HealthNet
Blue PPO products to its standard Alliance PPO products. There were
approximately 4,900 members enrolled in RightCHOICE's HealthNet Blue PPO
products as of December 31, 1999.
Through a provider network access agreement and a financial reinsurance
agreement with Blue Cross and Blue Shield of Kansas City, RightCHOICE members
residing in the service area of Blue Cross and Blue Shield of Kansas City are
able to access its preferred provider network just as members of a Blue Cross
and Blue Shield of Kansas City subsidiary residing in RightCHOICE's service
area are able to access the Alliance preferred provider networks in that area.
As a result of the agreements, members of either plan who are enrolled through
state-wide employers or associations are able to use the provider network of
the Blue Cross and Blue Shield plan where they live. Through the financial
reinsurance agreement, RightCHOICE's subsidiary, Healthy Alliance Life
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Insurance Company, and Blue Cross and Blue Shield of Kansas City share
underwriting profits, losses and risks on the affected members.
Illinois Preferred Provider Organization
RightCHOICE offers group and individual PPO coverage through its subsidiary,
RightCHOICE Insurance Company, in southern and central Illinois. RightCHOICE
utilizes the provider network of its subsidiary, HealthLink, to offer these
products to the approximately three million residents in this region. The
RightCHOICE Insurance Company PPO products accounted for approximately 14,200
members as of December 31, 1999.
AllianceCHOICE Point of Service
AllianceCHOICE POS offers a selective hospital and physician network in the
St. Louis metropolitan area. As of December 31, 1999, the AllianceCHOICE
network serves approximately 131,800 members, including approximately 1,600
members on a self-funded basis. AllianceCHOICE POS includes both group and
individual members and includes contractual arrangements with approximately
5,600 physicians and seventeen hospitals as of December 31, 1999.
BlueCard(R) PPO program
During 1998 and 1999, RightCHOICE and Blue Cross and Blue Shield of Missouri
achieved high member service performance ratings that made RightCHOICE eligible
for the Blue Cross and Blue Shield Association's BlueCard(R) PPO program. The
BlueCard(R) PPO program allows RightCHOICE's Alliance Blue Cross Blue Shield
PPO and POS members access to Blue Cross and Blue Shield plans' PPO providers
throughout the nation. As of December 31, 1999, there were approximately
260,000 Alliance and AllianceCHOICE members enrolled in the program. Members
who need to seek medical attention while living in or traveling to another part
of the country do not pay more out of pocket for being out of the service
area's provider network and accessing Blue Cross and Blue Shield plans' PPO
providers. Blue Cross and Blue Shield plans' PPO provider networks are offered
in forty-eight states across the United States.
Health Maintenance Organization product group
BlueCHOICE Health Maintenance Organization and Point of Service
products
RightCHOICE's subsidiary, HMO Missouri, Inc., doing business as BlueCHOICE,
is a federally qualified health maintenance organization with a service area
that currently includes sixty-one counties in Missouri and two counties in
Illinois. BlueCHOICE's operations are concentrated in the St. Louis
metropolitan area, where it currently is the third largest HMO based upon
number of members. There were approximately 118,000 BlueCHOICE HMO and POS
members, including 6,000 members on a self-funded basis, as of December 31,
1999. BlueCHOICE is an independent practice association model network, through
which RightCHOICE contracts directly with local providers for plan members'
health care services. The BlueCHOICE network, which supports both HMO and POS
products, has contractual arrangements with approximately 4,200 physicians and
sixty-seven hospitals as of December 31, 1999.
RightCHOICE offers its BlueCHOICE products in metropolitan St. Louis,
southwest Missouri, portions of southeast Missouri, and central Missouri
through the BlueCHOICE HMO network. BlueCHOICE provides members with
comprehensive coverage for network health care services with modest copayment
requirements. When using their primary care physician as a coordinator of care,
members incur the lowest out-of-pocket costs for preventive care, referred
specialist services, and inpatient services.
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In some areas, the BlueCHOICE HMO and POS products are supported by risk
arrangements with certain provider groups. These products are available in
Springfield, Missouri, a six-county area surrounding Joplin, Missouri, and
Jefferson City, Missouri.
In the metropolitan St. Louis and central Missouri regions, the Physician
Group Partners Program(R) provides primary care physicians in BlueCHOICE's
commercial HMO with the opportunity to earn additional compensation by
improving patient satisfaction and improving performance levels using
nationally recognized health care industry standards while effectively managing
the trend of costs for health care benefits. Currently, approximately 54% of
the BlueCHOICE HMO network primary care physicians in St. Louis and central
Missouri are enrolled in the program.
HealthNet Blue Point of Service
HealthNet Blue POS is offered to employee groups within a seven-county
region in southeast Missouri that provides members with comprehensive coverage
for network health care services, including preventive care, in-office
physician care, and maternity coverages for a minimal office visit copayment
charge. As of December 31, 1999, there were approximately 16,200 group members
enrolled in the underwritten HealthNet Blue POS product. To the extent
possible, RightCHOICE is in the process of transitioning enrollment in the
HealthNet Blue POS product to its standard Alliance PPO products.
Blue Horizons Medicare HMO
Blue Horizons Medicare HMO provides medical benefits at least as
comprehensive as Medicare benefits for persons eligible to receive Medicare
(parts A and B) at no or minimal cost to the member. Under this program, the
Health Care Financing Administration of the United States Department of Health
and Human Services pays a fixed capitation payment for coverage of each member
at a rate approximating 95% of the Medicare area average per capita cost,
subject to annual review and adjustment by the Health Care Financing
Administration. Effective January 1, 2000, the Health Care Financing
Administration introduced an inpatient risk adjustment program which will also
be used to adjust the amounts paid to health plans. The product is offered in
three Missouri counties in the metropolitan St. Louis area and has contractual
agreements with approximately 1,230 physicians and eight hospitals.
RightCHOICE's subsidiary, BlueCHOICE, shares risk with a large St. Louis
provider group for the majority of the membership that is enrolled in this
product. RightCHOICE changed the name of its BlueCHOICE Senior product to Blue
Horizons Medicare HMO effective January 1, 1999. The Blue Horizons Medicare HMO
is a Medicare+Choice plan as authorized by the Balanced Budget Act of 1997.
Effective January 1, 2001, RightCHOICE will no longer contract with the Health
Care Financing Administration of the United States Department of Health and
Human Services to provide benefits under the Medicare HMO program.
Medicare Supplement product group
RightCHOICE's subsidiary, Healthy Alliance Life Insurance Company, currently
offers Medicare supplement coverage to individuals eligible to enroll in
Medicare for medical expenses in excess of the coverage limitations of
Medicare. The products are marketed under the Blue Horizons banner of Medicare
products and include a 24-hour nurse assist line and value-added services such
as discount dental, vision, hearing, and pharmacy programs. As of December 31,
1999, RightCHOICE had approximately 53,000 members enrolled in its Medicare
supplement products.
Managed Indemnity product group
With the exception of a short-term medical product, RightCHOICE no longer
sells managed indemnity products but continues to renew coverage for those
members who are enrolled in the
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managed indemnity programs. RightCHOICE's managed indemnity products include
fee-for-service indemnity benefits that include review and coordination of
health care services used by members and other cost management measures but do
not require use of network providers. These products include certain cost-
management features, such as the use of deductibles, coinsurance, pre-admission
certification, concurrent review, large case management and retrospective
review.
Specialty products
RightCHOICE offers various products to supplement its medical coverage
products. These products include prescription benefits, dental care, vision
care, behavioral health care and health care education. Beginning January 1,
1999, Magellan Behavioral Health was selected to handle the review, management
and coordination of behavioral health care for all of RightCHOICE's mental
health and substance abuse programs. RightCHOICE also has a contractual
agreement with a pharmacy benefits manager, Express Scripts, Inc. The contract
covers approximately 448,500 members as of December 31, 1999. The current
contract is in effect until April 2002. RightCHOICE continues its efforts to
manage rising prescription drug costs while offering members freedom of choice.
RightCHOICE provides a three-tier copayment program that encourages physicians
and members to use the most cost-effective drugs within a drug class. The
program includes a higher member copayment for brand name drugs that are
included on RightCHOICE's preferred drug list as compared to their generic
equivalents. The program also allows for the purchase of brand name drugs that
are not included on RightCHOICE's preferred drug list by requiring an even
higher (third-tier) member copayment. As of December 31, 1999, approximately
79% of RightCHOICE's members with a drug benefit under a product underwritten
by a subsidiary of RightCHOICE participated in the three-tier copayment
program.
Self-Funded Products
Administrative and network services
As of December 31, 1999, RightCHOICE serviced self-funded health plans
covering approximately 1,818,000 members. These arrangements include third-
party administration services, administrative services, and contracts to access
provider networks. RightCHOICE assists self-funded employers in designing
benefit packages, claims processing, pricing and administration of claims,
review, management and coordination of health care services used by members,
production of management reports and other related matters. RightCHOICE also
enables employees with self-funded health plans to access RightCHOICE's PPO and
HMO provider networks and to realize savings through its favorable provider
arrangements, while allowing employers the ability to design health benefit
plans in accordance with their own requirements and objectives.
HealthLink, Inc.
HealthLink is a regional managed health care organization that serves a
seven-state area in the Midwest providing provider network contracting services
and review, management and coordination of health care services used by members
primarily to unions, commercial insurers and employers that fund their own
health plans. HealthLink is not an insurance company and does not assume any
underwriting risks. Its revenues are derived from fees for providing access to
its provider networks and administrative services. HealthLink had 857,100 PPO
administrative services members and 516,100 workers' compensation members as of
December 31, 1999. In addition, HealthLink owns HealthLink HMO, Inc., a
Missouri corporation, with approximately 142,700 members as of December 31,
1999, located primarily in the greater St. Louis area. HealthLink HMO is a
state-qualified health maintenance organization licensed in Missouri, Illinois
and Arkansas that provides health care services for a predetermined, prepaid
periodic fee to enrolled subscriber groups and individuals of selected
insurance companies, and that also provides third party administrator services,
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administrative services only, network rental services and various health care
services for predetermined, prepaid periodic fee to self-funded organizations.
HealthLink and HealthLink HMO also offer various products to supplement
their provider networks and administrative services. These products include a
prescription drug program, dental care, vision care, behavioral health care and
health care education. These products are offered through contracted
arrangements that HealthLink and HealthLink HMO have with various vendors, like
Express Scripts for the prescription drug program.
The EPOCH Group, L.C.
The EPOCH Group, L.C., a limited liability company, is a joint venture
between RightCHOICE and Blue Cross and Blue Shield of Kansas City which was
created in 1995 and combined most of their then existing third-party
administrator businesses. EPOCH is owned equally by RightCHOICE and a
subsidiary of Blue Cross and Blue Shield of Kansas City. EPOCH serves
approximately 275 businesses primarily in the Midwest as of December 31, 1999.
Diversified Life Insurance Agency of Missouri, Inc.
RightCHOICE provides access to life insurance products through its life
insurance agency subsidiary, Diversified Life Insurance Agency of Missouri,
Inc. Diversified Life receives commission revenue in return for providing
RightCHOICE's customers with access to life insurance benefits that are
underwritten by non-affiliated life insurance carriers. For the year ended
December 31, 1999, Diversified Life earned $3.5 million of commission revenue
from various life insurance carriers for providing this service.
Strategies
Sales and marketing strategy
RightCHOICE's strategy includes growing underwritten member levels through
targeted marketing efforts. Reflecting the market's desire for increased choice
and access to a national provider network, emphasis will be placed on marketing
RightCHOICE's PPO products, which deliver a national network through the
BlueCard(R) program. RightCHOICE's marketing and sales efforts are targeted at
the following markets: individuals, small employer groups (which RightCHOICE
defines as groups from two to twenty-five employees), emerging markets (which
RightCHOICE defines as groups with twenty-six to ninety-nine employees) and
middle/strategic markets (which RightCHOICE defines as groups of 100 employees
or more). Sales efforts include the use of a small group marketing unit that
has been successful in supporting sales to small employers in an efficient and
timely manner. RightCHOICE's independent broker networks and direct sales staff
market the full range of RightCHOICE's managed care products and services to
new customers, and manage existing accounts to ensure client satisfaction and
retention. Independent brokers are compensated pursuant to commission
arrangements that vary depending on the particular company products and
services sold.
Marketing efforts are supported by market research conducted internally as
well as public relations efforts and advertising programs that utilize
telemarketing, radio, television, direct mail and other media.
RightCHOICE is focused on a pricing strategy which endeavors to
appropriately price its subsidiaries' health benefit plans in a manner which
fully covers the health care costs and operating costs, inclusive of targeted
operating profits, associated with the benefit plan or services purchased.
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Medical management strategy
A major focus of RightCHOICE's service efforts has been to reduce the number
of rules and processes in order to simplify member access to health care.
RightCHOICE has eliminated precertification requirements on hundreds of medical
procedures. Currently, the thirty procedures that still require
precertification are generally those where experience suggests, based on
recognized standards of care, that members may be at risk for over- or under-
utilization of such procedures.
RightCHOICE recognizes the physician's expertise in managing patient care
and wants to facilitate physicians' autonomy in the practice of medicine by
offering physician groups the information needed to manage the delivery of
health care services while achieving high levels of patient satisfaction.
RightCHOICE's philosophy is to manage provider networks rather than to manage
members. It designs benefit plans to encourage members to use network
providers. The Physician Group Partners Program provides primary care
physicians in BlueCHOICE's commercial HMO with the opportunity to earn
additional compensation by improving patient satisfaction and improving
performance levels using nationally recognized health care industry standards
while effectively managing the trend of costs for health care benefits.
Approximately 54% of the BlueCHOICE HMO network primary care physicians in St.
Louis and central Missouri are enrolled in the program as of December 31, 1999.
Technology, information and operations strategy
In 1995, RightCHOICE implemented a comprehensive information and operations
strategy to assist in implementing its strategy of delivering access to managed
medical care. RightCHOICE believes that managing health care benefits in the
future will be highly dependent on readily accessing both member and provider
medical information at a detail level that provides real-time analytical
support. RightCHOICE's management receives capital expenditure authorizations
from RightCHOICE's board of directors to expend funds for the project, subject
to periodic review. In 1999, RightCHOICE incurred total expenditures of $6.6
million on this project, of which $4.3 million were capitalized. From January
1, 1995 to December 31, 1999, RightCHOICE incurred total expenditures of $62.1
million on this project, of which $51.8 million were capitalized. In 2000,
RightCHOICE anticipates that it will expend approximately $8.6 million related
to this project, of which $6.5 million will be capitalized.
The primary transaction functions of RightCHOICE, including enrollment,
membership maintenance, billing, rating, medical management, provider payments
and customer service, are currently processed by a combination of legacy
applications and newer software packages. In 1999, RightCHOICE completed a
successful migration of its HMO product line to FACETS(R), a client server
software package. Significant efforts during 2000 will focus on providing
additional automated functionality supporting FACETS(R), which includes
increasing the stability and reliability of technical processes and
establishing large-scale processing capabilities in preparation for future
product line migrations. RightCHOICE augments its processing applications with
other technologies:
. Electronic data interface for claim capture,
. Imaging for claim storage and workflow,
. Middleware for inter-platform communication and routing logic, and
. Robust data network to support its personal computer based workstations.
RightCHOICE continues to improve access to key business data through the use
of its data warehouse. RightCHOICE's data warehouse usage has increased 43% in
1999 while the average query response time has decreased by 33%. Critical
business functions ranging from quarterly premium rating and reserve
calculations to disease management programs are supported by the data
warehouse.
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In 2000, RightCHOICE's technology strategy includes electronic commerce
through the internet. These efforts began in 1999 by completing the redesign of
the current internet web site as well as increasing links to other related
internet web pages. Overall the effort is focused on increasing access to
standard information, providing transaction functionality for high volume
processes and increasing connectivity with targeted clients. These capabilities
support RightCHOICE's goals of improving service and retaining members.
The Health Insurance Portability and Accountability Act of 1996 is a
compendium of government regulations, a part of which focuses on the security
and confidentiality of a member's transactions with health care providers and
payers, as well as the standardization of certain electronic transaction code
sets and provider identifiers. During 2000, RightCHOICE will continue to assess
the standard code set requirements established by these regulations. The
implementation of security and encryption standards will require robust
safeguards to guard data integrity, confidentiality and availability of
information. RightCHOICE has not fully assessed the financial impact related to
full compliance with the Health Insurance Portability and Accountability Act of
1996; however, RightCHOICE believes the financial impact could be material.
The discussion under "Year 2000 issue" beginning on page 133 has more
information related to RightCHOICE's Year 2000 program.
General and administrative strategy
RightCHOICE will continue to pursue initiatives to streamline operations and
reduce general and administrative expenses, including expanded use of intranet
and internet technologies. During 1999, RightCHOICE completed the transition of
its HMO business from an older, transaction-based system to a state-of-the-art
client-server based system, FACETS(R). During 2000, RightCHOICE will focus on
enhancing processes in the FACETS(R) environment and plans to begin migrating
the bulk of the rest of its business operations to the FACETS(R) system toward
the end of the year 2000.
Competition
The managed care industry is highly competitive, both nationally and in
RightCHOICE's market area. Participants compete for members primarily on the
basis of price, scope and design of benefits, access to providers and
reputation of the plan sponsor and participants. RightCHOICE also competes with
other managed care organizations for contracts with hospitals, independent
physicians, physician groups and other providers.
In the metropolitan area of St. Louis and other regions in Missouri, the
managed care market is highly competitive, with a number of established
competitors offering a variety of benefit plans. The penetration of managed
health care is substantially less in other regions of Missouri where
RightCHOICE competes with traditional indemnity plans and smaller networks.
RightCHOICE's major competitors include commercial insurance carriers, other
HMOs and PPOs as well as provider service organizations, third-party
administrators, utilization review companies, and others, many of which are
operated as part of a regional or national network. Many competitors that have
regional or national networks have broader geographic coverage, larger total
memberships, and in many instances have greater financial resources than
RightCHOICE.
Regulation
Government regulation of the products and services offered by RightCHOICE
varies from jurisdiction to jurisdiction and is subject to change. RightCHOICE
and its subsidiaries are primarily subject to the insurance laws and
regulations of the States of Missouri and Illinois, the insurance laws and
regulations of the other jurisdictions in which RightCHOICE and its
subsidiaries are licensed or authorized to do business and certain federal laws
and regulations. These insurance laws
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and regulations generally give state and federal regulatory authorities broad
supervisory, regulatory and administrative powers over insurance companies and
insurance holding companies with respect to most aspects of their insurance
businesses. This regulation is intended primarily for the benefit of the
policyholders of the insurance companies. RightCHOICE and its subsidiaries are
in litigation relating to their compliance with various federal and state
regulations. Note 13 "Contingencies" of RightCHOICE's financial statements
included on page F-24 of this document includes a discussion of this
litigation.
Insurance holding company regulation
RightCHOICE is subject to regulation as a member of an insurance holding
company. Missouri and Illinois insurance holding company laws and regulations
generally require members of insurance holding companies to file with the
respective Departments of Insurance certain reports describing capital
structure, ownership, financial condition, certain intercompany transactions
and general business operations. Missouri insurance holding company laws and
regulations require prior regulatory approval or, in certain circumstances,
prior notice of, certain material intercompany transfers of assets as well as
certain transactions between insurance companies, their parent holding
companies and affiliates.
Insurance company regulation
The operations of RightCHOICE's subsidiaries, Healthy Alliance Life
Insurance Company, BlueCHOICE, HealthLink HMO, and RightCHOICE Insurance
Company, are subject to regulation and supervision by regulatory authorities of
the various jurisdictions in which they are licensed to conduct business.
Regulatory authorities exercise extensive supervisory power over insurance
companies and health maintenance organizations in regard to:
. Licensing,
. Amount of reserves that must be maintained,
. Approval of their forms and policies used,
. Nature of, and limitation on, their investments,
. Periodic examination of their operations,
. Form and content of annual statements and other reports required to be
filed on their financial condition, and
. Establishment of their capital requirements.
The subsidiaries of RightCHOICE mentioned above are required to file
periodic statutory financial statements in each jurisdiction in which they are
licensed. Additionally, these subsidiaries are periodically examined by the
insurance departments of the jurisdictions in which they are licensed to do
business.
Risk-based capital requirements
In 1993, Missouri adopted statutory risk-based capital requirements for life
and health insurance companies. In 1998, Missouri adopted the risk-based
capital requirements for health maintenance organizations which the National
Association of Insurance Commissioners adopted the same year. The formula for
calculating such risk-based capital requirements, set forth in instructions
adopted by the National Association of Insurance Commissioners, is designed to
take into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to the individual insurance company's business.
Under these laws, life and health insurance companies and health maintenance
organizations must submit a report of their risk-based capital level as of the
end of the previous calendar year. In addition, the Blue Cross and Blue Shield
Association requires RightCHOICE to
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meet more stringent risk-based capital requirements than that required under
the National Association of Insurance Commissioners and Missouri guidelines.
Because as of December 31, 1999 the total adjusted capital of Healthy
Alliance Life Insurance Company, RightCHOICE Insurance Company, BlueCHOICE, and
HealthLink HMO, determined in accordance with the risk-based capital
instructions adopted by the National Association of Insurance Commissioners on
a fully phased-in basis, exceed all risk-based capital minimum requirements
(including the requirements of the Blue Cross and Blue Shield Association),
RightCHOICE believes that the risk-based capital requirements will not have any
immediate impact upon Healthy Alliance Life Insurance Company, RightCHOICE
Insurance Company, BlueCHOICE, or HealthLink HMO or their operations. If in the
future the risk-based capital results were to decline, the risk-based capital
requirements could have a material effect upon their operations and the amount
of regulatory oversight to which they are subject.
In addition to adopting the risk-based capital requirements in 1998, the
National Association of Insurance Commissioners adopted the Codification of
Statutory Accounting Principles, which provides interpretive guidance on
statutory accounting principles and will replace the current manual of
Accounting Practices and Procedures adopted by the National Association of
Insurance Commissioners. The National Association of Insurance Commissioners is
now considering amendments to the Codification of Statutory Accounting
Principles that would be effective on the recommended implementation date of
January 1, 2001. The Codification of Statutory Accounting Principles provides
new interpretive guidance for some existing statutory accounting principles,
changes current statutory accounting principles in some areas, and requires the
filing of new insurance reports. RightCHOICE's management believes that it is
more likely than not that the Missouri and Illinois legislatures will enact the
Codification of Statutory Accounting Principles. RightCHOICE has not estimated
the potential effect of the Codification of Statutory Accounting Principles if
adopted.
Restrictions on dividends
Insurance laws and regulations restrict the payment of dividends by life
insurance companies and health maintenance organizations in a holding company
system. These laws generally limit the dividends that a life insurance company
may pay to an amount which, together with the amount of dividends and
distributions paid by the insurance company during the immediately preceding 12
months, does not exceed the greater of: (1) 10% of the insurance company's
surplus as regards policyholders as of the preceding December 31, or (2) the
insurance company's net gain from operations for the preceding calendar year.
For all other insurers (including HMOs), these laws generally limit the
dividends that a company may pay to an amount which, together with the amount
of dividends and distributions paid by the insurer during the immediately
preceding 12 months, does not exceed the lesser of: (1) 10% of the insurer's
surplus as regards policyholders as of the preceding December 31, or (2) the
net investment income for the 12-month period ending as of the preceding
December 31.
In addition, for all insurers, the amount of dividends that may be paid
without regulatory approval is limited by the amount of the insurer's earned
surplus. Earned surplus is the portion of surplus that represents the insurer's
cumulative earnings less dividends paid in prior periods. Any proposed dividend
in excess of the limitations described above is deemed to be an "extraordinary
dividend" and requires prior approval by the appropriate Director of Insurance.
At December 31, 1999, Healthy Alliance Life Insurance Company, BlueCHOICE,
RightCHOICE Insurance Company, and HealthLink HMO had surplus of approximately
$82 million, $17 million, $2 million, and $7 million, respectively. At December
31, 1999, RightCHOICE's
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insurance subsidiaries did not have a significant amount of earned surplus
available for dividend payment without the prior approval of the appropriate
Director of Insurance.
HMO regulation
BlueCHOICE and HealthLink HMO are subject to health care related regulation
by both state and federal regulatory authorities. BlueCHOICE, as a federally
qualified HMO, is subject to regulation and review by the U.S. Department of
Health and Human Services and other federal authorities. In 1997, a
comprehensive managed care law, known as House Bill 335, became effective in
Missouri. This law, together with other state and federal laws, governs many
aspects of the operations of BlueCHOICE and HealthLink HMO, including:
. Procedures for managing utilization of health care services,
. Procedures for quality assurance,
. Enrollment requirements,
. Covered benefits,
. Relationships between the HMO and its members and health care providers,
and
. Financial condition, including reserves and cash flow requirements.
Third-party administrator regulation
RightCHOICE, HealthLink HMO, and EPOCH, RightCHOICE's 50%-owned subsidiary,
are required to obtain a certificate of authority from the Departments of
Insurance in the various states in which they operate in connection with
certain of their benefit administration services and are subject to various
statutory requirements, including:
. Record-keeping and retention,
. Fiduciary obligations with respect to premiums collected,
. Limitations on commissions and fees, and
. Notice and reporting requirements.
Third-party administrator activities are also subject to the provisions of
the Employee Retirement Income Security Act of 1974.
Preferred Provider Organization (PPO) regulation
In connection with its PPO services, HealthLink is required to obtain a
certificate of authority from the Departments of Insurance in the states in
which it operates in connection with its PPO services and is subject to various
statutory requirements, including provider and client contracting requirements
and notice and reporting requirements.
Utilization review regulation
RightCHOICE and HealthLink provide management, review and coordination of
the utilization of health care services. RightCHOICE and HealthLink are
required to be registered with, or obtain a certificate of authority from, the
Departments of Insurance in the various states in which they operate in
connection with their utilization review services and are subject to various
statutory requirements, including notice and reporting requirements.
Health Insurance Portability and Accountability Act and other federal
legislation
The Health Insurance Portability and Accountability Act of 1996, originally
known in the Senate as the Kennedy-Kassebaum bill, was signed into law on
August 21, 1996. The Health Insurance
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Portability and Accountability Act and the implementing regulations that have
since been adopted impose new obligations for issuers of health insurance
coverage and health benefit plan sponsors. This law requires guaranteed
issuance of health coverage for small employers having fifty or fewer employees
and for individuals who meet certain eligibility requirements. It also requires
guaranteed renewability of health coverage for most employers and individuals.
The law limits exclusions based on preexisting conditions for individuals
covered under group policies to the extent the individuals had prior creditable
coverage. This law and the regulations that have been or will be promulgated
under it also focus on the security and confidentiality of a member's
transactions with health care providers and payers as well as the
standardization of certain electronic transaction code sets and provider
identifiers. The implementation of these security and privacy measures and
standards will require additional capabilities. RightCHOICE has not fully
assessed the financial impact related to full compliance with the Health
Insurance Portability and Accountability Act of 1996 and its regulations;
however, RightCHOICE believes such financial impact could be material.
Recent health care reform legislation
The Balanced Budget Act of 1997, and the related regulations, established a
new Medicare+Choice program that was intended to significantly expand the
health care options to Medicare beneficiaries. The Balanced Budget Act of 1997
imposed a number of new restrictions and requirements on health plans, such as
BlueCHOICE, that offer a Medicare+Choice plan. Effective January 1, 2001,
RightCHOICE will no longer contract with the Health Care Financing
Administration of the United States Department of Health and Human Services to
provide benefits under the Medicare HMO program. In addition, in 1999, the
State of Illinois passed legislation, known as the Managed Care Reform and
Patient Rights Act, that affects the activities of insurance companies, health
maintenance organizations, utilization review organizations and preferred
provider organizations, which now impose a number of new contracting
requirements, quality of care standards, grievance procedures, and access and
continuity of care requirements. A number of these requirements are similar to
the requirements of House Bill 335 which was enacted in Missouri in 1997.
Additionally, the Illinois legislation institutes small group reform in the
State of Illinois for employer groups of two to fifty employees. Although the
impact of the provisions of this recent legislation and any future legislation
cannot be fully predicted at this time, RightCHOICE believes that the ultimate
outcome will not have a material adverse effect on RightCHOICE. However,
RightCHOICE cannot provide any assurances that it or its subsidiaries will be
able to obtain or maintain required governmental approvals or licenses or that
any current or proposed federal and state legislation or other regulatory
reform imposed on RightCHOICE and its subsidiaries will not have a material
adverse effect on their business or results of operations in the future.
Proposed health care reform legislation
The federal and state governments continue to enact and seriously consider
many legislative and regulatory proposals that have impacted, or would
materially impact, various aspects of the operations and business of
RightCHOICE and its subsidiaries. For example, the United States House of
Representatives has passed the "Bipartisan Consensus Managed Care Improvement
Act," also known as the Norwood-Dingell bill, which would, if it became law,
among other things, impose limits on the methods of operation for group health
plans and health insurance issuers, limit the ability of group health plans and
health insurance issuers to define medical necessity for purposes of coverage,
and permit group health plans and health insurance issuers to be sued in state
courts for coverage determinations. In addition, the United States Senate
recently passed the "Patients' Bill of Rights Plus Act," which would, if it
became law, among other things, require access to emergency medical care for
certain group plans, require direct access by female participants to
obstetrical or gynecological care for certain group plans, require timely
access to specialty care when specialty care is a benefit for certain group
plans, and require continuity of care for certain group plans. These proposals
and other proposals, including those referred to generally as the "Patients
Bill of Rights," could impose additional restrictions or obligations on the
operations of RightCHOICE. In addition,
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the U.S. Department of Health and Human Services has issued proposed rules, as
contemplated by the Health Insurance Portability and Accountability Act of
1996, which would, if the rules are adopted, among other things, impose
security and confidentiality requirements with respect to a member's
transactions with health care providers and payers, as well as requirements for
the standardization of certain electronic transaction code sets and provider
identifiers.
It is uncertain whether RightCHOICE can recoup, through higher premiums or
other measures, the increased costs caused by any new legislation or
regulation, or any court or regulatory decision that expands or reduces the
interpretation or application of existing statutes and regulations (for
example, decisions that increase RightCHOICE's and its subsidiaries'
responsibilities under the Employee Retirement Income Security Act of 1974 or
reduce the scope of this law's preemption). While certain of these measures
would adversely affect RightCHOICE and its subsidiaries, at this time
RightCHOICE cannot predict the extent of this impact or which of (or in what
form) the pending laws or rules will be enacted or adopted.
Employees
RightCHOICE employed approximately 1,950 full time employees, including 510
HealthLink employees, as of December 31, 1999, compared to 1,800 full time
employees, including 370 HealthLink employees, as of December 31, 1998, none of
whom is subject to a collective bargaining agreement. RightCHOICE believes that
its employee relations are good.
Properties
As of December 31, 1999, RightCHOICE owned or leased the following
facilities which it considers material to its operations:
<TABLE>
<CAPTION>
Square Owned or
Type of Facility Location Footage Leased
---------------- -------- ------- --------
<S> <C> <C> <C>
Corporate Headquarters St. Louis, MO 343,017 Leased
Document Storage Warehouse St. Louis, MO 91,119 Leased
HealthLink, Inc. Headquarters St. Louis, MO 61,829 Leased
Southwest Regional Office Springfield, MO 30,000 Owned
Southeast Claims Training Cape Girardeau, MO 3,230 Leased
Southeast Claims Office Cape Girardeau, MO 42,000 Leased
Central Marketing Office Columbia, MO 5,000 Leased
</TABLE>
RightCHOICE sold its Southwest Regional Office on May 31, 2000 and now
leases a facility in Springfield, Missouri to conduct the operations previously
performed there.
Legal Proceedings
RightCHOICE is a party to various material legal proceedings which are
described in Note 13 to its financial statements included on page F-24 of this
document.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following presents management's discussion and analysis of RightCHOICE's
financial condition and results of operations as of the dates and for the
periods indicated. You should read this discussion in conjunction with the
"Selected Financial Data" of RightCHOICE beginning on page 10 of this document
and the financial statements and the accompanying notes, and the other
financial data about RightCHOICE included in this document.
This discussion contains forward-looking statements that involve risks and
uncertainties. Actual results could differ significantly from those anticipated
in these forward-looking statements.
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Results of operations
RightCHOICE offers a comprehensive array of managed health care products
and services that it segregates into two distinct segments: underwritten and
self-funded. RightCHOICE's underwritten segment includes preferred provider
organization (PPO), point of service (POS), health maintenance organization
(HMO), Medicare supplement, specialty managed care, and managed indemnity
benefit plans. RightCHOICE's self-funded segment includes third-party
administrator services, administrative services only for self-insured
organizations, network rental services for self-insured organizations,
insurance companies and other organizations, and life insurance agency
services.
Revenue
The following table sets forth revenue (in thousands) by product group for
the six months ended June 30, 2000 and 1999, and for the years ended December
31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
For the six
months For the year ended
ended June 30, December 31,
----------------- --------------------------
Product Group 2000 1999 1999 1998 1997
------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PPO:
Alliance PPO................. $122,339 $101,047 $209,487 $191,855 $197,329
AllianceCHOICE POS........... 94,665 81,070 167,392 151,034 124,890
HMO (includes other POS)....... 110,651 104,393 211,910 206,292 183,485
Medicare supplement............ 45,253 46,863 92,314 94,951 97,157
Managed indemnity.............. 1,104 1,851 3,659 7,627 12,531
Other specialty services....... 30,198 22,268 47,389 42,728 38,875
-------- -------- -------- -------- --------
Total premium revenue........ 404,210 357,492 732,151 694,487 654,267
ASO/Self-funded and other
income........................ 48,376 41,732 84,761 73,025 65,144
-------- -------- -------- -------- --------
Total revenues............... $452,586 $399,224 $816,912 $767,512 $719,411
======== ======== ======== ======== ========
</TABLE>
Operating ratios
The following table sets forth selected operating ratios. The medical loss
ratio reflects health care services expense as a percentage of premium
revenue. All other ratios are shown as a percentage of premium revenue and
fees and other income combined:
<TABLE>
<CAPTION>
For the six months For the year ended
ended June 30, December 31,
------------------- --------------------
2000 1999 1999 1998 1997
--------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Premium revenue.................. 89.3% 89.5% 89.6% 90.5% 90.9%
Fees and other income............ 10.7% 10.5% 10.4% 9.5% 9.1%
--------- --------- ------ ------ ------
100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ====== ====== ======
Operating ratios:
Medical loss ratio............... 81.2% 82.2% 82.2% 83.5% 84.8%
--------- --------- ------ ------ ------
Commission expense ratio......... 3.9% 3.8% 4.0% 4.1% 4.1%
--------- --------- ------ ------ ------
General and administrative
expense ratio................... 19.2% 20.2% 20.0% 20.8% 22.7%
--------- --------- ------ ------ ------
Adjusted general and
administrative expense ratio
(excludes depreciation and
amortization)................... 17.2% 18.1% 17.9% 18.3% 19.5%
--------- --------- ------ ------ ------
</TABLE>
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Membership
The following table sets forth the number of members by product category:
<TABLE>
<CAPTION>
June 30, % December 31, %
------------------- Increase/ ------------------- Increase/
Product Group 2000 1999 (Decrease) 1999 1998 (Decrease)
------------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Underwritten:
PPO:
Alliance PPO........ 166,711 143,014 16.6 149,769 141,225 6.0
AllianceCHOICE POS.. 136,900 124,906 9.6 130,192 127,907 1.8
HMO:
Commercial (includes
other POS)......... 119,552 126,579 (5.6) 128,215 129,417 (0.9)
Blue Horizons
Medicare HMO....... 4,823 5,125 (5.9) 4,914 5,432 (9.5)
Medicare supplement... 50,795 54,968 (7.6) 53,460 57,966 (7.8)
Managed indemnity..... 1,508 2,054 (26.6) 1,752 2,777 (36.9)
--------- --------- --------- ---------
480,289 456,646 5.2 468,302 464,724 0.8
--------- --------- --------- ---------
Self-funded:
PPO................... 44,110 45,792 (3.7) 44,355 43,688 1.5
HMO................... 7,687 7,694 (0.1) 7,152 8,843 (19.1)
ASO (includes
HealthLink):
Workers'
compensation....... 649,703 492,000 32.1 516,107 449,986 14.7
Other ASO*.......... 1,245,397 1,205,898 3.3 1,250,436 1,155,658 8.2
--------- --------- --------- ---------
Total membership........ 2,427,186 2,208,030 9.9 2,286,352 2,122,899 7.7
========= ========= ========= =========
</TABLE>
--------
*does not include additional third-party administrator members of 433,384 and
387,814 as of June 30, 2000 and 1999, and 391,021 and 455,006 as of December
31, 1999, and 1998, respectively, that are part of The EPOCH Group, L.C., a
joint venture with Blue Cross and Blue Shield of Kansas City formed in
December 1995.
Comparison of results for the first half of 2000 to the first half of 1999
Revenues
Underwritten
Premium revenue increased $46.7 million, or 13.1%, for the first half of
2000 in comparison to the first half of 1999. As described below, components of
premium revenue were affected by shifts in product mix, rate increases, and
other factors, and as a result, such changes in premium revenue may not be
indicative of future periods. RightCHOICE will continue to strive to establish
its premium rates based on anticipated health care costs. Depending on future
competition, customer acceptance of premium increases, future health care cost
trends or other factors, RightCHOICE cannot provide any assurances that it will
be able to price its products consistent with health care cost trends.
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PPO premium revenue increased $34.9 million in the first half of 2000 as
compared to the first half of 1999--$15.4 million due to an 8.3% increase in
net premium rates and $19.5 million resulting from a 10.1% increase in member
months. The term member months refers to the cumulative number of members added
together over a specific time period. Thus, for the first half of the year,
member months are determined by adding together the membership counts for all
six months. Net premium rates increased due in part to overall premium renewal
rate increases typically ranging from approximately 8% to 18% during enrollment
periods in the last half of 1999 and the first half of 2000. Net premium rate
increases are at the lower end of the overall premium increase range due in
part to changes in deductibles, the timing of group renewals throughout the
year and product mix changes. Alliance PPO membership increased by 23,697
members from June 30, 1999 to June 30, 2000 while AllianceCHOICE POS membership
increased by 11,994 over the same time period. These increases are partially
due to the announced departure from the Missouri market of several competitors
coupled with strong retention of RightCHOICE's existing members. RightCHOICE's
membership has also benefited from the positive performance of its BlueCard(R)
PPO program. The BlueCard(R) PPO program allows RightCHOICE's Alliance PPO and
POS members access to Blue Cross and Blue Shield plans' PPO providers
throughout the majority of the nation. In addition, RightCHOICE began offering
PPO products in Illinois at the end of the first quarter of 1997. Included in
the Alliance PPO member count are 22,424 PPO Illinois members as of June 30,
2000, an increase of 12,809 from June 30, 1999.
HMO premium revenue increased $6.3 million, or 6.0%, for the first half of
2000 as compared to the first half of 1999--$10.5 million due to a 9.3%
increase in net premium rates partially offset by a $4.2 million decrease
resulting from a 3.1% decrease in member months. Net premium rates increased in
part due to RightCHOICE's premium renewal rate increases typically ranging from
approximately 8% to 18% during enrollment periods in the last half of 1999 and
the first half of 2000. Net premium rate increases are at the lower end of the
overall premium increase range because of:
. Shifts in chosen benefit levels,
. Changes in the geographic mix of the HMO business,
. Product mix shifts, and
. The status of a large group, the Missouri Consolidated Health Care Plan,
comprised of approximately 41,198 members as of June 30, 2000.
Membership in the Missouri Consolidated Health Care Plan increased by 2,483
from June 30, 1999 to June 30, 2000. RightCHOICE's 1999 year-end annual report
on Form 10-K noted that a rate increase of approximately 21% would be effective
for the Missouri Consolidated Health Care Plan for the contract year beginning
January 1, 2000. In March 2000, the Missouri Consolidated Health Care Plan
notified RightCHOICE that a risk adjustment factor applied to the premiums the
Missouri Consolidated Health Care Plan pays insurance carriers will result in a
reduction of that increase to approximately 12%. Although RightCHOICE is
contesting this Missouri Consolidated Health Care Plan action, it increased its
loss reserve at March 31, 2000, by $1.5 million. This charge is reflected in
the health care services expense caption of the Consolidated Statement of
Income for the six months ended June 30, 2000. RightCHOICE's participation in
the Missouri Consolidated Health Care Plan program is currently scheduled to
terminate on December 31, 2000. See "Liquidity and Capital Resources" below.
Excluding the Missouri Consolidated Health Care Plan, membership in
RightCHOICE's HMO products decreased over the same time period by 9,812
members, partially due to increases in premium and partially due to a general
migration from HMO products to other managed care products such as PPO
products.
As of June 30, 2000, RightCHOICE had 4,823 Blue Horizons Medicare HMO
members. Effective December 31, 2000, RightCHOICE will no longer contract with
the Health Care Financing
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Administration of the United States Department of Health and Human Services to
provide benefits under the Medicare HMO program. RightCHOICE expects the Blue
Horizons Medicare HMO membership to gradually decline over the remainder of the
year as members opt for other Medicare-risk carriers. RightCHOICE expects that
the loss of these Medicare HMO members in the last half of 2000 will be more
than offset in 2000 by the expected enrollment gain of approximately 10,000
underwritten members in other HMO and PPO products as of July 1, 2000.
Premium revenue from Medicare supplement decreased by $1.6 million for the
first half of 2000 as compared to the first half of 1999. Member months
decreased by 7.8% partially offset by a 4.7% increase in net premium rates.
Membership in RightCHOICE's Medicare supplement products has decreased in part
due to subscribers opting for competitors' Medicare-risk programs, similar to
RightCHOICE's Blue Horizons Medicare HMO product, in which medical benefits are
at least as comprehensive as Medicare benefits for persons eligible to receive
Medicare (parts A and B) at no additional cost to the member.
Managed indemnity premium revenue decreased by $0.7 million in the first
half of 2000 due to a 32.7% decline in member months. Member month declines are
consistent with RightCHOICE's strategy to move toward more highly managed care
products. With the exception of a short-term medical product, RightCHOICE no
longer sells managed indemnity products, but continues to renew coverage for
those members who wish to remain in these managed indemnity programs.
Premium revenue from other specialty services, which includes certain of
RightCHOICE's drug and dental health care benefits plans, increased $7.9
million in the first half of 2000 as compared to the first half of 1999 due to
a 21.2% increase in net premium rates as well as an 11.9% increase in member
months. Specialty product membership related to RightCHOICE's drug products
increased during this period as a result of growth in RightCHOICE's Alliance
group membership, growth in the RightCHOICE Insurance Company PPO Illinois
group membership, and an increase in the AllianceCHOICE group membership. The
increase in membership for drug products was offset in part by decreases in
RightCHOICE's dental product member months, which decreased by 3.6% in the
first half of 2000 as compared to the first half of 1999; this decrease is due
to competition from dental products that are priced below RightCHOICE's dental
product. RightCHOICE continues to work towards revising its dental product to
be more competitive in the market. The large net premium rate increases
primarily relate to RightCHOICE's drug products and correspond to the high
levels of prescription utilization and trends that RightCHOICE, as well as the
industry as a whole, have experienced in recent years.
Self-funded
Fees and other income from administrative services only, network services
and life insurance commission revenues increased $6.6 million for the first
half of 2000 as compared to the first half of 1999. This increase is primarily
due to increased 2000 revenues from HealthLink, Inc., RightCHOICE's network
rental and managed care service subsidiary, of $7.2 million for the first half
of 2000, as compared to the same period of 1999. HealthLink's revenues
increased as a result of a 15.1% increase in membership from June 30, 1999 to
June 30, 2000 which was partially due to expansion into new territories as well
as membership growth in HealthLink's workers' compensation program, which
increased 32.1% to 649,703 at June 30, 2000 compared to 492,000 at June 30,
1999.
Operating expenses
The overall medical loss ratio decreased from 82.2% in the first half of
1999 to 81.2% in the first half of 2000. The medical loss ratio has decreased,
in part, due to RightCHOICE's pricing strategy. For the first half of 2000, the
premium per member per month increased by 8.8% as
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compared to the first half of 1999. For the first half of 2000, the net medical
cost per member per month increased by 7.5% as compared to the first half of
1999.
RightCHOICE continues its efforts initiated in 1998 to modify its pharmacy
benefits management program and recontract with physicians and ancillary
service providers. The drug cost trend increase ranged from approximately 17%
to the mid 20% range for the twelve month period ended June 30, 2000, driven by
a combination of factors, including:
. Introduction of new drug therapies,
. Physicians' use of newer, more expensive drugs, and
. Greater utilization of drugs driven in part by direct-to-consumer
advertising.
The per member per month drug cost has been reduced somewhat by
RightCHOICE's continuing strategy for managing drug costs by utilizing a three-
tier drug benefit design that allows members to make choices among generic,
preferred drugs (drugs which are part of RightCHOICE's preferred drug list), or
other brand name drugs, albeit at different copayment levels. Approximately 92%
and 61% of RightCHOICE's underwritten members with a drug benefit were covered
under the three-tier pharmacy benefit program as of June 30, 2000 and June 30,
1999, respectively. Physician education, utilization and prescribing pattern
analysis have increased through the assistance of an on-site pharmacist whose
services were negotiated through RightCHOICE's pharmacy benefit contract, which
runs through April 2002. RightCHOICE will also continue its hospital, physician
and service recontracting strategy, using the more detailed data and analysis
available through RightCHOICE's information and operations strategy (IOS).
RightCHOICE continues to work on cooperative programs with physicians designed
to increase client satisfaction and improve the medical cost trend. Plans
continue for the specialist model of the Physician Group Partners Program(R)
(PGPP(R)) to be introduced during fourth quarter 2000. Designed for the PPO and
POS programs, initial specialties to be included are internal medicine/family
practice, pediatrics, OB/GYN, cardiology and orthopedics. Like the current
program for the HMO physicians, the program will include patient satisfaction
and quality measurements. RightCHOICE cannot assure investors that its
initiatives to manage future increases in medical and pharmacy cost trends to
improve the medical loss ratio will be effective.
Commission expense increased by $2.5 million, or 16.0%, for the first half
of 2000 as compared to the first half of 1999. The increases are primarily due
to an increase in overall premium. The commission expense ratio increased
slightly to 3.9% for the first half of 2000 from 3.8% for the first half of
1999.
General and administrative expenses, excluding depreciation and
amortization, increased by $5.7 million, or 7.8%, for the first half of 2000 as
compared to the first half of 1999. This increase is partially attributable to
HealthLink's geographic and member expansion efforts which resulted in
increased HealthLink expenses of $3.1 million ($2.9 million excluding
depreciation and amortization) in the first half of 2000 as compared to the
same periods of 1999. RightCHOICE's general and administrative expense ratio,
excluding depreciation and amortization, decreased to 17.2% for the first half
of 2000 from 18.1% in the first half of 1999.
Depreciation and amortization expenses increased slightly to $8.8 million
for the first half of 2000 from $8.4 million in the first half of 1999.
Amortization expenses for the completed components of RightCHOICE's IOS project
increased by $0.3 million in the first half of 2000 as compared to the first
half of 1999.
Operating expenses for RightCHOICE's underwritten segment include health
care service costs, commissions, and general and administrative expenses.
Operating expenses for RightCHOICE's self-funded segment include commissions
and general and administrative expenses. Operating expenses
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for the underwritten segment of $401.3 million for the first half of 2000
represent an increase of $40.0 million, as compared to the first half of 1999.
The increase is primarily due to an increase in health care service costs of
$34.4 million in the first half of 2000 as compared to the first half of 1999.
Health care service costs increased due to an increase in RightCHOICE's
underwritten membership as well as an increase in per member claims costs, as
previously described. General and administrative expenses also increased by
$3.0 million in the first half of 2000, as compared to the same period of 1999.
This increase was also partially attributable to an increase in RightCHOICE's
underwritten membership of approximately 5% from June 30, 1999 to June 30,
2000. Operating expenses for the self-funded segment of $31.7 million for the
first half of 2000 represent an increase of $3.0 million, as compared to the
same period of 1999. This increase is primarily due to the increase in
HealthLink's general and administrative costs, as previously described.
Operating income
Operating income increased by $10.4 million for the first half of 2000 as
compared to the first half of 1999.
Operating income for RightCHOICE's underwritten segment increased to $3.1
million for the first half of 2000 as compared to an operating loss of $3.4
million for the first half of 1999. Operating income increased primarily due to
an improved pricing environment for RightCHOICE's underwritten products.
Operating income for RightCHOICE's self-funded segment increased to $16.5
million for the first half of 2000 as compared to $12.5 million for the first
half of 1999. Operating income increased primarily due to HealthLink's
continued growth from increased membership and regional expansion, as
previously described. HealthLink's operating income increased by $4.1 million
in the first half of 2000 as compared to the same period of 1999.
Net investment income
Net investment income includes investment income in the form of interest and
dividend income and net realized gains or losses from the sale of portfolio
securities. Net investment income of $8.0 million in the first half of 2000
represents a $1.7 million increase over the first half of 1999. Realized gains
from sales of investments increased by $1.5 million during the first half of
2000 as compared to the same period of 1999.
Provision for income taxes
RightCHOICE's effective income tax provision rates were 39.8% and 38.5% for
the first half of 2000 and 1999, respectively. RightCHOICE's effective income
tax rates for 2000 and 1999 were affected by state income taxes and non-
deductible goodwill amortization, among other things. The provision for the
first half of 1999 was more favorably impacted by a change in 1998 to
RightCHOICE's filing status for the State of Missouri as compared to the
provision for the first half of 2000.
Net income
RightCHOICE's net income of $16.0 million for the first half of 2000
represents an increase of $7.4 million compared to net income of $8.6 million
for the first half of 1999. Basic and diluted earnings per share for the first
half of 2000 were $0.86 and $0.84, respectively, compared to basic and diluted
earnings per share of $0.46 and $0.46, respectively, for the first half of
1999.
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Comparison of results for 1999 to the results for 1998
Revenues
Underwritten
Premium revenue increased $37.7 million to $732.2 million in 1999 from
$694.5 million in 1998. As described below, components of premium revenue were
affected by shifts in product mix, rate increases and other factors; and as a
result, the increase in premium revenue may not be indicative of future
periods.
PPO premium revenue increased $34.0 million in 1999--$40.5 million increase
due to an 11.5% increase in net premium rates, partially offset by a $6.5
million decrease resulting from a slight decrease in member months. The term
member months refers to the cumulative number of members added together over a
specific time period. Thus, for a year, member months are determined by adding
together the membership counts for all twelve months. Net premium rates
increased due in part to overall premium renewal rate increases ranging from 7%
to 19% during 1999 enrollment periods. Net premium rate increases are at the
lower end of the overall premium increase range due in part to changes in
deductibles, the timing of group renewals throughout the year and product mix
changes. Alliance PPO membership increased by 8,544 members from December 31,
1998, to December 31, 1999, and AllianceCHOICE POS membership increased by
2,285 over the same time period. RightCHOICE began offering PPO products in
Illinois at the end of first quarter 1997. Included in the Alliance PPO member
count are 14,248 PPO Illinois members as of December 31, 1999, an increase of
7,212 from December 31, 1998.
HMO premium revenue increased $5.6 million in 1999, or 2.7%--$22.4 million
due to a 10.0% increase in net premium rates, partially offset by a $16.8
million decrease resulting from a 6.6% decrease in member months. Net premium
rates increased in part due to overall premium renewal rate increases of 7% to
19% during 1999 enrollment periods. Net premium rate increases are lower than
the overall premium increase range because of:
. HMO competition in BlueCHOICE's HMO service areas,
. Shifts in chosen benefit levels,
. Changes in the geographic mix of the HMO business,
. Product mix shifts, and
. Status of a large group, the Missouri Consolidated Health Care Plan,
comprised of approximately 39,500 members as of December 31, 1999, with
which BlueCHOICE has historically had a limited ability to increase
premium rates.
Membership in the Missouri Consolidated Health Care Plan increased by 6,277
members from December 31, 1998 to December 31, 1999. Effective January 1, 2000,
the Missouri Consolidated Health Care Plan pricing increased by approximately
21% under a contract amendment. As described above, in March 2000 the Missouri
Consolidated Health Care Plan notified RightCHOICE that a risk adjustment
factor applied to the premiums the Missouri Consolidated Health Care Plan pays
insurance carriers will result in a reduction of that increase to approximately
12%. See "Liquidity and Capital Resources" below. Excluding the Missouri
Consolidated Health Care Plan, membership in RightCHOICE's HMO products
decreased over the same time period by 7,997 members, primarily due to
RightCHOICE's pricing strategy.
Premium revenue from Medicare supplement decreased by $2.6 million in 1999--
$7.3 million decrease resulting from a 7.4% decrease in member months,
partially offset by a $4.7 million increase because of a 5.0% increase in net
premium rates. Membership in RightCHOICE's Medicare supplement products has
decreased in part due to subscribers opting for Medicare-risk programs, similar
to RightCHOICE's Blue Horizons Medicare HMO product, in which medical benefits
are at
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least as comprehensive as Medicare benefits for persons eligible to receive
Medicare (parts A and B) at no additional cost to the member.
Managed indemnity premium revenue decreased by $4.0 million primarily as a
result of a 58.5% decline in member months. Member month declines are
consistent with RightCHOICE's strategy to move toward more highly managed care
products. With the exception of a short-term medical product, RightCHOICE no
longer sells managed indemnity products, but continues to renew coverage for
those members who wish to remain in these managed indemnity programs.
Revenue from other specialty services, which includes certain of
RightCHOICE's drug and dental health care benefit plans, increased $4.7
million--$7.3 million increase as a result of a 17.6% increase in net premium
rates partially offset by a $2.6 million decrease resulting from a 5.7%
decrease in member months. Specialty product membership related to
RightCHOICE's drug products increased slightly in 1999 as a result of growth in
RightCHOICE's Alliance group membership, growth in the RightCHOICE Insurance
Company group membership, and an increase in the AllianceCHOICE group
membership. The increase in membership for drug products was offset by larger
decreases in RightCHOICE's dental product member months, which decreased by
22.4% due to competition from dental products that are priced below
RightCHOICE's dental product. RightCHOICE intends to design a more competitive
dental product in 2000. The large net premium rate increases primarily relate
to RightCHOICE's drug products and correspond to the high levels of
prescription utilization and trends that RightCHOICE, as well as the industry
as a whole, have experienced in recent years.
Self-funded
Fees and other income from administrative services only, network services
and life insurance commission revenues increased in 1999 by $11.7 million.
These increases are primarily due to increased 1999 revenues of $14.2 million
from HealthLink, RightCHOICE's network rental and managed care service
subsidiary. HealthLink's revenues increased as a result of an 11.5% increase in
membership during 1999 which was partially due to expansion into new
territories. Additionally, HealthLink's membership increases during this period
included a transfer of approximately 10,000 members to HealthLink from
RightCHOICE's other self-funded plans.
Operating expenses
The overall medical loss ratio of RightCHOICE and its subsidiaries decreased
to 82.2% in 1999 from 83.5% in 1998. The medical loss ratio experienced in 1999
is lower compared to that in 1998 due in part to RightCHOICE's pricing
strategy, which resulted in an overall increase in the premium per member per
month of approximately 10.2% in 1999 as compared to 1998. The medical expense
on a per member per month basis increased by approximately 8.4% in 1999 as
compared to 1998.
RightCHOICE continues the efforts initiated in 1998 to modify its pharmacy
benefits management program and recontract with physicians and ancillary
service providers. The drug cost trend increase ranged from approximately 10%
to 20%, driven by a combination of factors, including:
. Introduction of new drug therapies,
. Physicians' use of newer, more expensive drugs, and
. Physicians' decreased use of generic drugs in favor of specific drugs
promoted by pharmaceutical companies.
RightCHOICE is continuing its strategy for managing drug costs by utilizing
a three-tier drug benefit design that allows members to make choices among
generic, preferred drugs (drugs which are
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part of RightCHOICE's preferred drug list), or other brand name drugs, albeit
at different copayment levels. Approximately 79% of RightCHOICE's members with
a drug benefit under a product underwritten by a subsidiary of RightCHOICE were
enrolled in the three-tiered pharmacy benefit programs as of December 31, 1999.
In 1999, RightCHOICE recognized a 26% savings on the three-tier program as
compared to the two-tier drug program. Physician education, utilization and
prescribing pattern analysis will be increased through the assistance of an on-
site pharmacist whose services were negotiated through RightCHOICE's pharmacy
benefit contract, which runs through 2002. RightCHOICE will also continue its
hospital, physician and service recontracting strategy, using the more detailed
data and analysis available through RightCHOICE's information and operations
strategy. RightCHOICE cannot assure investors that its initiatives to manage
future increases in medical and pharmacy cost trends to improve the medical
loss ratio will be effective.
Commission expense increased by $1.1 million, or 3.4%, in 1999. The
commission expense ratio of 4.0% for 1999 compares to 4.1% in 1998.
General and administrative expenses, excluding depreciation and
amortization, increased $5.7 million in 1999 compared to 1998. This increase is
directly attributable to HealthLink's geographic and member expansion efforts.
RightCHOICE's general and administrative expense ratio, excluding depreciation
and amortization, decreased to 17.9% in 1999 compared to 18.3% in 1998.
Depreciation and amortization expenses decreased to $17.2 million in 1999
from $19.3 million in 1998. Amortization expenses for completed components of
RightCHOICE's information and operations strategy project decreased by $1.3
million in 1999 compared to 1998. The decrease in amortization for the
information and operations strategy project is due in part to RightCHOICE's
change in the estimated useful life of the capitalized software from five to
seven years.
Operating expenses for the underwritten segment increased $19.3 million to
$737.0 million in 1999 from $717.7 million in 1998 primarily due to an increase
in health care service costs of $21.7 million in 1999 as compared to 1998.
Operating expenses for the self-funded segment increased $6.2 million to $60.3
million in 1999 from $54.0 million in 1998. This increase was primarily due to
the increase in HealthLink's general and administrative expenses of $6.6
million, as previously described.
Operating income (loss)
RightCHOICE's results from operations improved from an operating loss of
$4.2 million in 1998 to an operating income of $19.7 million in 1999. Pricing
strategies, medical cost management, and controlled general administrative
expense contributed to the increase in operating income in 1999.
The operating loss for RightCHOICE's underwritten segment decreased to $4.4
million in 1999 from $23.1 million in 1998. The significant improvement is due
to RightCHOICE's aforementioned successful pricing strategies and cost
management efforts.
The operating income for RightCHOICE's self-funded segment increased to
$24.1 million in 1999 from $18.8 million in 1998. This improvement is due
primarily to HealthLink's continued profit growth from increased membership and
regional expansion. HealthLink's operating income increased by $7.7 million in
1999 as compared to 1998. HealthLink's operating income is inclusive of $2.8
million and $2.8 million in 1999 and 1998, respectively, for amortization
expenses related to goodwill and other intangible assets that were acquired
through RightCHOICE's HealthLink acquisition.
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Net investment income
Net investment income includes investment income in the form of interest and
dividend income and net realized gains or losses from the sale of portfolio
securities. Net investment income of $12.9 million represents a $5.8 million
decrease from 1998 primarily as a result of a $4.4 million decrease in net
realized gains.
Provision for income taxes
RightCHOICE's effective income tax provision rate was 39.4% and 40.4% for
1999 and 1998, respectively. RightCHOICE's effective tax provision rates for
1999 and 1998 were affected by non-deductible goodwill amortization, among
other things. Due to a change in the filing status for the State of Missouri
during 1998, RightCHOICE's 1999 and 1998 state income tax provisions were
favorably impacted. Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," requires a valuation allowance against deferred
tax assets if, based on the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. As
of December 31, 1998, RightCHOICE maintained a valuation allowance of $0.1
million relating to items in which uncertainty existed with respect to the
future realization of the undistributed losses of minority-owned subsidiary
companies. During 1999, RightCHOICE determined that this uncertainty no longer
existed. Based upon all the available evidence, management believes it is more
likely than not that RightCHOICE will realize its deferred tax assets as of
December 31, 1999, and, accordingly, no valuation allowance has been provided
against such assets as of December 31, 1999.
Net income
RightCHOICE's net income for 1999 increased to $17.2 million, or $0.92 per
share, as compared to net income of $5.7 million, or $0.30 per share for 1998,
as a result of the factors noted above.
Comparison of results for 1998 to the results for 1997
Revenues
Underwritten
Premium revenue increased $40.2 million to $694.5 million in 1998 from
$654.3 million in 1997. As described below, components of premium revenue were
affected by shifts in product mix, rate increases and other factors; and as a
result, such increase in premium revenue may not be indicative of future
periods.
PPO premium revenue increased $20.7 million in 1998--$36.3 million increase
due to an 11.0% increase in net premium rates, partially offset by a $15.6
million decrease resulting from a 4.1% decrease in member months. Net rates
increased due in part to overall premium renewal rate increases averaging 7% to
19% during 1998 enrollment periods. Net premium rate increases are at the lower
end of the overall premium increase range due in part to changes in
deductibles, the timing of group renewals throughout the year and product mix
changes. Alliance PPO membership decreased by 8,114 members from December 31,
1997, to December 31, 1998, and AllianceCHOICE POS membership decreased by
4,017 over the same time period. Net membership decreases are due primarily to
RightCHOICE's aforementioned pricing strategy during 1998. Included in the
Alliance PPO member count are 7,000 PPO Illinois members as of December 31,
1998, an increase of 4,800 from December 31, 1997.
HMO premium revenue increased $22.8 million, or 12.4%--$16.7 million
increase due to an 8.0% increase in net premium rates and a $6.1 million
increase resulting from a 4.1% increase in
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member months. Net premium rates increased in part due to overall premium
renewal rate increases of 7% to 19% during 1998 enrollment periods. Net rate
increases are lower than the overall premium increase range because of
. HMO competition in RightCHOICE's HMO service areas,
. Shifts in chosen benefit levels,
. Changes in the geographic mix of the HMO business,
. Product mix shifts, and
. Status of one large group, the Missouri Consolidated Health Care Plan,
comprised of 33,200 members as of December 31, 1998, with which
BlueCHOICE has historically had limited ability to increase premium
rates.
Membership increases were driven primarily by an enrollment increase of
6,000 members in the Missouri Consolidated Health Care Plan products from
December 31, 1997, to December 31, 1998. HMO membership in non-Missouri
Consolidated Health Care Plan products (and excluding RightCHOICE's Medicaid
product) decreased over the same period by 11,600 members or 10.2%, due
primarily to RightCHOICE's aforementioned pricing strategy during 1998.
Effective March 1, 1998, RightCHOICE discontinued its Medicaid product in an
eighteen-county central Missouri region. RightCHOICE decided to discontinue
these services because it believed that the State of Missouri had proposed
unacceptable contract terms. As of December 31, 1997, RightCHOICE had
approximately 5,100 members enrolled in its Medicaid product.
Premium revenue from Medicare supplement decreased by $2.2 million in 1998.
Member months decreased by 8.1% partially offset by a 6.4% increase in net
premium rates. Membership declines are partially attributable to subscribers
opting for Medicare-risk programs, similar to RightCHOICE's Blue Horizons
Medicare HMO product, in which medical benefits are at least as comprehensive
as Medicare benefits for persons eligible to receive Medicare (parts A and B)
at no additional cost to the member.
Managed indemnity premium revenue decreased by $4.9 million because of a
44.3% decline in member months. Member month declines are consistent with
RightCHOICE's strategy to move toward more highly managed care products.
Revenue from other specialty services, which includes certain of
RightCHOICE's drug and dental health care benefit plans, increased $3.9
million--$6.3 million increase as a result of a 16.2% increase in net premium
rates partially offset by a $2.4 million decrease resulting from a 5.4%
decrease in member months. The large rate increases relate to RightCHOICE's
drug products and correspond to the high levels of prescription utilization and
trends that RightCHOICE, as well as the industry as a whole, have experienced
in recent years.
Self-funded
Fees and other income from administrative services only, network services
and life insurance commission revenues increased in 1998 by $7.9 million. These
increases are primarily due to increased 1998 revenues of $14.4 million from
HealthLink, RightCHOICE's network rental and managed care service subsidiary.
HealthLink's revenues increased due to a 21.1% increase in membership during
1998. Sales during this period included a 30,000-member group that enrolled in
HealthLink's self-funded ASO plan, transferring from RightCHOICE's other self-
funded business. HealthLink's increases to fees and other income were partially
offset by decreases to revenue caused by the loss of approximately 72,000
members in RightCHOICE's other self-funded business due to the nonrenewal of
three large groups.
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Operating expenses
The overall medical loss ratio decreased to 83.5% in 1998 from 84.8% in
1997. The medical loss ratio experienced in 1998 is lower compared to that in
1997 due in part to RightCHOICE's pricing strategy, which resulted in an
overall increase in premium per member per month of approximately 9.5% in 1998
as compared to 1997. The medical loss ratio in 1998 is slightly higher than
RightCHOICE previously anticipated in the beginning of the year as a result of
continued escalation of the medical cost trend, driven by increased cost and
utilization of both outpatient services and drug therapies. RightCHOICE's
medical expense on a per member per month basis increased by approximately 7.8%
in 1998 as compared to 1997.
Commission expense increased by $2.1 million, or 7.1%, in 1998. The
commission expense ratio of 4.1% for 1998 remained unchanged from 1997.
General and administrative expenses (excluding depreciation and
amortization) increased $0.2 million in 1998 compared to 1997. RightCHOICE
managed to keep general and administrative expenses relatively consistent from
1997 to 1998 despite the fact that HealthLink's comparable expenses increased
by $6.5 million in 1998 as compared to 1997. This increase is directly
attributable to HealthLink's geographic and member expansion efforts.
RightCHOICE's 1997 general and administrative expenses include a write-off of
$1.7 million for amounts due to BlueCHOICE from MedAmerica HealthNet, Inc., a
physician hospital organization that filed for bankruptcy during the fourth
quarter of 1997. RightCHOICE's general and administrative expense ratio
(excluding depreciation and amortization) decreased to 18.3% in 1998 compared
to 19.5% in 1997. Excluding depreciation, amortization and the $1.7 million
charge, the general and administrative expense ratio for 1997 was 19.2%.
Depreciation and amortization expenses decreased to $19.3 million in 1998
from $23.1 million in 1997. This reduction of depreciation and amortization
expenses primarily related to intangible assets that became fully amortized
during 1997. In 1997, Healthy Alliance Life Insurance Company recorded $4.3
million of expense to complete the amortization of a prepaid reinsurance asset
associated with RightCHOICE's reinsurance agreements with Blue Cross and Blue
Shield of Kansas City. Amortization expenses for completed components of
RightCHOICE's information and operations strategy project increased by $2.4
million in 1998 compared to 1997.
A non-recurring charge of $0.9 million was recognized in the fourth quarter
of 1998 related to a planned reduction of RightCHOICE's work force and changes
in its employee health care benefits. In 1997, RightCHOICE expensed $3.3
million related to costs associated with the relocation of RightCHOICE's
St. Louis-based claims, customer service, billing, and provider services
functions to its Springfield, Missouri facility and a new facility in Cape
Girardeau, Missouri.
In the third quarter of 1997, BlueCHOICE recorded a $29.5 million contract
loss reserve for estimated losses relating to its contract with the Missouri
Consolidated Health Care Plan. The reserve is based on actuarial estimates,
including projected limited rate increases, and projected enrollment and
medical cost trends accounted for through the year 2000. RightCHOICE cannot
provide any assurances that the amount of this loss reserve will be sufficient
to cover all future losses that may be associated with the Missouri
Consolidated Health Care Plan contract.
Operating expenses for the underwritten segment decreased $6.0 million to
$717.7 million in 1998 from $723.8 million in 1997. This decrease is partially
due to the $29.5 million charge for loss reserves in 1997 related to the
Missouri Consolidated Health Care Plan contract, as previously described.
Excluding this charge, operating expenses increased $23.5 million, primarily
due to an increase in health care service costs of $24.7 million in 1998 as
compared to 1997. Operating expenses for the self-funded segment decreased $2.6
million to $54.0 million in 1998 from $56.7
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million in 1997 despite the fact that HealthLink's general and administrative
expenses increased by $6.5 million over this same time period. This decrease
was primarily due to a reduction in RightCHOICE's other self-funded general and
administrative expenses due to the loss of approximately 72,000 members, as
previously described.
Operating loss
RightCHOICE's operating loss decreased from $61.0 million in 1997 to $4.2
million in 1998. Excluding the non-recurring relocation and restructuring
charges and the charge for the Missouri Consolidated Health Care Plan contract
loss reserve, the operating loss decreased from $28.2 million in 1997 to $3.3
million in 1998.
The operating loss for RightCHOICE's underwritten segment was $23.1 million
in 1998 compared to an operating loss of $69.4 million in 1997. The decrease in
losses in 1998 is partially attributable to the aforementioned $29.5 million
contract loss reserve as well as an increase in RightCHOICE's overall premium
rates.
RightCHOICE's self-funded segment experienced operating income of $18.8
million in 1998 as compared to operating income of $8.4 million for 1997. The
improvement in 1998 operating income is partially the result of the continued
positive performance of HealthLink, which added an additional $7.9 million to
this segment's operating income in 1998 as compared to 1997. HealthLink's
operating income is inclusive of $2.8 million and $3.1 million in 1998 and
1997, respectively, for amortization expenses related to goodwill and other
intangible assets that were acquired through RightCHOICE's HealthLink
acquisition.
Net investment income
Net investment income of $18.7 million in 1998 represents a decrease of
$14.5 million from 1997, inclusive of a $13.3 million decrease in net realized
gains. Realized gains in 1997 included a $5.7 million gain on the sale of
company-owned life insurance policies as well as additional 1997 net realized
gains from the liquidation of equity securities due to RightCHOICE's intent to
increase its holdings of fixed income securities and decision to repay $15.0
million of its debt in the first quarter of 1997.
Provision (benefit) for income taxes
RightCHOICE's effective income tax provision (benefit) rate was 40.4% and
(28.4)% for 1998 and 1997, respectively. RightCHOICE's effective tax provision
(benefit) rates for 1998 and 1997 were affected by non-deductible goodwill
amortization. RightCHOICE's 1998 state income tax provision was favorably
impacted by a change in the filing status of Missouri during 1998.
RightCHOICE's effective income tax benefit rate for 1997 was also affected by
gains from the liquidation of company-owned life insurance policies.
Net income (loss)
RightCHOICE's net income for 1998 was $5.7 million, or $0.30 per share,
compared to a net loss of $24.0 million, or $1.29 per share for 1997. Excluding
the non-recurring restructuring and relocation charges and the charge for the
Missouri Consolidated Health Care Plan loss reserve, RightCHOICE's net income
increased to $6.2 million, or $0.33 per share, in 1998, as compared to a net
loss of $2.7 million, or $0.14 per share, in 1997, as a result of the factors
noted above.
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Liquidity and capital resources
RightCHOICE's working capital as of June 30, 2000 was $93.3 million, an
increase of $20.2 million from December 31, 1999. A majority of the increase is
attributable to the net income of $16.0 million in the first half of 2000.
Depreciation and amortization expenses related to noncurrent assets were $8.8
million. RightCHOICE's unrealized net depreciation of investments available for
sale decreased (improved) by $0.2 million in the first half of 2000. In
addition, RightCHOICE repaid $4.0 million of the debt from its reducing
revolving credit facility as well as $2.6 million of debt related to capital
leases. RightCHOICE capitalized $4.5 million of costs for property and
equipment purchases, $2.4 million of which relates to capitalized IOS
development costs. In the first half of 2000, RightCHOICE incurred expenditures
of $2.9 million on its IOS project, of which $2.4 million were capitalized.
During the remainder of the year 2000, RightCHOICE anticipates that it will
expend approximately $5 million to $6 million on its IOS project of which
approximately $4 million to $5 million will be capitalized. RightCHOICE sold
its Southwest Missouri regional office building in May 2000 for $3.6 million.
RightCHOICE relocated the employees and its operations to a larger leased
facility within the same region.
Net cash provided by operations totaled $18.1 million for the first half of
2000 as compared to net cash used in operations of $0.9 million for the first
half of 1999. RightCHOICE's net income for the first half of 2000 was $16.0
million, which included $8.8 million of depreciation and amortization expenses,
and $2.6 million related to the net reduction in the Missouri Consolidated
Health Care Plan contract loss reserve. In addition, receivables from members,
accounts payable and accrued expenses, medical claims payable, and net
intercompany payables were affected by the timing of operating cash payments
and receipts, intercompany tax settlements, as well as changes in membership
and utilization and claims payment trends. Receivables from members increased
by $8.0 million in part due to an increase of $4.0 million related to
HealthLink receivables, increased sales activity and rate increases related to
RightCHOICE's underwritten products, and other timing factors. One timing
factor relates to an increase in billings for future service periods. This
increase is directly related to the increase in unearned premiums of $3.6
million since billings that are produced for future service periods are
recorded by RightCHOICE as unearned premium and recognized as income over the
applicable service period. Accounts payable and accrued expenses increased by
$1.1 million due to the timing of various operating cash payments and accruals
partially offset by the annual broker bonuses and annual employee incentive
programs that were paid in the first quarter of 2000. Medical claims payable
decreased by $8.2 million, due in part to RightCHOICE's efforts to reduce its
claim inventory. RightCHOICE's continued efforts to further reduce claims
inventory during 2000 could reduce the level of operating cash flows in future
quarters of 2000. Net intercompany payables increased by $6.7 million due to
intercompany tax settlements and the timing of operating cash receipts and
payments, among other things.
RightCHOICE's working capital as of December 31, 1999 was $73.0 million, an
increase of $8.5 million from December 31, 1998. The increase is partially
attributable to the net income of $17.2 million in 1999. Depreciation and
amortization expenses related to noncurrent assets were $17.2 million.
RightCHOICE capitalized $6.6 million of costs for property and equipment
purchases, $4.3 million of which relates to capitalized information and
operations strategy development costs. RightCHOICE's unrealized net
appreciation of investments available for sale decreased by $5.6 million in
1999. In addition, during 1999, RightCHOICE repaid $9.0 million of the debt
from RightCHOICE's reducing revolving credit facility as well as $4.6 million
of debt related to capital leases.
Net cash provided by operations totaled $28.7 million for the year ended
December 31, 1999 as compared to $11.0 million for the year ended December 31,
1998. For 1999, RightCHOICE's net
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income was $17.2 million, which included (on a before-tax basis) $0.5 million
of net realized losses from the sale of investments, $17.2 million of
depreciation and amortization expenses, and $9.1 million related to the
reduction in the Missouri Consolidated Health Care Plan contract loss reserve.
In addition, receivables from members, accounts payable and accrued expenses,
medical claims payable, and net intercompany payables were affected by the
timing of operating cash payments and receipts, intercompany tax settlements,
as well as changes in membership and utilization and claims payment trends.
Receivables from members increased by $10.9 million in part due to an increase
of $9.1 million related to HealthLink receivables, rate increases related to
RightCHOICE's underwritten products, and other timing factors. Accounts payable
and accrued expenses decreased by $5.2 million due in part to a $6.0 million
settlement payment relating to a contingency that was previously reserved.
Medical claims payable increased by $14.4 million, approximately 13%, due to
the increase in the cost of health care services, the timing of claim payments,
and an increase in RightCHOICE's claims inventory. RightCHOICE's efforts to
reduce claims inventory during 2000 could reduce the level of operating cash
flows in future quarters of 2000. Net intercompany payables decreased by $9.7
million due to the timing of operating cash receipts and payments and
intercompany tax settlements, among other things.
On August 29, 1997, RightCHOICE reported the commencement of the litigation
with the Missouri Consolidated Health Care Plan and estimated losses (giving
effect to all possible renewal terms of the Missouri Consolidated Health Care
Plan contract without requested rate increases) in the range of $30 million to
$40 million. As a result of management's assessment of the profitability of its
contract for providing health care services to members of the Missouri
Consolidated Health Care Plan, RightCHOICE recorded a pre-tax charge for
probable future losses of $29.5 million during the third quarter of 1997. The
charge resulted from inadequate rate increases that were contractually limited
for the remainder of the Missouri Consolidated Health Care Plan contract, which
extended through the year 2000. The pre-tax charge was based on actuarial
estimates, including projected limited rate increases, and projected enrollment
and medical cost trends accounted for through the year 2000 in accordance with
generally accepted accounting principles. RightCHOICE was advised by the
Missouri Department of Insurance in March 1998 that the entire amount of the
reserve for the Missouri Consolidated Health Care Plan contract recorded by
RightCHOICE for projected losses under the contract through the year 2000 must,
for statutory accounting purposes, be recorded by RightCHOICE's subsidiary
BlueCHOICE on its statutory filings with the Missouri Department of Insurance.
With the prior regulatory approval of the Missouri Department of Insurance,
BlueCHOICE issued surplus notes to RightCHOICE in the amount of $29 million to
ensure the statutory solvency of BlueCHOICE. On August 6, 1999, the Missouri
Consolidated Health Care Plan executed an amendment to the contract providing a
rate increase that was anticipated to be approximately 21% for public entities,
modified rate factors for state employees, and modification of the pharmacy
benefit, effective January 1, 2000, for the 2000 contract year. In March 2000,
the Missouri Consolidated Health Care Plan notified RightCHOICE that a risk
adjustment factor applied to the premiums the Missouri Consolidated Health Care
Plan pays insurance carriers will result in a reduction of that increase to
approximately 12%. Although RightCHOICE is contesting this Missouri
Consolidated Health Care Plan action, it increased its loss reserve at March
31, 2000 by $1.5 million. This charge is reflected in the health care services
expense caption of the Consolidated Statement of Income for the six months
ended June 30, 2000. While management of RightCHOICE believes the current
provision for losses is adequate, if the actual public entity membership in the
Missouri Consolidated Health Care Plan grows at a rate in excess of the rate
used in the actuarial estimates, or if the projected limited rate increases and
medical cost trends should differ materially from those assumed in the
actuarial estimates, then the amount of the reserve recorded to date could be
insufficient to cover all future losses which may be associated with the
Missouri Consolidated Health Care Plan contract, and such losses could have a
material adverse effect on RightCHOICE. RightCHOICE's participation in the
Missouri Consolidated Health Care Plan program is currently scheduled to
terminate on December 31, 2000.
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In the first quarter of 1999, RightCHOICE received regulatory approval of a
reinsurance arrangement between its subsidiaries, Healthy Alliance Life
Insurance Company and BlueCHOICE. Under this arrangement, Healthy Alliance Life
Insurance Company will reinsure the Missouri Consolidated Health Care Plan
losses that exceed certain thresholds over the remaining term of the current
Missouri Consolidated Health Care Plan contract. RightCHOICE anticipates that
this arrangement will assist in mitigating the risk that additional surplus
notes or other funding will need to be provided to BlueCHOICE.
RightCHOICE primarily invests positive cash flow in fixed income securities.
RightCHOICE's investment policies are designed to preserve principal, maximize
yield and provide liquidity to meet anticipated obligations. RightCHOICE's
available-for-sale securities primarily include fixed-rate government
securities and corporate bonds as well as mortgage-backed securities and other
asset-backed securities. RightCHOICE also has approximately $10.9 million as of
December 31, 1999, invested in a large capitalization equity index fund.
During the third quarter of 1999, RightCHOICE completed negotiations to
favorably amend the terms of its revolving credit facility, the material terms
of which are as follows:
. Borrowings under the credit agreement are to be denominated at reduced
interest rates at either 2.5% above the one month floating London
Interbank Offered Rate, or at 1.5% above the higher of the latest federal
funds rate plus 0.5% or the bank's reference rate, which approximates the
prime rate,
. Several financial covenant calculations were favorably modified and the
financial covenant requirements were favorably adjusted,
. Maximum commitment of the credit agreement of $36 million as of October
1, 1999, will be reduced by $2.0 million quarterly through January 1,
2002, the new termination date, and
. Additional $7 million of surplus notes will be permitted to be incurred
between RightCHOICE and its subsidiaries to provide for capital planning
flexibility.
In addition, if RightCHOICE meets specified criteria, it may denominate the
borrowings at further reduced interest rates at LIBOR plus 2.25%, or as a base
rate loan at 1.25% above the higher of the latest federal funds rate plus 0.5%
or the bank's reference rate, which approximates the prime rate.
Under applicable state regulations, some of RightCHOICE's subsidiaries are
required to retain cash generated from their operations. After giving effect to
these restrictions, RightCHOICE had approximately $9.1 million in cash and
investments available for general corporate purposes without regulatory
approval as of December 31, 1999.
Other than continued investment in information technology, debt repayment
and license fees, RightCHOICE currently has no definitive material commitments
for future use of its current or expected levels of available cash resources.
RightCHOICE anticipates that in 2000 it will repay $8.0 million of its long-
term debt under the credit agreement's requirements, as described above. In
2000, RightCHOICE anticipates that it will expend approximately $8.6 million,
of which $6.5 million will be capitalized, related to RightCHOICE's information
and operations strategy project. RightCHOICE expects to continue to pay annual
license fees of approximately $0.7 million to $0.8 million related to its
licenses from the Blue Cross and Blue Shield Association to use the Blue Cross
and Blue Shield service marks. However, the amount of the license fees may vary
from year to year based on RightCHOICE's total revenue as compared to that of
all Blue Cross and Blue Shield licensees as well as changes adopted by the Blue
Cross and Blue Shield Association to its overall formulas for computing the
license fees. RightCHOICE's management continually evaluates opportunities to
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<PAGE>
expand RightCHOICE's operations. RightCHOICE's expansion options may include
additional acquisitions and internal development of new products and programs.
RightCHOICE's available cash resources will remain in interest-bearing
investments until they are utilized for such purposes.
As described in Note 13, "Contingencies," to RightCHOICE's financial
statements, RightCHOICE, Blue Cross and Blue Shield of Missouri, the Missouri
Attorney General, and the Missouri Department of Insurance are working together
to settle outstanding litigation and regulatory issues. The proposed settlement
entails the reorganization of RightCHOICE and Blue Cross and Blue Shield of
Missouri. Blue Cross and Blue Shield of Missouri would, through a series of
transactions,
. transfer its insurance-related assets, contracts and agreements and
related liabilities to a wholly owned subsidiary of RightCHOICE;
. convert to a for-profit corporation;
. reincorporate in Delaware; and
. merge with RightCHOICE.
Approximately 20% of the outstanding common stock of the resulting entity
(referred to as New RightCHOICE) would be owned by RightCHOICE's current public
shareholders and approximately 80% of the outstanding shares of New RightCHOICE
would be owned by a charitable independent health care foundation (which equals
the current aggregate ownership interests of the public shareholders and Blue
Cross and Blue Shield of Missouri, respectively, in the equity of RightCHOICE).
Blue Cross and Blue Shield of Missouri would pay approximately $12.78 million
to the Missouri Foundation For Health (in addition to $175,000 paid by New
RightCHOICE).
New RightCHOICE is expected to have sufficient liquidity to meet all
operating cash flow needs. In addition, it is expected that New RightCHOICE
will remain in compliance with all limitations and covenants as required by
RightCHOICE's existing credit agreement.
Year 2000 issue
RightCHOICE executed a program to evaluate its major systems, processes and
equipment to minimize the possibility of a material disruption to its business
due to Year 2000 problems, e.g., the difficulties of certain computers,
computer programs and other equipment to distinguish between the year 1900 and
the year 2000.
RightCHOICE substantially completed its Year 2000 program in December 1999.
This included necessary remediation, implementation of new packages, testing of
critical components, testing of critical external interfaces and completion of
contingency plans for critical processes.
As a result of those planning and implementation efforts, RightCHOICE
experienced no significant problems relating to the Year 2000 transition.
RightCHOICE will continue to monitor its systems for continued processing. In
addition, as of June 30, 2000, RightCHOICE was not aware of significant Year
2000 problems encountered by its critical vendors, suppliers and providers or
in RightCHOICE's use of their services.
The total cost associated with modifications required to become Year 2000
ready was approximately $13.0 million with $0.1 million expensed in the first
six months of 2000 and $5.4 million expensed in the full year 1999. RightCHOICE
expensed all costs associated with these changes as they were incurred. These
costs were funded internally through operating cash flows or investment sales
and represented less than 10% of RightCHOICE's information technology budget
over the life of the Year 2000 program.
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<PAGE>
Inflation
Health care costs in the United States have increased more rapidly than the
national consumer price index in recent years and that trend is expected to
continue. In an effort to lessen the impact of health care cost inflation on
its premiums, RightCHOICE has implemented programs to strengthen its
underwriting standards. These programs include the three-tier copayment levels
for drug coverages and various deductible and copayment options for medical
coverages, as well as various provider networks and programs such as the
Physician Group Partners Program(R). However, RightCHOICE cannot provide any
assurances that its efforts to reduce the impact of inflation will be effective
or that premium increases will equal or exceed increasing health care costs.
Health Insurance Portability and Accountability Act of 1996
The United States Department of Health and Human Services has issued
proposed rules, as contemplated by the Health Insurance Portability and
Accountability Act of 1996, which would, if the rules are adopted, among other
things, impose security and confidentiality requirements with respect to a
member's transactions with health care providers and payers, as well as
requirements for the standardization of certain electronic transaction code
sets and provider identifiers. RightCHOICE has not fully assessed the financial
impact related to full compliance with the Health Insurance Portability and
Accountability Act of 1996 and its regulations; however, RightCHOICE believes
such financial impact could be material.
Other proposed health care reform legislation
The United States House of Representatives has passed the "Bipartisan
Consensus Managed Care Improvement Act," also known as the Norwood-Dingell
bill, which would, if it became law, among other things, impose limits on the
methods of operation for group health plans and health insurance issuers, limit
the ability of group health plans and health insurance issuers to define
medical necessity for purposes of coverage, and permit group health plans and
health insurance issuers to be sued in state courts for coverage
determinations. In addition, the United States Senate recently passed the
"Patients' Bill of Rights Plus Act," which would, if it became law, among other
things, require access to emergency medical care for certain group plans,
require direct access by female participants to obstetrical or gynecological
care for certain group plans, require timely access to specialty care when
specialty care is a benefit for certain group plans, and require continuity of
care for certain group plans. These proposals and other proposals, including
those referred to generally as the "Patients Bill of Rights," could impose
additional restrictions or obligations on the operations of RightCHOICE.
It is uncertain whether RightCHOICE can recoup, through higher premiums or
other measures, the increased costs caused by any new legislation or
regulation, or any court or regulatory decision that expands or reduces the
interpretation or application of existing statutes and regulations. While
certain of these measures would adversely affect RightCHOICE and its
subsidiaries, at this time RightCHOICE cannot predict the extent of this impact
or which of (or in what form) the pending laws or rules will be enacted or
adopted.
Recently issued accounting standards
See the description under the same caption in Note 2 to RightCHOICE's
financial statements included on page F-7 of this document.
Contingencies
See description under the same caption in Note 13 to RightCHOICE's financial
statements included on page F-24 of this document.
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Quantitative and Qualitative Disclosure about Market Risk
Investments available for sale
RightCHOICE's available-for-sale securities (see Note 4 of RightCHOICE's
financial statements included on page F-13 of this document for further
breakdown of the available-for-sale securities) are exposed to market risk from
changes in interest rates, as rate volatility will cause fluctuations in the
market value of held investments and the earnings potential of future
investments. RightCHOICE's objective in managing interest rate risk is to meet
the strategic operating needs by safeguarding principal, providing sufficient
liquidity to meet business needs and realizing optimal real returns within
acceptable risk levels, while at all times adhering to the restrictions of the
Missouri and Illinois Departments of Insurance. RightCHOICE's management is
responsible for recommending external portfolio managers and RightCHOICE's
finance and investment committee, comprised of certain members of RightCHOICE's
board of directors, is responsible for approving the selection of these
external managers, including the specific portfolio guidelines and restrictions
to be included in the management agreements. RightCHOICE's investment
guidelines are generally conservative and are established with the expectation
of receiving reasonable rates of return at reasonable levels of risk.
RightCHOICE's management is also responsible for recommending the percentage
distribution of the portfolio between short-term, fixed income, and equity
investments for the finance and investment committee's approval. RightCHOICE's
objective is to diversify to reduce volatility through exposure to various
investment styles. Managers of each external portfolio are expected to exceed a
specific index which is comparable to its style of management.
RightCHOICE classifies its investments as available-for-sale. Accordingly,
RightCHOICE's investments are reported on its consolidated balance sheets at
fair value. Changes in market interest rates or prices result in an unrealized
gain or loss, which is included in the reported fair value of the recorded
securities, with an offsetting amount (net of taxes) recorded in shareholders'
equity, and no related or immediate impact to the results of operations. At
December 31, 1999, RightCHOICE recorded an unrealized loss on these investments
and the fair value of the securities could potentially decrease further,
depending upon changes in market rates and other factors. As of December 31,
1999, RightCHOICE had $201.9 million invested in available-for-sale securities
at fair value. The analyses below are based on $172.5 million of RightCHOICE's
available-for-sale securities that are managed externally, with a weighted-
average yield to maturity of 7.31%. RightCHOICE's available-for-sale securities
primarily include fixed-rate government securities and corporate bonds as well
as mortgage-backed securities and other asset-backed securities. RightCHOICE
also has $10.9 million invested in an equity index fund. This fund's passive
strategy is designed to track the performance of the Standard & Poor's 500
Composite Stock Price Index. The fund's total return may fluctuate, like stock
prices generally, within a wide range. The remaining $18.5 million of
RightCHOICE's available-for-sale securities were not included in the analyses
as the investments are primarily either internally managed or represent short-
term securities or money market funds. The market risks related to these
internally managed and short-term investments are not deemed to be material to
the analyses presented below. A breakdown of the effective maturity and
effective duration of the $172.5 million of externally managed fixed maturity
investments is as follows:
<TABLE>
<CAPTION>
Effective Effective
Maturity % of Duration % of
(in years) Total Held (in years) Total Held
----------- ---------- --------- ----------
<S> <C> <C> <C>
0.00- 0.99 3.99 0.00-0.99 4.73
1.00- 2.99 22.22 1.00-2.99 24.47
3.00- 4.99 16.53 3.00-3.99 19.06
5.00- 9.99 41.33 4.00-5.99 38.18
10.00-19.99 11.58 6.00-7.99 7.52
20.00+ 4.35 8.00+ 6.04
</TABLE>
135
<PAGE>
The following table shows the effect of changes in interest rates on
RightCHOICE's investment return, duration and market value. The analysis below
incorporates the prepayment risk associated with RightCHOICE's investments in
callable securities as well as the optionality of its mortgage-backed and
asset-backed securities. The analysis includes a 12-month projection of market
values given the applicable changes in yields that management believes are
reasonably possible in the near term from that which existed at year-end 1999
with the assumption that investment income is reinvested.
<TABLE>
<CAPTION>
Yield Change Return %
(basis -------------------------------------- Effective
points) Total Income Price Duration Market Value
------------ ----- ------ ----- --------- ------------
<S> <C> <C> <C> <C> <C>
-200 15.71 7.23 8.48 3.98 199,559
-150 13.58 7.23 6.35 4.01 195,882
-100 11.49 7.25 4.24 4.07 192,276
-50 9.39 7.28 2.11 4.13 188,666
0 7.31 7.31 0.00 4.16 185,068
50 5.27 7.34 -2.07 4.16 181,554
100 3.29 7.37 -4.08 4.12 178,138
150 1.37 7.40 -6.03 4.08 174,834
200 -0.48 7.43 -7.91 4.03 171,644
</TABLE>
To summarize, a decrease in effective interest rates would result in an
increase in the fair value of RightCHOICE's portfolio with an offsetting
increase (net of taxes) recorded in shareholders' equity. Alternatively, an
increase in interest rates would result in a decrease in the fair value of
RightCHOICE's portfolio with an offsetting decrease (net of taxes) recorded in
shareholders' equity. RightCHOICE cannot provide any assurances that actual
changes in interest rates will have the effects as presented above, as this
analysis includes various assumptions, and changes in these assumptions, as
well as various other factors causing market volatility, could result in
material differences from the figures presented above.
Long-term debt
During 1999, RightCHOICE was exposed to changes in interest rates through
RightCHOICE's revolving credit facility with Bank of America National
Association, formerly known as Bank of America National Trust and Savings
Association, and a syndicate of banks. This exposure was primarily linked to
the adjusted London Interbank Offered Rate. RightCHOICE's debt under the credit
agreement was subject to interest at 2.75% above the adjusted London Interbank
Offered Rate, through September 30, 1999, and 2.5% above the adjusted London
Interbank Offered Rate, after September 30, 1999, and was adjusted monthly
accordingly. A hypothetical 10% increase in the adjusted London Interbank
Offered Rate would have increased RightCHOICE's interest expense by
approximately $0.3 million during 1999. At December 31, 1999, RightCHOICE had
$34.1 million outstanding under the credit agreement (see Note 10 of
RightCHOICE's financial statements included on page F-16 of this document for
further information related to RightCHOICE's credit agreement). RightCHOICE
expects to continue to denominate the borrowings under the credit agreement as
an offshore rate loan bearing interest at the adjusted London Interbank Offered
Rate plus 2.5%. However, as an alternative, RightCHOICE may denominate the
borrowings as a base rate loan which bears interest at 1.5% above the higher of
the latest federal funds rate plus 0.5% or the bank's reference rate, which
approximates the prime rate. In either case, the applicable interest rate is
subject to adjustment on a monthly basis. In addition, if RightCHOICE meets
specified criteria, RightCHOICE may denominate the borrowings at reduced rates,
either as an offshore rate loan at the adjusted London Interbank Offered Rate
plus 2.25%, or as a base rate loan at 1.25% above the higher of the latest
federal funds rate plus 0.5% or the bank's reference rate, which approximates
the prime rate. The maximum commitment of the credit agreement was reduced to
$34.1 million as of
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<PAGE>
December 31, 1999, with $2.0 million quarterly reductions scheduled through
January 1, 2002, the termination date. In addition, mandatory reductions to the
commitment, together with prepayments, are required upon the happening of
extraordinary events, such as the issuance of debt securities or the sale of a
subsidiary.
As of June 30, 2000, there have been no material changes in the market risk
exposures that affect RightCHOICE's quantitative and qualitative disclosures as
presented above for the year ended December 31, 1999.
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<PAGE>
INFORMATION ABOUT BLUE CROSS AND BLUE SHIELD OF MISSOURI
All financial information included in this document regarding Blue Cross and
Blue Shield of Missouri excludes its ownership of the class B common stock.
Business
General Description of Business
Blue Cross and Blue Shield of Missouri is a provider of health care benefits
in Missouri. As of December 31, 1999, Blue Cross and Blue Shield of Missouri
served approximately 155,000 members, the majority of whom reside in
metropolitan St. Louis, Missouri. Blue Cross and Blue Shield of Missouri offers
underwritten products, self-funded products, and owns and manages real estate.
Blue Cross and Blue Shield of Missouri segregates its products into these three
segments. Note 13 "Segment Information" of Blue Cross and Blue Shield of
Missouri's financial statements included on page F-73 of this document includes
financial data relating to its segments. Blue Cross and Blue Shield of
Missouri's underwritten segment includes, among others, the Federal Employees
Program and the Basic Blue product. Blue Cross and Blue Shield of Missouri's
self-funded segment includes, among others, business contracted with other
regional Blue Cross and Blue Shield plans, the Blue Cross and Blue Shield
Association and a contract with the State of Missouri Health Insurance Pool.
The other segment relates primarily to management of a corporate campus which
includes the corporate headquarters of Blue Cross and Blue Shield of Missouri
and RightCHOICE.
Blue Cross and Blue Shield of Missouri is a primary licensee of the Blue
Cross and Blue Shield Association, the national trade association of Blue Cross
Blue Shield licensees, each of which holds the exclusive right to use the Blue
Cross and/or Blue Shield names and service marks in specific geographic areas.
Each licensee is an independent legal organization and is not responsible for
the obligations of other Blue Cross and Blue Shield Association licensees. The
service area associated with Blue Cross and Blue Shield of Missouri has a
population of approximately 4.0 million and includes four of the five largest
cities in Missouri, but does not include Kansas City. Blue Cross and Blue
Shield of Missouri believes that the widespread and positive recognition of the
Blue Cross and Blue Shield names and service marks will continue to provide a
marketing advantage in its service area. New RightCHOICE does not plan to
change the business of Blue Cross and Blue Shield of Missouri as a result of
the reorganization.
Underwritten Products
Underwritten products include participation in a national account
arrangement between the Blue Cross and Blue Shield Association and the United
States Office of Personnel Management to provide health care benefits to
federal employees and retirees who choose to enroll in the Blue Cross and Blue
Shield Service Benefit Plan, which is often referred to as the Federal
Employees Program. As of December 31, 1999, Blue Cross and Blue Shield of
Missouri provided insurance to approximately 45,000 federal employees,
dependents and retirees in its service area.
Also included in underwritten business is Basic Blue, which is a product
started in 1992 to address the needs of low-income families in Blue Cross and
Blue Shield of Missouri's service area that do not qualify for Medicaid. Basic
Blue has an innovative benefit design that includes an exclusive provider
network and a benefit package geared to preventive care. This product's benefit
design is based upon the Missouri Limited Mandate Health Insurance Act. As of
December 31, 1999 total membership enrolled in Basic Blue was approximately
3,000.
A small amount of membership still exists in the indemnity-based products
called Base Major. Total underwritten membership at December 31, 1999 was
approximately 300. These products are closed to new membership and represent a
minimal amount of total underwritten business.
138
<PAGE>
Self-Funded
Self-funded products consist of Blue Cross and Blue Shield of Missouri's
participation in national account arrangements with other Blue Cross and Blue
Shield plans and a third party administration arrangement with the Missouri
Health Insurance Pool.
Blue Cross and Blue Shield of Missouri participates with other Blue Cross
and Blue Shield plans to provide health care benefits through PPO BlueCard(R)
for members living or traveling within its service area who are employed by
companies headquartered in other plans' service areas. PPO BlueCard(R) utilizes
a standard processing system used by all plans called the Inter-Plan
Teleprocessing Service which allows subscribers to receive care in any
participating plan's service area. Under standard financial arrangements, each
participating plan is paid an administrative fee for providing local processing
services and an access fee for providing access to its provider network by the
plan that has the enrolled membership. As of December 31, 1999, Blue Cross and
Blue Shield of Missouri had in excess of 54,000 subscribers living in its
service area enrolled in its PPO BlueCard(R) product. Blue Cross and Blue
Shield of Missouri anticipates that the unit pricing for administrative fees
and access fees may be reduced in the near future. Blue Cross and Blue Shield
of Missouri also believes that membership in the PPO BlueCard(R) will increase.
As a result of the combination of pricing decreases and membership increases,
Blue Cross and Blue Shield of Missouri expects revenues from PPO BlueCard(R) to
increase.
Participation in large national accounts is also processed on the National
and Special Accounts system, which is a centralized processing system used to
administer health benefit programs by some plans for large national account
arrangements. Under these arrangements Blue Cross and Blue Shield of Missouri
acts as a participating plan providing health benefits within its service area
for subscribers. As with PPO BlueCard(R), Blue Cross and Blue Shield of
Missouri is paid fixed administrative fees, based on membership, for providing
network access, customer service and claims processing. Any underwriting risk
is maintained either by the self-funded group or by the plan controlling the
national contract. As of December 31, 1999, Blue Cross and Blue Shield of
Missouri had approximately 52,000 members living in its service area enrolled
in arrangements processed on the National and Special Accounts system.
Blue Cross and Blue Shield of Missouri also acts as a third-party
administrator and provides access to its provider network to the Missouri
Health Insurance Pool. The Missouri Health Insurance Pool was created by
Missouri state law and is designed to provide health care benefits for people
living in Missouri with high-risk conditions that prevent them from obtaining
other coverage. Total membership as of December 31, 1999 was 552.
Other
Other business consists of commercial real estate owned by subsidiaries of
Blue Cross and Blue Shield of Missouri. Included is a 425,000 square foot
office building fully leased to three tenants, including 343,017 square feet
leased to RightCHOICE as of December 31, 1999. Also included is a 73,000 square
foot office building approximately 95% leased to a variety of tenants, a
parking garage and surface parking lots, all of which are contiguous covering
approximately three and one-half city blocks in central downtown St. Louis,
Missouri.
Properties
As of December 31, 1999, Blue Cross and Blue Shield of Missouri owned or
leased the following facilities that it considers material to its operations:
<TABLE>
<CAPTION>
Type of Facility Location Square Footage Owned or Leased
---------------- -------- -------------- ---------------
<S> <C> <C> <C>
Office Building St. Louis, MO 425,057 Owned
Office Building St. Louis, MO 73,211 Owned
Parking Lot St. Louis, MO Owned
Parking Garage St. Louis, MO Owned
</TABLE>
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<PAGE>
Legal Proceedings
Blue Cross and Blue Shield of Missouri is a party to various material legal
proceedings which are described in Note 10 to its financial statements included
on page F-59 of this document.
In addition, Blue Cross and Blue Shield of Missouri and RightCHOICE are
parties to a lawsuit captioned Dierkes v. Blue Cross and Blue Shield of
Missouri and RightCHOICE Managed Care, Inc. now pending in St. Louis City
Circuit Court. The two named plaintiffs who brought the lawsuit seek to
represent a class consisting of subscribers to Blue Cross and Blue Shield of
Missouri's Medicare supplement policies in the period from July 1, 1992 through
August 10, 1994.
The plaintiffs claim that, during this period, Blue Cross and Blue Shield of
Missouri breached its contracts with members who purchased Medicare supplement
policies by increasing premiums on these policies without the approval of the
Missouri Department of Insurance. The plaintiffs allege that Blue Cross and
Blue Shield of Missouri agreed in these contracts that it would comply with
applicable law and that it did not comply with regulations that required the
Missouri Department of Insurance to approve increases in premiums. The
plaintiffs also allege that Blue Cross and Blue Shield of Missouri made
fraudulent representations about these increases. The plaintiffs claim damages
in excess of $29,000,000, plus prejudgment interest and punitive damages.
The plaintiffs filed this action in August 1995. In July 1997, the circuit
court granted summary judgment in favor of Blue Cross and Blue Shield of
Missouri and RightCHOICE on all counts and dismissed the case. In June 1998,
the Missouri Court of Appeals affirmed the dismissal. However, the plaintiffs
asked the Missouri Supreme Court to review the case, and, in April 1999, the
Missouri Supreme Court found that the trial court had erred in dismissing the
plaintiffs' claims and ordered their claims reinstated. It returned the case to
the circuit court for further proceedings and a possible trial.
On August 30, 2000, the plaintiffs filed a second amended class action
petition expanding upon their breach of contract claims and other theories. In
December 2000, the circuit court is scheduled to conduct a hearing on the
plaintiffs' motion for class certification. The parties are now engaged in
additional discovery. Blue Cross and Blue Shield of Missouri and RightCHOICE
intend to continue to vigorously defend the action. Blue Cross and Blue Shield
of Missouri and RightCHOICE cannot determine the extent or amount of liability,
if any, that they may have to the plaintiffs in this case. An adverse decision
in this lawsuit could subject Blue Cross and Blue Shield of Missouri to
substantial damages.
Management's Discussions and Analysis of Financial Condition and Results of
Operations
The following presents management's discussion and analysis of Blue Cross
and Blue Shield of Missouri's historical carve-out financial condition and
results of operations as of the dates and for the periods indicated. You should
read this discussion in conjunction with the "Selected Financial Data" of Blue
Cross and Blue Shield of Missouri beginning on page 10 of this document and the
financial statements and the accompanying notes, and the other carve-out
financial data about Blue Cross and Blue Shield of Missouri included in this
document. All financial information for Blue Cross and Blue Shield of Missouri
included in this document excludes its ownership of the class B common stock.
This discussion contains forward-looking statements that involve risks and
uncertainties. Actual results could differ significantly from those anticipated
in these forward-looking statements.
Results of operations
Blue Cross and Blue Shield of Missouri offers health care benefit services
along with building management services for the corporate headquarters of Blue
Cross and Blue Shield of Missouri and
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RightCHOICE and other property. Blue Cross and Blue Shield of Missouri
segregates its business into three segments: underwritten products, self-funded
products and other.
The underwritten products include, among others, the Federal Employee
Program for which Blue Cross and Blue Shield of Missouri contracts with the
Blue Cross and Blue Shield Association's Federal Employees Program Director's
Office. Blue Cross and Blue Shield of Missouri is fully reimbursed for all
medical costs for Federal Employee Program members and is paid for
administrative costs within certain limitations. Other underwritten business
includes coverage for low income families and a traditional form of indemnity
product.
Blue Cross and Blue Shield of Missouri's self-funded segment includes, among
others, business contracted with other regional Blue Cross and Blue Shield
Plans, the Blue Cross and Blue Shield Association and a contract with the State
of Missouri Health Insurance Pool. The self-funded segment includes the PPO
BlueCard(R), which is a nationally based Blue Cross and Blue Shield Association
product which targets multi-site employers. Product revenue is generated from
processing claims and receiving discounts for PPO BlueCard(R) members who
utilize Blue Cross and Blue Shield of Missouri's network. The National and
Special Accounts program is also a self-funded program which produces revenue
from claims processing and customer service.
In the other segment, income is generated from management of the 425,000
square foot office building which serves as the corporate headquarters of Blue
Cross and Blue Shield of Missouri and RightCHOICE, garage facilities, parking,
and management of a 73,000 square foot office building.
Premium and Other Revenue
The following table sets forth premium and other revenue (in thousands) by
product group for the six months ended June 30, 2000 and 1999 and the years
ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
For the six
months For the year ended
ended June 30, December 31,
--------------- -------------------------
Product Group 2000 1999 1999 1998 1997
------------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Underwritten:
Federal Employee Program........ $44,495 $39,806 $ 82,153 $ 77,187 $77,473
Other........................... 1,372 1,738 3,240 3,485 3,849
------- ------- -------- -------- -------
Total Premium Revenue......... 45,867 41,544 85,393 80,672 81,322
Self-funded and other fees........ 9,887 8,679 17,856 13,132 11,232
Other............................. 3,923 3,762 7,498 6,617 5,548
------- ------- -------- -------- -------
Total revenues................ $59,677 $53,985 $110,747 $100,421 $98,102
======= ======= ======== ======== =======
</TABLE>
Operating Ratios
The following table sets forth selected operating ratios. The medical loss
ratio reflects health care services expense as a percentage of premium revenue.
All other ratios are shown as a percentage of total revenue:
<TABLE>
<CAPTION>
For the six
months
ended June For the year
30, ended December 31,
------------- --------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Premium revenue......................... 76.9% 76.9% 77.1% 80.3% 82.9%
Self-funded and other fees.............. 16.6% 16.1% 16.1% 13.1% 11.4%
Other................................... 6.5% 7.0% 6.8% 6.6% 5.7%
------ ------ ------ ------ ------
100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
141
<PAGE>
<TABLE>
<CAPTION>
For the six
months For the year
ended June ended December
30, 31,
----------- -----------------
2000 1999 1999 1998 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Operating ratios:
Medical loss ratio.......................... 89.9% 87.2% 85.6% 88.0% 92.0%
----- ----- ----- ----- -----
General and administrative expense ratio.... 22.9% 23.3% 23.0% 26.7% 27.8%
----- ----- ----- ----- -----
Adjusted general and administrative expense
ratio (excludes depreciation and
amortization).............................. 20.5% 20.7% 20.5% 23.9% 25.3%
----- ----- ----- ----- -----
</TABLE>
Membership
The following table sets forth the number of members by product category:
<TABLE>
<CAPTION>
For the six
months ended For the year
June 30, ended December 31,
--------------- -----------------------
Product Group 2000 1999 1999 1998 1997
------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Underwritten:
Federal Employee Program........... 47,699 45,567 44,952 44,930 48,664
Other.............................. 3,022 3,904 3,301 4,515 6,589
------- ------- ------- ------- -------
Total underwritten members....... 50,721 49,471 48,253 49,445 55,253
Self-funded and other members...... 113,589 92,972 106,705 77,437 82,266
------- ------- ------- ------- -------
Total members.................... 164,310 142,443 154,958 126,882 137,519
======= ======= ======= ======= =======
</TABLE>
Comparison of results for the first half of 2000 to the first half of 1999
Revenues
Underwritten
Premium revenue increased $4.3 million to $45.9 million in the first half of
2000 as compared to the first half of 1999. The pricing for indemnity products
is based on anticipated health care costs. Depending on future competition,
acceptance of premium rates and contracted cost reimbursement, there can be no
assurance that Blue Cross and Blue Shield of Missouri will be able to price its
products consistent with health care cost trends.
Federal Employee Program revenue increased $4.7 million in the first half of
2000 compared to the first half of 1999. Included in Federal Employee Program
revenue is reimbursement for administrative costs and claims submitted. A
portion of the increased revenue is due to increased reimbursements for
administrative costs while the majority of the increase is due to an increase
in claims costs of $5.1 million. Further, the increase in membership in this
product was a major factor that contributed to the increase in revenue and
claims. The Federal Employee Program membership increased by 2,132 members from
June 30, 1999 to June 30, 2000. This increase of 4.7% is due, in part, to a
competitor exiting the Federal Employee Program at the end of 1999.
Indemnity insurance includes coverage for low income families and
traditional indemnity insurance. Revenue for these products decreased to $1.4
million in the first half of 2000 from $1.7 million in the first half of 1999
due to a reduction in underwritten members of 882 from June 30, 1999 to June
30, 2000.
142
<PAGE>
Self-funded and other fees
Fees and other income from administrative services only/self-funded and
other network services increased in the first half of 2000 to $9.9 million from
$8.7 million in the first half of 1999. The increase is attributed to an
increase of 23,010 PPO BlueCard(R) members from June 30, 1999 to June 30, 2000.
Management anticipates continued growth in PPO BlueCard(R); however, the growth
in revenues remains dependent on future pricing and competition. National and
Special Accounts membership decreased by 2,380 members over the same timeframe.
In addition, revenue decreased by $1.8 million related to the termination of an
administrative fee contract between Blue Cross and Blue Shield of Missouri and
another unaffiliated Blue Cross and Blue Shield licensee. This contract, under
which Blue Cross and Blue Shield of Missouri provided electronic data
processing services, was terminated in June 1999.
Other income
The main tenant in the corporate headquarters owned by Blue Cross and Blue
Shield of Missouri is its 80% owned subsidiary, RightCHOICE. In addition to
RightCHOICE, Blue Cross and Blue Shield of Missouri has two other tenants in
the building and derives income from these tenants as well as from parking fees
from employees and special events. Rental income was relatively flat at $3.9
million for the first half of 2000 as compared with $3.8 million for the first
half of 1999.
Operating expenses
The overall medical loss ratio increased 2.7% in the first half of 2000 to
89.9% from 87.2% in the first half of 1999. The increase in this ratio is a
result of an increase in the Federal Employee Program medical loss ratio.
Health care services cost increased $5.0 million to $41.2 million in the
first half of 2000 from $36.2 million in the first half of 1999. Health care
services cost reflects the direct costs of care incurred by the Federal
Employee Program members. The increase in health care services costs is
primarily due to an increase in the Federal Employee Program claims expense of
$5.1 million which was driven in part by increased membership, as previously
described.
General and administrative expenses, excluding depreciation and amortization
and excluding the non-recurring charges, increased to $12.2 million for the
first half of 2000 compared to $11.2 million for the first half of 1999. The
increase is primarily due to an overall increase of 21,867 members, or 15.4%,
from June 30, 1999 to June 30, 2000.
Depreciation and amortization expense was flat at $1.4 million in the first
half of 2000 compared to $1.4 million in the first half of 1999.
Operating expenses for the underwritten segment include health care services
costs, commissions, and general and administrative expenses, as well as any
non-recurring charges that are attributable to that segment's operations.
Operating expenses for the self-funded segment include commissions, general and
administrative expenses, and non-recurring charges attributable to the segment.
Operating expenses for the other segment include general and administrative
expenses and non-recurring charges primarily related to Blue Cross and Blue
Shield of Missouri's real estate activities. Operating expenses for the
underwritten segment increased $3.8 million to $46.1 million in the first half
of 2000 from $42.3 million in the first half of 1999. This increase was
primarily due to the $5.0 million increase in health care services cost, as
previously described. Operating expenses for the self-funded segment increased
$0.8 million to $6.7 million in the first half of 2000 from $5.9 million in the
first half of 1999. This increase corresponds to the increase in self-funded
membership,
143
<PAGE>
as previously described. Operating expenses for the other segment were flat at
$2.4 million for the first half of 2000 as compared to $2.5 million for the
first half of 1999.
Operating income
Operating income increased to $4.5 million in the first half of 2000 from
$3.4 million in the first half of 1999. The first half of 1999 includes a non-
recurring charge of $1.8 million while the first half of 2000 includes a non-
recurring charge of $0.3 million. The non-recurring charges for both periods
relate to the settlement and reorganization of Blue Cross and Blue Shield of
Missouri.
The operating loss for the underwritten segment decreased from $0.7 million
in the first half of 1999 to $0.2 million in the first half of 2000. This
improvement is partially due to the decrease in the non-recurring charges
related to the settlement and reorganization, as previously described.
Operating income for the self-funded segment increased from $2.8 million in
the first half of 1999 to $3.2 million in the first half of 2000. The
improvement is also partially due to the decrease in the non-recurring charges.
In addition, operating income improved due to the growth in the BlueCard(R)
membership, as previously described, offset partially by the termination of the
data processing service agreement with another Blue Cross plan, as previously
described.
Operating income for the other segment improved slightly, from $1.3 million
in the first half of 1999 to $1.5 million in the first half of 2000.
Net investment income
Net investment income includes investment income from invested cash and
short term investments. Net investment income increased to $1.5 million in the
first half of 2000 compared to $0.7 million in the first half of 1999. This
increase is related to earnings on comparatively higher cash and short term
investment levels in 2000.
Provision for income taxes
Blue Cross and Blue Shield of Missouri's effective income tax provision for
the first half of 2000 was 39.8% and 42.5% in the first half of 1999. Blue
Cross and Blue Shield of Missouri's effective tax provision rates for the
periods in comparison were affected by expenses associated with the settlement
which includes litigation and non-deductible permanent items.
Net income
Blue Cross and Blue Shield of Missouri's net income for the first half of
2000 was $3.5 million compared to net income of $1.3 million in the first half
of 1999. The first half of 1999 net income includes a $1.1 million charge
related to the cumulative effect of an accounting change related to startup
costs. These expenses include fees for legal, consulting and accounting
services, as well as other fees related to the settlement and reorganization of
Blue Cross and Blue Shield of Missouri. In 1998, Blue Cross and Blue Shield of
Missouri capitalized such costs. Blue Cross and Blue Shield of Missouri adopted
the American Standards Executive Committee Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" effective January 1, 1999 which
resulted in the write-off of $1.3 million of costs ($1.1 million, net of tax)
which had previously been capitalized as an asset in 1998. In addition, Blue
Cross and Blue Shield of Missouri incurred additional expenses for the
settlement and reorganization of $1.8 million in the first half of 1999 and
$0.3 million in the first half of 2000.
144
<PAGE>
Comparison of results for 1999 to the results for 1998
Revenues
Underwritten
Premium revenue increased $4.7 million to $85.4 million in 1999 from $80.7
million in 1998. As described below, premium revenue has been affected by
membership, rate increases, and payments for cost reimbursement and performance
bonus payments. Premium pricing is based on anticipated health care costs.
Depending on future competition, acceptance of premium rates, and contracted
cost reimbursement levels, Blue Cross and Blue Shield of Missouri cannot
provide any assurances that it will be able to price its products consistent
with health care cost trends.
Federal Employee Program revenue increased $5.0 million in 1999. Included in
Federal Employee Program revenue is reimbursement for administrative costs and
claims submitted. Approximately $2.3 million of the increase results from
increased reimbursed claim activity. Additionally, as a result of a focused
effort to recover administrative costs from prior years which had not been
reimbursed by the Federal Employee Program, Blue Cross and Blue Shield of
Missouri received $2.3 million in administrative cost reimbursement in 1999
related to administrative costs incurred in 1994 through 1998. Blue Cross and
Blue Shield of Missouri also received payments of $0.3 million in 1999 related
to the achievement of superior service levels for the Federal Employee Program.
Other underwritten premiums include coverage for low income families and
traditional indemnity insurance. Revenue for these products decreased to $3.2
million in 1999 from $3.5 million in 1998. The decrease is related to a
reduction in underwritten members of 1,214 in 1999. The membership decrease was
offset by rate increases of 35% in 1999.
Self-funded and other fees
Fees and other income from self-funded and other network services increased
in 1999 to $17.9 million from $13.1 million in 1998. The increase is attributed
to an increase of 29,928 PPO BlueCard(R) members in 1999 over 1998, an increase
of 125%. Management anticipates continued growth in PPO BlueCard(R) membership;
however, the growth in revenues remain dependent on future pricing and
competition. Blue Cross and Blue Shield of Missouri believes that membership in
the PPO BlueCard(R) will increase. As a result of the combination of pricing
decreases and membership increases, Blue Cross and Blue Shield of Missouri
expects revenue from PPO BlueCard(R) to increase. National and Special Accounts
membership did not change significantly in 1999. As previously described,
revenue was impacted by the cancellation of an administrative fee contract for
electronic data processing services resulting in a decrease to 1999 revenue of
$1.0 million as compared to 1998.
Other income
The main increase in the rental income to $7.5 million in 1999 from $6.6
million in 1998 is related to an escalation of base rent on the lease with
RightCHOICE.
Operating expenses
The overall medical loss ratio decreased in 1999 to 85.6% from 88.0% in
1998. The reduction in this ratio is related to price increases for
underwritten products other than the Federal Employee Program and additional
revenue for the Federal Employee Program. The increase in Federal Employee
Program revenue relates primarily to cost reimbursements for prior years'
administrative costs and performance bonuses.
145
<PAGE>
Health care services costs reflect the direct costs of care incurred by
Federal Employee Program members. These costs are fully reimbursed by the
Federal Employee Program. Administrative costs of the Federal Employee Program
are reimbursed at allowable cost.
General and administrative expenses, excluding depreciation and amortization
and including the non-recurring charges, increased $2.4 million in 1999 to
$26.4 million from $24.0 million in 1998. This increase can be traced to the
cost of litigation for the settlement agreement, The Missouri Foundation For
Health development, and other legal costs. The impact of the settlement
expenses and reorganization costs was $3.8 million in 1999, exclusive of $1.3
million in reorganization costs related to 1998 charges, which were capitalized
in 1998 and subsequently expensed in 1999 as a cumulative effect adjustment
($1.1 million, net of tax) to reflect adoption of Statement of Position 98-5.
Management anticipates that additional settlement and reorganization expenses
will be incurred until the reorganization is completed. Management believes
that subsequent to the reorganization, general and administrative costs
associated with the settlement will not be material. The settlement expense was
offset by a $1.4 million reduction in other operating expenses.
Depreciation and amortization expense remained constant at $2.8 million in
1999 when compared to 1998. The expense consists mainly of depreciation on the
building and related improvements.
Operating expenses for the underwritten segment increased $4.8 million to
$85.9 million in 1999 from $81.1 million in 1998. This increase was primarily
due to the non-recurring charges related to Blue Cross and Blue Shield of
Missouri's settlement and reorganization costs, as previously described.
Operating expenses for the self-funded segment decreased to $11.7 million in
1999 compared to $12.0 million in 1998. Operating expenses for the other
segment remained relatively flat at $4.7 million in 1999 compared to $4.8
million in 1998.
Operating income
Operating income increased to $8.4 million in 1999 from $2.6 million in 1998
for the reasons described above.
Net investment income
Net investment income increased to $1.9 million in 1999, related to earnings
on comparatively higher cash and short term investment levels. The increase in
cash and short term investments resulted from the sale of property, positive
operating results in 1999, reductions in member receivables, increases in
claims payable and the funding of net related party receivables.
Provision (benefit) for income taxes
Blue Cross and Blue Shield of Missouri's effective income tax provision
(benefit) for 1999 was 41.3% and (34.4)% in 1998. Blue Cross and Blue Shield of
Missouri's effective tax provision (benefit) rates in 1999 and 1998 were
effected by expenses associated with the settlement which includes litigation
in 1999 and non-deductible permanent items in 1998.
Net income (loss)
Blue Cross and Blue Shield of Missouri's net income for 1999 was $5.0
million compared to a net loss of $1.3 million in 1998. The 1999 net income
includes a charge of $1.1 million related to the cumulative effect adjustment
for the accounting change related to startup costs, as previously described.
146
<PAGE>
Comparison of results for 1998 to the results for 1997
Revenues
Underwritten
Premium revenue decreased $0.6 million to $80.7 million in 1998 from $81.3
million in 1997. As described below, premium revenue has been affected by
membership and rate increases. Premium pricing is based on anticipated health
care costs. Depending on future competition and acceptance of premium rates,
Blue Cross and Blue Shield of Missouri cannot provide any assurances that it
will be able to price its products consistent with health care cost trends.
Federal Employee Program revenue decreased slightly by $0.3 million in 1998.
Included as Federal Employee Program revenues is reimbursement for
administrative costs and claims submitted.
Other underwritten premium includes coverage for low income families and
traditional indemnity insurance. Revenue for these products decreased to $3.5
million in 1998 from $3.8 million in 1997. The decrease is related to a
reduction in underwritten members of 2,074 in 1998. The membership decrease was
offset by rate increases of 35% in 1998.
Self-funded and other fees
Fees and other income from self-funded and other network services increased
in 1998 to $13.1 million from $11.2 million in 1997. The increase is due to an
increase of approximately 9,154 members in PPO BlueCard(R) in 1998.
Other income
The main tenant in the corporate headquarters owned by Blue Cross and Blue
Shield of Missouri is its 80% owned subsidiary RightCHOICE. Blue Cross and Blue
Shield of Missouri also leases space to other tenants in the building and
derives income from parking fees from employees and special events. The main
increase in the rental income to $6.6 million in 1998 from $5.5 million in 1997
is related to an increase in the rental rate in the lease with RightCHOICE.
Operating expenses
The overall medical loss ratio decreased to 88.0% from 92.0% in 1997. The
reduction in this ratio is related to price increases for underwritten
products.
Health care services costs reflect the direct costs of care incurred by
Federal Employee Program members and these costs are fully reimbursed by the
Federal Employee Program. Administrative costs of the Federal Employee Program
are reimbursed at allowable cost.
General and administrative expense, excluding depreciation and amortization,
decreased $0.8 million in 1998 from $24.8 to $24.0 million. This decrease is
related to a focused effort to reduce operating costs.
Depreciation and amortization expense increased slightly to $2.8 million in
1998 compared to $2.5 million 1997. The expense consists mainly of depreciation
on building and related improvements.
Operating expenses for the underwritten segment decreased $6.1 million to
$81.1 million in 1998 from $87.2 million in 1997. This decrease is partially
due to a reduction in health care service
147
<PAGE>
costs of $3.8 million in 1998 as compared to 1997. In addition, general and
administrative expenses decreased by $2.3 million in 1998 as compared to 1997.
Both the reduction in health care service costs and general and administrative
costs were partially the result of a reduction of 5,808 underwritten members
from December 31, 1997 to December 31, 1998. Operating expenses for the self-
funded segment increased by $1.4 million to $12.0 million in 1998 from $10.6
million in 1997. Operating expenses for the other segment increased to $4.8
million for 1998 compared to $4.3 million for 1997.
Operating income (loss)
Operating income increased to $2.6 million in 1998 from a $4.0 million loss
in 1997 for the reasons described above.
Net investment income
Net investment income includes investment income in the form of interest
income from cash and short term investments. The decrease in net investment
income in 1998 resulted from a loss on the sale of building units owned by Blue
Cross and Blue Shield of Missouri.
Provision (benefit) for income taxes
Blue Cross and Blue Shield of Missouri's effective income tax (benefit) for
1998 was (34.4)% and (35.0)% in 1997. Blue Cross and Blue Shield of Missouri's
effective tax provision (benefit) rate in 1998 was affected by non-deductible
permanent items.
Net loss
Blue Cross and Blue Shield of Missouri's net loss for 1998 was $1.3 million
compared to a net loss of $2.2 million in 1997.
Liquidity and capital resources
Blue Cross and Blue Shield of Missouri's working capital increased to $36.7
million as of June 30, 2000 from $32.1 million as of December 31, 1999. The
increase is attributed to an increase in cash and investments.
Net cash provided by operating activities was $6.9 million for the first
half of 2000 compared to cash provided by operating activities of $16.9 million
for the first half of 1999. This reduction is attributable to a decrease of
$6.7 million in net payables to related parties during the first half of 2000
as compared to an increase in net payables to related parties of $5.0 million
during the first half of 1999. The net payable to related parties is related to
transactions between Blue Cross and Blue Shield of Missouri and RightCHOICE and
fluctuates based on the timing of operating cash receipts and payments and
intercompany tax settlements, among other things.
Blue Cross and Blue Shield of Missouri's working capital increased in 1999
to $32.1 million from $25.3 million in 1998. The increase is attributed to an
increase in cash and investments.
Net cash provided by operating activities was $29.7 million in 1999 compared
to cash provided by operating activities of $2.5 million in 1998. The factors
influencing this increase include net income of $5.0 million, a reduction in
member receivables of $3.9 million, an increase in medical claims payable of
$4.4 million and an increase of $10.5 million in payables to related parties in
1999. The changes in member receivables and medical claims payable are
primarily related to the Federal
148
<PAGE>
Employee Program product. Timing of claim payments affects the premium and
claims expense for this segment. The change in payables to related parties
results from cash funding from the subsidiaries of Blue Cross and Blue Shield
of Missouri for various liabilities such as income taxes.
As a result of the increase in cash provided by operations in 1999, Blue
Cross and Blue Shield of Missouri invested the cash in its investment
portfolio.
Blue Cross and Blue Shield of Missouri's investment portfolio consists
mainly of fixed income securities. Investment policies are designed to preserve
principal, maximize yield and provide liquidity to meet anticipated
obligations. Blue Cross and Blue Shield of Missouri's investments available for
sale mainly consist of commercial paper with maturity dates in 2000.
Other than the $12.8 million payment for the settlement for The Missouri
Foundation For Health and the transfer and assumption transaction as part of
the reorganization, described in "Pro forma Unaudited Condensed Combined
Financial Data," Blue Cross and Blue Shield of Missouri currently has no
definitive material commitments for future use of its current or expected
levels of available cash resources. Blue Cross and Blue Shield of Missouri
expects to pay annual license fees of approximately $0.1 million related to its
licenses from the Blue Cross and Blue Shield Association to use the Blue Cross
and Blue Shield service marks. However, the amount of the license fees may vary
from year to year based on the aggregate total revenue of Blue Cross and Blue
Shield of Missouri, RightCHOICE, Healthy Alliance Life Insurance Company and
BlueCHOICE as compared to that of all Blue Cross and Blue Shield licensees, the
total revenue of Blue Cross and Blue Shield of Missouri as compared to that of
RightCHOICE, Healthy Alliance Life Insurance Company and BlueCHOICE, as well as
changes adopted by the Blue Cross and Blue Shield Association to its overall
formulas for computing the license fees.
Contingencies
See the description under the same caption in Note 10 of Blue Cross and Blue
Shield of Missouri's financial statements included on page F-59 of this
document and the discussion under the heading "Legal Proceedings" on page 140
of this document.
149
<PAGE>
INFORMATION ABOUT NEW RIGHTCHOICE
General
The Missouri Foundation For Health incorporated New RightCHOICE on March 14,
2000 as a Delaware corporation under the settlement agreement solely to
facilitate the reorganization. Upon completion of the reorganization, New
RightCHOICE will be the surviving company and its business operations and
assets and liabilities initially will include:
. The combined business of RightCHOICE and the insurance and other business
of Blue Cross and Blue Shield of Missouri, and
. The combined assets and liabilities of RightCHOICE and Blue Cross and
Blue Shield of Missouri, except for:
-- approximately $13 million that Blue Cross and Blue Shield of
Missouri and New RightCHOICE will pay to The Missouri Foundation For
Health as part of the settlement, and
-- the shares of class B common stock owned by Blue Cross and Blue
Shield of Missouri, which New RightCHOICE will cancel and the value
of which New RightCHOICE will transfer to The Missouri Foundation
For Health in the form of shares of New RightCHOICE common stock.
The Pro Forma Unaudited Combined Condensed Financial Statements beginning on
page 91 of this document include historical amounts for RightCHOICE, the Blue
Cross and Blue Shield carve-out and New RightCHOICE, as well as adjustments
necessary to reflect the reorganization.
Ownership of New RightCHOICE Common Stock
Before Reorganization
Currently, The Missouri Foundation For Health owns the one outstanding share
of New RightCHOICE common stock. The Foundation will continue to be the sole
shareholder of New RightCHOICE until the merger of RightCHOICE with New
RightCHOICE.
After Reorganization
Following completion of the reorganization, the class A shareholders will
own approximately 20% of the outstanding shares of New RightCHOICE common
stock, and The Missouri Foundation For Health will own approximately 80% of the
outstanding shares of New RightCHOICE common stock. Unlike the class B common
stock, which has ten votes per share, each share of New RightCHOICE common
stock will have one vote per share. Therefore, the public shareholders of New
RightCHOICE will have approximately 20% of the voting power of New RightCHOICE,
and the Foundation will have approximately 80% of the voting power of New
RightCHOICE, although a voting trust will hold at least 95% of the Foundation's
shares of New RightCHOICE common stock until the Foundation sells the shares as
required by the voting trust and divestiture agreement.
Ownership by Management
The following table sets forth (1) historical information as of December 31,
1999 regarding the beneficial ownership of class A common stock by the
directors and certain executive officers of RightCHOICE who will become
directors and executive officers of New RightCHOICE immediately after the
reorganization, and (2) pro forma information regarding the beneficial
ownership of New RightCHOICE common stock by these same persons assuming that
the parties completed the reorganization on January 1, 2000.
150
<PAGE>
Beneficial ownership is determined in accordance with Securities and
Exchange Commission rules that generally attribute beneficial ownership of
securities to persons who possess sole or shared voting power and/or investment
power with respect to those securities and includes, among other things,
securities that an individual has the right to acquire within sixty days.
Unless otherwise indicated, the persons identified in this table have sole
voting and investment power with respect to all shares shown as beneficially
owned by them.
Percentage ownership calculations are based on 3,710,653 shares of class A
common stock outstanding plus 471,390 shares of class A common stock that
individuals may acquire beneficial ownership of under options that are
exercisable or will become exercisable within sixty days.
<TABLE>
<CAPTION>
Post-
Pre-Reorganization Reorganization
------------------ ------------------
Amount and Nature
of Beneficial Amount and Nature
Ownership of of Beneficial
RightCHOICE Ownership of New
class A RightCHOICE
common stock common stock
------------------ ------------------
Name shares % of class shares % of class
---- ------- ---------- ------- ----------
<S> <C> <C> <C> <C>
John A. O'Rourke(/1/).............. 70,332 * 70,332 *
William H.T. Bush(/2/)............. 6,000 * 6,000 *
Earle H. Harbison, Jr.(/3/)........ 6,500 * 6,500 *
Gloria W. White(/4/)............... 4,702 * 4,702 *
Roger B. Porter, Ph.D.(/5/)........ 5,000 * 5,000 *
William J. Schicker(/6/)........... 1,005 * 1,005 *
Sandra A. Van Trease(/7/).......... 61,703 * 61,703 *
Angela F. Braly(/8/)............... 25,902 * 25,902 *
Michael Fulk(/9/).................. 20,359 * 20,359 *
Herbert B. Schneiderman(/10/)...... 55,224 * 55,224 *
Directors and executive officers
as a group(/11/) (21 persons)..... 502,148 12.0% 502,148 2.6%
</TABLE>
--------
*Less than 1%.
(1) Includes 36,117 shares that Mr. O'Rourke may acquire under vested stock
options at December 31, 1999 and 28,215 shares that Mr. O'Rourke may
acquire under stock options that vested on January 1, 2000.
(2) Includes 5,000 shares that Mr. Bush may acquire under vested stock
options.
(3) Includes 5,000 shares that Mr. Harbison, Jr. may acquire under vested
stock options.
(4) Includes 4,667 shares that Ms. White may acquire under vested stock
options.
(5) Includes 5,000 shares that Dr. Porter may acquire under vested stock
options.
(6) A trust holds all of the shares for the benefit of Mr. Schicker.
(7) Includes 39,884 shares that Ms. Van Trease may acquire under vested stock
options at December 31, 1999, 18,154 shares that Ms. Van Trease may
acquire under stock options that vested on January 1, 2000 and 865 shares
Ms. Van Trease beneficially owns through RightCHOICE's 401(k) plan.
(8) Includes 16,000 shares that Ms. Braly may acquire under vested stock
options at December 31, 1999 and 9,902 shares that Ms. Braly may acquire
under stock options that vested on January 1, 2000.
(9) Includes 11,577 shares that Mr. Fulk may acquire under vested stock
options at December 31, 1999 and 8,782 shares that Mr. Fulk may acquire
under stock options that vested on January 1, 2000.
151
<PAGE>
(10) Includes 42,830 shares that Mr. Schneiderman may acquire under vested
stock options at December 31, 1999 and 10,894 shares that Mr. Schneiderman
may acquire under stock options that vested on January 1, 2000. A trust
holds all of the shares for the benefit of Mr. Schneiderman.
(11) Includes 9,079 shares all directors and executive officers as a group
beneficially own through the 401(k) plan and 83,395 shares that Edward J.
Tenholder, who was Executive Vice President and Chief Operating Officer of
Blue Cross and Blue Shield of Missouri and an employee of RightCHOICE,
owns or may acquire under vested stock options.
Ownership by Certain Beneficial Owners
The following table sets forth (1) historical information as of December 31,
1999 regarding the beneficial ownership of class A common stock and class B
common stock by each entity known by the RightCHOICE board of directors to
beneficially own more than 5% of either class of RightCHOICE's common stock,
and (2) pro forma information regarding the beneficial ownership of New
RightCHOICE common stock by each entity known by RightCHOICE's board of
directors to beneficially own more than 5% of New RightCHOICE's common stock
assuming that the parties completed the reorganization on January 1, 2000.
Beneficial ownership is determined in accordance with Securities and
Exchange Commission rules that generally attribute beneficial ownership of
securities to persons who possess sole or shared voting power and/or investment
power with respect to those securities and includes, among other things,
securities that an individual has the right to acquire within sixty days.
Unless otherwise indicated, the entities identified in this table have sole
voting and investment power with respect to all shares shown as beneficially
owned by them. Percentage ownership calculations are based on 3,710,653 shares
of class A common stock outstanding and 14,962,500 shares of class B common
stock outstanding.
<TABLE>
<CAPTION>
Pre-Reorganization Post-Reorganization
---------------------------------------------------------------------------
Amount and Nature of
Amount and Nature of Beneficial Ownership Beneficial Ownership of New
of RightCHOICE common stock RightCHOICE common stock
---------------------------------------------------------------------------
Name and Address class A % of class B % of
of Beneficial Owner common stock class common stock class common stock % of class
------------------- ------------ ---------------------- ------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
The Missouri Foundation
For Health.............. 0 0% 0 0% 14,962,500 80.1%
P.O. Box 726
Jefferson City,
Missouri 65102
Blue Cross and Blue
Shield of Missouri(/1/). 36,740 * 14,962,500 100% 0 0%
1831 Chestnut Street
St. Louis, Missouri
63103-2275
Heartland Advisors,
Inc.(/2/).............. 1,151,700 31.0% 0 0% 1,151,700 6.2%
790 North Milwaukee St.
Milwaukee, Wisconsin
53202
Health Care Services
Corporation(/3/)........ 695,800 18.8% 0 0% 695,800 3.7%
300 Randolph Street
Chicago, Illinois 60601
</TABLE>
152
<PAGE>
<TABLE>
<CAPTION>
Pre-Reorganization Post-Reorganization
-------------------------------- -----------------------------
Amount and Nature of Amount and Nature of
Beneficial Ownership Beneficial Ownership of New
of RightCHOICE common stock RightCHOICE common stock
-------------------------------- -----------------------------
class A class B
Name and Address common % of common % of
of Beneficial Owner stock class stock class common stock % of class
------------------- --------- ----- ---------- ----- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dimensional Fund
Advisors, Inc.(/4/).... 211,700 5.7% 0 0% 211,700 1.1%
1299 Ocean Avenue 11th
Floor
Santa Monica,
California 90401
</TABLE>
--------
*Less than 1%.
(1) According to information contained in a report on Schedule 13G, dated
February 16, 1996, Blue Cross and Blue Shield of Missouri beneficially owns
the shares. Blue Cross and Blue Shield of Missouri may, at its option,
convert each share of class B common stock that it owns into one share of
class A common stock. If Blue Cross and Blue Shield of Missouri converted
all of the shares of class B common stock that it owns into shares of class
A common stock, it would own 14,999,240 shares of class A common stock,
representing 80.3% of the outstanding shares of class A common stock, and
no one would own any shares of class B common stock.
(2) According to information contained in a report on Schedule 13G/A, dated
July 6, 2000, 1,151,700 shares may be deemed beneficially owned by
Heartland Advisors, Inc. by virtue of its investment discretion and in some
cases voting power over client securities, which may be revoked, and
William J. Nasgovitz as a result of his position with and stock ownership
of Heartland Advisors which could be deemed to confer upon him voting
and/or investment power over the shares Heartland Advisors beneficially
owns.
(3) According to information contained in a report on Schedule 13D, dated
October 22, 1999, Health Care Service Corporation, which operates the Blue
Cross and Blue Shield Plans in Illinois and Texas, beneficially owns the
shares.
(4) According to information contained in a report on Schedule 13G, dated
February 4, 2000, four registered investment companies and certain other
investment vehicles for which Dimensional Fund Advisors, Inc. serves as an
investment advisor beneficially own the shares. Dimensional Fund Advisors
furnishes investment advice to these investment companies and serves as
investment manager to certain other investment vehicles including
commingled group trusts. In its role as investment advisor and investment
manager, Dimensional Fund Advisors possesses both voting and investment
power over 211,700 shares of class A common stock as of December 30, 1999.
Dimensional Fund Advisors' investment companies and investment vehicles own
all of the shares, and Dimensional Fund Advisors disclaims beneficial
ownership of those shares.
Directors of New RightCHOICE
Immediately upon completion of the reorganization, New RightCHOICE will have
six directors. The initial directors of New RightCHOICE will be the directors
of RightCHOICE immediately prior to the reorganization. New RightCHOICE expects
that it will add additional persons to the New RightCHOICE board of directors
after the reorganization. The New RightCHOICE board of directors may increase
its size and fill the newly-created vacancies without the approval of the New
RightCHOICE shareholders.
The New RightCHOICE board of directors will be divided into three classes.
Initially, each class will consist of two directors. Thereafter, upon a change
in the number of directors, each class will consist, as nearly as possible, of
one-third of the total number of directors constituting the entire New
RightCHOICE board of directors. Initially, Class I directors will be appointed
for a one-year term
153
<PAGE>
ending in 2001, Class II directors will be appointed for a two-year term
ending in 2002 and Class III directors will be appointed for a three-year term
ending in 2003. Successors to directors whose terms expire will be elected to
three-year terms.
Information about each designee to New RightCHOICE's board of directors is
set forth below:
<TABLE>
<C> <S> <C>
Current Position with RightCHOICE or
Name Blue Cross and Blue Shield of Missouri Age
---- -------------------------------------- ---
William H. T. Bush Director of RightCHOICE 61
Earle H. Harbison, Jr. Director of RightCHOICE 71
John A. O'Rourke Chairman, President and Chief 56
Executive Officer of RightCHOICE, and
President and Chief Executive
Officer of Blue Cross and Blue Shield of
Missouri
Roger B. Porter, Ph.D. Director of RightCHOICE 53
William J. Schicker Director of RightCHOICE 65
Gloria W. White Director of RightCHOICE 65
</TABLE>
William H. T. Bush has served as a director of RightCHOICE since April
1994. Mr. Bush currently serves as Chairman of the RightCHOICE audit
committee, the RightCHOICE finance and investment committee and the
RightCHOICE nominating committee. He served on the Blue Cross and Blue Shield
of Missouri board of directors from 1989 to 1994 and as Secretary of the Blue
Cross and Blue Shield of Missouri board of directors from 1990 to 1994. Mr.
Bush is the Chairman of Bush-O'Donnell & Company, Inc. of St. Louis, an
investment management and financial advisory firm he founded in 1986. Prior to
1986, Mr. Bush served as President and director of The Boatmen's National Bank
of St. Louis. Mr. Bush currently is a director of Mississippi Valley
Bancshares, Inc., Maritz, Inc., D.T. Industries, Inc., the Lord-Abbett Family
of Mutual Funds and Engineered Support Systems, Inc.
Earle H. Harbison, Jr. has served as a director of RightCHOICE since April
1994. Mr. Harbison currently serves as Chairman of the RightCHOICE
compensation committee. Since September 1993, Mr. Harbison has served as
Chairman of Harbison Corporation, a manufacturing company located in St.
Louis. From May 1986 until his retirement in September 1993, he served as
President, Chief Operating Officer and a director of Monsanto Company. Mr.
Harbison is a director of HealthLink, Inc., Angelica Corporation, National
Life Insurance Co., Mutual of America, Washington University, Barnes-Jewish
Hospital, Automobile Club of Missouri and the National Law Center, George
Washington University.
John A. O'Rourke has served as a director of RightCHOICE and as Chairman
and Chief Executive Officer of RightCHOICE since February 1997 and as
President of RightCHOICE since March 1997. Mr. O'Rourke also has served as
President and Chief Executive Officer of Blue Cross and Blue Shield of
Missouri since March 1997. He served as President and Chief Executive Officer
of HealthLink, Inc., now a subsidiary of RightCHOICE, from January 1985 to
February 1997. Prior to joining HealthLink, Mr. O'Rourke was a member of the
Federal Senior Executive Service and served for approximately fifteen years in
the United States Department of Health and Human Services in several
capacities, including Deputy Director of the Office of Health Maintenance
Organizations, Deputy Director of the Office of Health Practice Assessment and
Senior Policy Analyst in the Office of the Surgeon General. Prior to serving
in the Department of Health and Human Services, Mr. O'Rourke was the Director
of the Department of Economic Research for the American Medical Association.
154
<PAGE>
Roger B. Porter, Ph.D. has served as a director of RightCHOICE since April
1994. Dr. Porter currently serves as Chairman of the RightCHOICE business
opportunities committee. Since 1993, Dr. Porter has served as IBM Professor of
Business and Government at the John F. Kennedy School of Government at Harvard
University. From 1989 to 1993, Dr. Porter served as Assistant to the President
of the United States for Economic and Domestic Policy. From 1985 to 1989, Dr.
Porter was Professor of Business and Government at Harvard University and
Faculty Chairman of the Program for Senior Managers in Government. He is a
director of HMO Missouri, Inc., Zions Bancorporation, National Life Insurance
Company, Tenneco Automotive, and PACTIV Corporation.
William J. Schicker has served as a director of RightCHOICE since July 2000.
Mr. Schicker also has served as a director of Blue Cross and Blue Shield of
Missouri since 1994. Mr. Schicker is the owner and president of McMahon Ford
Company, Barreth Chrysler Company, Ford Groves Company, McMahon Lincoln Mercury
and J.D. Byrider, all of which are automobile dealership companies located in
the metropolitan St. Louis area. He is a director of Citizens National Bank and
numerous community organizations including the Boys Club of St. Louis, the
Urban League of Metropolitan St. Louis and the St. Louis Sports Commission.
Gloria W. White has served as a director of RightCHOICE since November 1994.
Mrs. White currently serves as Chair of the RightCHOICE litigation committee.
She served on the Board of Directors of Blue Cross and Blue Shield of Missouri
from 1986 to 1996 and as Chair of the Blue Cross and Blue Shield of Missouri
Board of Directors from August 1994 to January 1996. Mrs. White has been Vice
Chancellor Emerita of Washington University since June 1997 and has served in
various other capacities at Washington University since 1967. She currently
serves as Chair of the American Red Cross North Central Region. Mrs. White is
also a director of HMO Missouri, Inc., Missouri Goodwill Industries, United Way
of Greater St. Louis, the St. Louis Symphony and the St. Louis Art Museum, a
member of the Firstar Private Banking Advisory Committee, Chair of The Sheldon
Foundation Board of Trustees and a member of the Executive Committee of United
Way of Greater St. Louis.
Committees of Board of Directors
New RightCHOICE's bylaws provide for an audit committee, a compensation
committee, and a nominating committee. New RightCHOICE's bylaws also authorize
the New RightCHOICE board of directors to designate additional committees.
Compensation of Board of Directors
New RightCHOICE expects that the directors of New RightCHOICE initially will
receive the same compensation for their services as the directors of
RightCHOICE as described below.
Directors' Fees
In 1999, each director of RightCHOICE who was not an employee of RightCHOICE
or its subsidiaries or of Blue Cross and Blue Shield of Missouri received: (1)
an annual retainer of $13,000, (2) $800 for each meeting attended and (3)
reimbursement of reasonable out-of-pocket expenses incurred in conjunction with
attending board and committee meetings. Each non-employee director also
received $700 for each committee meeting attended, except the committee chair
who received $900 for each committee meeting attended. RightCHOICE also pays
non-employee directors additional fees for attending lengthy meetings.
RightCHOICE did not pay any additional fees to directors in 1999. Directors
serving on the business opportunities committee also received $275 per hour for
any additional efforts expended on committee matters outside of the meetings.
155
<PAGE>
In 2000, RightCHOICE increased its non-employee director compensation so
that it pays each non-employee director: (1) an annual retainer of $26,500, (2)
$1,000 for each board meeting attended and (3) $1,000 for each committee
meeting attended, except the committee chair who receives $1,200 for each
committee meeting attended.
Directors' Stock Option Plan
RightCHOICE has adopted a stock option plan for non-employee directors to
provide non-employee directors with stock options to purchase shares of class A
common stock. The purpose of the plan is to attract and retain qualified
outside directors and to provide additional incentive for these directors to
promote the success of RightCHOICE's business through sharing in the future
growth of the business. The plan provides that only non-employee directors,
currently five individuals, may participate in the plan. New RightCHOICE will
adopt this plan upon completion of the reorganization. New RightCHOICE also
expects that it will consider amendments to this plan and/or may adopt new
stock and stock option plans after the parties complete the reorganization.
Under the plan, RightCHOICE grants each non-employee director an option to
purchase 1,000 shares of class A common stock each year. RightCHOICE grants
each person elected for the first time as a non-employee director an option to
purchase a pro-rated number of shares of class A common stock based upon the
number of months until the next annual grant. RightCHOICE may only issue 60,000
shares of class A common stock under options granted under the plan, subject to
adjustment in the event of various changes in RightCHOICE's capital structure.
A committee designated by the board of directors and composed of directors not
otherwise eligible to participate in the plan administers the directors' stock
option plan. In 1999, John A. O'Rourke was the only member of this committee.
The exercise price for an option is the closing price of the class A common
stock on the New York Stock Exchange on the date of grant. Each option expires
ten years from the date of grant. In the event of a change in control of
RightCHOICE, the committee which administers the option plan has the discretion
to accelerate the vesting of options, require the cash-out of options, adjust
the options to reflect the change in control, or deem the options to be
exercisable for the consideration the optionee would have received had he or
she exercised the options prior to the change in control. The reorganization
will not constitute a change in control under this plan.
Directors' Deferred Compensation Plan
Non-employee directors of RightCHOICE may also elect to participate in a
nonqualified deferred compensation plan. Under the plan, non-employee directors
may make an annual election to defer a portion or all of their directors' fees.
Directors may invest their deferred directors' fees in various mutual funds or
they may purchase shares of class A common stock. New RightCHOICE will assume
the obligations of RightCHOICE under this plan upon completion of the
reorganization.
156
<PAGE>
Executive Officers
New RightCHOICE expects that the current executive officers of RightCHOICE
will continue as executive officers of New RightCHOICE after the reorganization
with the same titles and duties they currently have with RightCHOICE.
Information about each designated executive officer of New RightCHOICE
immediately following the reorganization is set forth below:
<TABLE>
<CAPTION>
Current Position with RightCHOICE and Expected
Name Age Position with New RightCHOICE
---- --- ----------------------------------------------
<C> <C> <S>
John A. O'Rourke 56 Chairman of the Board, President and Chief
Executive
Officer
Sandra A. Van Trease 39 Senior Executive Vice President and Chief
Operating
Officer; Chief Financial Officer
Angela F. Braly 39 Executive Vice President, General Counsel and
Corporate Secretary
Stuart K. Campbell 38 Senior Vice President, Client Services
Michael Fulk 52 Senior Vice President and Chief Marketing
Executive
Herbert B. Schneiderman 54 Senior Vice President, Medical Delivery Systems
John J. Seidenfeld, M.D. 53 Senior Vice President and Corporate Medical
Officer
Connie L. Van Fleet 47 Senior Vice President and Chief Information
Officer
Kathleen M. Zorica 44 Senior Vice President, Business Analysis and
Product
Management
David T. Ott 45 President, Chief Executive Officer and Director
of
HealthLink
Courtney B. Walter 45 Executive Vice President and Chief Financial
Officer
of HealthLink
Robin Theiss 45 Senior Vice President, Strategic Affairs of
HealthLink
</TABLE>
John A. O'Rourke was named Chairman and Chief Executive Officer of
RightCHOICE in February 1997 and President in March 1997. Mr. O'Rourke came to
RightCHOICE from his position as President and Chief Executive Officer of
HealthLink. Mr. O'Rourke was appointed President and Chief Executive Officer of
Healthlink in January 1985. Initially established by a consortium of St. Louis
hospitals, HealthLink became the largest preferred provider organization in
Missouri under Mr. O'Rourke's leadership. Earlier, Mr. O'Rourke was Deputy
Director of the Office of Health Maintenance Organizations in the U.S.
Department of Health and Human Services.
Sandra A. Van Trease was named Senior Executive Vice President, Chief
Operating Officer and Chief Financial Officer of RightCHOICE in December 1998.
She joined RightCHOICE in June 1994, was promoted to Chief Financial Officer in
November 1995 and was also named Chief Operating Officer in October 1997. Prior
to joining RightCHOICE, she was a Senior Manager with Price Waterhouse LLP.
Angela F. Braly was named Executive Vice President, General Counsel and
Corporate Secretary of RightCHOICE in January 1999. Ms. Braly acted as Interim
General Counsel from September 1997 through December 1998 while a member of the
St. Louis law firm of Lewis, Rice & Fingersh, L.C. where she had practiced law
since 1987.
Stuart K. Campbell was named RightCHOICE's Senior Vice President, Client
Services, in August 1997. Mr. Campbell joined RightCHOICE as Chief Internal
Auditor in September 1994 and
157
<PAGE>
was named Corporate Compliance Officer in 1996. Prior to joining RightCHOICE,
Mr. Campbell was a Senior Manager with Price Waterhouse LLP.
Michael Fulk joined RightCHOICE as Senior Vice President and Chief Marketing
Executive in January 1998. Mr. Fulk joined RightCHOICE from United HealthCare,
Birmingham, Alabama, where he was Senior Vice President of Sales and Marketing
from April 1995 until December 1997. Earlier, Mr. Fulk served as the top sales
and marketing executive for United HealthCare's HMO, POS and PPO operations in
Texas, Alabama, Louisiana, Tennessee, Arkansas, Mississippi and the Gulf Coast
region.
Herbert B. Schneiderman joined RightCHOICE as Senior Vice President, Medical
Delivery Systems in July 1995. Mr. Schneiderman came to RightCHOICE after
spending twenty-one years at Saint Louis University Hospital, the last seven as
its Chief Executive Officer.
John J. Seidenfeld, M.D. was named Senior Vice President and Corporate
Medical Officer of RightCHOICE in June 1999. He came to RightCHOICE from CIGNA
Health Care of Texas where he had served as Vice President and Corporate
Medical Director beginning 1996. In 1995, Dr. Seidenfeld was in private
practice as a pulmonary and critical care physician, the Executive Director and
Medical Director at the Solomon Anthony Clinic in San Antonio, a clinical
professor at the University of Texas at San Antonio and a Consultant Medical
Director of Humana Health Plan of Texas.
Connie L. Van Fleet was named Senior Vice President and Chief Information
Officer of RightCHOICE in November 1997. Ms. Van Fleet joined RightCHOICE in
1990 and immediately prior to her current position served as Vice President,
Business Analysis and Development. Prior to joining RightCHOICE, Ms. Van Fleet
was with MetLife Health Care Management Corporation.
Kathleen M. Zorica was named Senior Vice President, Business Analysis and
Product Management of RightCHOICE in July 1999. She joined Blue Cross and Blue
Shield of Missouri in 1977. Ms. Zorica was named Vice President, Product
Management in November 1994 and has been Director, Product Development,
Director, Account Operations and Services, Director, Financial Analysis, and
immediately prior to her current position, Vice President, Business Analysis
and Product Management.
David T. Ott was named President and Chief Executive Officer of HealthLink
in March 1997. Mr. Ott had been Executive Vice President of HealthLink since
July 1990. Mr. Ott joined HealthLink in 1986 as Director of Marketing and later
was promoted to Vice President of Sales and Marketing.
Courtney B. Walter was named Executive Vice President and Chief Financial
Officer of HealthLink in March 1997. Mr. Walter has been with HealthLink since
1993. Prior to joining HealthLink, Mr. Walter worked for Ernst & Young LLP,
MetLife Health Care Management Corporation and Spectrum Emergency Care.
Robin Theiss was named Senior Vice President, Strategic Affairs of
HealthLink in September 1997. Ms. Theiss has been with HealthLink since 1990
and previously held the position of Vice President, Operations. Prior to
joining HealthLink, Ms. Theiss held positions with General American, SANUS
Health Plan and MetLife Healthcare Network.
Executive Compensation and Other Information
Executive Compensation
New RightCHOICE expects that the current executive officers of RightCHOICE
will continue as executive officers of New RightCHOICE after the reorganization
with the same titles and duties they
158
<PAGE>
currently have with RightCHOICE. The following table summarizes for the years
ended December 31, 1999, 1998 and 1997 all of the compensation RightCHOICE paid
to its five most highly compensated executive officers, including its Chief
Executive Officer. The compensation paid by RightCHOICE includes amounts Blue
Cross and Blue Shield of Missouri fully reimbursed to RightCHOICE under an
administrative services agreement.
As a general matter, "salary" includes amounts each named executive
electively deferred under RightCHOICE's 401(k) plan, executive deferred
compensation plan and Section 125 plan. The 401(k) plan enables participants to
voluntarily reduce their salary up to the lesser of 15% of compensation or the
maximum dollar amount allowed under the Internal Revenue Code. RightCHOICE
matches 60% of these contributions up to 5% of a participant's compensation.
The matching contribution, which is reported under the column entitled "All
Other Compensation," vests over a period of years and is fully vested after
five years of service. The deferred compensation plan permits additional
elective deferrals and additional matching contributions and restores benefits
that RightCHOICE cannot otherwise contribute or provide because of limits
imposed by the Internal Revenue Code. RightCHOICE has not granted any stock
appreciation rights.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------- -----------------------------------------
Awards Payouts
--------------------- -------------------
Other Securities
Annual Restricted Under- All Other
Compen- Stock Lying LTIP Compen-
Name and Principal Salary Bonus(/1/) sation Award(s) Options/ Payouts sation(/2/)
Position Year ($) ($) ($) ($) SARs (#) ($) ($)
------------------ ---- -------- ---------- ------- ---------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John A. O'Rourke(/3/)... 1999 $400,000 $284,460 $ 0 $ 0 26,558 $ 0 $145,583
Chairman, President, and 1998 375,000 228,552 0 0 34,080 0 53,784
Chief Executive Officer 1997 322,365 114,309 0 0 24,010 0 583,046(/4/)
Sandra A. Van Trease.... 1999 $300,000 $209,930 $ 0 $ 0 21,246 $ 0 $ 27,384
Senior Executive Vice 1998 258,333 156,195 0 0 20,292 0 19,552
President, Chief 1997 208,750 0 0 0 12,926 0 13,397
Operating Officer and
Chief Financial Officer
Angela F. Braly(/5/).... 1999 $250,000 $177,829 $ 0 $ 0 37,705 $ 0 $ 9,298
Executive Vice
President,
General Counsel and
Corporate Secretary
Michael Fulk(/6/)....... 1999 $217,300 $150,201 $ 0 $ 0 11,615 $ 0 $ 14,595
Senior Vice President 1998 205,000 91,193 30,000 0 24,730 0 8,400
and Chief Marketing
Officer
Herbert B. Schneiderman. 1999 $201,400 $121,514 $ 0 $ 0 9,419 $ 0 $ 13,698
Senior Vice President 1998 190,000 83,028 0 0 11,048 0 13,941
Medical Delivery Systems 1997 190,000 0 0 0 12,215 0 13,892
</TABLE>
--------
(1) The bonus reported in the table for Mr. O'Rourke includes compensation paid
under the Blue Cross and Blue Shield of Missouri Management Incentive Plan
based upon (1) Blue Cross and Blue Shield of Missouri's overall corporate
financial performance as measured by its operating profit/loss excluding
investment income, extraordinary income/expense and taxes on income, and
(2) the attainment of certain individual performance goals. Of the amounts
reported for Mr. O'Rourke, the Blue Cross and Blue Shield of Missouri
Management Incentive Plan accounted for 50% of the amount paid for 1999,
61% of the amount paid for 1998 and 100% of the amount paid for 1997.
RightCHOICE initially paid these amounts, and Blue Cross and Blue Shield of
Missouri later fully reimbursed RightCHOICE. Otherwise, for all other named
executives the bonus consists of compensation paid under the Alliance Blue
Cross Blue Shield Incentive Plan. RightCHOICE pays amounts under the plan
upon the achievement of a pre-
159
<PAGE>
defined annual corporate operational target--net income less extraordinary
charges. RightCHOICE met its pre-defined annual corporate target in 1999 and
1998 but not in 1997 and therefore did not pay a bonus under the plan in
1997.
(2) Includes (1) reimbursed matching contributions that accrued during the year
ended December 31, 1999, 1998 and 1997, respectively, for the accounts of
the named executives under the 401(k) plan and the deferred compensation
plan, (2) the value of term life insurance assigned to the named executives
under split dollar universal life insurance policies owned by RightCHOICE,
(3) earnings on amounts deferred under the deferred compensation plan for
the named executives, and (4) an automobile lease arrangement or car
allowance for the named executives. In each case with respect to Mr.
O'Rourke, Blue Cross and Blue Cross and Blue Shield of Missouri reimburses
RightCHOICE for amounts attributable to Mr. O'Rourke's service to Blue
Cross and Blue Shield of Missouri. Matching contributions that accrued
under the 401(k) plan and the deferred compensation plan for 1999, 1998 and
1997 were $24,407, $17,968 and $6,681, respectively, for Mr. O'Rourke,
$13,686, $9,425 and $4,800, respectively, for Ms. Van Trease, $0 for 1999
for Ms. Braly, $4,800 and $0 for 1999 and 1998 for Mr. Fulk, and $4,800,
$4,800 and $4,800, respectively, for Mr. Schneiderman. The value of the
term life insurance attributable to RightCHOICE (and with respect to Mr.
O'Rourke, to Blue Cross and Blue Shield of Missouri) for 1999, 1998 and
1997 was $5,226, $1,662 and $1,144, respectively, for Mr. O'Rourke, $293,
$198 and $197, respectively, for Ms. Van Trease, $186 for 1999 for Ms.
Braly, $1,395 and $0 for 1999 and 1998 for Mr. Fulk, and $498, $741 and
$692, respectively, for Mr. Schneiderman. Earnings on amounts deferred
under the deferred compensation plan for 1999, 1998 and 1997 were $115,080,
$31,704 and $1,162, respectively, for Mr. O'Rourke, $5,005, $1,529 and $0,
respectively, for Ms. Van Trease, $712 for 1999 for Ms. Braly, $0 and $0
for 1999 and 1998 for Mr. Fulk, and $0, $0 and $0, respectively, for Mr.
Schneiderman. The value of the automobile lease arrangements or car
allowances for 1999, 1998 and 1997 was $870, $2,450 and $2,450,
respectively, for Mr. O'Rourke, $8,400, $8,400 and $8,400, respectively,
for Ms. Van Trease, $8,400 for 1999 for Ms. Braly, $8,400 and $8,400 for
1999 and 1998 for Mr. Fulk, and $8,400, $8,400 and $8,400, respectively,
for Mr. Schneiderman.
(3) The amount of salary reported in the table for 1997 for Mr. O'Rourke
includes $41,532 HealthLink paid to Mr. O'Rourke as salary for that portion
of 1997, January 1-February 18, in which he served as President and Chief
Executive Officer of HealthLink prior to becoming President and Chief
Executive Officer of RightCHOICE. RightCHOICE paid Mr. O'Rourke
approximately 50% of the remaining amount of salary reported in the table
in 1998 and 1997 for serving as Blue Cross and Blue Shield of Missouri's
President and Chief Executive Officer, and Blue Cross and Blue Shield of
Missouri reimbursed RightCHOICE for this amount under an administrative
services agreement.
(4) Included in this amount is a $571,610 retention bonus paid to Mr. O'Rourke
under an employment contract between Mr. O'Rourke, HealthLink and
RightCHOICE. The employment agreement, which the HealthLink board of
directors authorized and directed in connection with the sale of
HealthLink, provided for an escrow bonus arrangement paid over a two-year
term following the sale of HealthLink provided that RightCHOICE still
employed by Mr. O'Rourke. HealthLink created this two-year bonus
arrangement to assure the purchaser of HealthLink (which RightCHOICE
acquired in August 1995) of the continued employment of Mr. O'Rourke and
thereby assure the full value of HealthLink upon its sale.
(5) Ms. Braly joined RightCHOICE on January 1, 1999.
(6) Mr. Fulk joined RightCHOICE on December 29, 1997 and received a signing
bonus of $30,000.
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<PAGE>
Option Grants
New RightCHOICE expects that the current executive officers of RightCHOICE
will continue as executive officers of New RightCHOICE after the reorganization
with the same titles and duties they currently have with RightCHOICE. The
following table sets forth information with respect to each of the RightCHOICE
named executive officers concerning grants of stock options for the year ended
December 31, 1999.
RightCHOICE has not granted any stock appreciation rights. RightCHOICE
granted the options reported in this table on January 1, 1999. In the event of
a change in control of RightCHOICE, the committee which administers the option
plan has the discretion to accelerate the vesting of options, require the cash-
out of options, adjust the options to reflect the change in control, or deem
the options to be exercisable for the consideration which the optionee would
have received had he or she exercised the option prior to the change in
control. The reorganization will not constitute a change in control under this
option plan.
We determined the dollar value of the stock options as of January 1, 1999
using the Black-Scholes option pricing model based on the assumptions that (1)
RightCHOICE granted the options on January 1, 1999, (2) the price for the
shares of class A common stock underlying the options on the grant date was
$11.50 per share, (3) the options are exercisable for ten years from the grant
date, (4) the option exercise price is $11.50 per share, (5) the dividend yield
is 0%, (6) the "risk free" interest rate is 6.45%, the yield on a United States
government zero coupon bond having a ten-year maturity from the grant date, (7)
the price volatilities for the shares of class A common stock underlying the
options is 40.52%, and (8) the options have an expected term of ten years.
Options/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------
Percent of Total
Number of Securities Options/SARs
underlying Granted To Exercise or
options/SARs Granted Employees in Fiscal Base Price Expiration Grant Date
Name (#) Year ($/Sh) Date Present Value
---- -------------------- ------------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
John A. O'Rourke........ 26,558 8.5% $11.50 January 1, 2009 $187,499
Sandra A. Van Trease.... 21,246 6.8% $11.50 January 1, 2009 $149,997
Angela F. Braly(/1/).... 37,705 12.0% $11.50 January 1, 2009 $266,197
Michael Fulk............ 11,615 3.7% $11.50 January 1, 2009 $ 82,002
Herbert B. Schneiderman. 9,419 3.0% $11.50 January 1, 2009 $ 66,498
</TABLE>
--------
(1) Ms. Braly joined RightCHOICE on January 1, 1999 and received options for
20,000 shares at that time.
Option/SAR Exercises and Holdings
New RightCHOICE expects that the current executive officers of RightCHOICE
will continue as executive officers of New RightCHOICE after the reorganization
with the same titles and duties they currently have with RightCHOICE. The
following table sets forth information with respect to each RightCHOICE named
executive officer concerning the exercise of options during 1999 and
unexercised options held as of December 31, 1999.
RightCHOICE has not granted any stock appreciation rights. The last reported
sale price of class A common stock reported on the New York Stock Exchange on
December 31, 1999 was $11.50 per share. In the following table, we calculated
value by determining the difference between $11.50 and the option exercise
price multiplied by the number of shares of class A common stock underlying the
options.
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Aggregated Option/SAR Exercises in Last Fiscal Year
And December 31, 1999 Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs Options/SARs
Shares Value At December 31, 1999 (#) at December 31, 1999 ($)
Acquired on Realized ------------------------- -------------------------
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. O'Rourke........ 0 $ 0 36,117 57,280 $26,049 $44,973
Sandra A. Van Trease.... 0 $ 0 39,884 39,082 $26,349 $29,134
Angela F. Braly......... 0 $ 0 16,000 21,705 $ 0 $ 0
Michael Fulk............ 0 $ 0 11,577 24,768 $22,123 $24,870
Herbert B. Schneiderman. 0 $ 0 42,830 20,855 $18,906 $17,371
</TABLE>
Employment Agreements
RightCHOICE and John A. O'Rourke are parties to an employment agreement
which provides that Mr. O'Rourke will serve as Chairman and Chief Executive
Officer of RightCHOICE until RightCHOICE terminates his employment or until he
resigns. Mr. O'Rourke also serves as President and Chief Executive Officer of
Blue Cross and Blue Shield of Missouri under the agreement. The agreement
provides Mr. O'Rourke with a base salary, eligibility in RightCHOICE's and Blue
Cross and Blue Shield of Missouri's employee benefit plans and other benefits
provided in the same manner and to the same extent as RightCHOICE's and Blue
Cross and Blue Shield of Missouri's other senior executives.
Mr. O'Rourke's employment agreement also provides that he will receive
severance benefits if he is the subject of an involuntary termination for any
reason other than cause, disability or death or if he terminates his employment
for good reason as defined in the agreement. Severance payments equal three
times his annual base salary payable in thirty-six substantially equal monthly
installments plus an amount equal to thirty-six months of premiums generally
paid by RightCHOICE for health, dental, vision and life insurance. Outplacement
services are also provided. Mr. O'Rourke must execute a complete waiver of all
claims against RightCHOICE, except for claims against RightCHOICE to enforce
the agreement, prior to his receipt of any severance benefits. The employment
agreement reduces any severance benefits to the extent necessary to ensure that
these payments, when added to other benefits provided by RightCHOICE, would not
constitute an excess parachute payment under the Internal Revenue Code. The
employment agreement also contains a confidentiality agreement, a covenant not
to compete and a binding arbitration provision and provides for reimbursement
of legal fees and other fees and expenses incurred by Mr. O'Rourke to protect
his benefits under the agreement as well as payments for additional taxes
incurred with respect to the reimbursement of fees and expenses.
As the successor to RightCHOICE, New RightCHOICE will have all of
RightCHOICE's rights and responsibilities under the agreement upon completion
of the reorganization.
Executive Severance Agreements
RightCHOICE has entered into severance agreements with each of its senior
vice presidents and senior executives, including Sandra A. Van Trease, Angela
F. Braly, Michael Fulk and Herbert B. Schneiderman. The executive severance
agreements provide for severance benefits in the event of termination of
employment following a change in control. The reorganization constitutes a
change in control under the severance agreements. Accordingly, an executive
will receive severance benefits (1) if New RightCHOICE terminates the executive
officer's employment within two years after the parties complete the
reorganization or (2) if within two years following the reorganization the
executive officer terminates his or her employment within three months of an
event constituting good reason. The executive severance agreements are
discussed on page 53 of this document.
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As the successor to RightCHOICE, New RightCHOICE will have all of
RightCHOICE's rights and responsibilities under the agreements upon completion
of the reorganization.
Officers' Severance Agreements
RightCHOICE has entered into officer severance agreements with certain of
its officers, including Sandra A. Van Trease, Angela F. Braly, Michael Fulk and
Herbert B. Schneiderman. The agreements provide for severance benefits to those
officers whose employment RightCHOICE involuntarily terminates for reasons
other than cause, death or disability, or who voluntarily terminate their
employment for proper reason, if the executive severance agreement benefits are
not payable.
Under the officer severance agreements, officers will receive a severance
benefit equal to either one year's base pay, payable in twelve monthly
installments, two year's base pay, payable in twenty-four monthly installments,
or three years' base pay, payable in thirty-six monthly installments, depending
upon the specific terms of each officer's agreement. If the officer finds other
employment prior to the payment of the last monthly installment, RightCHOICE
may pay the remaining severance benefit in a lump sum.
In addition, RightCHOICE will provide amounts equal to health, dental and
life insurance premiums for up to twelve months. Outplacement services are also
provided. The severance agreements reduce severance benefits to the extent
necessary to ensure that these payments, when added to other benefits provided
by RightCHOICE, or Blue Cross and Blue Shield of Missouri, if applicable, would
not constitute excess parachute payments under the Internal Revenue Code. Each
officer severance agreement contains a covenant not to compete and a
confidentiality agreement. Officers are required to enter into a complete
waiver of all claims against RightCHOICE prior to their receipt of any benefits
under the agreement. In the event of the death or disability of an officer, the
severance agreements reduce the amounts otherwise payable by any benefits paid
to the officer or his or her representatives under the life insurance program
or long-term disability plan maintained by RightCHOICE.
As the successor to RightCHOICE, New RightCHOICE will have all of
RightCHOICE's rights and responsibilities under the agreements upon completion
of the reorganization.
Pension Plans
Eligible employees of RightCHOICE participate in a qualified defined benefit
pension plan. Employees become vested in the plan after accruing five years of
credited service. The pension plan provides for a normal retirement benefit
payable in the form of a life annuity equal to 1% of final average earnings up
to Social Security-covered compensation plus 1.5% of final average earnings in
excess of Social Security-covered compensation, multiplied by years of credited
service up to thirty. Credited service for this purpose includes service with
other organizations licensed by the Blue Cross and Blue Shield Association, and
the plan offsets its pension benefits by the pension benefits payable by these
other organizations. The plan pays normal retirement benefits once a
participant reaches age 65.
The pension plan provides for subsidized early retirement benefits for
employees who terminate their employment with RightCHOICE after having obtained
age 55 and completion of five or more years of credited service. The plan
increases the subsidies for participants who retire on or after attaining age
62 with twenty years or more of credited service. Employees with twenty or more
years of service who retire between the ages of 55 and 61 may draw an unreduced
benefit if they defer receipt of the payments until age 62. Those employees
with twenty-five or more years of service may draw a benefit reduced by 4% per
year for each year that they draw benefits before age 62. Participants may
elect to receive their pension benefits in the form of a joint and survivor
annuity, a single life annuity, a ten-year certain life annuity or other
optional forms.
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RightCHOICE also maintains a supplemental executive retirement plan for some
of its executives, including the named executives. The supplemental executive
retirement plan provides for an annual retirement benefit equal to 2.5% of
final average earnings, multiplied by years of service up to twenty, offset by
benefits provided under the pension plan and various other qualifying pension
plans and annuities.
The table below shows, based on various levels of final average earnings and
years of credited service, the total estimated maximum annual benefits payable
in the form of a single life annuity to hypothetical participants at normal
retirement age (age 65) under the pension plan as supplemented by the
supplemental executive retirement plan. The amounts listed in the table below
are not subject to any reduction for Social Security benefits but are subject
to offset by any pensions payable under the pension plans of other
organizations licensed by the Blue Cross and Blue Shield Association.
<TABLE>
<CAPTION>
Estimated Annual Benefit for Representative
Final Years of Credited Service
Average -------------------------------------------------------------
Earnings 5 10 15 20 25 30 35
-------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$125,000................ $15,625 $ 31,250 $ 46,875 $ 62,500 $ 62,500 $ 62,500 $ 62,500
$150,000................ $18,750 $ 37,500 $ 56,250 $ 75,000 $ 75,000 $ 75,000 $ 75,000
$175,000................ $21,875 $ 43,750 $ 65,625 $ 87,500 $ 87,500 $ 87,500 $ 87,500
$200,000................ $25,000 $ 50,000 $ 75,000 $100,000 $100,000 $100,000 $100,000
$225,000................ $28,125 $ 56,250 $ 84,375 $112,500 $112,500 $112,500 $112,500
$250,000................ $31,250 $ 62,500 $ 93,750 $125,000 $125,000 $125,000 $125,000
$300,000................ $37,500 $ 75,000 $112,500 $150,000 $150,000 $150,000 $150,000
$400,000................ $50,000 $100,000 $150,000 $200,000 $200,000 $200,000 $200,000
$450,000................ $56,250 $112,500 $168,750 $225,000 $225,000 $225,000 $225,000
$500,000................ $62,500 $125,000 $187,500 $250,000 $250,000 $250,000 $250,000
$550,000................ $68,750 $137,500 $206,250 $275,000 $275,000 $275,000 $275,000
$600,000................ $75,000 $150,000 $225,000 $300,000 $300,000 $300,000 $300,000
</TABLE>
As of December 31, 1999, each of the named executives had the following
years of service recognized under the pension plan and the supplemental
executive retirement plan, respectively: Mr. O'Rourke, 4.5 years and 15 years
(including Mr. O'Rourke's prior service at HealthLink), Ms. Van Trease, 5.5
years and 5.5 years, Ms. Braly, 1 year and 1 year, Mr. Fulk, 2 years and 2
years, and Mr. Schneiderman, 4.5 years and 4.5 years. Mr. O'Rourke and Ms. Van
Trease each have a vested benefit in both the pension plan and the supplemental
executive retirement plan, and Mr. Schneiderman, has a vested benefit in the
supplemental executive retirement plan. Compensation recognized under the
pension plan generally includes a participant's base salary (including any
portion deferred under RightCHOICE's qualified deferred benefit plans and
Section 125 plan), annual bonus compensation and payouts received under
RightCHOICE's long-term incentive plans, subject to maximum limits on
compensation imposed under the Internal Revenue Code. The supplemental
executive retirement plan recognizes the same compensation plus amounts
deferred under the non-qualified deferred compensation plan but without the
maximum limits. RightCHOICE calculates retirement benefits based upon the
average of a participant's five highest consecutive years of compensation out
of the most recent ten years of credited service. Under this formula, the final
average earnings under the supplemental executive retirement plan (before
applying the maximum limits under the Internal Revenue Code) as of December 31,
1999 for each of the named executives who has a vested benefit in the plan are
as follows: John A. O'Rourke, $455,285, Sandra A. Van Trease, $258,429, and
Herbert B. Schneiderman, $224,826, and the final average earnings under the
plan (before applying the maximum limits under the Internal Revenue Code) as of
December 31, 1999 for each of the named executives who does not have a vested
benefit in the plan are as follows: Angela F. Braly, $258,400 and Michael Fulk,
$281,329. The estimated annual benefit for representative years of credited
service can be determined by reference in the table to the level of final
average earnings and the recognized years of service for each of the named
executives.
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As the successor to RightCHOICE, New RightCHOICE will have all of
RightCHOICE's responsibilities under the pension plan and supplemental
executive retirement plan upon completion of the reorganization.
Compensation Committee Interlocks and Insider Participation
RightCHOICE's compensation committee has general responsibility for
recommending to the Board of Directors the compensation and benefits of
RightCHOICE's executive officers. In October 1999, Dr. Evens resigned as a
director of RightCHOICE and as a member of the compensation committee, and Mr.
Bush and Dr. Porter joined the committee. As a result, the members of the
compensation committee were Mr. Harbison, Jr., Chairman, Mrs. White, Mr. Bush
and Dr. Porter. During 1999, no member of the compensation committee was an
officer or employee of RightCHOICE or any of its subsidiaries, and no member of
the compensation committee was formerly an officer of RightCHOICE or any of its
subsidiaries.
New RightCHOICE anticipates that after the reorganization the members of New
RightCHOICE's compensation committee will be Mr. Harbison, Jr., Mrs. White, Mr.
Bush and Dr. Porter. Accordingly, no member of the New RightCHOICE compensation
committee will be an officer or employee of New RightCHOICE or any of its
subsidiaries, and no member of the New RightCHOICE compensation committee was
formerly an officer of New RightCHOICE or any of its subsidiaries.
Certain Relationships and Related Transactions
In connection with the reorganization, New RightCHOICE and The Missouri
Foundation For Health will enter into the voting trust and divestiture
agreement, the registration rights agreement and the indemnification agreement.
We describe these agreements under "Terms of Voting Trust and Divestiture
Agreement" beginning on page 77, "Terms of Registration Rights Agreement"
beginning on page 83 and "Terms of Indemnification Agreement" beginning on page
88. The Foundation initially will own approximately 80% of the outstanding
shares of New RightCHOICE common stock.
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INFORMATION ABOUT THE MISSOURI FOUNDATION FOR HEALTH
The Missouri Foundation For Health is a Missouri non-profit public benefit
corporation. The Foundation is exempt from federal income tax as a social
welfare organization pursuant to Section 501(c)(4) of the Internal Revenue
Code.
The State of Missouri established The Missouri Foundation For Health to
serve the needs of underinsured and uninsured Missourians in Blue Cross and
Blue Shield of Missouri's service area. The Foundation will receive, hold and
ultimately sell the shares of New RightCHOICE common stock that it will receive
in the reorganization and use the proceeds for its nonprofit purposes.
The Missouri Foundation For Health will have no stockholders or members. The
Foundation's business and affairs will be governed by its board of directors.
Currently, its board of directors consists of three members appointed by the
Director of the Missouri Department of Insurance and the Missouri Attorney
General. Immediately following the reorganization, the Foundation's board of
directors will consist of fifteen members. The Governor of the State of
Missouri will appoint ten of these members and the Missouri Attorney General
will appoint the remaining five members. The Governor and the Attorney General
will make these appointments from a slate of thirty-five nominees that a
nominating committee has provided.
The nominating committee consisted of thirteen persons appointed by the
Governor and Attorney General acting jointly in consultation with the American
Association of Retired Persons (Missouri Chapter), the League of Women Voters
of Missouri, the Missouri Association for Social Welfare, the Missouri Consumer
Health Care WATCH Coalition and the Reform Organization of Welfare.
The Foundation's board of directors will be divided into three classes of
five members each. Members of the first class of directors will serve a one-
year term, members of the second class of directors will serve a two-year term
and members of the third class of directors will serve a three-year term.
Thereafter, directors will each serve a three-year term.
After the Governor and the Attorney General appoint the initial board, the
Foundation's board of directors will fill all vacancies on the board from among
persons nominated by a community advisory committee appointed by the Governor
and Attorney General acting jointly in consultation with community
representatives. The initial members of the community advisory committee will
be the members of the nominating committee.
In order to qualify for appointment to The Missouri Foundation For Health's
board of directors, the members of the board must possess the qualifications
listed in the bylaws of the Foundation, one of which is that no director can be
an officer, agent, employee or independent contractor of any governmental
authority.
No officer, director or employee of New RightCHOICE or its affiliates,
predecessors or successors is permitted to serve as an officer, director or
employee of The Missouri Foundation For Health.
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NEW RIGHTCHOICE CERTIFICATE OF INCORPORATION AND BYLAWS
The following is a summary of New RightCHOICE's certificate of incorporation
and bylaws which are Appendices F and G to this document. New RightCHOICE's
certificate of incorporation and bylaws are complex documents that are not
easily summarized. We encourage you to read New RightCHOICE's certificate of
incorporation and bylaws in their entirety.
Introduction
Upon completion of the reorganization, you will become a shareholder of New
RightCHOICE. As a result, your rights as a shareholder will cease to be
governed by RightCHOICE's articles of incorporation and bylaws and instead will
be governed by New RightCHOICE's certificate of incorporation and bylaws.
Authorized Stock
New RightCHOICE is authorized to issue 250,000,000 shares of stock,
consisting of 225,000,000 shares of common stock and 25,000,000 shares of
preferred stock. Upon completion of the reorganization, approximately
18,636,000 shares of common stock and no shares of preferred stock will be
outstanding.
Common Stock
On all matters shareholders will vote on, you will have one vote for each
share of New RightCHOICE common stock you own. In addition, you will receive
dividends and other distributions in cash, stock or property of New RightCHOICE
as declared by the board of directors, subject to the rights of holders of New
RightCHOICE preferred stock, if any. As a New RightCHOICE shareholder, you will
share in the assets of New RightCHOICE that are legally available for
distribution in the event of liquidation or dissolution of New RightCHOICE.
Preferred Stock
Immediately after the reorganization, no shares of preferred stock will be
issued or outstanding. The New RightCHOICE board of directors is authorized to
issue preferred stock and to fix the number of shares and the rights and
restrictions of any series of preferred stock. Depending upon the rights
designated to the preferred stock, an issuance of preferred stock could have an
adverse effect on the owners of common stock by:
. Delaying or preventing a change in control of New RightCHOICE,
. Making removal of the present management of New RightCHOICE more
difficult, or
. Resulting in restrictions upon the payment of dividends and other
distributions to the owners of common stock.
New RightCHOICE does not have any current plans to issue any preferred
stock.
Classified Board
The New RightCHOICE board of directors will be divided into three classes.
Each class will serve for a three-year period and will consist, as nearly as
possible, of one-third of the total number of directors. At each annual meeting
of shareholders, shareholders will elect for a three-year term the successors
to the class of directors whose term expires at that annual meeting.
The interim board of directors consists of three directors, John A.
O'Rourke, Sandra A. Van Trease and Angela F. Braly, all of whom New RightCHOICE
appointed as directors solely to
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facilitate the reorganization. Upon completion of the reorganization, the New
RightCHOICE board of directors will consist of six directors. The initial
directors of New RightCHOICE will be the directors of RightCHOICE immediately
prior to the reorganization. Thereafter, the New RightCHOICE board of directors
will consist of no less than three and no more than twenty-one directors. New
RightCHOICE expects that it will invite additional individuals to join its
board of directors upon completion of the reorganization. The New RightCHOICE
board of directors may increase its size and may fill the newly-created
vacancies without the vote or approval of the New RightCHOICE shareholders.
Qualification of Directors
No one can become a director of New RightCHOICE unless he or she is an
"independent director," or immediately after an individual becomes a director,
at least 80% of the directors would be independent directors. A person will
qualify as an independent director if he or she:
. Is not a "major participant,"
. Is not nominated to be a director by a major participant,
. Has not announced a commitment to a proposal made by a major participant
that has not been approved by a majority of independent directors and a
majority of all directors, and
. Has not been determined by a majority of independent directors and a
majority of all directors to have been subject to any relationship or
arrangement which those directors deem to be likely to interfere with his
or her exercise of independent judgment.
New RightCHOICE's certificate of incorporation defines a "major participant"
as:
. The Missouri Foundation For Health and any other entity which, in the
judgment of a majority of independent directors and a majority of all
directors, succeeds to the Foundation's position,
. A person or entity who owns shares of New RightCHOICE common stock in
excess of the ownership limitations described below,
. A person or entity that has filed proxy materials with the Securities and
Exchange Commission supporting a candidate for election to the board of
directors in opposition to candidates approved by a majority of
independent directors and a majority of all directors,
. A person or entity that has taken actions to become a major participant,
or
. A person or entity that is an affiliate or associate of a major
participant.
If, however, (1) a majority of independent directors and a majority of all
directors approve an acquisition of New RightCHOICE common stock by a third
party, and (2) the acquisition results in a person or entity becoming a major
participant, that person or entity will not be deemed to be a major participant
if the person or entity:
. Makes no other acquisition of New RightCHOICE common stock that the
directors do not approve, and
. Takes no action that would make the person or entity a major participant.
The Missouri Foundation For Health will always be a major participant.
Removal of Directors
A director may be removed only if either:
. Convicted of a felony or
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. Found by a court to be liable for gross negligence or willful misconduct
in connection with a matter of substantial importance to New RightCHOICE,
and, in either case, the holders of 75% or more of the outstanding shares of
New RightCHOICE common stock vote for removal.
Special Meetings of Shareholders
A special meeting of shareholders may be called only by:
. The Chairman of the Board,
. The Chief Executive Officer,
. The President or
. A majority of independent directors and a majority of all directors.
Shareholders may not call a special meeting or act by written consent in
lieu of a meeting.
Indemnification
Directors and Officers
New RightCHOICE must indemnify any director or officer of New RightCHOICE if
he or she is made or threatened to be made a party to any action by reason of
being a director or officer or by reason of being a director or officer and
having served in such capacity for another entity at the request of New
RightCHOICE, against all expenses, judgments, and fines and amounts paid in
settlement incurred by him or her in connection with the action to the fullest
extent permitted by law.
Employees and Agents
New RightCHOICE may indemnify any employee or agent of New RightCHOICE if he
or she is made or threatened to be made a party to any action by reason of
being an employee or agent or by reason of having served for another entity at
the request of New RightCHOICE, against all expenses, judgments, fines and
amounts paid in settlement in connection with such action to the fullest extent
permitted by Delaware law.
Limitation on Liability for Breach of Fiduciary Duty
Directors will not be personally liable to New RightCHOICE or its
shareholders for monetary damages for breach of fiduciary duty, except for
liability which results from the following:
. Breach of loyalty to New RightCHOICE or its shareholders,
. Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. Unlawfully paying dividends, or
. Any transaction from which the director derives any improper personal
benefit.
A director will not breach his or her fiduciary duties by reason of:
. Failure to vote for or against any proposal or cause of action that the
director believes would breach any requirement imposed by the Blue Cross
and Blue Shield Association or could lead to termination of any license
granted by Blue Cross and Blue Shield Association to New RightCHOICE or
any of its subsidiaries or affiliates, or
. The decision to vote in favor of any proposal or cause of action that the
director believes is necessary to prevent a breach of any requirement
imposed by the Blue Cross and Blue Shield
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Association or would prevent termination of any license granted by the
Blue Cross and Blue Shield Association to New RightCHOICE or any of its
subsidiaries or affiliates.
Limitations on Ownership
General
New RightCHOICE's certificate of incorporation contains the following
ownership limitations required by the Blue Cross and Blue Shield Association
for its for-profit licensees. The Blue Cross and Blue Shield Association
imposes these ownership limitations to protect New RightCHOICE's independence
from any single shareholder or group of shareholders. Under these ownership
limitations:
. No institutional investor may beneficially own 10% or more of the
combined voting power of all outstanding New RightCHOICE securities,
. No noninstitutional investor may beneficially own 5% or more of the
combined voting power of all outstanding New RightCHOICE securities, and
. No person or entity may own 20% or more of all outstanding New
RightCHOICE equity securities.
The certificate of incorporation defines "beneficial ownership" to include
securities:
. Which a person or entity has a direct or indirect beneficial ownership
interest,
. Which a person or entity has an option to purchase,
. Which a person or entity has the right to vote,
. With respect to which a person or entity would be required to file a
Schedule 13D or Schedule 13G under the Securities Exchange Act, or
. Which any affiliate or associate would beneficially own under any
agreement, arrangement or understanding.
The beneficial ownership provisions include several exceptions included in
the definition of beneficial ownership in New RightCHOICE's certificate of
incorporation which is Appendix F to this document.
Violation of Limitations on Ownership
Except as described below, if any person or entity beneficially owns New
RightCHOICE securities in excess of the ownership limits:
. The person or entity will not receive any rights to the excess shares,
and
. The excess shares will immediately be deemed to be transferred to a share
escrow agent.
A person or entity's beneficial ownership will not be in excess of the
ownership limits if the person or entity's excess shares do not exceed the
lesser of 1% of the voting power of the capital stock or 1% of the outstanding
stock and the person or entity disposes of or transfers the excess shares
within fifteen days of becoming aware of the ownership of excess shares.
Voting of Excess Shares
The share escrow agent must vote all excess shares that it holds in the
following manner:
. For each nominee to the board of directors nominated by a majority of the
independent directors and a majority of all directors,
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. Against any candidate for the board of directors for whom a majority of
the independent directors and a majority of all directors have not
nominated or selected a competing candidate,
. Unless the action is initiated by or with the consent of the board of
directors:
-- against the removal of any director,
-- against any change to New RightCHOICE's certificate of incorporation
or bylaws,
-- against nominating a candidate to fill a vacancy on the board of
directors,
-- against the holding of a special meeting of shareholders, and
-- against any action that would have the effect of defeating these
voting requirements,
. On any proposal requiring the approval of the board of directors as a
prerequisite to become effective and not provided for above, in the same
proportion as the owners vote all other New RightCHOICE securities on
such proposal, and
. On all other matters, as recommended by the board of directors.
Dividends and Distributions on Excess Shares
The share escrow agent will be entitled to receive all dividends and
distributions on the excess shares that it holds. The share escrow agent will
hold these dividends or distributions until it sells the excess shares as
described below.
An owner of excess shares must repay to New RightCHOICE or the share escrow
agent any dividends or distributions received. In the event of any liquidation,
dissolution or winding up of New RightCHOICE, the share escrow agent will be
entitled to receive its pro rata share of the assets of New RightCHOICE based
upon the number of excess shares that it holds compared to the total number of
securities outstanding.
Sale of Excess Shares
The share escrow agent must sell the excess shares as determined by New
RightCHOICE. It is expected that the sale of the excess shares will require
registration with the Securities and Exchange Commission. Registration is a
time consuming and expensive process. Therefore, the sale of the excess shares
may take a considerable amount of time. Also, as described below, the excess
owner will be responsible for all of the costs and expenses of the sale,
including Securities and Exchange Commission registration costs and expenses.
Excess shares that a party purchases from the escrow agent without violating
the ownership limits will become ordinary outstanding securities of New
RightCHOICE. To the extent permitted by law, neither New RightCHOICE, the share
escrow agent nor anyone else will have any liability to the owner of the excess
shares for any action or inaction taken in good faith when selling the excess
shares.
Proceeds From Sale of Excess Shares
The share escrow agent will distribute the proceeds from the sale of excess
shares and the receipt of excess share dividends in the following manner:
. First, to the share escrow agent for any costs and expenses incurred in
administering the excess shares for which New RightCHOICE has not
reimbursed the share escrow agent,
. Second, to New RightCHOICE for all costs and expenses incurred in
connection with the sale of the excess shares, and
. Finally, the remainder to the owner of the excess shares.
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Exceptions to Ownership Limits
The ownership limits will not apply to:
. The share of New RightCHOICE common stock issued to The Missouri
Foundation For Health upon New RightCHOICE's incorporation,
. The shares of New RightCHOICE common stock that The Missouri Foundation
For Health receives in the reorganization, or
. The shares of New RightCHOICE common stock that The Missouri Foundation
For Health acquires as a result of a stock dividend, stock split,
conversion, or recapitalization on the shares of New RightCHOICE common
stock originally issued to the Foundation in the reorganization.
The ownership limits apply to any shares of New RightCHOICE common stock
that The Missouri Foundation For Health transfers to another person or entity.
Change in Ownership Limits
A majority of the independent directors and a majority of all directors have
the right to change the ownership limits without prior shareholder approval in
order to conform to the terms of the license agreement between New RightCHOICE
and the Blue Cross and Blue Shield Association. In addition, a majority of the
independent directors, a majority of all directors and the holders of 75% or
more of the outstanding shares of common stock may change the ownership limits
without regard to the terms of the license agreement between New RightCHOICE
and the Blue Cross and Blue Shield Association by amending the certificate of
incorporation.
Cumulative Voting
You will not have cumulative voting rights in the election of directors.
Preemptive Rights
You will not have any preemptive or preferential rights to purchase any
other New RightCHOICE securities.
Amendments to Certificate of Incorporation
New RightCHOICE's certificate of incorporation provides that the approval of
(1) a majority of the independent members of the board of directors, (2) a
majority of all directors, and (3) the holders of 75% or more of the
outstanding shares of common stock is required in order to amend various
sections of the certificate of incorporation, including the sections dealing
with:
. The number, qualifications, indemnification and removal of directors,
. The inability of shareholders to act by written consent,
. Special shareholder meetings,
. Limits on a director's liability for breach of fiduciary duty,
. The ownership limitations,
. Amendments to the bylaws,
. The prohibition on cumulative voting, and
. The right to amend the certificate of incorporation.
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Amendments to Bylaws
A majority of the New RightCHOICE board of directors has the power to amend
or replace the bylaws. Only the holders of 75% or more of the New RightCHOICE
common stock may change or alter any provision of the bylaws.
Qualified Candidates
The bylaws provide that shareholders will elect directors by a plurality
vote and that shareholders may only elect "qualified candidates" to the board
of directors. A qualified candidate is an individual nominated by a majority of
the independent directors and a majority of all directors, or timely nominated
by shareholders, and, in either event, who is not disqualified from serving on
the board by being a "non-independent candidate." A non-independent candidate
is a candidate nominated by a majority of the independent directors and a
majority of all directors, or timely nominated by shareholders, but who does
not qualify as an "independent director" under the certificate of
incorporation. Page 168 of this document sets forth the qualifications an
individual must meet in order to qualify as an independent director.
In the event that some, but not all, of the non-independent candidates for
director become eligible for election to the board of directors because seats
are available for non-independent directors, the non-independent candidates
will be treated as qualified candidates until shareholders fill all positions
available for non-independent candidates at the election.
Meetings of Shareholders
With respect to shareholder meetings, the bylaws provide:
. New RightCHOICE will hold meetings of shareholders at its principal
offices unless its board of directors decides otherwise,
. New RightCHOICE will hold the annual meeting of its shareholders on the
second Tuesday in May of each year, unless otherwise provided by the
board of directors or the bylaws, and
. Only the (1) the Chairman of the Board, (2) the Chief Executive Officer,
(3) the President or (4) a majority of the independent members of the
board of directors and a majority of all directors may call a special
meeting of shareholders.
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COMPARISON OF RIGHTS OF SHAREHOLDERS
OF RIGHTCHOICE AND NEW RIGHTCHOICE
Introduction
Upon completion of the reorganization, you will become a shareholder of New
RightCHOICE. As a result, Delaware law and New RightCHOICE's certificate of
incorporation and bylaws, rather than Missouri law and RightCHOICE's articles
of incorporation and bylaws, will govern your rights as a shareholder.
New RightCHOICE's certificate of incorporation and bylaws are materially
different from RightCHOICE's articles of incorporation and bylaws. In addition,
Delaware law is materially different from Missouri law.
Set forth below is a brief comparison between Delaware law and New
RightCHOICE's certificate of incorporation and bylaws, on one hand, and
Missouri law and RightCHOICE's articles of incorporation and bylaws, on the
other hand. New RightCHOICE's certificate of incorporation and bylaws are
Appendices F and G to this document. Copies of RightCHOICE's articles of
incorporation and bylaws are available for inspection at RightCHOICE's main
office, or RightCHOICE will send them to you upon request. We urge you to read
each of these documents carefully for a complete understanding of your rights
as a shareholder.
Authorized Stock
RightCHOICE. RightCHOICE's articles of incorporation authorize 250,000,000
shares of capital stock, consisting of 125,000,000 shares of class A common
stock, 100,000,000 shares of class B common stock and 25,000,000 shares of
preferred stock.
New RightCHOICE. New RightCHOICE's certificate of incorporation authorizes
250,000,000 shares of capital stock, consisting of 225,000,000 shares of common
stock and 25,000,000 shares of preferred stock.
Board of Directors
Number
RightCHOICE. Missouri law provides that a Missouri corporation must have
three or more directors, unless its articles of incorporation provide
otherwise. RightCHOICE's articles of incorporation provide for seven directors,
with the actual number of directors to be fixed by RightCHOICE's bylaws (which
calls for seven to twelve directors). Each director serves for a three-year
term and until his or her successor is duly qualified or until he or she
resigns or is removed. The terms for each of the three classes of directors
will expire in different years, so that shareholders will vote on the
appointment or re-election of a new class of directors at each annual meeting
of shareholders.
New RightCHOICE. Delaware law provides that a Delaware corporation must have
at least one director. New RightCHOICE's certificate of incorporation provides
for no fewer than three and no more than twenty-one directors. The directors
will be divided into three classes as nearly as equal in number as possible.
Except for the initial directors, each director will serve for a three-year
term and until his or her successor is duly qualified or until he or she
resigns or is removed. The terms for each of the three classes of directors
will expire in different years, so that shareholders will vote on the
appointment or re-election of a new class of directors at each annual meeting
of shareholders.
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Vacancies
RightCHOICE. Missouri law provides that a majority of the directors then in
office, although less than a quorum, or the sole remaining director may fill
vacancies on the board of directors. Missouri law also provides that if a
corporation has a classified board of directors, the shareholders do not need
to vote upon a director elected to fill a vacancy or a newly created
directorship until his or her class of directors is presented for election.
New RightCHOICE. Delaware law provides that, unless the corporation's
certificate of incorporation or bylaws provide otherwise, a majority of the
directors then in office although less than a quorum may fill vacancies on the
board of directors. Delaware law also provides that if, at the time of filling
any vacancy, the directors then in office constitute less than a majority of
the board (as constituted immediately prior to the vacancy), the Delaware
Court of Chancery may, at the request of any shareholder owning at least 10%
of the corporation's outstanding shares, order a special election to fill the
vacancy or to replace directors chosen by the board to fill the vacancies.
Election
RightCHOICE. Under Missouri law, in order for a director to be elected, he
or she must receive the vote of a majority of the shares represented in person
or by proxy at a meeting at which a quorum is present, unless cumulative
voting is permitted in which case directors are elected by a plurality of the
votes cast.
New RightCHOICE. Under Delaware law, directors are elected by a plurality
of the votes cast.
Qualifications
RightCHOICE. RightCHOICE's articles of incorporation do not provide any
qualifications for serving as a director, except that a person may not be
nominated for director if he or she has been convicted of a felony and the
conviction is no longer subject to direct appeal.
New RightCHOICE. New RightCHOICE's certificate of incorporation provides
that at least 80% of the directors must be independent directors as described
on page 168 of this document.
Removal
RightCHOICE. Under Missouri law, a majority of the entire board may remove
a director for cause if the director:
. Fails to meet the qualifications for director stated in the corporation's
articles of incorporation or bylaws, or
. Breaches any agreement between the director and the corporation relating
to his or her services as a director or employee of the corporation.
In addition, under Missouri law, a majority of the outstanding shares
entitled to vote at an election of directors may remove any director or the
entire board of directors, with or without cause. However, if shareholders are
entitled to vote cumulatively in the election of directors, shareholders may
not remove a director, unless the entire board is removed, if the number of
votes cast against his or her removal would be sufficient to elect the
director under cumulative voting.
RightCHOICE's articles of incorporation provide that shareholders may
remove a single director or the entire board of directors at any time for:
. Commission of a felony, or
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. Finding by a court of liability for negligence or misconduct in a matter
of substantial importance to RightCHOICE where such adjudication is no
longer subject to direct appeal,
but only upon the vote of a majority of the outstanding shares of common stock.
New RightCHOICE. Under Delaware law, a majority of the outstanding shares
entitled to vote at an election of directors may remove any director or the
entire board of directors with or without cause. However, unless a
corporation's certificate of incorporation provides otherwise, shareholders may
remove a director of a corporation with a classified board of directors only
for cause. In addition, if the corporation has cumulative voting, if less than
the entire board is to be removed, shareholders may not remove a director
without cause if the votes cast against his or her removal would be sufficient
to elect the director under cumulative voting.
New RightCHOICE's certificate of incorporation provides that its
shareholders may remove any director, or the entire board of directors, only
for cause, which is defined as a conviction of a felony or a finding by a court
of liability for gross negligence or willful misconduct in a matter of
substantial importance to New RightCHOICE, and then only upon a vote of 75% or
more of the outstanding shares of common stock entitled to vote at an election
of directors.
Amendment of Charter
General. Missouri law and Delaware law both provide that in order for a
corporation to amend its articles or certificate of incorporation:
. Its board of directors must adopt a resolution setting forth the proposed
amendment and submit it to its shareholders for a vote, and
. A majority of the outstanding shares must approve the resolution.
Missouri law and Delaware law also provide that the holders of the
outstanding shares of stock are entitled to vote as a class on a proposed
amendment, whether or not they are entitled to vote on the amendment by the
articles or certificate of incorporation, if the amendment would:
. Increase or decrease the aggregate number of authorized shares of the
class,
. Increase or decrease the par value of the shares of the class, or
. Adversely affect the special rights of the shares of the class.
If any proposed amendment would adversely affect the rights of one or more
series of any class of stock, but does not affect the entire class, then only
the shares of the series affected by the amendment will be considered a
separate class for the purposes of determining whether there must be a class
vote.
RightCHOICE. RightCHOICE's articles of incorporation provide that the
holders of class A common stock and class B common stock are entitled to vote
separately as classes on any amendment to the articles of incorporation which
alters the rights of their respective classes of stock. The affirmative vote of
a majority of the shares within each class of stock is required for approval of
any proposed amendment that requires a vote by both classes of stock.
New RightCHOICE. New RightCHOICE's certificate of incorporation provides
that amendments to various provisions of the certificate of incorporation
described on page 172 of this document require the approval of:
. A majority of the independent directors and a majority of all directors,
and
. The holders 75% or more of the outstanding shares of common stock
entitled to vote.
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However, this requirement will not apply in the event New RightCHOICE's license
agreements with the Blue Cross and Blue Shield Association terminate.
Furthermore, only the vote of the holders of a majority of the outstanding
shares of New RightCHOICE common stock is required to effect an amendment to
the certificate of incorporation if the purpose of the amendment is to:
. Conform to any change in the terms of the license agreements,
. Conform to any change in the license agreements required or permitted by
the Blue Cross and Blue Shield Association, or
. Approve a proposal of a majority of the independent directors and a
majority of all directors with respect to a proposed acquisition of all
the outstanding capital stock of New RightCHOICE.
Amendments to provisions of the certificate of incorporation other than
those set forth on page 172 of this document require only the vote of the
holders of a majority of the outstanding shares of New RightCHOICE common stock
entitled to vote.
Amendment of Bylaws
RightCHOICE. Missouri law vests the power to amend or repeal the bylaws of a
corporation in the shareholders unless the corporation vests that power in the
board of directors in its articles of incorporation. RightCHOICE's bylaws may
be amended or repealed by the affirmative vote of:
. A majority of the total number of directors which RightCHOICE would have
if it had no vacancies on the board, or
. A majority of the shares of common stock outstanding and entitled to vote
at any meeting of shareholders.
New RightCHOICE. Delaware law provides that the shareholders of a
corporation have the power to amend or repeal bylaws unless the corporation
vests that power in the board of directors in its certificate of incorporation.
New RightCHOICE's bylaws provide that the shareholders may only amend or
replace the bylaws upon the vote of 75% or more of the outstanding shares of
common stock. A majority of the board of directors also may amend various
portions of the bylaws.
Rights Upon Liquidation
In the event of any liquidation, dissolution or winding up of RightCHOICE or
New RightCHOICE, the holders of its common stock would be entitled to receive,
after payment of all debts and liabilities, the remaining assets of the company
available for distribution. However, if either company has issued preferred
stock, the holders of the preferred stock may have priority over the holders of
the common stock in the event of liquidation or dissolution.
Voting Rights
RightCHOICE. On all matters submitted to a vote of the shareholders, holders
of class A common stock are entitled to one vote per share and holders of class
B common stock are entitled to ten votes per share.
New RightCHOICE. All shareholders have one vote per share on all matters
submitted to a vote of the shareholders.
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Preemptive Rights
Neither shareholders of RightCHOICE nor shareholders of New RightCHOICE have
preemptive rights. In general, preemptive rights entitle an existing
shareholder to buy additional shares of any new issuance of stock to preserve
his or her proportionate ownership in the company and prevent possible dilution
of value and control when the corporation issues new shares.
Power to Call Special Shareholder Meetings
RightCHOICE. Missouri law provides that the board of directors or anyone
authorized by the corporation's articles of incorporation or bylaws may call
special shareholder meetings. RightCHOICE's bylaws provide that only the
chairman of the board of directors, the president or a majority of the board of
directors may call special shareholder meetings. RightCHOICE must deliver
notice of a special shareholder meeting to each shareholder not less than ten
days or more than seventy days before the date of the special meeting.
New RightCHOICE. Delaware law provides that the board of directors or anyone
authorized in the corporation's certificate of incorporation or bylaws may call
special shareholder meetings. New RightCHOICE's bylaws provide that only the
chairman of the board of directors, the chief executive officer, the president,
or a majority of independent directors and a majority of all directors may call
special shareholder meetings. New RightCHOICE must deliver notice of a special
shareholder meeting to each shareholder not less than ten days or more than
sixty days before the date of the special meeting.
Quorum
RightCHOICE. The presence, in person or by proxy, of a majority of all the
outstanding shares of common stock, a majority of the outstanding shares of
class A common stock and a majority of the outstanding shares of class B common
stock is required for a quorum. If a quorum is present at a meeting, a decision
of the holders of a majority of the outstanding shares entitled to vote at the
meeting will be a valid act of the shareholders unless a larger vote is
required by Missouri law or the articles of incorporation or bylaws.
Shareholders may take any action required or permitted to be taken by the
shareholders without a meeting if all of the shareholders entitled to vote at
the meeting sign written consents.
New RightCHOICE. The presence, in person or by proxy, of a majority of the
outstanding shares of common stock entitled to vote at a meeting of
shareholders is required for a quorum. If a quorum is present at a meeting, a
decision of the holders of a majority of the outstanding shares entitled to
vote at the meeting will be a valid act of the shareholders unless a larger
vote is required by Delaware law or the certificate of incorporation or bylaws.
Shareholders may not act by written consent.
Shareholder Approval of Certain Business Combinations
RightCHOICE. Missouri law contains both a "five year freeze" statute and a
"control share acquisition" statute. The five year freeze statute generally
prohibits, for a period of five years, a merger or consolidation between a
"resident domestic" Missouri corporation, with shares of its stock registered
under the federal securities laws, and any owner of 20% or more of the
corporation's stock. The control share acquisition statute provides that
"acquiring persons" who hold more than a specified percentage of the stock of a
public company will not possess voting rights for the stock unless voting
rights are approved by both a majority of the voting stock and a majority of
the voting stock, excluding the shares held by the acquiring person or any
officer or director of the company. If a control share acquisition occurs, the
other shareholders of the corporation are granted dissenters'
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rights if the shareholders grant voting rights to the control shares.
RightCHOICE constitutes a resident domestic corporation for purposes of the
five year freeze statute and an issuing public corporation for purposes of the
control share acquisition statute.
New RightCHOICE. Delaware law prohibits a Delaware corporation from engaging
in a merger or other business combination with an "interested stockholder" for
a period of three years after the stockholder becomes an "interested
stockholder" unless various requirements are met. Generally, an interested
stockholder is:
. The owner of 15% or more of the corporation's outstanding voting stock,
including any rights to acquire stock by means of an option or warrant or
upon the exercise of conversion or exchange rights, or
. An affiliate or associate of the corporation and was the owner of 15% or
more of the voting stock of the corporation at any time within the
previous three years.
Delaware defines the term "business combination" broadly to include, among
other things, mergers of the corporation or a subsidiary with or caused by the
interested stockholder and sales or other dispositions to the interested
stockholder, except proportionately with the corporation's other shareholders,
of assets of the corporation or a subsidiary equal to 10% or more of the
aggregate market value of the corporation's consolidated assets or outstanding
stock.
However, the three-year moratorium imposed on business combinations does not
apply if:
. The board of directors approves either the business combination or the
transaction which resulted in the person becoming an interested
stockholder prior to the date the stockholder becomes an interested
stockholder,
. The interested stockholder owns 85% of the corporation's voting stock
upon consummation of the transaction which resulted in the person
becoming an interested stockholder, or
. On or after the date the person becomes an interested stockholder, the
board of directors and two-thirds of the voting stock not owned by the
interested stockholder approve the business combination.
The certificate of incorporation of New RightCHOICE provides that:
. No institutional investor may beneficially own more than 10% of the
voting power of all outstanding New RightCHOICE securities,
. No non-institutional investor may beneficially own 5% of more of the
voting power of all outstanding New RightCHOICE securities, and
. No person or entity may own 20% or more of all outstanding New
RightCHOICE securities. New RightCHOICE has made an exception to these
ownership limitations for The Missouri Foundation For Health.
Indemnification
General. Missouri law and Delaware law both provide that a corporation may
indemnify any director, officer, employee or agent of the corporation, in their
capacity as a director, officer, employee or agent of the corporation, against
expenses or other amounts incurred in connection with any action, suit or
proceeding if that person (1) acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the corporation, and (2)
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. In the case of an action or suit by or
in the right of the corporation, the corporation may not provide
indemnification against judgments and fines, and no person will be indemnified
in connection with any claim, issue or matter he or she has been adjudged to be
liable, for negligence or misconduct in
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Missouri only, in the performance of his or her duty to the corporation unless
the court determines that the person is reasonably entitled to indemnity for
proper expenses.
Missouri law and Delaware law also provide that if a director or an officer
of a corporation has been successful in the defense of a claim, he or she must
be indemnified against expenses, including attorney's fees, incurred in
connection with the claim. Missouri law also provides this indemnification for
employees and agents and provides that a Missouri corporation may provide
additional indemnification if authorized by the corporation's articles of
incorporation or by a shareholder-approved bylaw or agreement. Both Missouri
and Delaware law permit a corporation to purchase and maintain insurance on
behalf of any person against any liability asserted against that person and
incurred by that person in any capacity, or arising out of that person's status
to the corporation, whether or not the corporation would have the power to
indemnify the person against liability under the provisions of state law.
RightCHOICE. RightCHOICE's bylaws provide for indemnification of directors
in substantially the same manner as provided under Missouri law. RightCHOICE
has entered into indemnification agreements with its directors and certain of
its officers, which contractually obligate RightCHOICE to indemnify them to the
extent permitted under applicable law and to provide them with directors' and
officers' liability insurance. New RightCHOICE will assume these
indemnification agreements upon completion of the reorganization.
New RightCHOICE. New RightCHOICE's certificate of incorporation and bylaws
provide for indemnification of directors and officers to the fullest extent
permitted by Delaware law.
Limitation of Liability
RightCHOICE. Missouri law does not expressly address whether a corporation
may prohibit or limit the liability of directors.
New RightCHOICE. As permitted under Delaware law, New RightCHOICE's
certificate of incorporation provides that a director will not be personally
liable to New RightCHOICE or its shareholders for monetary damages for breach
of fiduciary duty as a director, except for liability for:
. Breaches of the director's duty of loyalty to New RightCHOICE or its
stockholders,
. Acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law,
. Unlawful dividends,
. Stock repurchases or redemptions, or
. Transactions from which the director received an improper personal
benefit.
In addition, New RightCHOICE's certificate of incorporation states that a
director will not be deemed to have breached any fiduciary duty or other
obligation owed by failing to vote for, or voting against, any proposal that
the director believes would breach any requirements imposed on New RightCHOICE
by the Blue Cross and Blue Shield Association or that could lead to the
termination of any license granted by the Blue Cross and Blue Shield
Association.
Dividends and Repurchases of Shares
RightCHOICE. Missouri law generally permits corporations to pay dividends
when the net assets of the corporation are not less than its stated capital and
the payment of dividends will not reduce the net assets of the corporation
below its stated capital. Missouri law also provides generally that a
corporation may redeem or repurchase its shares only if the redemption or
repurchase would not impair the corporation's capital.
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New RightCHOICE. Generally, Delaware law permits a corporation to declare
and pay dividends out of statutory surplus or out of net profits for the fiscal
year in which the dividend is declared or for the preceding fiscal year. In
addition, Delaware law generally provides that a corporation may redeem or
repurchase its shares only if the redemption or repurchase would not impair the
corporation's capital.
Shareholder Voting on Mergers or Consolidations
RightCHOICE. Missouri law provides that a plan of merger or consolidation
must be approved by a majority of the corporation's directors and by two-thirds
of the outstanding shares entitled to vote.
New RightCHOICE. Delaware law provides that a plan of merger or
consolidation must be approved by a corporation's board of directors and
requires the vote of a majority of the outstanding shares entitled to vote.
However, unless required by its certificate of incorporation, a vote of the
shareholders of the surviving corporation in a merger is not required if:
. The merger agreement does not amend the certificate of incorporation of
the corporation,
. Each share of stock of the corporation outstanding immediately prior to
the merger will become an outstanding or treasury share of the surviving
corporation after the merger, and
. The surviving corporation will not issue or deliver any shares of its
common stock under the merger.
Various provisions of New RightCHOICE's certificate of incorporation,
discussed below, may have the effect of preventing a merger or acquisition of
New RightCHOICE by a third party that a majority of the independent directors
and a majority of the whole board of directors do not approve in advance.
New RightCHOICE's certificate of incorporation provides for limitations on
the amount of New RightCHOICE securities that any one person or entity may
beneficially own. Specifically, the certificate of incorporation provides that:
. No institutional investor may beneficially own 10% or more of the voting
power of all outstanding New RightCHOICE securities,
. No non-institutional investor may beneficially own 5% or more of the
voting power of all outstanding New RightCHOICE securities, and
. No person or entity may beneficially own 20% or more of the total
outstanding equity of New RightCHOICE.
However, the certificate of incorporation provides that a person or entity
will not be deemed to "beneficially own" securities if that person or entity
has entered into an agreement with New RightCHOICE pursuant to which that
person or entity, or its affiliates or associates, will acquire all the
outstanding stock of New RightCHOICE by means of a merger, consolidation or
stock sale, so long as:
. The agreement is approved by a majority of independent directors and a
majority of all directors,
. The acquiring party is not already in violation of the stock ownership
limitations described above,
. The acquisition is subject to the approval of the shareholders, and
. Neither the acquiring party, nor its affiliates or associates, have
acquired any securities of New RightCHOICE after the execution of the
agreement, other than in accordance with the terms of the agreement.
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The provisions set forth above would allow New RightCHOICE to enter into an
agreement with a third party for the acquisition of all of its stock without
violating the ownership limits applicable to holders of New RightCHOICE common
stock. However, in order to consummate the transaction, the stock ownership
limitations contained in the certificate of incorporation must either be
amended or repealed. The certificate of incorporation generally provides that a
change to the ownership limitations require the vote of the holders of at least
75% of the shares of common stock. However, if a majority of independent
directors and a majority of all directors approve the amendment in connection
with a proposal to acquire all of the outstanding stock of New RightCHOICE,
then the amendment would only require the vote of the holders of at least a
majority of the common stock, or a greater amount as may be required under
Delaware law.
Shareholder Voting on Sale of Substantially All Assets
RightCHOICE. Missouri law provides that approval of the sale of all or
substantially all of the assets of a corporation, if not made in the usual and
regular course of its business, requires the affirmative vote of the holders of
at least two-thirds of the outstanding shares entitled to vote. The sale of all
or substantially all of the assets of a corporation not made in the ordinary
course of business does not require prior approval by the corporation's board
of directors.
New RightCHOICE. Delaware law provides that the sale of all or substantially
all of a corporation's assets requires the approval of the board of directors
and the holders of a majority of the outstanding shares of stock entitled to
vote.
Interested Director Transactions
Under both Missouri and Delaware law, generally, contracts or transactions
between a corporation and its directors, or between a corporation and any other
entity in which one or more of its directors are directors or have a financial
interest, are not void or voidable because of that financial interest or
because that director is present at a meeting of the board which authorizes or
approves the contract or transaction.
The conditions for approval of these interested director transactions under
both Missouri and Delaware law must be accomplished as follows:
. After full disclosure of the material facts, the board of directors or a
committee of directors must approve the contract or transaction by the
vote of a majority of disinterested directors, even though the
disinterested directors are less than a quorum; or
. After full disclosure of the material facts or after acquiring knowledge
of the material facts, the shareholders must specifically approve the
contract or transaction in good faith and by a vote of shareholders
entitled to vote; or
. The contract or transaction is fair to the corporation at the time the
board of directors, a committee of directors, or the shareholders approve
it.
Under both Missouri and Delaware law, interested directors may be counted in
determining the presence of a quorum at a meeting of the board of directors or
a committee of directors which authorizes the contract or transaction.
Dissenters' and Appraisal Rights
RightCHOICE. Under Missouri law, a shareholder is entitled to receive
payment for the fair value of his or her shares if the shareholder dissents
from a sale or exchange of substantially all of the property and assets of the
corporation or a merger or consolidation involving the corporation. A
shareholder also is entitled to receive payment for the fair value of his or
her shares if the
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shareholder dissents from according voting rights to control shares in a
control share acquisition.
New RightCHOICE. Under Delaware law, generally, a shareholder may be
entitled to dissenters' or appraisal rights under which a shareholder may
receive cash in the amount of the fair market value of his or her shares in
lieu of the consideration he or she would otherwise receive in a particular
transaction. Under Delaware law, appraisal rights are not available:
. With respect to the sale, lease or exchange of all or substantially all
of the assets of a corporation,
. With respect to a merger or consolidation by a corporation whose shares
are either listed on a national securities exchange, qualified for
trading on The Nasdaq Stock Market's National Market or held of record by
more than 2,000 holders if the shareholders receive only shares of the
surviving corporation or shares of any other corporation meeting the
requirements of this item, or
. To shareholders of a corporation surviving a merger if (a) no vote of the
shareholders of the surviving corporation is required to approve the
merger because the merger agreement does not amend the existing
certificate of incorporation, (b) each share of the surviving corporation
outstanding prior to the merger is an identical outstanding or treasury
share after the merger, and (c) the number of shares to be issued in the
merger does not exceed 20% of the shares of the surviving corporation
outstanding immediately prior to the merger.
Dissolution
RightCHOICE. Under Missouri law, a corporation may elect to wind up and
dissolve upon the vote of two-thirds or more of the voting power of the
corporation. In addition, under Missouri law, any corporation that has not
issued any shares or has not commenced business may elect by majority approval
of the incorporators or the initial board of directors to wind up and dissolve.
New RightCHOICE. Under Delaware law, a dissolution must be approved by the
board of directors and by a majority of the corporation's outstanding voting
stock or, if no action of the directors is taken, by all of the shareholders
entitled to vote.
LEGAL MATTERS
Lewis, Rice & Fingersh, L.C., St. Louis, Missouri, will pass upon the
validity of the New RightCHOICE common stock that New RightCHOICE will issue in
the reorganization. PricewaterhouseCoopers LLP will render opinions with
respect to material federal income tax consequences as described in their
opinion.
EXPERTS
We have included the financial statements of RightCHOICE and Blue Cross and
Blue Shield of Missouri carve-out as of December 31, 1999 and 1998 and for each
of the three years in the period ended December 31, 1999 and the financial
statement of New RightCHOICE as of March 14, 2000 in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
such firm as experts in auditing and accounting.
183
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
RightCHOICE files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy, upon the payment of fees prescribed by the Securities and Exchange
Commission, any document that RightCHOICE files with the Securities and
Exchange Commission at its public reference rooms in Washington, D.C., 450
Fifth Street, N.W. 20549, New York, New York, 7 World Trade Center, Suite 1300,
10048, and Chicago, Illinois, 500 West Madison Street, Suite 1400, 60661. You
may call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the public reference rooms. RightCHOICE's filings also are
available to the public on the internet through the Securities and Exchange
Commission's EDGAR database which may be accessed at the Securities and
Exchange Commission's web site at http://www.sec.gov. The class A common stock
is traded on the New York Stock Exchange, and certain reports, proxy statements
and other information is also available for inspection and copying at
prescribed rates at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
As permitted by Securities and Exchange Commission rules, this proxy
statement/prospectus does not contain all the information contained in the
registration statement and accompanying exhibits and schedules filed by New
RightCHOICE with the Securities and Exchange Commission. You may refer to the
registration statement, the exhibits and schedules for more information about
the reorganization. The registration statement, exhibits and schedules are
available at the Securities and Exchange Commission's public reference rooms or
through its EDGAR database on the internet.
You should rely only on the information contained in this document to vote
your shares at the special meeting. We have not authorized anyone to provide
any information that is different from what this document contains. This
document is dated October 4, 2000. You should not assume that the information
contained in this document is accurate as of any date other than that date, and
neither the mailing of this document nor the issuance of New RightCHOICE common
stock in the reorganization should create any implication to the contrary.
184
<PAGE>
INDEX TO FINANCIAL STATEMENTS
RIGHTCHOICE MANAGED CARE, INC. (RIGHTCHOICE)
<TABLE>
<S> <C>
Consolidated Balance Sheets, June 30, 2000, December 31, 1999 and
December 31, 1998...................................................... F-2
Consolidated Statements of Income for the six months ended June 30, 2000
and 1999 and for the years ended December 31, 1999, 1998 and 1997...... F-3
Consolidated Statements of Changes in Shareholders' Equity for the six
months ended June 30, 2000 and 1999 and for the years ended December
31, 1999, 1998 and 1997................................................ F-4
Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and 1999 and for the years ended December 31, 1999, 1998 and 1997. F-5
Notes to Consolidated Financial Statements.............................. F-7
Report of Independent Accountants....................................... F-42
Financial Statement Schedule-Condensed Financial Information............ F-43
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
Consolidated Balance Sheets, June 30, 2000, December 31, 1999 and
December 31, 1998...................................................... F-46
Consolidated Statements of Income for the six months ended June 30, 2000
and 1999 and for the years ended December 31, 1999, 1998 and 1997...... F-47
Consolidated Statements of Changes in Net Assets Representing Reserve
for Protection of Members for the six months ended June 30, 2000 and
1999 and for the years ended December 31, 1999, 1998 and 1997.......... F-48
Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and 1999 and for the years ended December 31, 1999, 1998 and 1997. F-49
Notes to Consolidated Financial Statements.............................. F-50
Report of Independent Accountants....................................... F-76
Financial Statement Schedule-Condensed Financial Information............ F-77
Report of Independent Accountants....................................... F-79
RIGHTCHOICE MANAGED CARE, INC. (NEW RIGHTCHOICE)
Balance Sheet, June 30, 2000 and March 14, 2000......................... F-80
Note to Balance Sheet................................................... F-81
Report of Independent Accountants....................................... F-82
</TABLE>
F-1
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1998
ASSETS (unaudited)
------ ----------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 43,147 $ 44,400 $ 39,409
Investments available for sale, at market value... 215,002 201,926 208,281
Receivables from members.......................... 86,912 78,947 68,024
Receivables from related parties.................. 17,403 28,764 18,294
Deferred income taxes............................. 8,622 8,629 4,798
Other assets...................................... 18,781 17,981 19,818
-------- -------- --------
Total current assets.......................... 389,867 380,647 358,624
Property and equipment, net......................... 50,528 55,470 58,234
Deferred income taxes............................... 10,300 9,791 11,583
Investments in affiliates........................... 5,872 5,905 5,729
Goodwill and intangible assets, net................. 67,320 71,400 74,508
-------- -------- --------
Total assets.................................. $523,887 $523,213 $508,678
======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Medical claims payable............................ $116,246 $124,428 $109,986
Unearned premiums................................. 66,422 62,824 56,407
Accounts payable and accrued expenses............. 60,604 59,476 64,754
Current portion of long-term debt................. 8,000 8,000 10,000
Payables to related parties....................... 22,390 27,009 26,194
Reserve for loss contract......................... 4,629 7,259 9,052
Obligations for employee benefits................. 1,608 1,577 2,954
Income taxes payable.............................. 13,428 12,965 10,485
Obligations under capital leases.................. 3,284 4,071 4,254
-------- -------- --------
Total current liabilities..................... 296,611 307,609 294,086
Reserve for loss contract........................... 7,259
Long-term debt...................................... 22,063 26,063 33,063
Obligations for employee benefits................... 27,338 26,819 24,338
Obligations under capital leases.................... 4,206 5,179 4,058
-------- -------- --------
Total liabilities............................. 350,218 365,670 362,804
-------- -------- --------
Shareholders' equity:
Preferred stock, $0.01 par, 25,000,000 shares
authorized, no shares issued and outstanding.....
Common stock:
Class A, $0.01 par, 125,000,000 shares
authorized, 3,737,500 shares issued, 3,710,866,
3,710,653 and 3,710,426 shares outstanding,
respectively................................... 37 37 37
Class B, convertible, $0.01 par, 100,000,000
shares authorized, 14,962,500 shares issued and
outstanding.................................... 150 150 150
Additional paid-in capital........................ 132,634 132,634 132,635
Retained earnings................................. 45,495 29,529 12,313
Treasury stock, 26,634, 26,847 and 27,074 class A
shares, respectively, at cost.................... (377) (380) (383)
Accumulated other comprehensive (loss) income..... (4,270) (4,427) 1,122
-------- -------- --------
Total shareholders' equity.................... 173,669 157,543 145,874
-------- -------- --------
Total liabilities and shareholders' equity.... $523,887 $523,213 $508,678
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
For the six months For the year ended
ended June 30, December 31,
2000 1999 1999 1998 1997
(unaudited) (unaudited)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Premium............... $ 404,210 $ 357,492 $ 732,151 $ 694,487 $ 654,267
Fees and other income. 48,376 41,732 84,761 73,025 65,144
----------- ----------- ----------- ----------- -----------
Total revenues...... 452,586 399,224 816,912 767,512 719,411
----------- ----------- ----------- ----------- -----------
Operating expenses:
Health care services.. 328,411 293,985 601,532 579,827 555,126
Commissions........... 17,828 15,367 32,462 31,394 29,302
General and
administrative
(excludes
depreciation and
amortization and
excludes net
intercompany charges
of $6,766, $6,254,
$11,728, $11,231 and
$8,356, respectively,
allocated to Blue
Cross and Blue Shield
of Missouri)......... 77,991 72,340 146,036 140,304 140,064
Depreciation and
amortization......... 8,792 8,383 17,215 19,334 23,108
Charge for loss
reserves............. 29,510
Other non-recurring
charges.............. 900 3,301
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 433,022 390,075 797,245 771,759 780,411
----------- ----------- ----------- ----------- -----------
Operating income (loss). 19,564 9,149 19,667 (4,247) (61,000)
----------- ----------- ----------- ----------- -----------
Investment income:
Interest and
dividends............ 6,904 6,711 13,367 14,737 15,916
Realized gains
(losses), net........ 1,065 (449) (516) 3,932 17,268
----------- ----------- ----------- ----------- -----------
Total investment
income, net........ 7,969 6,262 12,851 18,669 33,184
----------- ----------- ----------- ----------- -----------
Other:
Interest expense...... (1,978) (2,009) (4,344) (4,539) (4,681)
Other income
(expense), net....... 948 556 219 (379) (1,058)
----------- ----------- ----------- ----------- -----------
Total other, net.... (1,030) (1,453) (4,125) (4,918) (5,739)
----------- ----------- ----------- ----------- -----------
Income (loss) before
provision (benefit) for
income taxes........... 26,503 13,958 28,393 9,504 (33,555)
Provision (benefit) for
income taxes........... 10,537 5,374 11,177 3,844 (9,521)
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 15,966 $ 8,584 $ 17,216 $ 5,660 $ (24,034)
=========== =========== =========== =========== ===========
Weighted average common
shares outstanding..... 18,673,000 18,673,000 18,673,000 18,672,100 18,672,600
----------- ----------- ----------- ----------- -----------
Basic earnings (loss)
per share.............. $ 0.86 $ 0.46 $ 0.92 $ 0.30 $ (1.29)
=========== =========== =========== =========== ===========
Diluted earnings (loss)
per share.............. $ 0.84 $ 0.46 $ 0.92 $ 0.30 $ (1.29)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
<TABLE>
<CAPTION>
Common
Stock Accumulated
----------- Additional Other
Class Class Paid In Retained Treasury Comprehensive
A B Capital Earnings Stock Income (Loss) Total
----- ----- ---------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $37 $150 $132,640 $30,687 $(326) $ 9,766 $172,954
Comprehensive loss:
Net loss.............. (24,034) (24,034)
Change in unrealized
appreciation on
available-for-sale
securities, net of
income tax benefit of
$4,386............... (7,977) (7,977)
--------
Comprehensive loss...... (32,011)
Purchase of 5,400 shares
of class A common
stock, at cost......... (78) (78)
Balance at December 31,
1997................... 37 150 132,640 6,653 (404) 1,789 140,865
=== ==== ======== ======= ===== ======= ========
Comprehensive income:
Net income............ 5,660 5,660
Change in unrealized
appreciation on
available-for-sale
securities, net of
income tax benefit of
$147................. (297) (297)
Minimum pension
liability adjustment,
net of income tax
benefit of $199...... (370) (370)
--------
Comprehensive income.... 4,993
1,426 shares issued
under the company's
stock option plan...... (5) 21 16
Balance at December 31,
1998................... 37 150 132,635 12,313 (383) 1,122 145,874
=== ==== ======== ======= ===== ======= ========
Comprehensive income
(unaudited):
Net income............ 8,584 8,584
Change in unrealized
appreciation on
available-for-sale
securities, net of
income tax benefit of
$2,188............... (3,872) (3,872)
--------
Comprehensive income.... 4,712
Balance at June 30, 1999
(unaudited)............ 37 150 132,635 20,897 (383) (2,750) 150,586
=== ==== ======== ======= ===== ======= ========
Comprehensive income
(unaudited):
Net income............ 8,632 8,632
Change in unrealized
depreciation on
available for-sale
securities, net of
income tax benefit of
$1,010............... (1,752) (1,752)
Minimum pension
liability adjustment,
net of income tax
provision of $40..... 75 75
--------
Comprehensive income.... 6,955
227 shares issued under
the company's stock
option plan............ (1) 3 2
Balance at December 31,
1999................... 37 150 132,634 29,529 (380) (4,427) 157,543
=== ==== ======== ======= ===== ======= ========
Comprehensive income
(unaudited):
Net income............ 15,966 15,966
Change in unrealized
depreciation on
available-for-sale
securities, net of
income tax expense of
$130................. 157 157
--------
Comprehensive income.... 16,123
213 shares issued
pursuant to the
company's deferred
compensation program
for directors.......... 3 3
Balance at June 30, 2000
(unaudited)............ $37 $150 $132,634 $45,495 $(377) $(4,270) $173,669
=== ==== ======== ======= ===== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the six months ended For the year ended December
June 30, 31,
--------------------------- -------------------------------
2000 1999 1999 1998 1997
(unaudited) (unaudited)
------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $ 15,966 $ 8,584 $ 17,216 $ 5,660 $ (24,034)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
(Benefit) provision
for deferred income
taxes................ (631) (771) 1,118 1,697 (6,507)
Depreciation and
amortization......... 8,792 8,383 17,215 19,334 23,108
(Gain) loss on sale of
property and
equipment............ (655) (231) 514 53 (44)
Distributions net of
undistributed
earnings from
unconsolidated
affiliates........... 33 142 (176) 48 916
(Gain) loss on sale of
investments.......... (1,065) 449 516 (3,932) (17,268)
Accretion of discounts
and amortization of
premiums, net........ 81 291 400 612 6
(Increase) decrease in
certain assets, net of
effects from investment
in affiliates:
Receivables from
members.............. (7,965) (6,277) (10,923) (8,005) (5,182)
Receivables from
related parties...... 11,361 (2,875) (10,470) (2,164) 943
Other assets.......... 1,859 848 2,232 (4,556) (2,859)
(Decrease) increase in
certain liabilities,
net of effects from
investment in
affiliates:
Medical claims
payable.............. (8,182) (2,698) 14,442 (2,353) 506
Unearned premiums..... 3,598 437 6,417 (1,249) 4,957
Accounts payable and
accrued expenses..... 1,128 (2,161) (5,163) 8,293 (13,065)
Payables to related
parties.............. (4,619) (2,226) 815 5,981 3,064
Reserve for loss
contract............. (2,630) (4,526) (9,052) (9,052) 25,363
Obligations for
employee benefits.... 550 1,141 1,104 2,217 (33)
Income taxes payable.. 463 584 2,480 (1,566) (755)
----------- ------------ --------- --------- ---------
Net cash provided by
(used in) operating
activities............. 18,084 (906) 28,685 11,018 (10,884)
----------- ------------ --------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands)
<TABLE>
<CAPTION>
For the six months ended For the year ended December
June 30, 31,
--------------------------- -------------------------------
2000 1999 1999 1998 1997
(unaudited) (unaudited)
------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from
investing activities:
Proceeds from matured
investments:
Fixed maturities.... 4,635 3,400 10,489 20,359 3,975
Proceeds from
investments sold:
Fixed maturities.... 23,189 120,910 157,505 273,591 311,599
Equity securities... 21,303 521 521 40,734
Other............... 513 8 101 4,482 32,469
Investments purchased:
Fixed maturities.... (35,201) (111,985) (161,665) (282,400) (340,366)
Equity securities... (26,046) (5,000) (10,034) (548) (230)
Other............... (230) (231) (489) (796) (2,039)
Investment in other
affiliates, net of
cash acquired........ 24
Sale and redemption of
affiliates........... 3,444
Proceeds from property
and equipment sold... 3,598 11 24 2,051 561
Property and equipment
purchased............ (4,517) (3,154) (6,598) (12,496) (18,544)
----------- ------------ --------- --------- ---------
Net cash (used in)
provided by investing
activities............. (12,756) 4,480 (10,146) 7,687 28,183
----------- ------------ --------- --------- ---------
Cash flows from
financing activities:
Issuance (purchase) of
class A treasury
stock................ 3 2 16 (78)
Payments of long-term
debt................. (4,000) (5,000) (9,000) (3,937) (15,000)
Payments of capital
lease obligations.... (2,584) (2,135) (4,550) (5,247) (5,767)
----------- ------------ --------- --------- ---------
Net cash used in
financing activities... (6,581) (7,135) (13,548) (9,168) (20,845)
----------- ------------ --------- --------- ---------
Net (decrease) increase
in cash and cash
equivalents............ (1,253) (3,561) 4,991 9,537 (3,546)
Cash and cash
equivalents at
beginning of period.... 44,400 39,409 39,409 29,872 33,418
----------- ------------ --------- --------- ---------
Cash and cash
equivalents at end of
period................. $ 43,147 $ 35,848 $ 44,400 $ 39,409 $ 29,872
=========== ============ ========= ========= =========
Supplemental disclosure
of cash information:
Interest paid......... $ 1,970 $ 2,000 $ 4,344 $ 4,687 $ 5,036
Income taxes paid
(refund received),
net.................. 10,706 5,560 7,579 712 (2,262)
Supplemental schedule of
noncash investing and
financing activities:
Equipment acquired
through capital
leases............... $ 824 $ 4,116 $ 7,631 $ 4,325 $ 9,730
Disposal of equipment
under capital leases. 2,223 2,143 675 2,810
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
1. Organization
RightCHOICE Managed Care, Inc. (RightCHOICE or the company) is a majority
owned subsidiary of Blue Cross and Blue Shield of Missouri (BCBSMo)
incorporated in the State of Missouri. In connection with RightCHOICE's initial
public offering of class A common stock on August 1, 1994, BCBSMo transferred
its managed health care business to RightCHOICE. The holders of class A common
stock have one vote per share and the holders of class B common stock have 10
votes per share. BCBSMo is the sole holder of class B common stock. Each share
of class B common stock is convertible into one share of class A common stock
at the option of the holder at any time. At December 31, 1999, BCBSMo and all
holders of class A common stock have control over approximately 97.6% and 2.4%,
respectively, of the combined voting power of both classes of common stock.
There are no liquidation preferences between the two classes of common stock.
RightCHOICE has not issued shares of its authorized preferred stock. In
addition, RightCHOICE provides certain guarantees relating to the financial
stability of certain affiliates.
RightCHOICE offers a comprehensive array of managed health care products and
services, including preferred provider organizations (PPO), point of service
(POS), health maintenance organizations (HMO), Medicare supplement, specialty
managed care and managed indemnity benefit plans, third-party administrator
(TPA) services, administrative services only (ASO), network rental services and
life insurance agency services.
2. Summary of significant accounting policies
The following is a summary of significant accounting policies used in the
preparation of the accompanying Consolidated Financial Statements. Such
policies are in accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The interim consolidated financial statements included herein have been
prepared by RightCHOICE without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC). In the opinion of management,
all adjustments, consisting only of normal recurring adjustments necessary to
present fairly the consolidated financial position of the company with respect
to the interim consolidated financial statements, and the consolidated results
of its operations and its cash flows for the interim periods then ended, have
been included. The results of operations for the interim periods are not
necesssarily indicative of the results for the full year.
Principles of consolidation
The Consolidated Financial Statements include the accounts of RightCHOICE
and its subsidiaries after elimination of all significant intercompany
transactions. These subsidiaries include Healthy Alliance Life Insurance
Company (HALIC), HealthLink HMO, Inc. (HealthLink HMO), HMO Missouri, Inc.
(BlueCHOICE), and Diversified Life Insurance Agency of Missouri, Inc., all
Missouri corporations, and HealthLink, Inc. (HealthLink) and RightCHOICE
Insurance Company (RIC), both Illinois corporations. Investments in business
entities in which the company does not have control, but has the ability to
exercise significant influence over operating and financial policies (generally
20-50% ownership), are accounted for by the equity method. Other investments
are accounted for by the cost method.
F-7
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
Cash and cash equivalents
Cash and cash equivalents are highly liquid investments with an original
maturity of three months or less when purchased.
Investments available for sale
Unaffiliated investments with readily determinable fair values have been
classified as available-for-sale. Unrealized gains and losses are computed on
the basis of specific identification and are included as other comprehensive
income in the shareholders' equity section of the balance sheet, net of
applicable deferred income taxes. Realized gains and losses on the disposition
of investments are included in investment income. The specific identification
method is used in computing the cost of debt and equity securities sold.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are provided on the straight-
line basis over the estimated useful life of the respective assets, ranging
from 30 years for buildings, 3 to 10 years for furniture and equipment, 3 to 7
years for capitalized software development costs, and 5 to 10 years for
leasehold improvements.
Improvements are capitalized while expenditures for maintenance and repairs
are charged to expense as incurred. Realized gains and losses are recognized
upon disposal or retirement of the related assets and are reflected in
earnings. RightCHOICE also capitalizes purchased and internally developed
software costs to the extent they are expected to benefit future operations.
Software amortization of such costs commences when specific components are
operational. Unamortized software development cost as of December 31, 1999, and
1998 was $31,715 and $33,852, respectively. Software amortization expense for
the years ended December 31, 1999, 1998, and 1997, was $6,407, $7,701, and
$5,521, respectively.
Change in estimate
Based upon management's periodic review of the useful lives of its various
assets, RightCHOICE's estimate of the useful life of various modules of its
capitalized software changed from 5 years to 7 years, effective with the
beginning of 1999. The change relates to the software capitalized as part of
the company's information and operations strategy (IOS). This IOS software will
continue to replace the company's core operating systems for enrollment,
billing, claims payment, and customer service. Management believes that this
change will more appropriately match the amortization expense of the software
with the periods in which the software will be utilized. This change in
estimate on an after-tax basis resulted in an increase to RightCHOICE's net
income for 1999 of approximately $2.4 million or $0.13 per share.
Goodwill and intangible assets
Goodwill and intangible assets represent the excess of cost over the fair
market value of net assets acquired in purchase transactions. Gross goodwill
and intangible assets (excluding related accumulated amortization) was $85,770
and $85,975 as of December 31, 1999, and 1998, respectively, and is amortized
on a straight-line basis over periods not exceeding 40 years. Gross
F-8
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
goodwill is inclusive of $74,137 of goodwill related to the purchase of
HealthLink in 1995 and is amortized over 40 years. All other goodwill and
intangible assets are amortized over periods not exceeding 10 years.
Accumulated amortization on goodwill and intangible assets as of December 31,
1999, and 1998 was $14,370 and $11,467, respectively. Accumulated amortization
of the HealthLink goodwill was $8,186 and $6,333 as of December 31, 1999 and
1998, respectively. Amortization expense of the goodwill and other intangibles
aggregated $2,903, $2,924, and $7,487 in 1999, 1998, and 1997, respectively,
including the amortization of the intangibles related to the purchase of
HealthLink in 1995 of $2,769, $2,769, and $3,061 in 1999, 1998, and 1997,
respectively.
RightCHOICE reviews the carrying value of goodwill, intangibles and other
long-lived assets for impairment when events or changes in circumstances
indicate that the carrying value of the asset may not be recoverable. This
review is performed by comparing estimated undiscounted future cash flows from
use of the asset to the recorded value of the asset.
Medical claims payable
In addition to the liability for processed but unpaid claims at period-end,
RightCHOICE provides for the estimated amount of liability arising from medical
care provided to members, net of coordination of benefit refunds, for claims
still in process, as well as undischarged and unreported claims. This estimate
is based on current membership statistics, claim run-off patterns and certain
actuarial formulas. The liability includes estimated processing expenses
relating to such claims. Such estimates are subject to revision; however,
management believes these estimates reasonably approximate actual costs.
Reinsurance
In the normal course of business, RightCHOICE's subsidiaries cede insurance
to other unrelated insurance carriers on an excess loss or quota share basis.
RightCHOICE's subsidiaries engage in such reinsurance activity to limit losses
from large exposures and to permit recovery of a portion of direct losses. The
company expensed $1,060, $1,042, and $1,009 for the years ended December 31,
1999, 1998, and 1997, respectively, for costs related to this stop loss
coverage. Recoveries in these years were not significant. RightCHOICE and its
subsidiary, Healthy Alliance Life Insurance Company, also reached a network
access and financial reinsurance agreement with Blue Cross and Blue Shield of
Kansas City (BCBSKC). As a result of the agreements, members of either plan who
are enrolled through statewide employers or associations are able to use the
provider network of the Blue Cross and Blue Shield company where they live. The
impact of these reinsurance activities is not significant to the Consolidated
Financial Statements.
Income taxes
RightCHOICE utilizes the asset and liability method of accounting for income
taxes. This approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
RightCHOICE, along with its subsidiaries, files consolidated federal and
Missouri state income tax returns with Blue Cross and Blue Shield of Missouri.
In accordance with the federal tax-sharing agreement of the consolidated group,
federal income tax expense is allocated to RightCHOICE and its subsidiaries
based upon the consolidated income generated by RightCHOICE and its
subsidiaries.
F-9
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
Dividend restrictions
Missouri and Illinois insurance laws and regulations provide certain
restrictions on the payment of dividends by insurance companies and health
maintenance organizations in a holding company structure. The Missouri and
Illinois Directors of Insurance may bring an action to enjoin or rescind the
payment of any dividend or distribution that would cause the insurer's
statutory surplus to be unreasonable or inadequate. At December 31, 1999,
RightCHOICE's insurance and HMO subsidiaries did not have a significant amount
of earned surplus available for dividend payments without the prior approval of
the Missouri or Illinois Directors of Insurance. HealthLink, which is not an
insurance company or HMO, is not subject to these restrictions.
Earnings per share
Basic earnings per share are computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
year. Diluted earnings per share are calculated by dividing net income by the
number of weighted average shares outstanding plus additional shares
representing stock distributable under stock-based compensation plans using the
treasury stock method. There were 243,895 and 57,183 dilutive potential common
shares for the first six months of 2000 and 1999, respectively, and 43,438 and
17,924 dilutive potential common shares for the years 1999 and 1998,
respectively. Because 1997 results reflect a net loss, basic and diluted
earnings per share are calculated based on the same weighted average number of
shares outstanding. The antidilutive potential common shares that could dilute
earnings per share in the future were 32,576 and 171,611 as of June 30, 2000
and 1999, respectively, and 464,615, 439,508, and 469,766 as of December 31,
1999, 1998, and 1997, respectively.
Concentration of credit risk
RightCHOICE primarily conducts business in the State of Missouri, and a
significant portion of its customer base is concentrated with companies that
are located in the metropolitan St. Louis area. No single customer generates in
excess of 10% of RightCHOICE's total revenue.
RightCHOICE invests its excess cash in interest-bearing deposits with major
banks, commercial paper and money market funds. Although a majority of the cash
accounts exceed the federally insured deposit amount, management does not
anticipate non-performance by the other parties. Management reviews the
stability of these institutions on a periodic basis.
Investments principally include U.S. Treasury and agency bonds and fixed
maturity bonds in a variety of companies A-rated or better by nationally
recognized rating services. Investments in life insurance contracts consist
primarily of flexible premium variable life products, invested in managed bond
and equity funds, purchased from an insurance company that has an A.M. Best
rating of A+. Such credit ratings are routinely reviewed by management.
Fair value of financial instruments
The carrying amount for cash and cash equivalents, receivables, and accounts
payable approximates fair value because of the short maturity of those
instruments. The fair value of investments available for sale at December 31,
1999, and 1998, determined based upon quoted market prices, is disclosed in
Note 4. The carrying amount of the long-term debt approximates fair value as
the underlying instruments have variable interest rates at market value (see
Note 10).
F-10
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
Revenue recognition and unearned premiums
For the majority of members, premiums are billed in advance of coverage
periods. For all other members, premiums are billed based on actual incurred
claims or other contractual arrangements. Premiums are recognized when the
payor is obligated to pay and are recorded as earned revenue over the period to
which health care coverage relates. Amounts billed but unearned are recorded as
unearned premiums. RightCHOICE's TPA and ASO self-funded program revenue is
earned as services are performed and the payor is obligated to pay and consists
of administrative fees for services provided to third parties, including
management of medical services, claims processing and access to provider
networks. Under TPA and ASO contracts, self-funded employers retain the full
risk of financing benefits. Funds received from employers are equal to amounts
required to fund benefit expenses and administrative fees, and are shown net in
the financial statements. Net revenue for these programs is reflected in fees
and other income. RightCHOICE's TPA and ASO self-funded programs do not involve
the assumption of significant insurance or credit risks; therefore, revenue
from these programs is reflected in fees and other income. During the years
ended December 31, 1999, 1998 and 1997, RightCHOICE received reimbursements for
claims paid of $54,232, $50,558, and $106,227, respectively, from TPA and ASO
self-funded groups.
Non-recurring charges
During the fourth quarter of 1998, RightCHOICE recorded a $0.9 million
charge related to the reduction of its workforce. RightCHOICE also incurred
charges to earnings of $3.3 million in 1997, for costs associated with moving
RightCHOICE's claims, customer service, billing, and provider services
functions from St. Louis to Springfield, Missouri, and Cape Girardeau,
Missouri. In addition, during the third quarter of 1997, BlueCHOICE recorded a
$29.5 million loss reserve for estimated losses relating to its contract with
the Missouri Consolidated Health Care Plan. The reserve is based on actuarial
estimates, including projected limited rate increases, and projected enrollment
and medical cost trends accounted for through the year 2000 in accordance with
generally accepted accounting principles. The remaining balance of this loss
reserve was $7.3 million at December 31, 1999. As of December 31, 1999,
management believed that this remaining balance would be adequate to cover the
actual losses expected to be incurred on this contract during the year 2000. In
March 2000, the Missouri Consolidated Health Care Plan notified RightCHOICE
that the premiums that it would pay to RightCHOICE in 2000 would be reduced by
a risk adjustment factor. Although RightCHOICE is contesting this Missouri
Consolidated Health Care Plan action, RightCHOICE increased its loss reserve at
March 31, 2000 by $1.5 million as a result of this unanticipated action. This
charge is reflected in the health care services cost caption of the
Consolidated Statement of Income for the six months ended June 30, 2000.
Management believes that the liability balance at June 30, 2000 is adequate to
cover the remaining actual losses expected to be incurred on this contract
during the year 2000.
Reclassifications
Certain reclassifications have been made to the Consolidated Financial
Statements for 1997 and 1998 to conform to the 1999 presentation.
Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and
F-11
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
Hedging Activities." SFAS No. 133 establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. SFAS No. 133 is
effective for all fiscal years beginning after June 15, 2000, as extended by
SFAS No. 137. Earlier application of SFAS No. 133 is encouraged but should not
be applied retroactively to financial statements of prior periods. RightCHOICE
believes that the adoption of SFAS No. 133 will not have a material impact on
RightCHOICE's financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 98-1, "Accounting for Computer Software Developed
For or Obtained For Internal Use," which is effective for fiscal years
beginning after December 15, 1998. The SOP requires preliminary stage project
costs to be expensed as incurred. Once a project is in the application
development stage, the SOP requires all external direct costs for materials and
services and payroll and related fringe benefit costs to be capitalized, and
subsequently amortized over the estimated useful life of the project. The
adoption of SOP 98-1 did not have a material impact on RightCHOICE's financial
position or results of operations.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-
up Activities," which is effective for fiscal years beginning after December
15, 1998. The SOP requires that certain costs of start-up activities, including
organization costs, should be expensed as incurred. RightCHOICE adopted SOP 98-
5 in the first quarter of 1999 and this adoption did not have a material impact
on RightCHOICE's financial position or results of operations.
3. Comprehensive income
The components of other comprehensive income related to the unrealized gains
or losses on RightCHOICE's available-for-sale securities for the six months
ended June 30, 2000 and 1999 and for the years ended December 31, 1999, 1998,
and 1997 are as follows:
<TABLE>
<CAPTION>
Six months ended Year ended December
June 30, 31,
----------------------- ------------------------
2000 1999
(unaudited) (unaudited) 1999 1998 1997
----------- ----------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Unrealized holding gains
(losses) arising during
period, net of taxes.... $ 850 $(4,165) $(5,961) $1,671 $ 3,163
Less: reclassification
adjustment for (gains)
losses included in net
income (loss), net of
taxes................... (693) 293 337 (1,968) (11,140)
----- ------- ------- ------ -------
Net unrealized gains
(losses) on securities.. $ 157 $(3,872) $(5,624) $ (297) $(7,977)
===== ======= ======= ====== =======
</TABLE>
The components of accumulated other comprehensive income on the Consolidated
Balance Sheets include unrealized net (depreciation) appreciation of
investments as well as a minimum pension liability adjustment. The unrealized
net (depreciation) appreciation of investments was $(3,975), $(4,132) and
$1,492 at June 30, 2000, December 31, 1999 and December 31, 1998, respectively.
The minimum pension liability increase was $295, $295 and $370 at June 30,
2000, December 31, 1999 and December 31, 1998, respectively.
F-12
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
4. Investments available for sale
Investments available for sale are summarized below:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1999
Fixed maturities:
U.S. government and agency
securities.................. $106,228 $ 36 $(4,214) $102,050
Corporate bonds and notes.... 76,622 16 (3,437) 73,201
Short-term investments....... 8,835 8,835
-------- ------- ------- --------
191,685 52 (7,651) 184,086
-------- ------- ------- --------
Equity securities.............. 10,149 925 11,074
-------- ------- ------- --------
Other invested assets.......... 6,766 6,766
-------- ------- ------- --------
$208,600 $ 977 $(7,651) $201,926
======== ======= ======= ========
December 31, 1998
Fixed maturities:
U.S. government and agency
securities.................. $ 92,281 $ 1,083 $ (149) $ 93,215
Corporate bonds and notes.... 100,927 2,039 (587) 102,379
Short-term investments....... 5,249 5,249
-------- ------- ------- --------
198,457 3,122 (736) 200,843
-------- ------- ------- --------
Other invested assets.......... 7,501 (63) 7,438
-------- ------- ------- --------
$205,958 $ 3,122 $ (799) $208,281
======== ======= ======= ========
</TABLE>
Interest and dividend income comprises the following:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest on bonds................................ $11,966 $13,152 $12,822
Dividends on stocks.............................. 231 112 102
Accretion of discounts and amortization of
premiums, net................................... (400) (612) (6)
Interest on cash equivalents and other investment
income.......................................... 2,269 2,712 3,697
------- ------- -------
Gross investment income.......................... 14,066 15,364 16,615
Investment expenses.............................. (699) (627) (699)
------- ------- -------
$13,367 $14,737 $15,916
======= ======= =======
</TABLE>
Realized (losses) gains on investments available for sale are as follows:
<TABLE>
<CAPTION>
Year ended December
31,
---------------------
1999 1998 1997
----- ------ -------
<S> <C> <C> <C>
Net realized (losses) gains:
Fixed maturities.................................... $(530) $3,054 $ 6,930
Equity securities................................... 10,338
----- ------ -------
$(530) $3,054 $17,268
===== ====== =======
</TABLE>
F-13
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
In addition, during 1999, RightCHOICE realized a $14 gain from the sale of
other assets. During 1998, RightCHOICE realized a $794 gain from the sale of a
subsidiary that was accounted for under the equity method and an $84 gain from
the sale of other assets. Proceeds from sales of available-for-sale securities
were $158,127, $278,073, and $384,802, during 1999, 1998, and 1997,
respectively. Gross realized gains on investments available for sale were $929,
$3,553, and $19,203, during 1999, 1998, and 1997, respectively. Gross realized
losses on investments available for sale were $1,459, $499, and $1,935, during
1999, 1998, and 1997, respectively. Contractual maturities of fixed maturity
investments, excluding other invested assets (primarily consisting of variable
life insurance contracts), held on December 31, 1999, are as presented below.
Actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
--------- ---------
<S> <C> <C>
Due in one year or less............................... $ 17,869 $ 17,843
Due after one year through five years................. 68,794 67,069
Due after five years through 10 years................. 43,205 40,610
Due after 10 years.................................... 61,817 58,564
-------- --------
$191,685 $184,086
======== ========
</TABLE>
5. Receivables from members
Receivables from members consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Individual subscribers................................... $ 6,823 $ 6,202
Underwritten groups...................................... 42,268 40,109
Self-funded/ASO groups................................... 29,856 21,713
------- -------
$78,947 $68,024
======= =======
</TABLE>
Based on historical collection experience, RightCHOICE considers its
receivables from members to be fully collectible; accordingly, no significant
allowance for doubtful accounts is recorded.
6. Property and equipment, net
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Land and building....................................... $ 4,815 $ 4,338
Furniture and equipment, including capitalized leases... 44,829 59,959
Capitalized software development costs.................. 51,790 47,520
Leasehold improvements.................................. 3,953 3,914
------- -------
105,387 115,731
Less accumulated depreciation and amortization.......... (49,917) (57,497)
------- -------
$55,470 $58,234
======= =======
</TABLE>
Depreciation and amortization expense was $14,312, $16,410, and $15,621, for
the years ended December 31, 1999, 1998, and 1997, respectively.
F-14
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
7. Investments in affiliates
RightCHOICE has a non-controlling, 50% interest in The EPOCH Group, L.C.
(EPOCH). EPOCH is a limited liability company that performs third-party
administrator (TPA) functions for self-insured organizations. EPOCH is not
consolidated with RightCHOICE's operations and is accounted for using the
equity method. The combined annual revenues of EPOCH were $23.7 million in 1999
and $22.9 million in 1998. Operating income was $1.5 million and $1.1 million
in 1999 and 1998, respectively. EPOCH distributed a $0.5 million dividend to
RightCHOICE during 1999. Undistributed earnings to RightCHOICE for 1999 and
1998 were $176 and $330, respectively. EPOCH serves approximately 275
businesses primarily in the Midwest as of December 31, 1999.
8. Medical claims payable
Medical claims payable represents the amounts needed to provide for the
estimated ultimate cost of settling claims related to insured events that have
occurred on or before December 31. The payable is estimated to include the
amounts required for future payment of medical claims that have been reported
to RightCHOICE and its subsidiaries, claims related to insured events that have
occurred but that have not been reported to RightCHOICE and its subsidiaries as
of December 31, and claims adjustment expenses. Claims adjustment expenses
include costs incurred in the claim settlement process such as costs to record,
process and adjust claims.
Activity in medical claims payable is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Balance at January 1................................... $109,986 $112,339
-------- --------
Incurred related to:
Current year......................................... 609,150 585,469
Prior years.......................................... 1,434 3,410
-------- --------
Total incurred..................................... 610,584 588,879
-------- --------
Paid related to:
Current year......................................... 503,402 498,423
Prior years.......................................... 92,740 92,809
-------- --------
Total paid......................................... 596,142 591,232
-------- --------
Net balance at December 31............................. $124,428 $109,986
======== ========
</TABLE>
The incurred amounts related to prior years represent the differences
between RightCHOICE's estimated claims payable for prior years' claims and the
actual amounts required to satisfy such claims. In addition, RightCHOICE's
health care services expense caption on the Consolidated Statements of Income
has been reduced by $9,052 and $9,052 for 1999 and 1998, respectively, related
to the beneficial effect of the premium deficiency that was recorded in 1997.
F-15
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
9. Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Accounts payable......................................... $21,702 $23,470
Accrued salaries and other expenses...................... 15,110 13,010
Other accrued expenses................................... 22,664 28,274
------- -------
$59,476 $64,754
======= =======
</TABLE>
10. Long-term debt and commitments
RightCHOICE currently has a reducing revolving credit facility (the Credit
Agreement) with Bank of America National Association (B of A), Administrative
Agent, and Mercantile Bank National Association, co-agent. At December 31,
1999, RightCHOICE had a $34.1 million outstanding balance under the Credit
Agreement, which represented the maximum commitment. The maximum commitment
will be reduced by $2.0 million on a quarterly basis through January 1, 2002,
the termination date. In addition, mandatory reductions to the commitment,
together with prepayments, are required upon the occurrence of certain
extraordinary events such as the issuance of debt securities or the sale of a
subsidiary.
Borrowings under the Credit Agreement may be denominated, at the option of
RightCHOICE, as base rate loans or offshore rate loans. Base rate loans bear
interest at B of A's base rate, which is 1.5% above the higher of the latest
federal funds rate plus 0.5% or B of A's reference rate, which approximates the
prime rate. Offshore rate loans bear interest at 2.5% above the adjusted London
Interbank Offered Rate (LIBOR). At December 31, 1999, all of RightCHOICE's
outstanding borrowings were in offshore rate loans. The weighted average
interest rate incurred by RightCHOICE was 8.01%, 8.38%, and 7.32% in 1999,
1998, and 1997, respectively.
As a condition to providing the Credit Agreement, RightCHOICE pledged the
stock of its direct subsidiaries and a guaranty of repayment was provided by
HealthLink. In addition, the Credit Agreement establishes certain covenants
that restrict RightCHOICE's ability to incur additional indebtedness or pay
cash dividends; limit future capital contributions, investments, acquisitions,
and capital expenditures, and limitations on indebtedness of RightCHOICE's
subsidiaries; and require the maintenance of certain financial ratios as well
as a minimum consolidated tangible net worth. As of December 31, 1999,
RightCHOICE was in compliance with these covenants.
RightCHOICE has an agreement with Blue Cross and Blue Shield of Missouri to
lease certain office space, including an operating lease for its headquarters
facility (see Note 15 "Transactions with Blue Cross and Blue Shield of
Missouri"). RightCHOICE also leases certain electronic data processing
equipment under non-cancellable lease agreements classified as either capital
or operating leases.
The following is a schedule of future minimum rental payments required under
capital leases and under non-cancellable operating leases that have initial or
remaining terms in excess of one year
F-16
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
together with the present value of net minimum lease payments under capital
leases at December 31, 1999:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<S> <C> <C>
Year ending December 31,
2000.................................................. $4,747 $13,369
2001.................................................. 2,732 9,081
2002.................................................. 1,877 8,509
2003.................................................. 847 7,701
2004.................................................. 83 6,310
Thereafter............................................ 2,537
------ -------
Total minimum lease payments........................ 10,286 $47,507
=======
Less amount representing interest................... (1,036)
------
Present value of net minimum lease payments,
including current portion of $4,071................ $9,250
======
</TABLE>
Total rental expense for all operating leases, except those with terms of
one month or less that were not renewed, was $10,707, $10,133, and $9,900, for
the years ended December 31, 1999, 1998, and 1997, respectively.
11. Income taxes
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Six months ended Year ended December
June 30, 31,
----------------------- -----------------------
2000 1999
(unaudited) (unaudited) 1999 1998 1997
----------- ----------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Current:
Federal................... $10,112 $6,040 $ 9,684 $2,652 $(3,771)
State..................... 1,056 105 375 (505) 757
------- ------ ------- ------ -------
11,168 6,145 10,059 2,147 (3,014)
Deferred:
Federal................... (631) (771) 1,118 1,697 (6,507)
------- ------ ------- ------ -------
$10,537 $5,374 $11,177 $3,844 $(9,521)
======= ====== ======= ====== =======
</TABLE>
The effective tax rate, expressed as a percentage of pre-tax income (loss),
differs from the federal statutory rate as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
----------------------- -----------------
2000 1999
(unaudited) (unaudited) 1999 1998 1997
----------- ----------- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Tax provision (benefit) based
on federal statutory rate..... 35.0% 35.0% 35.0% 35.0% (35.0)%
State income taxes, net of
federal provision (benefit)... 4.0 0.8 1.3 (5.3) 2.3
Goodwill amortization.......... 1.4 2.5 2.4 6.8 2.2
Other.......................... (0.6) 0.2 0.7 3.9 2.1
---- ---- ---- ---- -----
Effective tax provision
(benefit) rate................ 39.8% 38.5% 39.4% 40.4% (28.4)%
==== ==== ==== ==== =====
</TABLE>
F-17
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
The primary temporary differences that gave rise to deferred income taxes
were as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Capitalized vendor software........................... $ 6,223 $ 4,149
Medical claims payable discounting.................... 1,672 1,501
Employee benefits..................................... 8,738 7,910
Unearned premiums..................................... 4,065 3,767
Other capitalized expenses............................ 2,324 2,429
Reserve for loss contract............................. 2,541 5,709
Unrealized depreciation of securities................. 2,366
Other................................................. 5,775 8,136
------- -------
Total deferred tax assets........................... 33,704 33,601
------- -------
Deferred tax liabilities:
Capitalized internal software......................... 8,081 8,983
Unrealized appreciation of securities................. 832
Other tax-deductible expenses......................... 7,203 7,293
------- -------
Total deferred tax liabilities...................... 15,284 17,108
------- -------
Valuation allowance..................................... (112)
------- -------
Net deferred tax asset.................................. $18,420 $16,381
======= =======
</TABLE>
SFAS No. 109, "Accounting for Income Taxes," requires a valuation allowance
against deferred tax assets if, based on the weight of available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized. As of December 31, 1998, RightCHOICE maintained a valuation allowance
of $112 relating to items in which uncertainty existed with respect to the
future realization of the undistributed losses of minority-owned subsidiary
companies. During 1999, RightCHOICE determined that this uncertainty no longer
existed. Based upon all the available evidence, management believes it is more
likely than not that RightCHOICE will realize its deferred tax assets and,
accordingly, no valuation allowance has been provided against such assets as of
June 30, 2000 and December 31, 1999.
12. Employee benefit programs
Pension plan
RightCHOICE and its subsidiaries participate in a defined benefit pension
plan covering substantially all company employees (excluding HealthLink
employees) who meet the plan eligibility requirements as to age and length of
service. The national Blue Cross and Blue Shield Association (BCBSA) is
responsible for administration of this defined benefit pension plan. The
benefits are based on years of service and average annual compensation for the
employee's highest consecutive five of the last 10 years.
F-18
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
Net periodic pension cost for RightCHOICE includes the following components:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Service cost................................. $ 2,061 $ 1,834 $ 1,802
Interest cost................................ 3,273 2,989 2,814
Expected return on plan assets............... (3,587) (3,211) (2,770)
Amortization of transition asset............. (304) (304) (304)
Amortization of prior service cost........... (230) (230) (230)
------- ------- -------
Net periodic pension cost.................... $ 1,213 $ 1,078 $ 1,312
======= ======= =======
Other components (included in non-recurring
charges):
Curtailment gain........................... $ (816)
=======
Special termination benefits............... $ 198
=======
</TABLE>
The following tables present the status of RightCHOICE's pension benefits:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................. $49,736 $43,122
Service cost............................................ 2,061 1,834
Interest cost........................................... 3,273 2,989
Benefit payments........................................ (1,350) (1,324)
Actuarial (gains) losses................................ (9,296) 3,115
------- -------
Benefit obligation at end of year....................... $44,424 $49,736
======= =======
</TABLE>
The primary cause of the actuarial gain and loss in 1999 and 1998,
respectively, relates to the change in the discount rate assumptions. The
discount rate assumption dropped from 7.25% to 6.75% during 1998 and rose from
6.75% to 7.75% during 1999. The effect on 1998 was an actuarial loss of $4.3
million and the effect on 1999 was an actuarial gain of $8.7 million. In
addition, other factors, primarily demographic experience, resulted in
actuarial gains in both years. These other factors resulted in an actuarial
gain of $0.6 million and $1.2 million in 1999 and 1998, respectively.
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year.......... $44,980 $40,264
Actual return on assets................................. 7,171 6,040
Benefit payments........................................ (1,350) (1,324)
------- -------
Fair value of plan assets at end of year................ $50,801 $44,980
======= =======
</TABLE>
RightCHOICE did not make and was not required to make contributions to the
plan during 1999 and 1998.
F-19
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
The funded status of RightCHOICE's pension plan and the amount recorded as
accrued pension cost consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- ------
<S> <C> <C>
Unfunded status.......................................... $(6,377) $4,756
Unrecognized actuarial gain.............................. 16,704 3,825
Unrecognized transition asset............................ 284 588
Unrecognized prior service cost.......................... 53 282
------- ------
Accrued pension cost..................................... $10,664 $9,451
======= ======
</TABLE>
Weighted average assumptions used in the development of pension data as of
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Discount rate........................................... 7.75% 6.75%
Expected long-term rate of return on assets............. 9.0 9.0
Rates of increase in compensation levels................ 3.0-6.5 3.0-6.5
</TABLE>
HealthLink provides a defined contribution pension plan covering
substantially all HealthLink employees who meet the plan eligibility
requirements as to age and length of service. HealthLink contributes an amount
equal to 4% of participating employees' annual gross compensation levels.
Additional amounts can be contributed at HealthLink's discretion. HealthLink's
pension expense during 1999, 1998, and 1997, was $640, $377, and $368,
respectively.
Postretirement benefits other than pensions
RightCHOICE provides certain health care and life insurance benefits for
retired and terminated employees (excluding HealthLink employees).
Substantially all of RightCHOICE's employees may become eligible for those
benefits if they reach normal retirement age while working for RightCHOICE. The
health care and life insurance benefits for retired employees are provided
through insurance companies whose premiums are based on the benefits paid
during the year. The estimated cost of retiree benefit payments other than
pensions is accrued over the period such benefits are earned.
The net periodic cost for postretirement benefits includes the following
components:
<TABLE>
<CAPTION>
Year ended December
31,
----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Service cost...................................... $ 629 $ 671 $ 522
Interest cost..................................... 1,161 1,165 1,171
Amortization of prior service cost................ (94) (25) (6)
Amortization of actuarial loss.................... 183 130 82
------ ------ ------
Net periodic postretirement cost.................. $1,879 $1,941 $1,769
====== ====== ======
</TABLE>
The amortization of any prior service cost is determined using straight-line
amortization over the average remaining service period of employees expected to
receive benefits under the plan as permitted by SFAS No. 106.
F-20
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
The assumed discount rate is 7.75% and 6.75% for 1999 and 1998,
respectively. The rate of compensation increase is assumed to be 4.0% for 1999
and 1998. The health care cost trend rate is assumed to be 6.0% for 1999, and
5.5% for 2000 and thereafter. A one percentage point change in the assumed
trend rate would have the following effects as of December 31, 1999:
<TABLE>
<CAPTION>
One One
percent percent
increase decrease
-------- --------
<S> <C> <C>
Effect on postretirement accumulated benefit
obligation.......................................... $1,203 $(1,064)
Effect on total service and interest cost components. $ 144 $ (126)
</TABLE>
RightCHOICE's postretirement benefit plan is currently not funded. The
following table presents the status of RightCHOICE's postretirement benefits:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Change in accumulated benefit obligation:
Accumulated benefit obligation at beginning of year..... $18,370 $16,860
Service cost............................................ 629 671
Interest cost........................................... 1,161 1,165
Plan amendments......................................... (814) (394)
Benefit payments........................................ (938) (1,214)
Actuarial (gains) losses................................ (1,866) 1,282
------- -------
Accumulated benefit obligation at end of year........... $16,542 $18,370
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year.......... $ 0 $ 0
Employer contributions.................................. 938 1,214
Benefit payments........................................ (938) (1,214)
------- -------
Fair value of plan assets at end of year................ $ 0 $ 0
======= =======
</TABLE>
The funded status and accrued cost of RightCHOICE's postretirement plan
consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Unfunded status......................................... $16,542 $18,370
Unrecognized actuarial loss............................. (3,183) (5,233)
Unrecognized prior service cost......................... 1,065 345
------- -------
Accrued postretirement benefit cost..................... $14,424 $13,482
======= =======
</TABLE>
Postemployment benefits
RightCHOICE also provides certain severance benefits for employees who
involuntarily terminate their employment and long-term disability benefits for
employees who are disabled. Severance benefits include salary continuation,
medical benefits and career transition benefits. Disability benefits include
life insurance, medical coverage and salary continuation.
F-21
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
Postemployment benefits are accrued if attributable to service already
rendered, if the benefits accumulate or vest, if payment is probable and if the
amounts can be reasonably estimated. Postemployment benefit expense was $(132),
$1,150, and $688, for 1999, 1998, and 1997, respectively. The 1999 reduction to
expense was due to the increase in interest rates as well as the favorable
claims experience of the plan, among other factors.
Stock-based compensation plans
RightCHOICE provides an Equity Incentive Plan and a Directors' Stock Option
Plan (the plans), which allow for the annual grant of stock options in the form
of incentive stock options, non-qualified stock options and restricted stock
grants, and are further described below. RightCHOICE applies APB Opinion 25 and
related interpretations in accounting for these plans. RightCHOICE does not
issue stock options to non-employees other than directors. Accordingly, no
compensation cost has been recognized for these plans. Had compensation cost
for RightCHOICE's plans been determined consistent with SFAS No. 123, net
income (loss) and earnings (loss) per share would have been reduced or
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ --------
<S> <C> <C> <C> <C>
Net income (loss)........... As reported.......... $17,216 $5,660 $(24,034)
Pro forma............ $16,582 $4,917 $(24,677)
Basic and diluted earnings
(loss) per share........... As reported.......... $ 0.92 $ 0.30 $ (1.29)
Pro forma............ $ 0.89 $ 0.26 $ (1.32)
</TABLE>
As of December 31, 1999, the maximum number of shares subject to options and
grants under the Equity Incentive Plan and Directors' Stock Option Plan is 1.5
million and 60,000, respectively. The exercise price of each option equals the
market price of RightCHOICE's stock on the date of grant and an option's
maximum term is 10 years. Options vest by the end of the third year.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for option grants in 1999, 1998, and 1997,
respectively: expected volatility of 37%, 35%, and 34%; risk-free interest
rates of approximately 5%, 6%, and 6%; and expected lives of 6.5 years. In
addition, for all three years, no dividend yield was assumed.
F-22
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
A summary of the status of the plans as of December 31, 1999, 1998, and 1997
and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
Weighted-
Number Weighted- average
of average fair
shares exercise price value
-------- -------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1996...... 573,428 $12.45
Granted............................... 310,787 $10.91 $5.18
Forfeited............................. (414,449) $11.77
--------
Outstanding at December 31, 1997...... 469,766 $12.03
Granted............................... 292,366 $ 9.68 $4.59
Exercised............................. (1,426) $10.81
Forfeited............................. (58,003) $11.17
--------
Outstanding at December 31, 1998...... 702,703 $11.13
Granted............................... 319,609 $11.50 $5.35
Exercised............................. (227) $ 9.63
Forfeited............................. (49,502) $11.60
--------
Outstanding at December 31, 1999...... 972,583 $11.22
========
</TABLE>
There were 469,112, 198,920 and 105,413 options exercisable at December 31,
1999, 1998, and 1997, respectively. There were no options exercised during
1997. The pro forma disclosures included above may not be representative of the
effects on reported net income or loss for future years.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/99 Contractual Life Price at 12/31/99 Price
---------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$9 to $12 817,269 7.9 years $10.71 320,572 $10.58
$13 to $18 155,314 6.0 years $13.92 148,540 $13.94
------- -------
$9 to $18 972,583 7.6 years $11.22 469,112 $11.64
======= =======
</TABLE>
Other benefit plans
RightCHOICE provides a pre-tax 401(k) plan covering substantially all
company employees. RightCHOICE recognized expenses of $1,221, $1,144, and
$1,083, during 1999, 1998, and 1997, respectively, for costs related to this
plan. RightCHOICE also provides an incentive program to key management
personnel for the achievement of corporate and individual goals, a sales
incentive program to encourage exceptional performance in marketing to and
servicing clients, and a supplemental executive retirement plan (SERP) for
certain executives. RightCHOICE recognized expenses of $7,225, $5,002, and
$3,709, during 1999, 1998, and 1997, respectively, for costs related to these
plans. RightCHOICE also provides short-term disability and workers'
compensation benefits; the cost of providing these programs is not significant
to RightCHOICE's overall results of operations. At December 31, 1999 and 1998,
RightCHOICE had a minimum pension liability adjustment of $454 and $569,
respectively, related to the SERP that is included as a component of
RightCHOICE's other comprehensive income on the Consolidated Balance Sheet.
F-23
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
13. Contingencies
Litigation of Blue Cross and Blue Shield of Missouri with the Missouri Attorney
General and Missouri Department of Insurance and related actions, settlement
efforts and proposed reorganization
In August 1994, Blue Cross and Blue Shield of Missouri created RightCHOICE
as a for-profit subsidiary. Blue Cross and Blue Shield of Missouri transferred
certain of its assets to RightCHOICE, and offered to the public 20% of the
common stock of RightCHOICE (such events are referred to collectively as the
1994 Reorganization and Public Offering). Although the Missouri Department of
Insurance (DOI) formally approved the 1994 Reorganization and Public Offering
on April 14, 1994, the DOI subsequently claimed that the 1994 Reorganization
and Public Offering violated state laws and that Blue Cross and Blue Shield of
Missouri was obligated to transfer all of its assets, including all of the
stock of RightCHOICE that it owned, to the State of Missouri or a charity
designated by the State of Missouri.
On May 13, 1996, Blue Cross and Blue Shield of Missouri filed a declaratory
judgment action in the Circuit Court of Cole County Missouri (the Circuit
Court) against the DOI and the Missouri Attorney General (the Missouri Attorney
General was a necessary party due to his sole authority to enforce nonprofit
corporation laws). This litigation is described more fully below under
"Litigation relating to the 1994 Reorganization and Public Offering."
RightCHOICE, Blue Cross and Blue Shield of Missouri, the DOI and the
Attorney General reached agreement for settlement of this litigation. The
settlement is described below under the caption "Agreement for Settlement of
Certain Litigation Matters and Reorganization of RightCHOICE." The agreement
provides for the dismissal of the lawsuit and appeals in which the State
officials claimed Blue Cross and Blue Shield of Missouri violated state law.
The agreement provides for a corporate reorganization of Blue Cross and Blue
Shield of Missouri and RightCHOICE and the creation of an independent public
benefit health care foundation by December 31, 2000. There are a number of
contingencies that might affect the closing of that reorganization. RightCHOICE
cannot provide any assurances that those contingencies will be fulfilled. The
parties have agreed to use their best efforts to effect the reorganization by
December 31, 2000. If the settlement does not go forward, the Attorney General
and DOI will be free to further prosecute their claims against Blue Cross and
Blue Shield of Missouri arising from the 1994 Reorganization and Public
Offering which would have a material adverse effect on RightCHOICE and its
stock.
Agreement for Settlement of Certain Litigation Matters and Reorganization of
RightCHOICE
Status of Proposed Settlement Agreements
Following many developments in the litigation described below, on January 6,
2000, RightCHOICE, Blue Cross and Blue Shield of Missouri, the Missouri
Attorney General, and the DOI signed the Amended and Restated Settlement
Agreement which would, if consummated, resolve all outstanding litigation and
regulatory issues between RightCHOICE, Blue Cross and Blue Shield of Missouri
and their affiliates and the State of Missouri described below and would create
an independent public benefit health care foundation. This agreement modified
the principal settlement agreement first announced as a conceptual framework on
April 22, 1998, which was reduced to definitive settlement agreements entered
into on September 20, 1998, and subsequently modified on March 12, 1999 (as
amended, the amended settlement agreement).
F-24
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
The amended settlement agreement included a number of significant conditions
and contingencies described further herein. Among those conditions were
approval by an appropriate court and a judicial determination by the Circuit
Court, that the reorganization contemplated by the amended settlement agreement
was lawful as to the subscribers of Blue Cross and Blue Shield of Missouri,
RightCHOICE, and their affiliates. In the Amended and Restated Settlement
Agreement that the parties signed on January 6, 2000, the parties removed the
court approval and determination of lawfulness contingencies from their
settlement agreement. That action was the result of the following events.
On October 29, 1999, the Circuit Court entered an order disapproving the
amended settlement agreements. Blue Cross and Blue Shield of Missouri, together
with the Missouri Attorney General and the DOI, filed a notice of appeal from
that order to the Missouri Court of Appeals for the Western District, and asked
for immediate transfer of that appeal to the Missouri Supreme Court. Blue Cross
and Blue Shield of Missouri and the Missouri Attorney General also notified the
Missouri Supreme Court of the Circuit Court's disapproval of the amended
settlement agreement, and asked the Missouri Supreme Court to (1) deem the
Circuit Court's order final for purposes of appeal, (2) conduct its own review
of the settlement agreement, and (3) enter a stay prohibiting Judge Brown and
the Special Master from further proceedings, including consideration of
alternatives, pending the appeal.
The Supreme Court of Missouri accepted the appeal and stayed further
proceedings in the Circuit Court. Counsel for the Special Master, whose role in
these proceedings is described further herein, appeared in the appeal as Amici
Respondents, charged with defending the order of the Circuit Court.
Following oral arguments before the Supreme Court of Missouri on December 8,
1999, on December 9, the Supreme Court entered an order which stated that the
parties had "failed to establish that court approval is required or authorized
by law or that any such determination would be other than advisory." The
Supreme Court stayed all proceedings until February 8, 2000, to permit the
parties to dismiss the underlying lawsuit and the appeals.
On January 6, 2000, the Amended and Restated Settlement Agreement was
signed, thereby removing the conditions requiring court approval and a
determination of lawfulness of the proposed reorganization. On January 6, 2000,
the parties filed a joint stipulation of dismissal in the Cole County Circuit
Court, dismissing all pending claims in that court in the principal litigation
between the parties. On February 8, 2000, the parties moved for dismissal of
the appeal pending in the Supreme Court of Missouri. The Supreme Court granted
that motion and dismissed the appeals on February 9, 2000.
The litigation underlying the settlement is described below. See "Litigation
relating to the 1994 Reorganization and Public Offering."
Terms of the Proposed Settlement Agreement
The principal terms of the Amended and Restated Settlement Agreement include
the following:
. Blue Cross and Blue Shield of Missouri would, through a series of
transactions, (i) transfer its insurance-related assets, contracts and
agreements and related liabilities to a wholly owned subsidiary of
RightCHOICE; (ii) convert to a for-profit corporation; (iii)
reincorporate in Delaware; and (iv) merge with RightCHOICE. Approximately
20% of the outstanding common stock of the resulting entity (referred to
as New RightCHOICE) would be owned by
F-25
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
RightCHOICE's current public shareholders and approximately 80% of the
outstanding shares of New RightCHOICE would be owned by a charitable
independent health care foundation (which equals the current aggregate
ownership interests of the public shareholders and Blue Cross and Blue
Shield of Missouri, respectively, in the equity of RightCHOICE).
. Blue Cross and Blue Shield of Missouri would pay approximately $12.78
million to the Missouri Foundation For Health (in addition to $175 paid
by New RightCHOICE).
. The Missouri Foundation For Health would be required to liquidate its
shares of New RightCHOICE stock over a prescribed period of time not to
exceed seven years under a divestiture plan. The Foundation would be
required to reduce its ownership of New RightCHOICE stock to less than
50% of the total outstanding stock of New RightCHOICE within three years
of the closing of the reorganization, subject to possible extension, and
to less than 20% of the total outstanding stock of New RightCHOICE within
five years of the closing of the reorganization, subject to possible
extension. The proceeds would be used for health care purposes. All but
up to 5% of the shares of New RightCHOICE stock owned by the Foundation
would be subject to a voting trust that would, with certain exceptions,
effectively vest voting control of such shares of New RightCHOICE stock
owned by the Foundation in the board of directors of New RightCHOICE on
all matters except that the Foundation would have the right to vote as it
deems appropriate on a change of control transaction involving New
RightCHOICE.
. The charter documents of New RightCHOICE would include the "basic
protections" required by the Blue Cross and Blue Shield Association
(BCBSA) of all of its for-profit licensees to provide for independence
from the direction, control and influence of the Missouri Foundation For
Health or any other shareholder. The "basic protections" would include
limitations on the amount of New RightCHOICE stock that may be owned by
certain categories of shareholders--(i) no "institutional" shareholder
may own 10% or more of the voting power of New RightCHOICE, (ii) no "non-
institutional" shareholder may own 5% or more of the voting power of New
RightCHOICE, and (iii) no shareholder may own 20% or more of the equity
of New RightCHOICE (with certain exceptions in the case of the Foundation
as described above). Any shares owned by a shareholder in excess of the
applicable ownership limits could be redistributed by New RightCHOICE.
The transactions contemplated by the Amended and Restated Settlement
Agreement are subject to a number of significant conditions and contingencies,
including approval by various regulators and the shareholders of RightCHOICE,
receipt of certain legal opinions, the receipt of rulings from the Internal
Revenue Service or tax opinions regarding the tax-free nature of the
transactions, and the satisfactory resolution of the Sarkis Litigation, which
is now over. The Sarkis Litigation is described below under the caption
Subscriber Class Action Litigation.
Litigation relating to the 1994 Reorganization and Public Offering
In August 1994, Blue Cross and Blue Shield of Missouri effectuated the 1994
Reorganization and Public Offering. The DOI had formally approved the 1994
Reorganization and Public Offering on April 14, 1994. The DOI subsequently
claimed that the 1994 Reorganization and Public Offering violated Missouri
state laws and that Blue Cross and Blue Shield of Missouri was obligated to
transfer all of its assets, including all of the stock of RightCHOICE that it
owned, to the State of Missouri or a charity designated by the State of
Missouri. The DOI threatened to bring legal action, seek a receivership, or
terminate Blue Cross and Blue Shield of Missouri's insurance license unless
Blue Cross and Blue Shield of Missouri surrendered its assets.
F-26
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
Blue Cross and Blue Shield of Missouri's extensive efforts to resolve the
dispute without litigation were unsuccessful. On May 13, 1996, Blue Cross and
Blue Shield of Missouri filed a declaratory judgment action in the Circuit
Court against the DOI and the Missouri Attorney General (the Missouri Attorney
General was a necessary party due to his sole authority to enforce nonprofit
corporation laws). The action sought a declaratory judgment that Blue Cross and
Blue Shield of Missouri followed all applicable laws and regulations in the
1994 Reorganization and Public Offering resulting in the creation of
RightCHOICE. It also sought a permanent injunction forbidding the DOI from
refusing to renew Blue Cross and Blue Shield of Missouri's license or taking
other administrative action against Blue Cross and Blue Shield of Missouri to
pressure it into paying a "toll charge" or "charitable asset assessment" or any
other fee as a result of the 1994 Reorganization and Public Offering.
On June 13, 1996, the DOI filed an answer and counterclaims setting forth
several affirmative defenses, including alleged fraud and negligent
misrepresentation with respect to the application filed by Blue Cross and Blue
Shield of Missouri seeking approval of the 1994 Reorganization and Public
Offering. The counterclaims alleged violations of certain health services
corporation and nonprofit corporation statutes. The DOI's counterclaims sought,
among other things: (i) permanent injunctions against Blue Cross and Blue
Shield of Missouri; (ii) imposition of a trust on Blue Cross and Blue Shield of
Missouri's assets for public benefit purposes; (iii) return of profits from
Medigap policies reinsured with a subsidiary; and (iv) an accounting of all
assets transferred by Blue Cross and Blue Shield of Missouri.
On June 20, 1996, the Missouri Attorney General filed an answer and
counterclaim alleging that the 1994 Reorganization and Public Offering, and its
continued operations through RightCHOICE and its subsidiaries, exceeded Blue
Cross and Blue Shield of Missouri's statutory purposes. The Missouri Attorney
General requested a declaration that Blue Cross and Blue Shield of Missouri
exceeded its lawful authority and sought such relief as the Circuit Court would
determine to be appropriate under the circumstances based on a statute that
authorizes judicial dissolution or less drastic alternative relief in the
Circuit Court's discretion.
On September 9, 1996, the Circuit Court granted Blue Cross and Blue Shield
of Missouri's motion for summary judgment against the DOI, rejected all of the
DOI's affirmative defenses (including allegations of fraud), issued a permanent
injunction against the DOI and declared that: (i) under Missouri law the DOI
had no authority to demand that Blue Cross and Blue Shield of Missouri make a
payment as a result of the 1994 Reorganization and Public Offering; (ii) under
Missouri law the DOI had no jurisdiction to take any action, the practical
effect of which would be to amend, modify or reverse the DOI's April 14, 1994
final administrative approval of the 1994 Reorganization and Public Offering;
(iii) under Missouri law, the DOI had no jurisdiction to take any
administrative action, including, but not limited to, revoking, suspending or
refusing to renew Blue Cross and Blue Shield of Missouri's Certificate of
Authority based in any way on the 1994 Reorganization and Public Offering or
Blue Cross and Blue Shield of Missouri's refusal to make payment as the DOI had
demanded; and (iv) (A) Blue Cross and Blue Shield of Missouri was a mutual
benefit type of nonprofit corporation rather than a public benefit type of
nonprofit corporation; (B) the 1994 Reorganization and Public Offering were
authorized under all laws applicable to nonprofit health services corporations;
and (C) Blue Cross and Blue Shield of Missouri did not owe the State or any
person or entity a "toll charge," "charitable asset settlement" or any other
payment as a result of the 1994 Reorganization and Public Offering (the
September 9 Order). On December 30, 1996, the Circuit Court issued orders
(described more fully below) modifying the findings and declarations set forth
in (iv) above, on the grounds that it was legally unnecessary to resolve such
issues because the Circuit Court had already ruled against the DOI for other
reasons.
F-27
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
The September 9 Order permanently enjoined the DOI from, among other things,
(i) revoking, suspending or refusing to renew Blue Cross and Blue Shield of
Missouri's insurance license based in any part upon the 1994 Reorganization and
Public Offering; (ii) commencing a valuation of Blue Cross and Blue Shield of
Missouri's assets and demanding a payment as a result of the 1994
Reorganization and Public Offering; (iii) commencing any administrative hearing
or making any administrative determination based in any part upon the 1994
Reorganization and Public Offering; (iv) instituting any seizure, receivership,
conservatorship or similar action or proceeding against Blue Cross and Blue
Shield of Missouri based in any part upon the 1994 Reorganization and Public
Offering; and (v) taking any other action, however denominated, against Blue
Cross and Blue Shield of Missouri based in any part upon the 1994
Reorganization and Public Offering.
On August 28, 1996, the DOI filed an amended answer asserting a new
counterclaim that the 1994 Reorganization and Public Offering were not
reasonably designed to serve any of Blue Cross and Blue Shield of Missouri's
purposes as a health services corporation and sought a declaration that Blue
Cross and Blue Shield of Missouri had exceeded or abused the authority
conferred upon it by law. Under this counterclaim, the DOI sought an order to
rehabilitate Blue Cross and Blue Shield of Missouri or, in the alternative,
injunctive relief.
On October 18, 1996, the Missouri Attorney General filed a motion for leave
to file an amended counterclaim against Blue Cross and Blue Shield of Missouri
that sought a declaration that Blue Cross and Blue Shield of Missouri was a
public benefit corporation, not a mutual benefit corporation, and requested an
order that Blue Cross and Blue Shield of Missouri amend its Articles of
Incorporation accordingly. The Circuit Court granted the Missouri Attorney
General's motion for leave to file the amended counterclaim.
On December 30, 1996, the Circuit Court issued five orders (the December 30
Orders): (i) denying Blue Cross and Blue Shield of Missouri's motion for
summary judgment against the Missouri Attorney General; (ii) granting the
Missouri Attorney General's motion for partial summary judgment against Blue
Cross and Blue Shield of Missouri; (iii) denying Blue Cross and Blue Shield of
Missouri's supplemental motion for summary judgment against the DOI on their
amended counterclaim; (iv) granting the DOI's motion for summary judgment
against Blue Cross and Blue Shield of Missouri on their amended counterclaim;
and (v) modifying, in part, the Circuit Court's previous September 9 Order. The
December 30 Orders declared that (i) Blue Cross and Blue Shield of Missouri had
continued to exceed or abuse its statutorily permissible purposes and the
authority conferred on it by law; and (ii) Blue Cross and Blue Shield of
Missouri is subject to judicial dissolution proceedings, but that prior to
ordering dissolution, the Circuit Court is required to consider whether there
are alternatives to dissolution and whether dissolution is in the public
interest or is the best way of protecting the interests of its members.
The Circuit Court also (i) certified the December 30 Orders and the
September 9 Order, as modified, for immediate appeal; (ii) held in abeyance
further proceedings on the Missouri Attorney General's counterclaim pending
appeal; and (iii) stayed the legal effect of the order granting the Director
and the DOI summary judgment pending the filing of an appeal bond (which Blue
Cross and Blue Shield of Missouri promptly filed).
On August 4, 1998, the Missouri Court of Appeals entered its opinion
affirming the judgments entered December 30, 1996.
F-28
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
On September 20, 1998, the company and certain of its affiliates entered
into various settlement agreements with the Missouri Attorney General and
certain state agencies, including the DOI. The settlement agreements, as most
recently amended on January 6, 2000, (principally, the Amended and Restated
Settlement Agreement) are described above under the caption "Terms of the
Proposed Settlement Agreements." If consummated, the Amended and Restated
Settlement Agreement would resolve the outstanding litigation and regulatory
disputes between Blue Cross and Blue Shield of Missouri and its affiliates and
the State of Missouri, including the litigation related to the 1994
Reorganization and Public Offering, and create an independent public benefit
health care foundation.
Notwithstanding the fact that the litigation had not yet been remanded to
the Circuit Court, on October 29, 1998, the Circuit Court "acting on its own
motion" issued an Order (the October 29, 1998 Order) in the litigation. The
October 29, 1998 Order provided for, among other things, the appointment of
Robert G. Russell as receiver/custodian to, among other things, take exclusive
possession and control of all of the issued and outstanding shares of the
company's common stock owned by Blue Cross and Blue Shield of Missouri. The
October 29, 1998 Order cited concerns by the Circuit Court about the fairness
of the transactions set forth in the settlement agreements, alleged conflicts
of interest and the need for an independent examination of the proposed
settlement and related issues. The October 29, 1998 Order also approved the
engagement of legal counsel and an investment banker to advise the
receiver/custodian. Had the October 29, 1998 Order not been void "from the
beginning" as described below, a number of significant and adverse consequences
would have resulted, including the automatic termination of the company's Blue
Cross and Blue Shield licenses and a resultant event of default under
RightCHOICE's Credit Agreement.
On November 2, 1998, Blue Cross and Blue Shield of Missouri filed a motion
to vacate the October 29, 1998 order and a supporting memorandum. Blue Cross
and Blue Shield of Missouri alleged therein that (i) the Circuit Court lacked
jurisdiction to issue the October 29, 1998 Order because the case was still
pending before the Missouri Supreme Court; (ii) the Circuit Court issued the
order without notice and an opportunity to be heard; (iii) there were no
exigent circumstances that would warrant the appointment of a receiver without
due process; and (iv) the appointment of the receiver had the effect of
frustrating the purpose for which the receiver was to be appointed, namely, the
preservation of the nonprofit assets of Blue Cross and Blue Shield of Missouri.
On November 2, 1998, BCBSA filed a complaint against the company, its
subsidiaries and Blue Cross and Blue Shield of Missouri in the United States
District Court for the Northern District of Illinois alleging that the
appointment of the receiver/custodian caused the automatic termination of the
licenses to use the Blue Cross and Blue Shield service marks. The complaint
alleged service mark infringement and breach of license agreements as a result
of the company's continued use of the Blue Cross and Blue Shield service marks
following the issuance of the October 29 Order. The BCBSA later dismissed its
complaint (as described below under "Status of Blue Cross and Blue Shield
licenses").
On November 4, 1998, the Circuit Court issued an Order (the November 4
Order) vacating the October 29, 1998 Order and declaring it to be void "from
the beginning". The Circuit Court, in issuing the November 4 Order,
acknowledged that the significant and adverse consequences that could have
resulted from the October 29, 1998 Order were unintended. On November 4, 1998,
the Circuit Court also issued an Order (the November 4 Special Master Order)
appointing a special master for the purpose of collecting and analyzing
information related to the proposed settlement. The November 4 Special Master
Order also approved the engagement of legal counsel and such financial advisors
as are approved by the court to advise the special master. The effect of the
F-29
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
November 4 Order was to void the October 29, 1998 Order as if it never existed.
The special master, at that time, had expressed his interest in providing that
RightCHOICE would continue its business in the normal course during his review.
On November 6, 1998, the Circuit Court entered an Order of Reference (the
November 6 Order), among other things, directing the special master to collect
and analyze information as to the options and alternatives available to the
Circuit Court for disposition of the remaining issues in the litigation,
including, but not limited to, an examination of the settlement agreements. The
special master was also directed to address several concerns of the Circuit
Court that were originally outlined in the October 29, 1998 Order. The special
master was further directed to investigate issues concerning the Blue Cross and
Blue Shield licenses and marks and the company's Credit Agreement.
On November 19, 1998, the Blue Cross and Blue Shield license agreements were
reinstated with addenda that provided, among other things, that the licenses
would terminate on the date of the next scheduled meeting of the BCBSA Board of
Directors, then March 11, 1999, unless extended by the Board of Directors of
the BCBSA. On March 11, June 17, September 17, and November 19, 1999, the BCBSA
Board of Directors extended the licenses until the next scheduled meeting. On
March 9, 2000, the BCBSA Board of Directors unanimously voted to fully
reinstate the licenses so that extensions on the "board to board" basis would
no longer be required. See "Status of Blue Cross and Blue Shield licenses"
below.
On November 24, 1998, the Supreme Court of Missouri granted the motion of
Blue Cross and Blue Shield of Missouri to accept transfer of the litigation
related to the 1994 Reorganization and Public Offering and, as a result of this
action, the opinion of the Missouri Court of Appeals dated August 4, 1998,
(referred to above) is of no effect. The Supreme Court, on application of the
parties, deferred briefing of the appeal pending review of the parties'
settlement agreement in the Circuit Court.
The special master conducted a series of public hearings on December 4,
December 16, and December 22, 1998, and on February 4, 1999, where evidence
related to the proposed settlement and other subjects was presented.
At the public hearing on December 16, representatives of Blue Cross and Blue
Shield of Kansas City presented an "alternative" to the proposed settlement
agreement by suggesting that the Kansas City plan would acquire the assets of
Blue Cross and Blue Shield of Missouri, including the stock of RightCHOICE that
it owns. The Kansas City plan's proposal provided for a cash purchase price of
$13.50 per share for the shares of the company held by the public and $15.25
per share for the other shares held by Blue Cross and Blue Shield of Missouri.
The proposal included a number of conditions, such as a financing contingency
and an obligation that all litigation of Blue Cross and Blue Shield of Missouri
be resolved. This proposal was not made directly to RightCHOICE or Blue Cross
and Blue Shield of Missouri.
Following the completion of the hearings and other investigation, on
February 10, 1999, the special master issued his 47-page report (the first
report of the special master) which recommended that the settlement agreement
"not be approved in its present form" and that the Circuit Court "withhold a
ruling on the settlement agreement to give the parties and the public interest
groups who had filed briefs and participated in the proceedings as "friends of
the court" an opportunity to meet and confer, and engage in a good faith effort
to address" concerns that were noted in the report of the special master. While
the special master stated that "there are many things to commend the
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<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
Settlement Agreement for the Court's approval," he indicated he had concerns
with its terms that prevented him from recommending approval. Among the
concerns he identified in his first report were: (1) whether the charitable
independent health care foundation that would be created if the settlement were
implemented would receive full value of the present assets of Blue Cross and
Blue Shield of Missouri; (2) whether a contemplated method of divestiture of
the New RightCHOICE shares to be held by the foundation -- sale of the shares
over time pursuant to a Voting Trust and Divestiture Agreement and Registration
Rights Agreement -- would yield full value for the shares; (3) whether the
proposed provisions for governance of the foundation were reasonable; and (4)
whether the provisions for the purposes of the charitable independent health
care foundation were justified.
Following the first report of the special master, the parties and the public
interest groups discussed the concerns noted therein. On March 12, 1999,
RightCHOICE, Blue Cross and Blue Shield of Missouri, the Missouri Attorney
General, and the DOI entered into an Amendment to Settlement Agreement. The
parties to the amended settlement agreement, together with certain consumer
groups that had participated in the public hearings, filed with the Circuit
Court a joint motion seeking approval of the amended settlement agreement.
On March 12, 1999, the parties also filed with the Circuit Court their
respective objections and comments to the first report of the special master.
In its objections, Blue Cross and Blue Shield of Missouri asserted that the
special master made certain erroneous factual and unjustified legal conclusions
in the report and requested the Circuit Court to approve the amended settlement
agreement.
Although the Missouri Supreme Court initially had stayed the briefing
schedule for 120 days in the proceedings before it in order to permit the
proceedings in the Circuit Court concerning review of the settlement agreement
to go forward, that stay was lifted and oral arguments were heard by the
Missouri Supreme Court on September 8, 1999. Following the oral arguments, on
September 9, 1999, the Supreme Court entered an order that the Circuit Court
"finally dispose" of the amended settlement agreement.
The special master conducted public hearings on September 3, and October 4,
1999. On October 8, 1999, he issued a second report (the second report of the
special master). The second report recommended that the amended settlement
agreement be disapproved because it failed to provide for the full value of the
Blue Cross and Blue Shield of Missouri assets for the public. The report also
suggested that the settlement should provide for the forced sale of RightCHOICE
or provide that the foundation should have the right to cause the sale of
RightCHOICE.
On October 29, 1999 the Circuit Court issued an order in which it
disapproved the amended settlement agreement. Subsequent proceedings were then
had as described above under the caption "Status of Proposed Settlement
Agreements."
On January 6, 2000, as a result of the Amended and Restated Settlement
Agreement, the parties filed a joint notice of dismissal without prejudice of
the pending claims in the lawsuit in the Circuit Court of Cole County in which
the Attorney General and the DOI contended that Blue Cross and Blue Shield of
Missouri were in violation of the Missouri health services corporation law and
non-profit corporation law. On February 8, 2000, Blue Cross and Blue Shield of
Missouri, the Attorney General and DOI moved in the Missouri Supreme Court to
dismiss their pending appeals in that litigation. Their motions were granted on
February 9, 2000.
F-31
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
An effect of the dismissal of these appeals is to leave in place, without
further right of appeal, the December 30, 1996 Orders, particularly the finding
that Blue Cross and Blue Shield of Missouri violated the non-profit law through
the continued operation of RightCHOICE. If the Settlement Agreement is not
consummated, the Attorney General and DOI remain free to seek further relief in
enforcement of those judgments, including seeking to terminate the Certificate
of Authority of Blue Cross and Blue Shield of Missouri and seeking to dissolve
Blue Cross and Blue Shield of Missouri under the Missouri non-profit
corporation law.
Subscriber class action litigation
On March 15, 1996, a suit (the Sarkis Litigation) was filed in the Circuit
Court of the City of St. Louis, Missouri (the St. Louis Circuit Court), by
Anthony J. Sarkis, Sr. and James Hacking individually and on behalf of a
purported class of (i) subscribers in individual or group health plans insured
or administered by Blue Cross and Blue Shield of Missouri or RightCHOICE, and
(ii) all persons and/or entities who benefited from Blue Cross and Blue Shield
of Missouri's tax-exempt status (the Sarkis plaintiffs). The petition named
RightCHOICE, Blue Cross and Blue Shield of Missouri, HealthLink, Inc. (a
subsidiary of RightCHOICE), and certain officers of RightCHOICE as defendants.
The named plaintiffs later abandoned their claim to represent all persons or
entities that benefited from Blue Cross and Blue Shield of Missouri's tax-
exempt status.
The Sarkis plaintiffs' claims related to an alleged conversion of Blue Cross
and Blue Shield of Missouri from a not-for-profit entity to a for-profit entity
and payment of excessive compensation to management. The petition further
alleged that certain amendments to Blue Cross and Blue Shield of Missouri's
Articles of Incorporation were improper. The petition also alleged that the
purchase of HealthLink was at an excessive price and that HealthLink operates
under contracts providing for illegal discounts by health care providers. The
Sarkis plaintiffs sought restitution, compensatory damages and punitive damages
in unspecified amounts, as well as injunctive and other equitable relief.
On November 4, 1998, the St. Louis Circuit Court issued its judgment and
order granting the motion of the defendants to dismiss the action for lack of
standing and entering judgment in favor of the defendants. The Sarkis
plaintiffs appealed the St. Louis Circuit Court's order. James Hacking later
dismissed his appeal, leaving Anthony Sarkis as the only appellant.
On February 1, 2000, the Missouri Court of Appeals entered an Order
affirming the judgment of dismissal entered in the St. Louis Circuit Court on
November 4, 1998. Appellant did not file a motion for rehearing or an
application for transfer of the appeal to the Missouri Supreme Court. As a
result, the Sarkis Litigation is now over.
The obligations of the parties to consummate the reorganization contemplated
by the Amended and Restated Settlement Agreement is conditioned upon, among
other things, satisfactory final resolution of the Sarkis Litigation. This
condition is now fully satisfied.
Anthony Sarkis, as a representative of a subscriber class, is also a party
in the actions described below under "Litigation relating to corporate status
of Blue Cross and Blue Shield of Missouri."
Litigation relating to corporate status of Blue Cross and Blue Shield of
Missouri
On November 3, 1997, Blue Cross and Blue Shield of Missouri filed an action
in the Circuit Court against the Missouri Attorney General seeking declarations
that (1) Blue Cross and Blue Shield
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<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
of Missouri is a mutual benefit type of nonprofit corporation under Chapter 355
of the Missouri Revised Statutes; and (2) Blue Cross and Blue Shield of
Missouri does not hold its assets in constructive, charitable, or other trust
for the benefit of the public generally, but rather holds its assets for the
benefit of its subscribers. The action was filed in response to continued
public and private statements by the Missouri Attorney General, the DOI and
others that Blue Cross and Blue Shield of Missouri was a public benefit type of
nonprofit corporation that held its assets for the benefit of the public
generally. The Missouri Attorney General filed an answer and counterclaim
seeking a declaration that Blue Cross and Blue Shield of Missouri is a public
benefit type of nonprofit corporation.
On June 10, 1998, Anthony Sarkis and James Hacking (plaintiffs in the Sarkis
Litigation described above under "Subscriber class action litigation") moved to
intervene in this action as plaintiffs. Sarkis and Hacking are or have been
subscribers of Blue Cross and Blue Shield of Missouri. They sought to
intervene, contending that the present parties to the action would not
adequately represent their interests in the resolution of the question whether
Blue Cross and Blue Shield of Missouri is a public benefit or a mutual benefit
corporation. Thereafter, Blue Cross and Blue Shield of Missouri moved to file
an amended petition adding Sarkis, Hacking and the DOI as parties to the
action. For its relief, Blue Cross and Blue Shield of Missouri sought, among
other things, a declaration of its status as a public benefit or mutual benefit
corporation. The Circuit Court granted Blue Cross and Blue Shield of Missouri's
motion to file the amended petition on August 17, 1998.
On June 17, 1999, the Circuit Court determined that this action would go
forward as a class action for declaratory relief. On that date, Sarkis and
Hacking dismissed all claims other than their claims for declaratory relief. On
July 6, 1999, the Attorney General of Missouri filed a motion for a summary
judgment declaring that Blue Cross and Blue Shield of Missouri is a public
benefit corporation. On August 5, 1999, Blue Cross and Blue Shield of Missouri
filed a motion for summary judgment that the class representatives and the
class lack standing to assert the claims for declaratory relief that they are
asserted. Those motions for summary judgment are under submission to the
Circuit Court.
If Blue Cross and Blue Shield of Missouri is declared to be a mutual benefit
type of nonprofit corporation that does not hold its assets for the benefit of
the public generally, Blue Cross and Blue Shield of Missouri would be required
to exercise its ownership interest in RightCHOICE consistent with the best
interests of Blue Cross and Blue Shield of Missouri's subscribers, subject to
any final rulings made in the litigation described elsewhere herein. If Blue
Cross and Blue Shield of Missouri is declared to be a public benefit type of
nonprofit corporation or if it is declared that Blue Cross and Blue Shield of
Missouri holds assets for the benefit of the public generally, Blue Cross and
Blue Shield of Missouri would be required to exercise its ownership interest in
RightCHOICE consistent with the best interests of the public at large. The
subscriber class in this action has requested a declaration that Blue Cross and
Blue Shield of Missouri may not lawfully transfer its assets to a charitable
trust. If a judgment is entered after the reorganization is completed, the
company resulting from the reorganization, referred to herein as New
RightCHOICE, could be obligated to pay substantial money damages. It is also
possible, although RightCHOICE believes unlikely, that a court could order that
the reorganization be rescinded. If an order like that were entered, it would
have a material adverse effect on New RightCHOICE.
F-33
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
Litigation relating to the Market Conduct Study and Copayment Calculations
On February 11, 1998, the DOI filed a Notice of Institution of Case (the
Market Conduct Proceeding) relating to a market conduct examination of
RightCHOICE and its affiliates. On January 6, 2000, the settlement agreement
relating to these proceedings was consummated, and the Market Conduct
Proceeding was dismissed.
On February 9, 1998, the Missouri Attorney General filed suit against
RightCHOICE, Blue Cross and Blue Shield of Missouri, BlueCHOICE, Healthy
Alliance Life Insurance Company (HALIC, a subsidiary of RightCHOICE), and
Preferred Health Plans of Missouri, Inc. (a subsidiary of RightCHOICE) in the
Circuit Court seeking injunctive relief, compensatory damages and civil
penalties under Missouri's Merchandising Practices Act for the way in which
RightCHOICE disclosed and marketed co-payment amounts prior to January 1996
(the Attorney General Co-Payment Claim). RightCHOICE discontinued the
challenged co-payment practices in January 1996.
On September 20, 1998, RightCHOICE entered a settlement agreement with the
Attorney General for resolution of the Attorney General Co-Payment Claim
conditioned on court approval of the separate principal settlement agreement of
September 20, 1998 described above under the caption Terms of the Settlement
Agreement. The Attorney General Co-Payment Claim was dismissed by the Missouri
Attorney General without prejudice pending the approval of the amended
settlement agreement described above.
On January 6, 2000, the parties agreed to remove the court approval
condition precedent to consummating the settlement of the Attorney General Co-
Payment Claim. The settlement is now completed.
Status of Blue Cross and Blue Shield licenses
On March 9, 2000, after a period of "board to board" extensions resulting
from the pendency of the principal litigation with the State of Missouri, the
BCBSA Board of Directors voted to reinstate the full licenses for RightCHOICE
and its licensed affiliates. This action followed the dismissal of the
principal litigation pursuant to the Amended and Restated Settlement Agreement
described above under "Agreement for Settlement of Certain Litigation Matters
and Reorganization of RightCHOICE." Important events that preceded this
reinstatement are described in the following paragraphs.
The October 29 Order (as described above under "Litigation relating to the
1994 Reorganization and Public Offering") provided for the appointment of
Robert G. Russell as receiver/custodian to, among other things, take exclusive
possession and control of all of the issued and outstanding shares of
RightCHOICE's class B common stock, all of which is owned by Blue Cross and
Blue Shield of Missouri. On November 2, 1998, the BCBSA notified RightCHOICE
and its licensed affiliates that their licenses to use the Blue Cross and Blue
Shield service marks had terminated automatically pursuant to their terms on
October 29, 1998, as a result of the October 29 Order, and filed a complaint
against RightCHOICE and its licensed affiliates alleging service mark
infringement and breach of license agreements as a result of the continued use
of the service marks following the issuance of the October 29 Order (the BCBSA
Complaint). On November 4, 1998, after Blue Cross and Blue Shield of Missouri
filed a motion seeking a revocation of the October 29 Order and supporting
memorandum, the Circuit Court issued the November 4 Order and the November 4
Special Master Order. The November 4 Order set aside the October 29 Order and
declared it to be "void from the beginning." The November 4 Special Master
Order appointed Robert G. Russell as
F-34
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
special master for the purpose of collecting and analyzing information related
to the proposed settlement of the litigation described above. On November 6,
1998, the Court issued an Order of Reference for the special master. As a
result of the November 4 Order, the BCBSA agreed to dismiss the BCBSA
Complaint.
Each of the reinstated license agreements approved by the BCBSA on November
19, 1998 included an addendum that provided, among other things, that the
licenses granted under such license agreements would be reviewed by the BCBSA
at the next regularly scheduled meeting of the BCBSA Board of Directors
(originally, March 11, 1999). If, on or before such date, the BCBSA did not
extend the termination dates for the license agreements until the next
regularly scheduled meeting of the BCBSA Board of Directors after such date, or
otherwise modify the addenda, the license agreements would have terminated.
This "board-to-board" extension of the license agreements has been adopted in
conjunction with the issuance of reinstated licenses granted to other BCBSA
licensees following a license termination. On March 11, June 17, September 17
and November 19, 1999, the Board of Directors of the BCBSA unanimously voted to
extend RightCHOICE's licenses to use the Blue Cross and Blue Shield names and
service marks until the next scheduled meeting of the BCBSA Board of Directors.
The licenses (which include the primary licenses granted to Blue Cross and
Blue Shield of Missouri and the controlled affiliate licenses to RightCHOICE,
HALIC and BlueCHOICE) give these companies the right to use the Blue Cross and
Blue Shield names and service marks in connection with health insurance
products marketed and sold in Blue Cross and Blue Shield of Missouri's licensed
operating area (consisting of 85 counties in eastern and central Missouri). The
licenses require Blue Cross and Blue Shield of Missouri, RightCHOICE, HALIC and
BlueCHOICE to pay license fees to BCBSA for the use of the marks. These license
fees have aggregated approximately $0.7 million to $0.8 million per year for
1997 through 1999. The company expects to continue to incur annual license fees
of similar amounts; however, the amounts may vary from year to year based on
the company's total revenue as compared to that of all Blue Cross and Blue
Shield licensees as well as changes adopted by BCBSA to its overall formulas
for computing the license fees.
Each of the licenses provides that it automatically terminates if, among
other things: (i) the DOI or another regulatory agency assumes control of the
licensee or delinquency proceedings are instituted; (ii) a trustee, interim
trustee, receiver or other custodian for any of Blue Cross and Blue Shield of
Missouri's or the BCBSA's property or business is appointed, or (iii) an action
is instituted by any governmental entity or officer against the licensee
seeking dissolution or liquidation of its assets or seeking the appointment of
a trustee, interim trustee, receiver or custodian for any of its property or
business, which is consented or acquiesced to by the licensee or is not
dismissed within 130 days of the licensee being served with the pleading or
document commencing the action, provided that if the action is stayed or its
prosecution enjoined, the 130-day period is tolled for the duration of the stay
or injunction, and provided further that the BCBSA's Board of Directors may
toll or extend the 130-day period at any time prior to its expiration. Each
license also provides that it may be terminated by BCBSA if, among other
things, the licensee fails to meet certain quality control standards or minimum
capital or liquidity requirements. Pursuant to the addendum, which became part
of the reinstated license agreements following the November 19, 1998 BCBSA
Board meeting, an automatic termination will also occur (i) if the BCBSA Board
does not take action to extend the licenses on or before the date of the next
regularly scheduled BCBSA Board meeting, and (ii) upon any judicial act that
(a) provides for or approves a transaction pursuant to which a person, entity
or group other than the licensees of BCBSA, acquires the ability to select the
majority of the
F-35
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
members of the Board of Directors of Blue Cross and Blue Shield of Missouri,
RightCHOICE or certain of its affiliates or otherwise gains control of Blue
Cross and Blue Shield of Missouri, RightCHOICE or such affiliates, or (b)
changes the composition of, or the voting rights of the members of the Board of
Directors of Blue Cross and Blue Shield of Missouri, RightCHOICE or such
affiliates. The foregoing provision does not apply to a settlement or
resolution of the litigation described above that complies with all BCBSA
rules, regulations and standards and is approved by or conditioned on the
approval of the BCBSA. In addition, the licenses may be terminated if Blue
Cross and Blue Shield of Missouri, RightCHOICE, or certain subsidiaries of
RightCHOICE are unable to achieve certain financial benchmarks as required by
the BCBSA.
The affiliate licenses are derivative of the primary licenses and
automatically terminate if the primary licenses terminate. According to their
terms, if a license is terminated, Blue Cross and Blue Shield of Missouri,
RightCHOICE, HALIC and BlueCHOICE are jointly liable to the BCBSA for payment
of a termination fee in an amount equal to $25 times the number of licensed
enrollees of the terminated entity and its licensed controlled affiliates, and
must give written notice of such termination to their enrollees. In connection
with the reinstatement described above, the BCBSA waived the application of
these provisions to the alleged automatic termination resulting from the entry
of the October 29 Order.
RightCHOICE believes that the exclusive right to use the Blue Cross and Blue
Shield names and service marks provides it and its controlled affiliates with a
marketing advantage in Blue Cross and Blue Shield of Missouri's licensed
operating area, the loss of which would have a material adverse effect on
RightCHOICE and the market for its stock. In addition, the loss of the licenses
would be an event of default under RightCHOICE's Credit Agreement which, if not
waived or otherwise addressed, could result in a material adverse effect on
RightCHOICE and the market for its stock.
In connection with the settlement agreements described above under "Status
of Proposed Settlement Agreements," Blue Cross and Blue Shield of Missouri and
RightCHOICE have filed a request with the BCBSA to transfer its primary license
to New RightCHOICE as part of the transactions contemplated by the Amended and
Restated Settlement Agreement. The BCBSA had conditionally approved the
transfer as proposed under the Amended and Restated Settlement Agreement.
RightCHOICE cannot provide any assurances that the transactions contemplated by
the Amended and Restated Settlement Agreement will be effected. The failure to
consummate the transactions contemplated by the Amended and Restated Settlement
Agreement could have a material adverse effect on RightCHOICE and the market
for its stock.
Other contingencies
In addition to the matters described above, from time to time in the
ordinary course of business, RightCHOICE and certain of its subsidiaries are
parties to various legal proceedings, many of which involve claims relating to
the denial of health care benefits. In some cases, plaintiffs may seek
substantial punitive damages. The loss of even one of these claims, if it
resulted in a significant punitive damage award, could adversely affect
RightCHOICE's financial condition or results of operations. The risk of
potential liability under punitive damage theories also may make reasonable
settlements of claims more difficult to obtain.
In addition, plaintiffs continue to bring new types of purported legal
claims against managed care companies such as RightCHOICE. RightCHOICE cannot
determine with any certainty the impact that these evolving theories of
recovery may have on the managed care industry in general or on RightCHOICE or
its subsidiaries in particular.
F-36
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
RightCHOICE anticipates that it will have insurance coverage for some of
these potential liabilities. Other potential liabilities may not be covered by
insurance, insurers may dispute coverage, or the amount of insurance may not be
enough to cover the damages awarded.
Update to contingencies (unaudited)
RightCHOICE continues to work toward completing the proposed statement. The
parties to the settlement have agreed to use their best efforts to consummate
the settlement and the related reorganization by December 31, 2000. Progress
that the parties have made toward implementation of the settlement and the
related reorganization include the following:
. The Blue Cross and Blue Shield Association has fully restored the
licenses to use the Blue Cross and Blue Shield names and service marks
and has preliminarily approved the reorganization.
. New RightCHOICE, which will be the resulting company in the
reorganization, has been incorporated.
. The Missouri Department of Insurance has issued preliminary approval for
the reorganization.
. Preliminary filings relating to the reorganization have been made with
the SEC.
. Blue Cross and Blue Shield of Missouri has requested that the IRS issue a
private letter tax ruling to the effect that various aspects of the
reorganization will be tax-free. The company's special tax advisor,
PricewaterhouseCoopers LLP, has issued a tax opinion relating to the tax-
free nature of the reorganization.
. The Missouri Foundation for Health has been incorporated and has received
a determination from the IRS that it is a tax-exempt organization. A
nominating committee has been formed to select a board of directors for
the Foundation.
. The company's lenders under its credit facility have consented to the
reorganization.
A number of significant conditions must be satisfied before the settlement
is completed, including finalizing the preliminary filings made with the SEC
and receipt of approval of the reorganization from the company's shareholders
at a special shareholders' meeting that currently is expected to be held before
the end of the year. The parties have sought a private letter ruling from the
IRS and final approval of the reorganization from both the Blue Cross and Blue
Shield Association and the Missouri Department of Insurance. The reorganization
is also conditioned upon the receipt of legal opinions from the counsel to the
various parties. In addition, there remains pending a case regarding the status
of Blue Cross and Blue Shield of Missouri that could affect the closing of the
reorganization. The case relates to whether Blue Cross and Blue Shield of
Missouri is a public benefit or a mutual benefit company as described above
under "Litigation relating to corporate status of Blue Cross and Blue Shield of
Missouri." The issue is currently before the Circuit Court.
14. Segment information
RightCHOICE operates in two segments which it defines as underwritten and
self-funded. RightCHOICE's underwritten segment includes a comprehensive array
of products including PPO, POS, HMO, Medicare supplement, managed indemnity and
specialty managed care coverages. RightCHOICE's self-funded segment includes
TPA, ASO for self-insured organizations, network rental services for self-
insured organizations, insurance companies and other organizations, and life
insurance agency services. All of RightCHOICE's revenues, both underwritten
premiums and self-funded fees and other income, are derived from domestic
(United States) sources and no single customer accounts for more than 10% of
total revenues.
F-37
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
Operating income for RightCHOICE's underwritten segment is determined by
deducting from premium revenue the health care service costs, commissions, and
general and administrative expenses, as well as any non-recurring charges, that
are attributable to that segment's operations. Operating income for the self-
funded segment is determined by deducting from fees and other income the
commissions, general and administrative expenses and non-recurring charges
attributable to the segment. Expenses not directly traceable to an industry
segment are allocated on a consistent and reasonable basis utilizing
membership, groups, claims, and other key drivers. Corporate identifiable
assets by segment include only receivables from members since RightCHOICE does
not produce more detailed information by segment internally. Intersegment
revenues are not material. Financial information by segment is as follows (in
thousands):
<TABLE>
<CAPTION>
Underwritten Self-funded Consolidated
------------ ----------- ------------
<S> <C> <C> <C>
As of and for the six months ended
June 30, 2000 (unaudited)
Revenues............................ $404,390 $48,196 $452,586
Operating income.................... 3,102 16,462 19,564
Depreciation and amortization
expense............................ 5,968 2,824 8,792
Identifiable assets................. 52,711 34,201 86,912
<CAPTION>
Underwritten Self-funded Consolidated
------------ ----------- ------------
<S> <C> <C> <C>
As of and for the six months ended
June 30, 1999 (unaudited)
Revenues............................ $357,940 $41,284 $399,224
Operating (loss) income............. (3,359) 12,508 9,149
Depreciation and amortization
expense............................ 5,726 2,657 8,383
Identifiable assets................. 50,181 24,120 74,301
<CAPTION>
Underwritten Self-funded Consolidated
------------ ----------- ------------
<S> <C> <C> <C>
As of and for the year ended
December 31, 1999
Revenues............................ $732,595 $84,317 $816,912
Operating (loss) income............. (4,394) 24,061 19,667
Depreciation and amortization
expense............................ 11,720 5,495 17,215
Identifiable assets................. 49,091 29,856 78,947
<CAPTION>
Underwritten Self-funded Consolidated
------------ ----------- ------------
<S> <C> <C> <C>
As of and for the year ended
December 31, 1998
Revenues............................ $694,678 $72,834 $767,512
Operating (loss) income............. (23,056) 18,809 (4,247)
Depreciation and amortization
expense............................ 13,779 5,555 19,334
Non-recurring operating charges..... 777 123 900
Identifiable assets................. 46,311 21,713 68,024
<CAPTION>
Underwritten Self-funded Consolidated
------------ ----------- ------------
<S> <C> <C> <C>
As of and for the year ended
December 31, 1997
Revenues............................ $654,315 $65,096 $719,411
Operating (loss) income............. (69,437) 8,437 (61,000)
Depreciation and amortization
expense............................ 16,821 6,287 23,108
Charge for loss reserves............ 29,510 29,510
Other non-recurring operating
charges............................ 2,190 1,111 3,301
Identifiable assets................. 44,763 15,256 60,019
</TABLE>
F-38
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
The following table sets forth revenue (in thousands) by product group for
the six months ended June 30, 2000 and 1999 and for the years ended December
31, 1999, 1998, and 1997. The ASO/self-funded and other income category below
includes $180, $448, $444, $191 and $48 of other income related to
RightCHOICE's underwritten segment for the six months ended June 30, 2000 and
1999 and the years ended December 31, 1999, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
For the six months For the year ended
ended June 30, December 31,
----------------------- --------------------------
Product Group 2000 1999 1999 1998 1997
------------- ----------- ----------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
PPO:
Alliance PPO............. $122,339 $101,047 $209,487 $191,855 $197,329
AllianceCHOICE POS....... 94,665 81,070 167,392 151,034 124,890
HMO (includes other POS)... 110,651 104,393 211,910 206,292 183,485
Medicare supplement........ 45,253 46,863 92,314 94,951 97,157
Managed indemnity.......... 1,104 1,851 3,659 7,627 12,531
Other specialty services... 30,198 22,268 47,389 42,728 38,875
-------- -------- -------- -------- --------
Total premium revenue.. 404,210 357,492 732,151 694,487 654,267
ASO/Self-funded and other
income.................... 48,376 41,732 84,761 73,025 65,144
-------- -------- -------- -------- --------
Total revenues......... $452,586 $399,224 $816,912 $767,512 $719,411
======== ======== ======== ======== ========
</TABLE>
15. Transactions with Blue Cross and Blue Shield of Missouri
Pursuant to an administrative services agreement, RightCHOICE provides
certain administrative and support services, including computerized data
processing and management information systems, telecommunication systems and
accounting, finance, legal, actuarial and other management services to Blue
Cross and Blue Shield of Missouri. These expenses are allocated to and paid by
Blue Cross and Blue Shield of Missouri in an amount equal to the direct and
indirect costs and expenses incurred in furnishing these services. In addition,
RightCHOICE provides services to Blue Cross and Blue Shield of Missouri, which
include health plan services, processing claims related to such plans, provider
contracting, market research and advertising, to be reimbursed on a basis that
approximates cost.
BCBSMo provides office space and parking to RightCHOICE pursuant to lease
agreements between the companies. The cost to RightCHOICE associated with these
leases comprises the majority of the expenses detailed below beside the
caption, "Services provided by BCBSMo." Management of RightCHOICE and of Blue
Cross and Blue Shield of Missouri consider the allocation methodologies and
cost approximations utilized to be reasonable and appropriate.
General and administrative expense excludes net intercompany charges
allocated to Blue Cross and Blue Shield of Missouri by RightCHOICE for the
respective periods, as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C> <C>
Services provided to BCBSMo................ $16,798 $15,642 $12,792
Services provided by BCBSMo................ (5,070) (4,411) (4,436)
------- ------- -------
Net expense allocated to BCBSMo.......... $11,728 $11,231 $ 8,356
======= ======= =======
</TABLE>
F-39
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(dollars in thousands, except share data)
RightCHOICE has intercompany receivables and payables between HALIC and
BCBSMo, which include $9.8 million of receivables and $3.4 million of payables
related to the BCBSMo transfer of all economic risks and rewards on certain
insurance policies originally issued by BCBSMo, pursuant to a reinsurance
agreement. In addition, the intercompany receivables and payables include net
intercompany transactions for general and administrative expenses as well as
intercompany tax settlements, settled on a quarterly basis. Additional amounts
of receivables and payables relate to RightCHOICE's cash management activity
which is typically settled on a monthly basis.
16. Statutory information
The operations of RightCHOICE's subsidiaries, HALIC, BlueCHOICE, HealthLink,
HealthLink HMO, and RightCHOICE Insurance Company (RIC) are subject to
regulation and supervision by regulatory authorities of the various
jurisdictions in which they are licensed to conduct business. Regulatory
authorities exercise extensive supervisory power over the licensing of
insurance companies and health maintenance organizations; the amount of
reserves that must be maintained; the approval of forms and policies used; the
nature of, and limitation on, an insurance company's or a health maintenance
organization's investments; periodic examination of the operations of insurance
companies and health maintenance organizations; the form and content of annual
statements and other reports required to be filed on the financial condition of
insurance companies and health maintenance organizations; and the establishment
of capital requirements. HALIC, BlueCHOICE, HealthLink HMO, and RIC are
required to file periodic statutory financial statements in each jurisdiction
in which they are licensed. Additionally, these companies are also periodically
examined by the insurance departments of the jurisdictions in which they are
licensed to do business.
In addition to minimum capital requirements imposed by BCBSA, the company's
regulated subsidiaries must comply with certain minimum statutory surplus
requirements in each of the states in which they operate. The combined
statutory surplus of RightCHOICE's insurance and HMO subsidiaries was $111,482
and $102,489 at December 31, 1999 and 1998, respectively. At December 31, 1999
and 1998, these subsidiaries were required to maintain a combined minimum of
$51,111 and $57,451, respectively, of combined statutory surplus in order to
meet the minimum BCBSA capital and statutory surplus requirements for these
subsidiaries' states of domicile.
RightCHOICE's subsidiaries prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the Missouri
and Illinois Departments of Insurance. Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioners, as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
In 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles guidance (the Codification),
which will replace the current Accounting Practices and Procedures manual as
the National Association of Insurance Commissioners' primary guidance on
statutory accounting. The National Association of Insurance Commissioners is
now considering amendments to the Codification guidance that would also be
effective upon implementation. The National Association of Insurance
Commissioners has recommended an effective date of January 1, 2001. The
Codification provides guidance for areas where statutory accounting has been
silent and changes current statutory accounting in some areas. Management
believes that it is more likely than not that the Missouri and Illinois
legislatures will enact the Codification. RightCHOICE has not estimated the
potential effect of the Codification guidance if adopted.
F-40
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
17. Quarterly financial information (unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------
31-Mar 30-Jun 30-Sep 31-Dec
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999
----
Total revenues................... $200,013 $199,211 $204,503 $213,185
Operating expenses............... 195,411 194,664 199,294 207,876
Operating income................. 4,602 4,547 5,209 5,309
Investment income, net........... 3,475 2,787 3,076 3,513
Other, net....................... (760) (693) (1,216) (1,456)
Income before taxes.............. 7,317 6,641 7,069 7,366
Provision for income taxes....... 2,640 2,734 3,064 2,739
Net income....................... $ 4,677 $ 3,907 $ 4,005 $ 4,627
======== ======== ======== ========
Basic and diluted earnings per
share........................... $ 0.25 $ 0.21 $ 0.21 $ 0.25
======== ======== ======== ========
Weighted average shares
outstanding..................... 18,673 18,673 18,673 18,673
======== ======== ======== ========
Membership (in thousands)........ 2,140 2,208 2,235 2,286
======== ======== ======== ========
<CAPTION>
Three months ended
--------------------------------------
31-Mar 30-Jun 30-Sep 31-Dec
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
----
Total revenues................... $191,852 $191,818 $189,804 $194,038
Operating expenses............... 193,101 192,433 192,384 193,841
Operating (loss) income.......... (1,249) (615) (2,580) 197
Investment income, net........... 4,372 3,984 5,062 5,251
Other, net....................... (1,065) (1,237) (1,204) (1,412)
Income before taxes.............. 2,058 2,132 1,278 4,036
Provision for income taxes....... 1,090 930 763 1,061
Net income....................... $ 968 $ 1,202 $ 515 $ 2,975
======== ======== ======== ========
Basic and diluted earnings per
share........................... $ 0.05 $ 0.06 $ 0.03 $ 0.16
======== ======== ======== ========
Weighted average shares
outstanding..................... 18,672 18,672 18,672 18,673
======== ======== ======== ========
Membership (in thousands)........ 1,998 2,013 2,092 2,123
======== ======== ======== ========
</TABLE>
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of RightCHOICE Managed Care, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly in all material respects, the financial position of
RightCHOICE Managed Care, Inc., and its subsidiaries ("RightCHOICE") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of RightCHOICE's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 9, 2000, except for Note 13
for which the date is March 9, 2000
F-42
<PAGE>
Schedule I
(Page 1 of 3)
RIGHTCHOICE MANAGED CARE, INC.
CONDENSED FINANCIAL INFORMATION
Condensed balance sheets of RightCHOICE Managed Care, Inc. (parent company
only) as of December 31, 1999 and 1998, and the condensed statements of income
and cash flows for the years ended December 31, 1999, 1998 and 1997 are as
follows (certain reclassifications have been made to the condensed financial
statements for 1997 and 1998 to conform to the 1999 presentation):
BALANCE SHEETS
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
December 31,
1999 1998
-------- --------
ASSETS
------
<S> <C> <C>
Cash............................................................ $ 4,877 $ 2,998
Investments available for sale, at market value................. 560 4,703
Investments in affiliates (2)................................... 198,086 189,515
Property and equipment, net..................................... 3,683 5,941
Receivables from affiliates (1)................................. 147,931 136,042
Income taxes receivable, net.................................... 2,627 7,268
Other assets.................................................... 7,170 7,271
-------- --------
Total assets.............................................. $364,934 $353,738
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Accounts payable and accrued expenses........................... $ 25,908 $ 23,707
Payables to affiliates (1)...................................... 117,980 111,431
Obligations for employee benefits............................... 28,396 27,292
Long-term debt, including current portion....................... 34,063 43,063
Obligations under capital leases................................ 1,044 2,371
-------- --------
Total liabilities......................................... 207,391 207,864
-------- --------
Shareholders' equity:
Preferred stock, $.01 par, 25,000,000 shares authorized, no
shares issued and outstanding................................
Common stock:
Class A, $.01 par, 125,000,000 shares authorized, 3,737,500
shares issued, 3,710,653 and 3,710,426 shares outstanding,
respectively............................................... 37 37
Class B, convertible, $.01 par, 100,000,000 shares
authorized, 14,962,500 shares issued and outstanding....... 150 150
Additional paid-in capital.................................... 132,634 132,635
Retained earnings............................................. 29,529 12,313
Treasury stock, 26,847 and 27,074 class A shares,
respectively, at cost........................................ (380) (383)
Accumulated other comprehensive (loss) income................. (4,427) 1,122
-------- --------
Total shareholders' equity................................ 157,543 145,874
-------- --------
Total liabilities and shareholders' equity................ $364,934 $353,738
======== ========
</TABLE>
--------
(1) The majority of these intercompany amounts are eliminated in the
Consolidated Financial Statements with the remaining amounts explained in
Note 15 of the Notes to Consolidated Financial Statements.
(2) As of December 31, 1999 and 1998, $192,181 and $183,786, respectively, is
eliminated in the Consolidated Financial Statements.
The condensed financial information should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
F-43
<PAGE>
Schedule I
(Page 2 of 3)
RIGHTCHOICE MANAGED CARE, INC.
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue
Reimbursement from affiliates (1).............. $107,642 $108,972 $116,380
Dividends from affiliates (1).................. 7,300 15,203 13,813
-------- -------- --------
Total revenue................................ 114,942 124,175 130,193
Expense
General and administrative..................... 113,762 111,828 118,920
-------- -------- --------
Operating income................................. 1,180 12,347 11,273
Investment income and other...................... 2,550 3,895 4,802
Interest expense................................. (3,713) (4,223) (4,418)
-------- -------- --------
Income before equity in undistributed income
(loss)
of subsidiaries and income tax (benefit)
provision...................................... 17 12,019 11,657
Equity in undistributed income (loss) of
subsidiaries (1)................................ 14,321 (6,221) (36,477)
-------- -------- --------
Income (loss) before taxes....................... 14,338 5,798 (24,820)
Income tax (benefit) provision................... (2,878) 138 (786)
-------- -------- --------
Net income (loss)................................ $ 17,216 $ 5,660 $(24,034)
======== ======== ========
</TABLE>
--------
(1) Substantially all of the balances related to these intercompany items are
eliminated in the Consolidated Financial Statements.
The condensed financial information should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
F-44
<PAGE>
Schedule I
(Page 3 of 3)
RIGHTCHOICE MANAGED CARE, INC.
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 17,216 $ 5,660 $(24,034)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Equity in undistributed (income) loss of
subsidiaries................................. (14,321) 6,221 36,477
Depreciation.................................. 1,851 2,505 4,264
Loss on sale of property and equipment........ 805
Gain on sale of investments................... (794) (1,671)
Accretion of discounts and amortization of
premiums..................................... 1 (19) (170)
(Increase) decrease in:
Receivables from affiliates................... (11,889) (89,887) (30,444)
Income taxes receivable, net.................. 4,532 (7,069)
Other assets.................................. 277 (5,260) (141)
Increase (decrease) in:
Accounts payable and accrued expenses......... 2,316 3,657 (1,755)
Payables to affiliates........................ 6,549 74,343 22,306
Obligations for employee benefits............. 1,104 2,218 562
Income taxes payable, net..................... (14,425) 991
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... 8,441 (22,850) 6,385
-------- -------- --------
Cash flows from investing activities:
Investments purchased......................... (427) (4,845) (14,970)
Investments sold or matured................... 425 5,661 35,940
Investments purchased, sold or transferred
from/to affiliates, net...................... 4,163 17,773
Decrease (increase) in investment in
affiliates................................... 3,256 (814)
Property and equipment purchased, sold or
transferred from/to
affiliates, net.............................. (32) (427) 2,995
-------- -------- --------
Net cash provided by investing activities....... 4,129 21,418 23,151
-------- -------- --------
Cash flows from financing activities:
Payments of long-term debt.................... (9,000) (3,937) (15,000)
Payments on capital lease obligations......... (1,693) (2,797) (3,509)
Sale (purchase) of class A treasury stock..... 2 16 (78)
-------- -------- --------
Net cash used in financing activities........... (10,691) (6,718) (18,587)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 1,879 (8,150) 10,949
Cash and cash equivalents, beginning of year.... 2,998 11,148 199
-------- -------- --------
Cash and cash equivalents, end of year.......... $ 4,877 $ 2,998 $ 11,148
======== ======== ========
Supplemental Schedule of Noncash Investing And
Financing Activities:
Equipment acquired through capital leases....... $ 582 $ 4,001
Disposal of equipment under capital leases...... 216 $ 43
</TABLE>
The condensed financial information should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
F-45
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1998
----------- -------- --------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ 25,008 $ 19,076 $ 12,543
Investments available for sale, at market
value......................................... 27,218 26,617 3,522
Receivables from members....................... 17,277 16,513 20,363
Receivables from related parties............... 22,489 27,098 26,194
Deferred income taxes.......................... 1,244 1,244 2,224
Other assets................................... 11,146 11,049 9,941
-------- -------- --------
Total current assets......................... 104,382 101,597 74,787
Property and equipment, net...................... 60,889 61,936 64,562
Other assets..................................... 657 580 567
-------- -------- --------
Total assets................................. $165,928 $164,113 $139,916
======== ======== ========
Liabilities
Current liabilities:
Medical claims payable......................... $ 22,855 $ 16,609 $ 12,238
Unearned premiums.............................. 532 544 639
Accounts payable and accrued expenses.......... 13,641 14,626 15,035
Payables to related parties.................... 17,502 28,853 18,363
Income taxes payable........................... 13,201 8,888 3,244
-------- -------- --------
Total current liabilities.................... 67,731 69,520 49,519
Obligations for employee benefits................ 636 630 628
Deferred income taxes............................ 6,389 6,297 7,095
-------- -------- --------
Total liabilities............................ 74,756 76,447 57,242
-------- -------- --------
Net assets representing reserve for protection of
members......................................... 91,172 87,666 82,674
-------- -------- --------
Total liabilities and net assets representing
reserve for protection of members........... $165,928 $164,113 $139,916
======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-46
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
For the six months ended For the year ended
June 30, December 31,
---------------------------- ---------------------------
2000 1999 1999 1998 1997
(unaudited) (unaudited)
------------ ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Premium............... $ 45,867 $ 41,544 $ 85,393 $ 80,672 $ 81,322
Fees and other income. 11,345 9,922 20,314 15,583 12,704
Related party rental
income............... 2,465 2,519 5,040 4,166 4,076
------------ ------------ -------- -------- --------
Total revenues...... 59,677 53,985 110,747 100,421 98,102
------------ ------------ -------- -------- --------
Operating expenses:
Health care services.. 41,233 36,239 73,070 71,007 74,777
Commissions........... 18 20 43 42 42
General and
administrative
(excludes
depreciation and
amortization and
includes net
intercompany charges
of $9,164, $8,683,
$16,586, $15,245, and
$12,206,
respectively,
allocated by
RightCHOICE Managed
Care, Inc.).......... 12,213 11,172 22,662 24,008 24,792
Depreciation and
amortization......... 1,431 1,410 2,813 2,796 2,525
Non-recurring charges. 320 1,764 3,761
------------ ------------ -------- -------- --------
Total operating
expenses........... 55,215 50,605 102,349 97,853 102,136
------------ ------------ -------- -------- --------
Operating income (loss). 4,462 3,380 8,398 2,568 (4,034)
------------ ------------ -------- -------- --------
Investment income:
Interest and
dividends............ 1,502 696 1,895 592 786
Realized losses, net.. (5,200) (55)
------------ ------------ -------- -------- --------
Net investment
income............. 1,502 696 1,895 (4,608) 731
------------ ------------ -------- -------- --------
Other:
Interest expense...... (2) (42)
Other (expense)
income, net.......... (137) 80 40 113 (2)
------------ ------------ -------- -------- --------
Total other, net.... (137) 80 40 111 (44)
------------ ------------ -------- -------- --------
Income (loss) before
provision (benefit) for
income taxes and
cumulative effect of
accounting change...... 5,827 4,156 10,333 (1,929) (3,347)
Provision (benefit) for
income taxes........... 2,321 1,767 4,265 (663) (1,172)
------------ ------------ -------- -------- --------
Income (loss) before
cumulative effect of
accounting change...... 3,506 2,389 6,068 (1,266) (2,175)
Cumulative effect of
accounting change for
startup costs.......... 1,076 1,076
------------ ------------ -------- -------- --------
Net income (loss)....... $ 3,506 $ 1,313 $ 4,992 $ (1,266) $ (2,175)
============ ============ ======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-47
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
CONSOLIDATED STATEMENTS OF CHANGES IN
NET ASSETS REPRESENTING RESERVE FOR PROTECTION OF MEMBERS
(in thousands)
<TABLE>
<S> <C>
Net Assets Representing Reserve for Protection of Members at December
31, 1996............................................................. $85,811
-------
Net unrealized gain on investment securities........................ 304
Net loss for the year ended December 31, 1997....................... (2,175)
-------
Comprehensive loss for the year ended December 31, 1997............. (1,871)
-------
Net Assets Representing Reserve for Protection of Members at December
31, 1997............................................................. 83,940
Net loss and comprehensive loss for the year ended December 31,
1998............................................................... (1,266)
-------
Net Assets Representing Reserve for Protection of Members at December
31, 1998............................................................. 82,674
Net income and comprehensive income for the six months ended June
30, 1999 (unaudited)............................................... 1,313
-------
Net Assets Representing Reserve for Protection of Members at June 30,
1999 (unaudited)..................................................... 83,987
Net income and comprehensive income for the six months ended
December 31, 1999 (unaudited)...................................... 3,679
-------
Net Assets Representing Reserve for Protection of Members at December
31, 1999............................................................. 87,666
Net income and comprehensive income for the six months ended June
30, 2000 (unaudited)............................................... 3,506
-------
Net Assets Representing Reserve for Protection of Members at June 30,
2000 (unaudited)..................................................... $91,172
=======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-48
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the six months ended For the year ended
June 30, December 31,
2000 1999 1999 1998 1997
(unaudited) (unaudited)
------------ ------------ -------- -------- -------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $ 3,506 $ 1,313 $ 4,992 $ (1,266) $(2,175)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 1,431 1,410 2,813 2,796 2,525
Provision (credit) for
deferred income
taxes................ 92 312 182 (248) (836)
Loss on sale of
investments.......... 5,200 55
Accretion of discounts
and amortization of
premiums, net........ (203) (372) 7
(Increase) decrease in
certain assets:
Receivables from
members.............. (764) 5,954 3,850 (2,580) (3,265)
Receivables from
related parties...... 4,609 2,148 (904) (5,981) (3,064)
Other assets.......... (10) 1,652 (854) (321) (2,146)
Other long-term
investments.......... (790)
Increase (decrease) in
certain liabilities:
Medical claims
payable.............. 6,246 (1,102) 4,371 (2,772) 3,026
Unearned premiums..... (12) (36) (95) 22 308
Accounts payable and
accrued expenses..... (985) 770 (409) 3,769 403
Payables to related
parties.............. (11,351) 2,885 10,490 2,230 (940)
Obligations for
employee benefits.... 6 (6) 2 10 132
Income taxes payable.. 4,313 1,575 5,644 1,669 1,340
------------ ------------ -------- -------- -------
Net cash provided by
(used in) operating
activities............. 6,878 16,875 29,710 2,528 (5,420)
------------ ------------ -------- -------- -------
Cash flows from
investing activities:
Proceeds from matured
investments:
Fixed maturities.... 22,650 10,184
Proceeds from
investments sold:
Fixed maturities.... 6,288 23,774 8,514
Equity securities... 712 200
Other............... 5,384
Investments purchased:
Fixed maturities.... (29,500) (22,130) (57,660) (275)
Property and equipment
purchased............ (384) 145 (187) (1,672) (136)
------------ ------------ -------- -------- -------
Net cash (used in)
provided by investing
activities............. (946) (21,985) (23,177) 3,437 8,578
------------ ------------ -------- -------- -------
Net increase (decrease)
in cash and cash
equivalents............ 5,932 (5,110) 6,533 5,965 3,158
Cash and cash
equivalents at
beginning of period.... 19,076 12,543 12,543 6,578 3,420
------------ ------------ -------- -------- -------
Cash and cash
equivalents at end of
period................. $ 25,008 $ 7,433 $ 19,076 $ 12,543 $ 6,578
============ ============ ======== ======== =======
Supplemental Disclosure
of Cash Information:
Interest paid......... $ 42 $ 42
Income tax (payments)
refunds (received
from) paid to RIT.... $ (10,072) $ (5,928) $ (7,730) (842) 2,897
Income tax payments
(refunds)............ 7,988 5,580 5,941 (1,242) (4,745)
------------ ------------ -------- -------- -------
Net income taxes
received............. $ (2,084) $ (348) $ (1,789) $ (2,084) $(1,848)
============ ============ ======== ======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-49
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Organization and summary of significant accounting policies
Blue Cross and Blue Shield of Missouri (BCBSMo or the company) is
incorporated as a not-for-profit corporation and maintains a Certificate of
Authority as a health services corporation. The company provides prepaid
hospitalization, medical-surgical and other related health benefits to its
members. The company also provides administrative services to self-insured
employers and members of other Blue Cross and Blue Shield Plans.
The company is a licensee of the Blue Cross and Blue Shield Association
(BCBSA), the national trade association of Blue Cross and Blue Shield
Licensees, each of which holds exclusive right to use the Blue Cross and/or
Blue Shield names and service marks in specific geographic areas. Each
licensee, including the company, is an independent legal organization and is
not responsible for the obligations of other BCBSA licensees.
The Consolidated Financial Statements include the accounts of BCBSMo and its
100% owned subsidiaries--C&S Properties, Inc., Forty-Four Forty-Four Forest
Park Redevelopment Corporation (4444 Forest Park), and R&P Realty, Inc.--after
elimination of significant intercompany transactions. These subsidiaries
primarily own and operate real estate assets including the company's
headquarters building, the adjacent parking facilities, and one other nearby
general office building. The company's subsidiaries collect rental income on
these real estate assets, including income from a lease between 4444 Forest
Park and RightCHOICE Managed Care, Inc. (RIT). The Consolidated Financial
Statements exclude all of the assets and liabilities and results of operations
of RIT, a majority-owned subsidiary of BCBSMo. Pursuant to a reorganization,
BCBSMo's ownership interest in RIT will be transferred to an independent health
care foundation as further described in Note 10, "Contingencies."
The following is a summary of significant accounting policies used in the
preparation of the accompanying Consolidated Financial Statements. Such
policies are in accordance with generally accepted accounting principles
(GAAP), except that the carve-out financial statements exclude all of the
assets, liabilities, and operations of RIT, which under GAAP would be
consolidated in these financial statements. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Although BCBSMo is incorporated as a not-for-profit corporation, the
guidance of Statement of Financial Accounting Standards (SFAS) No. 117,
"Financial Statements of Not-for-Profit Organizations" does not apply as BCBSMo
does not fall within the scope or definition of a not-for-profit organization
as defined by SFAS No. 117. As a result, the company's financial statements and
notes do not follow the disclosure guidance as provided by SFAS No. 117.
The interim consolidated financial statements included herein have been
prepared by BCBSMo without audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the consolidated financial position of the company with respect
to the interim consolidated financial statements, and the consolidated results
of its operations and its cash flows for the interim periods then ended, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
Cash and cash equivalents
Cash and cash equivalents are highly liquid investments with an original
maturity of three months or less when purchased.
F-50
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Investments available for sale
Unaffiliated investments with readily determinable fair values have been
classified as available-for-sale. Unrealized gains and losses are computed on
the basis of specific identification and are included within the caption
entitled "Net assets representing reserve for protection of members" on the
Consolidated Balance Sheets, net of applicable deferred income taxes. Realized
gains and losses on the disposition of investments are included in investment
income. The specific identification method is used in computing the cost of
debt and equity securities sold. Investment securities are exposed to various
risks, such as interest rate, market, and credit. Due to the level of risk
associated with certain investment securities and the level of uncertainty
related to changes in the value of investment securities, it is at least
reasonably possible that changes in risks in the near term would materially
affect the amounts reported in the Consolidated Balance Sheets.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are provided on the straight-
line basis over the estimated useful life of the respective assets, ranging
from 30 years for buildings and 3 to 10 years for furniture and equipment.
Improvements are capitalized while expenditures for maintenance and repairs
are charged to expense as incurred. Realized gains and losses are recognized
upon disposal or retirement of the related assets and are reflected in
earnings.
Medical claims payable
In addition to the liability for processed but unpaid claims at period-end,
the company provides for the estimated amount of liability arising from medical
care provided to members, net of coordination of benefit refunds, for claims
still in process, as well as undischarged and unreported claims. Such estimate
is based on current membership statistics, claim run-off patterns and certain
actuarial formulas. The liability includes estimated processing expenses
related to such claims. The methods of making such estimates and for
establishing the resulting reserves are continually reviewed and updated by the
company and any adjustments are reflected in current operations. Management
believes that these estimates will reasonably approximate actual costs;
however, such estimates are subject to revision.
Reinsurance
Pursuant to a reinsurance agreement with RIT, BCBSMo transfers the economic
risks and rewards on certain insurance policies originally issued by BCBSMo to
a subsidiary of RIT. Premium revenue and health care services expense on the
company's Consolidated Statements of Income are presented net of these
reinsurance transactions.
Income taxes
The company utilizes the asset and liability method of accounting for income
taxes. The asset and liability approach requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities.
BCBSMo files consolidated federal income tax returns with its subsidiaries,
including RIT. In accordance with the federal tax-sharing agreement of the
consolidated group, federal income tax expense is allocated to the company and
its subsidiaries based upon the consolidated income generated by the company
and its subsidiaries.
F-51
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Concentration of credit risk
The company conducts business in the state of Missouri, and a significant
portion of its customer base is concentrated with companies that are located in
the metropolitan St. Louis area. The company's participation in the Federal
Employee Program (FEP) generated 74.2%, 76.9%, and 79.0% of the company's total
revenue in 1999, 1998, and 1997, respectively.
The company invests its excess cash in interest-bearing deposits with major
banks, commercial paper and money market funds. Although a majority of the cash
accounts exceed the federally insured deposit amount, management does not
anticipate non-performance by the other parties. Management reviews the
stability of these institutions on a periodic basis.
Investments principally include U.S. Treasury and agency bonds and fixed
maturity commercial paper in a variety of companies A rated or better by
nationally recognized rating services.
Fair value of financial instruments
The carrying amount for cash and cash equivalents, receivables, and accounts
payable approximates fair value because of the short maturity of those
instruments. The fair value of investments available for sale at December 31,
1999 and 1998, respectively, determined based upon quoted market prices, is
disclosed in Note 3.
Comprehensive income
As of January 1, 1998, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS No. 130 requires unrealized gains or losses on the
company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. For the six months ended June 30, 2000 and 1999 (unaudited), and the
years ended December 31, 1999 and 1998, the company did not have any components
of other comprehensive income and the company did not have unrealized gains or
losses on investments available-for-sale as of those quarterly (unaudited) and
year-end dates. During 1997, the company's unrealized holding gain (net of
taxes) was $269. The reclassification adjustment in 1997 for losses included in
net income (net of taxes) was $35. Thus, the net unrealized gain on securities
during 1997 (net of taxes) was $304.
Revenue recognition and unearned premiums
For the majority of members, premiums are billed in advance of coverage
periods. For all other members, premiums are billed based on actual incurred
claims or other contractual arrangements. Premiums are recognized when the
payor is obligated to pay and are recorded as earned revenue over the period to
which health care coverage relates. Amounts billed but unearned are recorded as
unearned premiums. The company's TPA and ASO self-funded program revenue is
earned as services are performed and the payor is obligated to pay and consists
of administrative fees for services provided to third parties, including
management of medical services, claims processing and access to provider
networks. Under TPA and ASO contracts, self-funded employers retain the full
risk of financing benefits. Funds received from employers are equal to amounts
required to fund benefit expenses and administrative fees, and are shown net in
the financial statements. Net revenue for these programs is reflected in fees
and other income. The company's third-party administrator
F-52
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
(TPA) and administrative services only (ASO) self-funded programs do not
involve the assumption of insurance or significant credit risks; therefore,
revenue from these programs is reflected in "fees and other income." During the
years ended December 31, 1999, 1998, and 1997, the company received
reimbursements for claims paid of $107,628, $81,340 and $64,135, respectively,
from TPA and ASO self-funded groups.
The company, as a lessor of various real estate properties, accounts for its
leases as operating leases and recognizes rental revenue when earned in
accordance with SFAS No. 13, "Accounting for Leases."
Non-recurring charges
During the first half and full year of 1999, the company expensed $3.1
million and $5.1 million, respectively, related to the settlement and
reorganization of the company with RIT as described in Note 10,
"Contingencies." The $3.1 million and $5.1 million include $1.8 million and
$3.8 million, respectively, expensed in the non-recurring charges caption of
the Consolidated Statements of Income for 1999 plus $1.3 million ($1.1 million,
net of tax) that is included in the caption entitled, "Cumulative effect of
accounting change for startup costs." These expenses include fees for legal,
consulting, and accounting services, as well as other fees related to the
settlement and reorganization of the company as described further in Note 10.
In the first half of 2000, the company recorded net expenses of $0.3 million
related to these settlement expenses. These expenses in 2000 were reduced in
part due to a change in estimate for certain external legal costs related to
the settlement based upon the resolution of certain legal fee obligations
determined subsequent to the end of 1999. The company does not accrue legal
fees before they are incurred. It is the company's policy to accrue both
internal and external legal costs as they are incurred which requires
management to make certain estimates of the costs of service rendered. Actual
results could differ from those estimates.
Recently issued accounting standards
The Financial Accounting Standards Board (FASB) released SFAS No. 133 which
establishes standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal years beginning after June 15, 2000 as extended
by SFAS No. 137. The company believes that the adoption of SFAS No. 133 will
not have a material impact on the company's financial position or results of
operations.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities," which
is effective for fiscal years beginning after December 15, 1998. The SOP
requires that certain costs of start-up activities, including organization
costs, should be expensed as incurred. The company adopted SOP 98-5 in the
first quarter of 1999 and this adoption resulted in a $1.3 million expense
write-off ($1.1 million, net of tax) in 1999 relating to costs incurred in 1998
for legal, consulting, accounting and other fees related to the settlement and
reorganization of the company with RIT. The company has reported the cumulative
effect of this accounting change in the 1999 Statements of Income. In total,
through December 31, 1999, the company expensed $5.1 million of costs related
to the settlement and reorganization of the company with RIT as described in
note 10, "Contingencies."
F-53
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
2. Receivables from members
Receivables from members consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Underwritten programs..................................... $16,102 $19,366
Self-funded programs...................................... 411 997
------- -------
$16,513 $20,363
======= =======
</TABLE>
Based on historical collection experience, BCBSMo has not recorded
significant write-offs for receivables from members and currently considers its
receivables from members to be fully collectible. Accordingly, no allowance for
doubtful accounts is recorded.
3. Investments available for sale
Investments available for sale are summarized below:
<TABLE>
<CAPTION>
Estimated
Amortized market
December 31, 1999 cost value
----------------- --------- ---------
<S> <C> <C>
Fixed maturities:
Short-term investments.............................. $25,829 $25,829
Equity securities:
Common stocks....................................... 788 788
------- -------
$26,617 $26,617
======= =======
<CAPTION>
Estimated
Amortized market
December 31, 1998 cost value
----------------- --------- ---------
<S> <C> <C>
Fixed maturities:
U.S. Government and agency securities............... $ 175 $ 175
Corporate bonds and notes........................... 1,847 1,847
------- -------
2,022 2,022
Equity securities:
Common stocks....................................... 1,500 1,500
------- -------
$ 3,522 $ 3,522
======= =======
</TABLE>
F-54
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The company had no unrealized gains or losses on its investments available
for sale at December 31, 1999 and December 31, 1998.
Interest and dividend income is comprised of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1999 1998 1997
------ ---- ----
<S> <C> <C> <C>
Interest on bonds.................................... $ 20 $172 $659
Accretion of discounts and amortization of premiums,
net................................................. 372 (7)
Interest on cash equivalents and other investment
income.............................................. 1,538 454 260
------ ---- ----
Gross investment income.............................. 1,930 626 912
Investment expenses.................................. (35) (34) (126)
------ ---- ----
$1,895 $592 $786
====== ==== ====
</TABLE>
The company did not realize gains and losses on the sale of investments
available for sale in 1999 and 1998. The company incurred a gross realized loss
of $55 in 1997. In 1998, the company realized a loss of $5,200 on the sale of
certain properties that were previously owned by the company's C&S Properties,
Inc. subsidiary. Proceeds from sales of securities were $24,486, $5,384, and
$8,714 during 1999, 1998 and 1997, respectively. All fixed maturity investments
at December 31, 1999 have contractual maturities of one year or less.
4. Property and equipment, net
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Land and buildings.................................... $ 79,380 $ 79,186
Furniture and equipment............................... 84 239
-------- --------
79,464 79,425
Less accumulated depreciation and amortization........ (17,528) (14,863)
-------- --------
$ 61,936 $ 64,562
======== ========
</TABLE>
Depreciation and amortization expense was $2,813, $2,796, and $2,525 for the
years ended December 31, 1999, 1998, and 1997 respectively.
5. Medical claims payable
Medical claims payable represents the amounts needed to provide for the
estimated ultimate cost of settling claims related to insured events that have
occurred on or before December 31. The payable is estimated to include the
amounts required for future payment of medical claims that have been reported
to the company, claims related to insured events that have occurred but that
have not been reported to the company as of December 31, and claims adjustment
expenses. Claims adjustment expenses include costs incurred in the claim
settlement process such as costs to record, process and adjust claims.
F-55
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Activity in medical claims payable is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Balance at January 1.................................... $12,238 $15,010
Incurred related to:
Current year.......................................... 74,239 71,821
Prior years........................................... (1,169) (814)
------- -------
Total incurred...................................... 73,070 71,007
------- -------
Paid related to:
Current year.......................................... 58,594 60,756
Prior years........................................... 10,105 13,023
------- -------
Total paid.......................................... 68,699 73,779
------- -------
Net balance at December 31.............................. $16,609 $12,238
======= =======
</TABLE>
The incurred amounts related to prior years represent the differences
between the company's estimated claims payable for prior years' claims and the
actual amounts required to satisfy such claims.
6. Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Accounts payable......................................... $ 3,395 $ 6,925
Accrued salaries and other expenses...................... 2,107 1,961
Other accrued expenses................................... 9,124 6,149
------- -------
$14,626 $15,035
======= =======
</TABLE>
7. Commitments
The company has an agreement to sublease certain office space from RIT
through 2005. The total rental expense for this lease was $181, $152, and $149
for the years ended December 31, 1999, 1998, and 1997, respectively. Total
rental expense (including associated operating expense) is expected to be
approximately $200 per year for 2000 through 2005. However, the actual amount
could fluctuate based on BCBSMo's pro rata share (based on square footage of
space occupied) of the actual operating expenses incurred during those years.
As described in Note 10, "Contingencies," BCBSMo, RightCHOICE, the Missouri
Attorney General, and the Missouri Department of Insurance are working together
to settle outstanding litigation and regulatory issues. The proposed settlement
entails the reorganization of BCBSMo and RightCHOICE as well as a payment by
BCBSMo of $12.78 million to the newly formed Missouri Foundation for Health. As
of June 30, 2000, the company has not recorded this potential payment as a
liability on the Consolidated Balance Sheet as significant conditions and
contingencies related to the settlement have not been resolved. The company
continues to work towards finalizing the settlement as more fully described in
Note 10 and plans to accrue this commitment after the significant conditions
and contingencies are satisfied.
F-56
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
8. Income taxes
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
----------------------- ---------------------
2000 1999 1999 1998 1997
(unaudited) (unaudited)
----------- ----------- ------ ----- -------
<S> <C> <C> <C> <C> <C>
Current:
Federal.................. $2,280 $1,455 $4,083 $(415) $ (336)
State.................... (51)
------ ------ ------ ----- -------
2,229 1,455 4,083 (415) (336)
Deferred:
Federal.................. 92 312 182 (248) (836)
------ ------ ------ ----- -------
$2,321 $1,767 $4,265 $(663) $(1,172)
====== ====== ====== ===== =======
</TABLE>
The effective rate, expressed as a percentage of pre-tax income (loss),
differs from the federal statutory rate as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
----------------------- -------------------
2000 1999 1999 1998 1997
(unaudited) (unaudited)
----------- ----------- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Tax provision (benefit)
based on federal
statutory rate........... 35.0% 35.0% 35.0% (35.0)% (35.0)%
State income taxes, net of
federal benefit.......... (0.9)%
Settlement expenses and
other.................... 5.7% 7.5% 6.3% 0.6%
---- ---- ---- ----- -----
Effective tax provision
(benefit) rate........... 39.8% 42.5% 41.3% (34.4)% (35.0)%
==== ==== ==== ===== =====
</TABLE>
The primary temporary differences which gave rise to deferred income taxes
were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Capitalized software......................... $ 753 $ 753
Employee benefits............................ 1,131 1,142
Unearned premiums............................ 979
Other........................................ 3,562 2,845
----------- -----------
Total deferred tax assets.................. 5,446 5,719
----------- -----------
Deferred tax liabilities:
Depreciation and amortization................ 3,747 4,252
National accounts............................ 772 1,122
Incurred but not reported claim adjustments.. 1,832 1,832
Medical claims payable discounting........... 1,113 1,110
Other tax-deductible expenses................ 3,035 2,274
----------- -----------
Total deferred tax liabilities............. 10,499 10,590
----------- -----------
Net deferred tax liability..................... $ (5,053) $ (4,871)
=========== ===========
</TABLE>
F-57
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
SFAS No. 109, "Accounting for Income Taxes," requires a valuation allowance
against deferred tax assets if based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized. Based upon all the available evidence, management believes it is more
likely than not that the company will realize its remaining deferred tax assets
and, accordingly, no valuation allowance has been provided against such
remaining assets as of June 30, 2000, December 31, 1999 and December 31, 1998.
9. Employee benefit plans and deferred compensation
BCBSMo participates in a defined benefit pension plan and post-retirement
benefit plan covering substantially all of its employees.
The national Blue Cross and Blue Shield Association (BCBSA) is responsible
for administration of the defined benefit pension plan in which BCBSMo
participates. The benefits are based on years of service and average annual
compensation for the employee's highest consecutive five of the last ten years.
Plan assets are invested primarily in publicly traded equity securities and
bonds. The funding policy is to contribute amounts needed to meet the minimum
funding requirements set forth in the Employee Retirement Income Security Act
of 1974 (ERISA), plus additional amounts as may be determined from time to
time.
The company provides certain health care and life insurance benefits for
retired and terminated employees. Substantially all BCBSMo employees may become
eligible for those benefits if they reach normal retirement age while working
for BCBSMo. The health care and life insurance benefits for retired employees
are provided through insurance companies whose premiums are based on the
benefits paid during the year.
Direct pension and post-retirement benefit costs, which have been determined
in accordance with generally accepted accounting principles and allocated to
BCBSMo, are approximated as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net periodic pension cost................................. $193 $159 $191
Net periodic post-retirement benefit cost................. 300 287 257
---- ---- ----
$493 $446 $448
==== ==== ====
</TABLE>
The majority of these costs represent expenses allocated to BCBSMo by RIT
pursuant to an administrative services agreement. The components of net
periodic pension cost and post-retirement benefit cost for the years ended
December 31, 1999, 1998, and 1997 and accrued employee benefits at December 31,
1999, and 1998 are not separately available for BCBSMo. RIT and BCBSMo did not
make and were not required to make contributions to the pension plan during
1999 and 1998.
BCBSMo and RIT also provide certain severance benefits for employees who
involuntarily terminate their employment and long-term disability benefits for
employees who are disabled. Additionally, BCBSMo provides a pre-tax 401(k) plan
covering substantially all of its employees and a Management Incentive Program
(MIP) to management personnel for the achievement of corporate and individual
goals. The company expensed $364, $463, and $255 for the years ended December
31, 1999, 1998, and 1997, respectively, for costs associated with the MIP Plan.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
10. Contingencies
Litigation of BCBSMo with the Missouri Attorney General and Missouri Department
of Insurance and related actions, settlement efforts and proposed
reorganization
In August 1994, BCBSMo created RIT as a for-profit subsidiary. BCBSMo
transferred certain of its assets to RIT, and offered to the public 20% of the
common stock of RIT (such events are referred to collectively as the 1994
Reorganization and Public Offering). Although the Missouri Department of
Insurance (DOI) formally approved the 1994 Reorganization and Public Offering
on April 14, 1994, the DOI subsequently claimed that the 1994 Reorganization
and Public Offering violated state laws and that BCBSMo was obligated to
transfer all of its assets, including all of the stock of RIT that it owned, to
the State of Missouri or a charity designated by the State of Missouri.
On May 13, 1996, BCBSMo filed a declaratory judgment action in the Circuit
Court of Cole County Missouri (the Circuit Court) against the DOI and the
Missouri Attorney General (the Missouri Attorney General was a necessary party
due to his sole authority to enforce nonprofit corporation laws). This
litigation is described more fully below under "Litigation relating to the 1994
Reorganization and Public Offering."
RIT, BCBSMo, the DOI and the Attorney General reached agreement for
settlement of this litigation. The settlement is described below under the
caption "Agreement for Settlement of Certain Litigation Matters and
Reorganization of RIT." The agreement provides for the dismissal of the lawsuit
and appeals in which the State officials claimed BCBSMo violated state law. The
agreement provides for a corporate reorganization of BCBSMo and RIT and the
creation of an independent public benefit health care foundation by December
31, 2000. There are a number of contingencies that might affect the closing of
that reorganization. There can be no assurance that those contingencies will be
fulfilled. The parties have agreed to use their best efforts to effect the
reorganization by December 31, 2000. If the settlement does not go forward, the
Attorney General and DOI will be free to further prosecute their claims against
BCBSMo arising from the 1994 Reorganization and Public Offering. Such action
could materially adversely affect the operations of BCBSMo.
Agreement for Settlement of Certain Litigation Matters and Reorganization of
RIT
Status of Proposed Settlement Agreements
Following many developments in the litigation described below, on January 6,
2000, RIT, BCBSMo, the Missouri Attorney General, and the DOI signed the
Amended and Restated Settlement Agreement which would, if consummated, resolve
all outstanding litigation and regulatory issues between RIT, BCBSMo and their
affiliates and the State of Missouri described below and would create an
independent public benefit health care foundation. This agreement modified the
principal settlement agreement first announced as a conceptual framework on
April 22, 1998, which was reduced to definitive settlement agreements entered
into on September 20, 1998, and subsequently modified on March 12, 1999 (as
amended, the amended settlement agreement).
The amended settlement agreement included a number of significant conditions
and contingencies described further herein. Among those conditions were
approval by an appropriate court and a judicial determination by the Circuit
Court, that the reorganization contemplated by the amended settlement agreement
was lawful as to the subscribers of BCBSMo, RIT, and their affiliates. In the
Amended and Restated Settlement Agreement that the parties signed on January 6,
2000, the parties removed the court approval and determination of lawfulness
contingencies from their settlement agreement. That action was the result of
the following events.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
On October 29, 1999, the Circuit Court entered an order disapproving the
amended settlement agreements. BCBSMo, together with the Missouri Attorney
General and the DOI, filed a notice of appeal from that order to the Missouri
Court of Appeals for the Western District, and asked for immediate transfer of
that appeal to the Missouri Supreme Court. BCBSMo and the Missouri Attorney
General also notified the Missouri Supreme Court of the Circuit Court's
disapproval of the amended settlement agreement, and asked the Missouri Supreme
Court to (1) deem the Circuit Court's order final for purposes of appeal, (2)
conduct its own review of the settlement agreement, and (3) enter a stay
prohibiting Judge Brown and the Special Master from further proceedings,
including consideration of alternatives, pending the appeal.
The Supreme Court of Missouri accepted the appeal and stayed further
proceedings in the Circuit Court. Counsel for the Special Master, whose role in
these proceedings is described further herein, appeared in the appeal as Amici
Respondents, charged with defending the order of the Circuit Court.
Following oral arguments before the Supreme Court of Missouri on December 8,
1999, on December 9, the Supreme Court entered an order which stated that the
parties had "failed to establish that court approval is required or authorized
by law or that any such determination would be other than advisory." The
Supreme Court stayed all proceedings until February 8, 2000, to permit the
parties to dismiss the underlying lawsuit and the appeals.
On January 6, 2000, the Amended and Restated Settlement Agreement was
signed, thereby removing the conditions requiring court approval and a
determination of lawfulness of the proposed reorganization. On January 6, 2000,
the parties filed a joint stipulation of dismissal in the Cole County Circuit
Court, dismissing all pending claims in that court in the principal litigation
between the parties. On February 8, 2000, the parties moved for dismissal of
the appeal pending in the Supreme Court of Missouri. The Supreme Court granted
that motion and dismissed the appeals on February 9, 2000.
The litigation underlying the settlement is described below. See "Litigation
relating to the 1994 Reorganization and Public Offering."
Terms of the Proposed Settlement Agreement
The principal terms of the Amended and Restated Settlement Agreement include
the following:
. BCBSMo would, through a series of transactions, (i) transfer its
insurance-related assets, contracts and agreements and related
liabilities to a wholly owned subsidiary of RIT; (ii) convert to a for-
profit corporation; (iii) reincorporate in Delaware; and (iv) merge with
RIT. Approximately 20% of the outstanding common stock of the resulting
entity (referred to as New RIT) would be owned by RIT's current public
shareholders and approximately 80% of the outstanding shares of New RIT
would be owned by a charitable independent health care foundation (which
equals the current aggregate ownership interests of the public
shareholders and BCBSMo, respectively, in the equity of RIT).
. BCBSMo would pay approximately $12.78 million to the Missouri Foundation
For Health (in addition to $175 paid by New RIT).
. The Missouri Foundation For Health would be required to liquidate its
shares of New RIT stock over a prescribed period of time not to exceed
seven years under a divestiture plan. The Foundation would be required to
reduce its ownership of New RIT stock to less than 50% of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
the total outstanding stock of New RIT within three years of the closing
of the reorganization, subject to possible extension, and to less than 20%
of the total outstanding stock of New RIT within five years of the closing
of the reorganization, subject to possible extension. The proceeds would
be used for health care purposes. All but up to 5% of the shares of New
RIT stock owned by the Foundation would be subject to a voting trust that
would, with certain exceptions, effectively vest voting control of such
shares of New RIT stock owned by the Foundation in the board of directors
of New RIT on all matters except that the Foundation would have the right
to vote as it deems appropriate on a change of control transaction
involving New RightCHOICE.
. The charter documents of New RIT would include the "basic protections"
required by the Blue Cross and Blue Shield Association (BCBSA) of all of
its for-profit licensees to provide for independence from the direction,
control and influence of the Missouri Foundation For Health or any other
shareholder. The "basic protections" would include limitations on the
amount of New RIT stock that may be owned by certain categories of
shareholders--(i) no "institutional" shareholder may own 10% or more of
the voting power of New RIT, (ii) no "non-institutional" shareholder may
own 5% or more of the voting power of New RIT, and (iii) no shareholder
may own 20% or more of the equity of New RIT (with certain exceptions in
the case of the Foundation as described above). Any shares owned by a
shareholder in excess of the applicable ownership limits could be
redistributed by New RIT.
The transactions contemplated by the Amended and Restated Settlement
Agreement are subject to a number of significant conditions and contingencies,
including approval by various regulators and the shareholders of RIT, receipt
of certain legal opinions, the receipt of rulings from the Internal Revenue
Service or tax opinions regarding the tax-free nature of the transactions, and
the satisfactory resolution of the Sarkis Litigation, which is now over. The
Sarkis Litigation is described below under the caption Subscriber Class Action
Litigation.
Litigation relating to the 1994 Reorganization and Public Offering
In August 1994, BCBSMo effectuated the 1994 Reorganization and Public
Offering. The DOI had formally approved the 1994 Reorganization and Public
Offering on April 14, 1994. The DOI subsequently claimed that the 1994
Reorganization and Public Offering violated Missouri state laws and that BCBSMo
was obligated to transfer all of its assets, including all of the stock of RIT
that it owned, to the State of Missouri or a charity designated by the State of
Missouri. The DOI threatened to bring legal action, seek a receivership, or
terminate BCBSMo's insurance license unless BCBSMo surrendered its assets.
BCBSMo's extensive efforts to resolve the dispute without litigation were
unsuccessful. On May 13, 1996, BCBSMo filed a declaratory judgment action in
the Circuit Court against the DOI and the Missouri Attorney General (the
Missouri Attorney General was a necessary party due to his sole authority to
enforce nonprofit corporation laws). The action sought a declaratory judgment
that BCBSMo followed all applicable laws and regulations in the 1994
Reorganization and Public Offering resulting in the creation of RIT. It also
sought a permanent injunction forbidding the DOI from refusing to renew
BCBSMo's license or taking other administrative action against BCBSMo to
pressure it into paying a "toll charge" or "charitable asset assessment" or any
other fee as a result of the 1994 Reorganization and Public Offering.
On June 13, 1996, the DOI filed an answer and counterclaims setting forth
several affirmative defenses, including alleged fraud and negligent
misrepresentation with respect to the application filed by BCBSMo seeking
approval of the 1994 Reorganization and Public Offering. The counterclaims
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
alleged violations of certain health services corporation and nonprofit
corporation statutes. The DOI's counterclaims sought, among other things: (i)
permanent injunctions against BCBSMo; (ii) imposition of a trust on BCBSMo's
assets for public benefit purposes; (iii) return of profits from Medigap
policies reinsured with a subsidiary; and (iv) an accounting of all assets
transferred by BCBSMo.
On June 20, 1996, the Missouri Attorney General filed an answer and
counterclaim alleging that the 1994 Reorganization and Public Offering, and its
continued operations through RIT and its subsidiaries, exceeded BCBSMo's
statutory purposes. The Missouri Attorney General requested a declaration that
BCBSMo exceeded its lawful authority and sought such relief as the Circuit
Court would determine to be appropriate under the circumstances based on a
statute that authorizes judicial dissolution or less drastic alternative relief
in the Circuit Court's discretion.
On September 9, 1996, the Circuit Court granted BCBSMo's motion for summary
judgment against the DOI, rejected all of the DOI's affirmative defenses
(including allegations of fraud), issued a permanent injunction against the DOI
and declared that: (i) under Missouri law the DOI had no authority to demand
that BCBSMo make a payment as a result of the 1994 Reorganization and Public
Offering; (ii) under Missouri law the DOI had no jurisdiction to take any
action, the practical effect of which would be to amend, modify or reverse the
DOI's April 14, 1994 final administrative approval of the 1994 Reorganization
and Public Offering; (iii) under Missouri law, the DOI had no jurisdiction to
take any administrative action, including, but not limited to, revoking,
suspending or refusing to renew BCBSMo's Certificate of Authority based in any
way on the 1994 Reorganization and Public Offering or BCBSMo's refusal to make
payment as the DOI had demanded; and (iv) (A) BCBSMo was a mutual benefit type
of nonprofit corporation rather than a public benefit type of nonprofit
corporation; (B) the 1994 Reorganization and Public Offering were authorized
under all laws applicable to nonprofit health services corporations; and (C)
BCBSMo did not owe the State or any person or entity a "toll charge,"
"charitable asset settlement" or any other payment as a result of the 1994
Reorganization and Public Offering (the September 9 Order). On December 30,
1996, the Circuit Court issued orders (described more fully below) modifying
the findings and declarations set forth in (iv) above, on the grounds that it
was legally unnecessary to resolve such issues because the Circuit Court had
already ruled against the DOI for other reasons.
The September 9 Order permanently enjoined the DOI from, among other things,
(i) revoking, suspending or refusing to renew BCBSMo's insurance license based
in any part upon the 1994 Reorganization and Public Offering; (ii) commencing a
valuation of BCBSMo's assets and demanding a payment as a result of the 1994
Reorganization and Public Offering; (iii) commencing any administrative hearing
or making any administrative determination based in any part upon the 1994
Reorganization and Public Offering; (iv) instituting any seizure, receivership,
conservatorship or similar action or proceeding against BCBSMo based in any
part upon the 1994 Reorganization and Public Offering; and (v) taking any other
action, however denominated, against BCBSMo based in any part upon the 1994
Reorganization and Public Offering.
On August 28, 1996, the DOI filed an amended answer asserting a new
counterclaim that the 1994 Reorganization and Public Offering were not
reasonably designed to serve any of BCBSMo's purposes as a health services
corporation and sought a declaration that BCBSMo had exceeded or abused the
authority conferred upon it by law. Under this counterclaim, the DOI sought an
order to rehabilitate BCBSMo or, in the alternative, injunctive relief.
On October 18, 1996, the Missouri Attorney General filed a motion for leave
to file an amended counterclaim against BCBSMo that sought a declaration that
BCBSMo was a public benefit
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
corporation, not a mutual benefit corporation, and requested an order that
BCBSMo amend its Articles of Incorporation accordingly. The Circuit Court
granted the Missouri Attorney General's motion for leave to file the amended
counterclaim.
On December 30, 1996, the Circuit Court issued five orders (the December 30
Orders): (i) denying BCBSMo's motion for summary judgment against the Missouri
Attorney General; (ii) granting the Missouri Attorney General's motion for
partial summary judgment against BCBSMo; (iii) denying BCBSMo's supplemental
motion for summary judgment against the DOI on their amended counterclaim; (iv)
granting the DOI's motion for summary judgment against BCBSMo on their amended
counterclaim; and (v) modifying, in part, the Circuit Court's previous
September 9 Order. The December 30 Orders declared that (i) BCBSMo had
continued to exceed or abuse its statutorily permissible purposes and the
authority conferred on it by law; and (ii) BCBSMo is subject to judicial
dissolution proceedings, but that prior to ordering dissolution, the Circuit
Court is required to consider whether there are alternatives to dissolution and
whether dissolution is in the public interest or is the best way of protecting
the interests of its members.
The Circuit Court also (i) certified the December 30 Orders and the
September 9 Order, as modified, for immediate appeal; (ii) held in abeyance
further proceedings on the Missouri Attorney General's counterclaim pending
appeal; and (iii) stayed the legal effect of the order granting the Director
and the DOI summary judgment pending the filing of an appeal bond (which BCBSMo
promptly filed).
On August 4, 1998, the Missouri Court of Appeals entered its opinion
affirming the judgments entered December 30, 1996.
On September 20, 1998, BCBSMo, RIT and certain of its affiliates entered
into various settlement agreements with the Missouri Attorney General and
certain state agencies, including the DOI. The settlement agreements, as most
recently amended on January 6, 2000, principally, the Amended and Restated
Settlement Agreement) are described above under the caption "Terms of the
Proposed Settlement Agreements." If consummated, the Amended and Restated
Settlement Agreement would resolve the outstanding litigation and regulatory
disputes between BCBSMo and its affiliates and the State of Missouri, including
the litigation related to the 1994 Reorganization and Public Offering, and
create an independent public benefit health care foundation.
Notwithstanding the fact that the litigation had not yet been remanded to
the Circuit Court, on October 29, 1998, the Circuit Court "acting on its own
motion" issued an Order (the October 29, 1998 Order) in the litigation. The
October 29, 1998 Order provided for, among other things, the appointment of
Robert G. Russell as receiver/custodian to, among other things, take exclusive
possession and control of all of the issued and outstanding shares of the RIT
common stock owned by BCBSMo. The October 29, 1998 Order cited concerns by the
Circuit Court about the fairness of the transactions set forth in the
settlement agreements, alleged conflicts of interest and the need for an
independent examination of the proposed settlement and related issues. The
October 29, 1998 Order also approved the engagement of legal counsel and an
investment banker to advise the receiver/custodian. Had the October 29, 1998
Order not been void "from the beginning" as described below, a number of
significant and adverse consequences would have resulted, including the
automatic termination of BCBSMo's and RIT's Blue Cross and Blue Shield licenses
and a resultant event of default under RIT's Credit Agreement.
On November 2, 1998, BCBSMo filed a motion to vacate the October 29, 1998
order and a supporting memorandum. BCBSMo alleged therein that (i) the Circuit
Court lacked jurisdiction to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
issue the October 29, 1998 Order because the case was still pending before the
Missouri Supreme Court; (ii) the Circuit Court issued the order without notice
and an opportunity to be heard; (iii) there were no exigent circumstances that
would warrant the appointment of a receiver without due process; and (iv) the
appointment of the receiver had the effect of frustrating the purpose for which
the receiver was to be appointed, namely, the preservation of the nonprofit
assets of BCBSMo.
On November 2, 1998, BCBSA filed a complaint against BCBSMo, RIT, and their
subsidiary licensed companies in the United States District Court for the
Northern District of Illinois alleging that the appointment of the
receiver/custodian caused the automatic termination of the licenses to use the
Blue Cross and Blue Shield service marks. The complaint alleged service mark
infringement and breach of license agreements as a result of the companies'
continued use of the Blue Cross and Blue Shield service marks following the
issuance of the October 29 Order. The BCBSA later dismissed its complaint (as
described below under "Status of Blue Cross and Blue Shield licenses").
On November 4, 1998, the Circuit Court issued an Order (the November 4
Order) vacating the October 29, 1998 Order and declaring it to be void "from
the beginning." The Circuit Court, in issuing the November 4 Order,
acknowledged that the significant and adverse consequences that could have
resulted from the October 29, 1998 Order were unintended. On November 4, 1998,
the Circuit Court also issued an Order (the November 4 Special Master Order)
appointing a special master for the purpose of collecting and analyzing
information related to the proposed settlement. The November 4 Special Master
Order also approved the engagement of legal counsel and such financial advisors
as are approved by the court to advise the special master. The effect of the
November 4 Order was to void the October 29, 1998 Order as if it never existed.
The special master, at that time, had expressed his interest in providing that
RIT would continue its business in the normal course during his review.
On November 6, 1998, the Circuit Court entered an Order of Reference (the
November 6 Order), among other things, directing the special master to collect
and analyze information as to the options and alternatives available to the
Circuit Court for disposition of the remaining issues in the litigation,
including, but not limited to, an examination of the settlement agreements. The
special master was also directed to address several concerns of the Circuit
Court that were originally outlined in the October 29, 1998 Order. The special
master was further directed to investigate issues concerning the Blue Cross and
Blue Shield licenses and marks and RIT's Credit Agreement.
On November 19, 1998, the Blue Cross and Blue Shield license agreements were
reinstated with addenda that provided, among other things, that the licenses
would terminate on the date of the next scheduled meeting of the BCBSA Board of
Directors, then March 11, 1999, unless extended by the Board of Directors of
the BCBSA. On March 11, June 17, September 17, and November 19, 1999, the BCBSA
Board of Directors extended the licenses until the next scheduled meeting. On
March 9, 2000, the BCBSA Board of Directors unanimously voted to fully
reinstate the licenses so that extensions on a "board to board" basis would no
longer be required. See "Status of Blue Cross and Blue Shield licenses" below.
On November 24, 1998, the Supreme Court of Missouri granted the motion of
BCBSMo to accept transfer of the litigation related to the 1994 Reorganization
and Public Offering and, as a result of this action, the opinion of the
Missouri Court of Appeals dated August 4, 1998 (referred to above) is of no
effect. The Supreme Court, on application of the parties, deferred briefing of
the appeal pending review of the parties' settlement agreement in the Circuit
Court.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The special master conducted a series of public hearings on December 4,
December 16, and December 22, 1998, and on February 4, 1999, where evidence
related to the proposed settlement and other subjects was presented.
At the public hearing on December 16, representatives of Blue Cross and Blue
Shield of Kansas City presented an "alternative" to the proposed settlement
agreement by suggesting that the Kansas City plan would acquire the assets of
BCBSMo, including the stock of RIT that BCBSMo owns. The Kansas City plan's
proposal provided for a cash purchase price of $13.50 per share for the shares
of RIT held by the public and $15.25 per share for the other shares held by
BCBSMo. The proposal included a number of conditions, such as a financing
contingency and an obligation that all litigation of BCBSMo be resolved. This
proposal was not made directly to RIT or BCBSMo.
Following the completion of the hearings and other investigation, on
February 10, 1999, the special master issued his 47-page report (the first
report of the special master) which recommended that the settlement agreement
"not be approved in its present form" and that the Circuit Court "withhold a
ruling on the settlement agreement to give the parties and the public interest
groups who had filed briefs and participated in the proceedings as "friends of
the court" an opportunity to meet and confer, and engage in a good faith effort
to address" concerns that were noted in the report of the special master. While
the special master stated that "there are many things to commend the Settlement
Agreement for the Court's approval," he indicated he had concerns with its
terms that prevented him from recommending approval. Among the concerns he
identified in his first report were: (1) whether the charitable independent
health care foundation that would be created if the settlement were implemented
would receive full value of the present assets of BCBSMo; (2) whether a
contemplated method of divestiture of the New RIT shares to be held by the
foundation--sale of the shares over time pursuant to a Voting Trust and
Divestiture Agreement and Registration Rights Agreement--would yield full value
for the shares; (3) whether the proposed provisions for governance of the
foundation were reasonable; and (4) whether the provisions for the purposes of
the charitable independent health care foundation were justified.
Following the first report of the special master, the parties and the public
interest groups discussed the concerns noted therein. On March 12, 1999, RIT,
BCBSMo, the Missouri Attorney General, and the DOI entered into an Amendment to
Settlement Agreement. The parties to the amended settlement agreement, together
with certain consumer groups that had participated in the public hearings,
filed with the Circuit Court a joint motion seeking approval of the amended
settlement agreement.
On March 12, 1999, the parties also filed with the Circuit Court their
respective objections and comments to the first report of the special master.
In its objections, BCBSMo asserted that the special master made certain
erroneous factual and unjustified legal conclusions in the report and requested
the Circuit Court to approve the amended settlement agreement.
Although the Missouri Supreme Court initially had stayed the briefing
schedule for 120 days in the proceedings before it in order to permit the
proceedings in the Circuit Court concerning review of the settlement agreement
to go forward, that stay was lifted and oral arguments were heard by the
Missouri Supreme Court on September 8, 1999. Following the oral arguments, on
September 9, 1999, the Supreme Court entered an order that the Circuit Court
"finally dispose" of the amended settlement agreement.
The special master conducted public hearings on September 3, and October 4,
1999. On October 8, 1999, he issued a second report (the second report of the
special master). The second report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
recommended that the amended settlement agreement be disapproved because it
failed to provide for the full value of the BCBSMo assets for the public. The
report also suggested that the settlement should provide for the forced sale of
RIT or provide that the foundation should have the right to cause the sale of
RIT.
On October 29, 1999 the Circuit Court issued an order in which it
disapproved the amended settlement agreement. Subsequent proceedings were then
had as described above under the caption "Status of Proposed Settlement
Agreements."
On January 6, 2000, as a result of the Amended and Restated Settlement
Agreement, the parties filed a joint notice of dismissal without prejudice of
the pending claims in the lawsuit in the Circuit Court of Cole County in which
the Attorney General and the DOI contended that BCBSMo were in violation of the
Missouri health services corporation law and non-profit corporation law. On
February 8, 2000, BCBSMo, the Attorney General and DOI moved in the Missouri
Supreme Court to dismiss their pending appeals in that litigation. Their
motions were granted on February 9, 2000.
An effect of the dismissal of these appeals is to leave in place, without
further right of appeal, the December 30, 1996 Orders, particularly the finding
that BCBSMo violated the non-profit law through the continued operation of RIT.
If the Settlement Agreement is not consummated, the Attorney General and DOI
remain free to seek further relief in enforcement of those judgments, including
seeking to terminate the Certificate of Authority of BCBSMo and seeking to
dissolve BCBSMo under the Missouri non-profit corporation law.
Subscriber class action litigation
On March 15, 1996, a suit (the Sarkis Litigation) was filed in the Circuit
Court of the City of St. Louis, Missouri (the St. Louis Circuit Court), by
Anthony J. Sarkis, Sr. and James Hacking individually and on behalf of a
purported class of (i) subscribers in individual or group health plans insured
or administered by BCBSMo or RIT, and (ii) all persons and/or entities who
benefited from BCBSMo's tax-exempt status (the Sarkis plaintiffs). The petition
named RIT, BCBSMo, HealthLink, Inc. (a subsidiary of RIT), and certain officers
of BCBSMo and RIT as defendants. The named plaintiffs later abandoned their
claim to represent all persons or entities that benefited from BCBSMo's tax-
exempt status.
The Sarkis plaintiffs' claims related to an alleged conversion of BCBSMo
from a not-for-profit entity to a for-profit entity and payment of excessive
compensation to management. The petition further alleged that certain
amendments to BCBSMo's Articles of Incorporation were improper. The petition
also alleged that the purchase of HealthLink was at an excessive price and that
HealthLink operates under contracts providing for illegal discounts by health
care providers. The Sarkis plaintiffs sought restitution, compensatory damages
and punitive damages in unspecified amounts, as well as injunctive and other
equitable relief.
On November 4, 1998, the St. Louis Circuit Court issued its judgment and
order granting the motion of the defendants to dismiss the action for lack of
standing and entering judgment in favor of the defendants. The Sarkis
plaintiffs appealed the St. Louis Circuit Court's order. James Hacking later
dismissed his appeal, leaving Anthony Sarkis as the only appellant.
On February 1, 2000, the Missouri Court of Appeals entered an Order
affirming the judgment of dismissal entered in the St. Louis Circuit Court on
November 4, 1998. Appellant did not file a motion for rehearing or an
application for transfer of the appeal to the Missouri Supreme Court. As a
result, the Sarkis Litigation is now over.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
The obligations of the parties to consummate the reorganization contemplated
by the Amended and Restated Settlement Agreement is conditioned upon, among
other things, satisfactory final resolution of the Sarkis Litigation. This
condition is now fully satisfied.
Anthony Sarkis, as a representative of a subscriber class, is also a party
in the actions described below under "Litigation relating to corporate status
of BCBSMo."
Litigation relating to corporate status of BCBSMo
On November 3, 1997, BCBSMo filed an action in the Circuit Court against the
Missouri Attorney General seeking declarations that (1) BCBSMo is a mutual
benefit type of nonprofit corporation under Chapter 355 of the Missouri Revised
Statutes; and (2) BCBSMo does not hold its assets in constructive, charitable,
or other trust for the benefit of the public generally, but rather holds its
assets for the benefit of its subscribers. The action was filed in response to
continued public and private statements by the Missouri Attorney General, the
DOI and others that BCBSMo was a public benefit type of nonprofit corporation
that held its assets for the benefit of the public generally. The Missouri
Attorney General filed an answer and counterclaim seeking a declaration that
BCBSMo is a public benefit type of nonprofit corporation.
On June 10, 1998, Anthony Sarkis and James Hacking (plaintiffs in the Sarkis
Litigation described above under "Subscriber class action litigation") moved to
intervene in this action as plaintiffs. Sarkis and Hacking are or have been
subscribers of BCBSMo. They sought to intervene, contending that the present
parties to the action would not adequately represent their interests in the
resolution of the question whether BCBSMo is a public benefit or a mutual
benefit corporation. Thereafter, BCBSMo moved to file an amended petition
adding Sarkis, Hacking and the DOI as parties to the action. For its relief,
BCBSMo sought, among other things, a declaration of its status as a public
benefit or mutual benefit corporation. The Circuit Court granted BCBSMo's
motion to file the amended petition on August 17, 1998.
On June 17, 1999, the Circuit Court determined that this action would go
forward as a class action for declaratory relief. On that date, Sarkis and
Hacking dismissed all claims other than their claims for declaratory relief. On
July 6, 1999, the Attorney General of Missouri filed a motion for a summary
judgment declaring that BCBSMo is a public benefit corporation. On August 5,
1999, BCBSMo filed a motion for summary judgment that the class representatives
and the class lack standing to assert the claims for declaratory relief that
they are asserted. Those motions for summary judgment are under submission to
the Circuit Court.
If BCBSMo is declared to be a mutual benefit type of nonprofit corporation
that does not hold its assets for the benefit of the public generally, BCBSMo
would be required to exercise its ownership interest in RIT consistent with the
best interests of BCBSMo's subscribers, subject to any final rulings made in
the litigation described elsewhere herein. If BCBSMo is declared to be a public
benefit type of nonprofit corporation or if it is declared that BCBSMo holds
assets for the benefit of the public generally, BCBSMo would be required to
exercise its ownership interest in RIT consistent with the best interests of
the public at large. The subscriber class in this action has requested a
declaration that BCBSMo may not lawfully transfer its assets to a charitable
trust. If a judgment is entered after the reorganization is completed, the
company resulting from the reorganization, referred to herein as New RIT, could
be obligated to pay substantial money damages. It is also possible, although
BCBSMo believes unlikely, that a court could order that the reorganization be
rescinded. If an order like that was entered, it would have a material adverse
effect on New RIT.
F-67
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Litigation relating to the Market Conduct Study and Copayment Calculations
On February 11, 1998, the DOI filed a Notice of Institution of Case (the
Market Conduct Proceeding) relating to a market conduct examination of RIT and
its affiliates. On January 6, 2000, the settlement agreement relating to these
proceedings was consummated, and the Market Conduct Proceeding was dismissed.
On February 9, 1998, the Missouri Attorney General filed suit against RIT,
BCBSMo, BlueCHOICE, Healthy Alliance Life Insurance Company (HALIC, a
subsidiary of RIT), and Preferred Health Plans of Missouri, Inc. (a subsidiary
of RIT) in the Circuit Court seeking injunctive relief, compensatory damages
and civil penalties under Missouri's Merchandising Practices Act for the way in
which RIT disclosed and marketed co-payment amounts prior to January 1996 (the
Attorney General Co-Payment Claim). BCBSMo and RIT discontinued the challenged
co-payment practices in January 1996.
On September 20, 1998, BCBSMo and RIT entered a settlement agreement with
the Attorney General for resolution of the Attorney General Co-Payment Claim
conditioned on court approval of the separate principal settlement agreement of
September 20, 1998 described above under the caption Terms of the Settlement
Agreement. The Attorney General Co-Payment Claim was dismissed by the Missouri
Attorney General without prejudice pending the approval of the amended
settlement agreement described above.
On January 6, 2000, the parties agreed to remove the court approval
condition precedent to consummating the settlement of the Attorney General Co-
Payment Claim. The settlement is now completed.
Status of Blue Cross and Blue Shield licenses
On March 9, 2000, after a period of "board to board" extensions resulting
from the pendency of the principal litigation with the State of Missouri, the
BCBSA Board of Directors voted to reinstate the full licenses for BCBSMo and
its licensed affiliates. This action followed the dismissal of the principal
litigation pursuant to the Amended and Restated Settlement Agreement described
above under "Agreement for Settlement of Certain Litigation Matters and
Reorganization of RIT." Important events that preceded this reinstatement are
described in the following paragraphs.
The October 29 Order (as described above under "Litigation relating to the
1994 Reorganization and Public Offering") provided for the appointment of
Robert G. Russell as receiver/custodian to, among other things, take exclusive
possession and control of all of the issued and outstanding shares of RIT's
Class B Common Stock, all of which is owned by BCBSMo. On November 2, 1998, the
BCBSA notified BCBSMo, RIT and their licensed affiliates that their licenses to
use the Blue Cross and Blue Shield service marks had terminated automatically
pursuant to their terms on October 29, 1998, as a result of the October 29
Order, and filed a complaint against BCBSMo, RIT and their licensed affiliates
alleging service mark infringement and breach of license agreements as a result
of the continued use of the service marks following the issuance of the October
29 Order (the BCBSA Complaint). On November 4, 1998, after BCBSMo filed a
motion seeking a revocation of the October 29 Order and supporting memorandum,
the Circuit Court issued the November 4 Order and the November 4 Special Master
Order. The November 4 Order set aside the October 29 Order and declared it to
be "void from the beginning." The November 4 Special Master Order appointed
Robert G. Russell as special master for the purpose of collecting and analyzing
information related to
F-68
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
the proposed settlement of the litigation described above. On November 6, 1998,
the Court issued an Order of Reference for the special master. As a result of
the November 4 Order, the BCBSA agreed to dismiss the BCBSA Complaint.
Each of the reinstated license agreements approved by the BCBSA on November
19, 1998 included an addendum that provided, among other things, that the
licenses granted under such license agreements would be reviewed by the BCBSA
at the next regularly scheduled meeting of the BCBSA Board of Directors
(originally, March 11, 1999). If, on or before such date, the BCBSA did not
extend the termination dates for the license agreements until the next
regularly scheduled meeting of the BCBSA Board of Directors after such date, or
otherwise modify the addenda, the license agreements would have terminated.
This "board-to-board" extension of the license agreements has been adopted in
conjunction with the issuance of reinstated licenses granted to other BCBSA
licensees following a license termination. On March 11, June 17, September 17,
and November 19, 1999, the Board of Directors of the BCBSA unanimously voted to
extend BCBSMo's licenses to use the Blue Cross and Blue Shield names and
service marks until the next scheduled meeting of the BCBSA Board of Directors.
The licenses (which include the primary licenses granted to BCBSMo and the
controlled affiliate licenses to RIT, HALIC and BlueCHOICE) give these
companies the right to use the Blue Cross and Blue Shield names and service
marks in connection with health insurance products marketed and sold in
BCBSMo's licensed operating area (consisting of 85 counties in eastern and
central Missouri). The licenses require BCBSMo, RIT, HALIC and BlueCHOICE to
pay license fees to BCBSA for the use of the marks. These license fees have
aggregated approximately $0.7 million to $0.8 million per year for 1997 through
1999. BCBSMo's portion of the aggregate fee was approximately $0.1 million
annually for all three years and was based on BCBSMo's total revenue as
compared to all four of these licensed companies. BCBSMo expects to continue to
incur annual license fees of similar amounts; however, the amounts may vary
from year to year based on the aggregate total revenue of BCBSMo, RIT, HALIC
and BlueCHOICE as compared to that of all Blue Cross and Blue Shield licensees,
the total revenue of BCBSMo as compared to that of RIT, HALIC and BlueCHOICE,
as well as changes adopted by BCBSA to its overall formulas for computing the
license fees.
Each of the licenses provides that it automatically terminates if, among
other things: (i) the DOI or another regulatory agency assumes control of the
licensee or delinquency proceedings are instituted; (ii) a trustee, interim
trustee, receiver or other custodian for any of BCBSMo's or the BCBSA's
property or business is appointed, or (iii) an action is instituted by any
governmental entity or officer against the licensee seeking dissolution or
liquidation of its assets or seeking the appointment of a trustee, interim
trustee, receiver or custodian for any of its property or business, which is
consented or acquiesced to by the licensee or is not dismissed within 130 days
of the licensee being served with the pleading or document commencing the
action, provided that if the action is stayed or its prosecution enjoined, the
130-day period is tolled for the duration of the stay or injunction, and
provided further that the BCBSA's Board of Directors may toll or extend the
130-day period at any time prior to its expiration. Each license also provides
that it may be terminated by BCBSA if, among other things, the licensee fails
to meet certain quality control standards or minimum capital or liquidity
requirements. Pursuant to the addendum, which became part of the reinstated
license agreements following the November 19, 1998 BCBSA Board meeting, an
automatic termination will also occur (i) if the BCBSA Board does not take
action to extend the licenses on or before the date of the next regularly
scheduled BCBSA Board meeting, and (ii) upon any judicial act that (a) provides
for or approves a transaction pursuant to which a person, entity or group other
than the licensees of BCBSA, acquires the ability to select the majority of the
members
F-69
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
of the Board of Directors of BCBSMo, RIT or certain of its affiliates or
otherwise gains control of BCBSMo, RIT or such affiliates, or (b) changes the
composition of, or the voting rights of the members of the Board of Directors
of BCBSMo, RIT or such affiliates. The foregoing provision does not apply to a
settlement or resolution of the litigation described above that complies with
all BCBSA rules, regulations and standards and is approved by or conditioned on
the approval of the BCBSA. In addition, the licenses may be terminated if
BCBSMo, RIT, or certain subsidiaries of RIT are unable to achieve certain
financial benchmarks as required by the BCBSA.
The affiliate licenses are derivative of the primary licenses and
automatically terminate if the primary licenses terminate. According to their
terms, if a license is terminated, BCBSMo, RIT, HALIC and BlueCHOICE are
jointly liable to the BCBSA for payment of a termination fee in an
amount equal to $25 times the number of licensed enrollees of the terminated
entity and its licensed controlled affiliates, and must give written notice of
such termination to their enrollees. In connection with the reinstatement
described above, the BCBSA waived the application of these provisions to the
alleged automatic termination resulting from the entry of the October 29 Order.
BCBSMo and RIT believe that the exclusive right to use the Blue Cross and
Blue Shield names and service marks provide them and their controlled
affiliates with a marketing advantage in BCBSMo's licensed operating area, the
loss of which would have a material adverse effect on BCBSMo and RIT and the
market for RIT's stock. In addition, the loss of the licenses would be an event
of default under RIT's Credit Agreement which, if not waived or otherwise
addressed, could result in a material adverse effects on BCBSMo.
In connection with the settlement agreements described above under "Status
of Proposed Settlement Agreements," BCBSMo and RIT have filed a request with
the BCBSA to transfer its primary license to New RIT as part of the
transactions contemplated by the Amended and Restated Settlement Agreement. The
BCBSA had conditionally approved the transfer as proposed under the Amended and
Restated Settlement Agreement. There can be no assurance that the transactions
contemplated by the Amended and Restated Settlement Agreement will be effected.
The failure to consummate the transactions contemplated by the Amended and
Restated Settlement Agreement could have a material adverse effect on BCBSMo.
Other contingencies
In addition to the matters described above, from time to time in the
ordinary course of business, BCBSMo and certain of its subsidiaries are parties
to various legal proceedings, many of which involve claims relating to the
denial of health care benefits. In some cases, plaintiffs may seek substantial
punitive damages. The loss of even one of these claims, if it resulted in a
significant punitive damage award, could adversely affect BCBSMo's financial
condition or results of operations. The risk of potential liability under
punitive damage theories also may make reasonable settlements of claims more
difficult to obtain.
In addition, plaintiffs continue to bring new types of purported legal
claims against health services corporations such as BCBSMo. BCBSMo cannot
determine with any certainty the impact that these evolving theories of
recovery may have on the health care industry in general or on BCBSMo or its
subsidiaries in particular.
BCBSMo anticipates that it will have insurance coverage for some of these
potential liabilities. Other potential liabilities may not be covered by
insurance, insurers may dispute coverage, or the amount of insurance may not be
enough to cover the damages awarded.
F-70
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
Update to contingencies (unaudited)
BCBSMo continues to work toward completing the proposed settlement. The
parties to the settlement have agreed to use their best efforts to consummate
the settlement and the related reorganization by December 31, 2000. Progress
that the parties have made toward implementation of the settlement and the
related reorganization include the following:
. The Blue Cross and Blue Shield Association has fully restored the
licenses to use the Blue Cross and Blue Shield names and service marks
and has preliminarily approved the reorganization.
. New RightCHOICE, which will be the resulting company in the
reorganization, has been incorporated.
. The Missouri Department of Insurance has issued preliminary approval for
the reorganization.
. Preliminary filings relating to the reorganization have been made with
the SEC.
. BCBSMo has requested that the IRS issue a private letter tax ruling to
the effect that various aspects of the reorganization will be tax-free.
The company's special tax advisor, PricewaterhouseCoopers LLP, has issued
a tax opinion relating to the tax-free nature of the reorganization.
. The Missouri Foundation for Health has been incorporated and has received
a determination from the IRS that it is a tax-exempt organization. A
nominating committee has been formed to select a board of directors for
the Foundation.
. RightCHOICE's lenders under its credit facility have consented to the
reorganization.
A number of significant conditions must be satisfied before the settlement
is completed, including finalizing the preliminary filings made with the SEC
and receipt of approval of the reorganization from RightCHOICE's shareholders
at a special shareholders' meeting that currently is expected to be held before
the end of the year. The parties have sought a private letter ruling from the
IRS and final approval of the reorganization from both the Blue Cross and Blue
Shield Association and the Missouri Department of Insurance. The reorganization
is also conditioned upon the receipt of legal opinions from counsel to the
various parties. In addition, there remains pending a case regarding the status
of BCBSMo that could affect the closing of the reorganization. The case relates
to whether BCBSMo is a public benefit or a mutual benefit company as described
above under "Litigation relating to corporate status of BCBSMo." The issue is
currently before the Circuit Court.
BCBSMo is a party to a lawsuit captioned Dierkes v. BCBSMo and RightCHOICE
Managed Care, Inc. presently pending in the Circuit Court of the City of St.
Louis, Missouri. In the action, plaintiffs seek to represent a class and assert
various allegations, including breach of contract and misrepresentation,
relating to BCBSMo's alleged failure to comply with certain regulations of the
Missouri Department of Insurance concerning premium rate increases for its
Medicare supplement policies for the years 1992, 1993, and 1994.
The action was originally filed in August 1995. In July 1997, the Circuit
Court of the City of St. Louis granted summary judgment on all counts on behalf
of BCBSMo and dismissed the case. In June 1998, the Missouri Court of Appeals
for the Eastern District affirmed the decision of the circuit
F-71
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
court dismissing the case. Upon transfer, in April 1999, the Missouri Supreme
Court reversed in part and remanded the case to the Circuit Court of the City
of St. Louis for further proceedings. Since that time, the parties have engaged
in additional discovery. BCBSMo intends to continue to vigorously defend the
action.
11. Statutory information
The operations of the company are subject to regulation and supervision by
regulatory authorities of the various jurisdictions in which the company is
licensed to conduct business. Regulatory authorities exercise extensive
supervisory power over the licensing of insurance companies; the amount of
reserves that must be maintained; the approval of forms and insurance policies
used; the nature of, and limitation on, an insurance company's investments;
periodic examination of the operations of insurance companies; the form and
content of annual statements and other reports required to be filed on the
financial condition of insurance companies; and the establishment of capital
requirements for insurance companies. The company is required to file periodic
statutory financial statements in the State of Missouri where the company is
licensed. Additionally, these companies are also periodically examined by the
insurance departments of the jurisdictions in which they are licensed to do
business.
In addition to minimum capital requirements imposed by BCBSA, the company
and regulated subsidiaries of RIT must comply with certain minimum statutory
surplus requirements in each of the states in which they operate. Combined
statutory surplus of BCBSMo and RIT's insurance and HMO subsidiaries was
$230,186 and $195,046 at December 31, 1999 and 1998, respectively. At
December 31, 1999 and 1998, BCBSMo and RIT's subsidiaries were required to
maintain a combined minimum of $88,347 and $79,069, respectively, of combined
statutory surplus in order to meet minimum BCBSA capital and statutory surplus
requirements for the company's and RIT's subsidiaries' states of domicile.
The company prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the Missouri Departments of
Insurance. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners, as well as
state laws, regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance (the Codification), which will replace the current
Accounting Practices and Procedures manual as the NAIC's primary guidance on
statutory accounting. The NAIC is now considering amendments to the
Codification guidance that would also be effective upon implementation. The
NAIC has recommended an effective date of January 1, 2001. The Codification
provides guidance for areas where statutory accounting has been silent and
changes current statutory accounting in some areas. Management believes that it
is more likely than not that the Missouri legislature will enact the
Codification. The company has not estimated the potential effect of the
Codification guidance if adopted.
12. Transactions with RightCHOICE
Pursuant to an administrative services agreement, the company receives
certain administrative and support services, including computerized data
processing and management information systems, telecommunication systems and
accounting, finance, legal, actuarial and other management services
F-72
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
from RIT. These expenses are allocated to and paid by BCBSMo in an amount equal
to the direct and indirect costs and expenses incurred in furnishing these
services. In addition, RIT provides services to BCBSMo, including health plan
services, processing claims related to such plans, provider contracting, market
research, and advertising.
These services are reimbursed on a basis that management believes
approximates cost. Management of BCBSMo and RIT consider the allocation
methodologies and cost approximations related to the intercompany services and
lease arrangements to be reasonable and appropriate. General and administrative
expense includes net intercompany charges allocated to BCBSMo by RIT for the
respective periods, as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Services provided by RIT....................... $16,798 $15,642 $12,792
Services provided to RIT....................... (212) (397) (586)
------- ------- -------
Net expense allocated to BCBSMo.............. $16,586 $15,245 $12,206
======= ======= =======
</TABLE>
The company provides office space and parking facilities to RIT pursuant to
lease agreements between BCBSMo's real estate subsidiaries and RIT. The
services provided to RIT caption above does not include $4,858, $4,014, and
$3,850 for 1999, 1998, and 1997, respectively, representing the related party
rental income collected by BCBSMo's real estate subsidiaries from RIT, net of
BCBSMo's rental expense related to its office space sublease from RIT. BCBSMo
has intercompany payables and receivables between the company and RIT, which
include $9.8 million of payables and $3.4 million of receivables related to the
BCBSMo transfer of all economic risks and rewards on certain insurance policies
originally issued by BCBSMo, pursuant to a reinsurance agreement. In addition,
the intercompany receivables and payables include net intercompany transactions
for general and administrative expenses as well as intercompany tax
settlements, settled on a quarterly basis. Additional amounts of receivables
and payables relate to the company's cash management activity which is
typically settled between BCBSMo and RIT on a monthly basis.
13. Segment information
The company operates in three segments which it defines as underwritten,
self-funded, and other. The company's underwritten segment includes a limited
set of PPO products, primarily comprised of the Federal Employee Program (FEP).
The company's self-funded segment includes national service accounts through
the BCBSA for which BCBSMo accepts no underwriting risk. The other segment
primarily includes the company's real estate assets and related rental and
lease revenues and expenses. All of the company's revenues, including
underwritten premiums and self-funded fees and other income and real estate
rental revenue, are derived from domestic (United States) sources. Federal
Employee Program comprised 74.2%, 76.9% and 79.0% of total revenues in 1999,
1998, and 1997 respectively.
Operating income for the company's underwritten segment is determined by
deducting from premium revenue the health care service costs, commissions, and
general and administrative expenses, that are attributable to that segment's
operations. Operating income for the self-funded segment is determined by
deducting from fees and other income the commissions, and general and
administrative expenses attributable to the segment. Operating income for the
other segment is determined by deducting from rental revenues the general and
administrative expenses (including depreciation) attributable to the segment.
Expenses not directly traceable to an industry segment are
F-73
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
allocated on a consistent and reasonable basis utilizing membership, groups,
claims, and other key drivers. Corporate identifiable assets for the
underwritten and self-funded segments include only receivables from members
because the company does not produce more detailed information for these
segments internally. Corporate identifiable assets for the company's other
segment includes the net book value for the company's real estate and related
assets. Intersegment revenues are not material. Financial information by
segment is as follows:
<TABLE>
<CAPTION>
Self-
Underwritten funded Other Consolidated
------------ ------- ------- ------------
<S> <C> <C> <C> <C>
As of and for the six months ended
June 30, 2000
(unaudited)
Revenues............................ $45,867 $9,887 $3,923 $59,677
Operating (loss) income............. (209) 3,171 1,500 4,462
Non-recurring charges............... 246 53 21 320
Depreciation and amortization
expense............................ 2 1,429 1,431
Receivables from members............ 17,097 180 17,277
Real estate assets.................. 60,883 60,883
<CAPTION>
Self-
Underwritten funded Other Consolidated
------------ ------- ------- ------------
<S> <C> <C> <C> <C>
As of and for the six months ended
June 30, 1999
(unaudited)
Revenues............................ $41,544 $ 8,679 $ 3,762 $53,985
Operating (loss) income............. (749) 2,827 1,302 3,380
Non-recurring charges............... 1,358 284 122 1,764
Depreciation and amortization
expense............................ 4 5 1,401 1,410
Receivables from members............ 14,069 340 14,409
Real estate assets.................. 62,987 62,987
<CAPTION>
Self-
Underwritten funded Other Consolidated
------------ ------- ------- ------------
<S> <C> <C> <C> <C>
As of and for the year ended
December 31, 1999
Revenues............................ $85,393 $17,856 $ 7,498 $110,747
Operating (loss) income............. (508) 6,112 2,794 8,398
Non-recurring charges............... 2,900 607 254 3,761
Depreciation and amortization
expense............................ 5 7 2,801 2,813
Receivables from members............ 16,102 411 16,513
Real estate assets.................. 61,928 61,928
</TABLE>
<TABLE>
<CAPTION>
Self-
Underwritten funded Other Consolidated
------------ ------- ------- ------------
<S> <C> <C> <C> <C>
As of and for the year ended December 31, 1998
Revenues............................. $80,672 $13,132 $ 6,617 $100,421
Operating (loss) income.............. (448) 1,157 1,859 2,568
Depreciation and amortization
expense............................. 16 24 2,756 2,796
Receivables from members............. 19,366 997 20,363
Real estate assets................... 64,534 64,534
<CAPTION>
Self-
Underwritten funded Other Consolidated
------------ ------- ------- ------------
<S> <C> <C> <C> <C>
As of and for the year ended December 31, 1997
Revenues............................. $81,322 $11,232 $ 5,548 $98,102
Operating (loss) income.............. (5,883) 621 1,228 (4,034)
Depreciation and amortization
expense............................. 26 37 2,462 2,525
Receivables from members............. 17,623 160 17,783
Real estate assets................... 76,295 76,295
</TABLE>
F-74
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(dollars in thousands)
The following table sets forth revenue (in thousands) by product group for
the six months ended June 30, 2000 and 1999 and for the years ended December
31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
For the six months For the year ended
ended June 30, December 31,
----------------------- -------------------------
2000 1999 1999 1998 1997
Product Group (unaudited) (unaudited)
------------- ----------- ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Underwritten:
Federal Employee
Program................ $44,495 $39,806 $ 82,153 $ 77,187 $77,473
Other................... 1,372 1,738 3,240 3,485 3,849
------- ------- -------- -------- -------
Total premium revenue. 45,867 41,544 85,393 80,672 81,322
ASO/Self-funded and other
fees..................... 9,887 8,679 17,856 13,132 11,232
Other..................... 3,923 3,762 7,498 6,617 5,548
------- ------- -------- -------- -------
Total revenues........ $59,677 $53,985 $110,747 $100,421 $98,102
======= ======= ======== ======== =======
</TABLE>
14. Quarterly financial information (unaudited)
<TABLE>
<CAPTION>
Three months ended
----------------------------------
31-Mar 30-Jun 30-Sep 31-Dec
------- ------- ------- -------
<S> <C> <C> <C> <C>
1999
----
Total revenues....................... $25,387 $28,598 $29,693 $27,069
Operating expenses................... 24,031 26,574 25,202 26,542
Operating income..................... 1,356 2,024 4,491 527
Investment income, net............... 310 386 535 664
Other (expense) income, net.......... (67) 147 (34) (6)
Income before taxes and accounting
change.............................. 1,599 2,557 4,992 1,185
Provision for income taxes........... 617 1,150 1,850 648
Income before accounting change...... 982 1,407 3,142 537
Cumulative effect of accounting
change.............................. 1,076
------- ------- ------- -------
Net (loss) income.................... $ (94) $ 1,407 $ 3,142 $ 537
======= ======= ======= =======
Membership (in thousands)............ 143 142 155 155
======= ======= ======= =======
<CAPTION>
Three months ended
----------------------------------
31-Mar 30-Jun 30-Sep 31-Dec
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
----
Total revenues....................... $25,885 $24,998 $24,125 $25,413
Operating expenses................... 25,565 25,041 22,824 24,423
Operating income (loss).............. 320 (43) 1,301 990
Investment income (loss), net........ 187 149 181 (5,125)
Other (expense) income, net.......... (89) (40) 163 77
Income (loss) before taxes........... 418 66 1,645 (4,058)
Provision (benefit) for income taxes. 151 23 578 (1,415)
------- ------- ------- -------
Net income (loss).................... $ 267 $ 43 $ 1,067 $(2,643)
======= ======= ======= =======
Membership (in thousands)............ 135 131 132 127
======= ======= ======= =======
</TABLE>
F-75
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Blue Cross and Blue Shield of Missouri:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in net assets representing
reserve for protection of members and of cash flows present fairly, in all
material respects, the financial position of Blue Cross and Blue Shield of
Missouri Historical Carve-Out and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Notes 1 and 10 to the consolidated financial statements, Blue
Cross and Blue Shield of Missouri is being merged with RightCHOICE Managed
Care, Inc. ("RIT") as part of a Settlement Agreement with the State of
Missouri. These historical carve-out financial statements prepared for the
purpose of this proxy statement prospectus exclude all the assets and
liabilities and results of operations and cash flows of RIT, a majority owned
subsidiary of Blue Cross and Blue Shield of Missouri.
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 9, 2000, except for Note 10
for which the date is March 9, 2000
F-76
<PAGE>
SCHEDULE III
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1999
(dollars in 000's)
<TABLE>
<CAPTION>
Costs
capitalized
subsequent
to
Description Initial Cost acquisition
----------------------------------------------- -------------------- -----------
Improvements
Square Buildings and land
Type of feet/parking and building preparation Carrying
Location property spaces Encumbrances Land improvements costs costs
-------- ------------ --------------- ------------ ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
1831 Chestnut St. Office 425,057 sq. ft. None $ 1,601 $33,599 $27,381 None
St. Louis, MO building (1)
<CAPTION>
Life on
which
Gross amount at which depreciation
Descricarriedpatt12/31/99ion Date of construction in
----------------------------------------------- ------------------------- latest
income
Buildings Accumulated Original Latest date statements
and building Total depreciation date of of Date is
Location Land improvements (6) (6) construction renovation acquired computed
-------- ------ ------------ ----- ------------ ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1831 Chestnut St. $1,601 $60,980 $62,581 $13,875 1930's late 1980's 02/92 30 years for
St. Louis, MO building;
lease term
(plus
extensions)
for tenant
improvements
1910 Pine St. Office 73,211 sq. ft. None 50 905 2,677 None
St. Louis, MO building (2)
1910 Pine St. 50 3,582 3,632 1,225 late 1800's early 1980's 02/92 30 years for
St. Louis, MO building;
lease term
(plus
extensions)
for tenant
improvements
Chestnut & 20th Parking lots 488 spaces None 3,010 0 1,401 None
St. Louis, MO (3)
1701 Chestnut St. Parking 860 spaces None 1,364 1,161 6,233 None
St. Louis, MO garage (4)
Cupples Real estate N/A None 7,300 0 3,284 None
Properties investment
St. Louis, MO (5)
------- ------- -------
$13,325 $35,665 $40,976
======= ======= =======
Chestnut & 20th 3,010 1,401 4,411 954 early 1990's 02/92 10 years for
St. Louis, MO parking lot
improvements
1701 Chestnut St. 1,364 7,394 8,758 1,400 1930's early 1990's 03/93 30 years
St. Louis, MO
Cupples 0 0 0 0 1885-1915 02/92 N/A
Properties
St. Louis, MO
------ ------------ ------- ------------
$6,025 $73,357 $79,382 $17,454
====== ============ ======= ============
</TABLE>
F-77
<PAGE>
SCHEDULE III
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1999
dollars in 000's
--------
(1) The building at 1831 Chestnut Street serves as BCBSMo's headquarters. In
addition, BCBSMo leases the building to several tenants, including RIT.
(2) BCBSMo leases space in the building at 1910 Pine Street to various non-
affiliated tenants.
(3) The cost of the land preparation fees includes the cost of demolition of
the buildings as well as the cost of environmental remediation. BCBSMo uses
these parking lots primarily for employee and visitor parking. Additional
revenues are collected from tenants (including RIT) and other public
parking.
(4) BCBSMo utilizes the parking garage at 1701 Chestnut Street for employee
parking. In addition, BCBSMo leases parking garage spaces to tenants,
including RIT.
(5) The Cupples Properties are located in downtown St. Louis and consisted of
ten abandoned warehouses and associated parking lots. BCBSMo sold the
properties in December 1998. Prior to disposition, BCBSMo held the real
estate as an investment. The cost of improving these properties primarily
consisted of environmental remediation.
(6) The analysis below represents a reconciliation of the gross amounts of real
estate held by BCBSMo for the years ended December 31, 1997, 1998, and
1999, as well as the associated accumulated depreciation.
<TABLE>
<CAPTION>
Gross
Property
------------
<S> <C>
Balance at December 31, 1996.................................. $ 87,175
Improvements.................................................. 1,017
--------
Balance at December 31, 1997.................................. 88,192
Improvements.................................................. 1,579
Cost of real estate sold...................................... (10,584)
--------
Balance at December 31, 1998.................................. 79,187
Improvements.................................................. 195
--------
Balance at December 31, 1999.................................. $ 79,382
========
<CAPTION>
Accumulated
Depreciation
------------
<S> <C>
Balance at December 31, 1996.................................. $ 9,437
Depreciation.................................................. 2,460
--------
Balance at December 31, 1997.................................. 11,897
Depreciation.................................................. 2,756
--------
Balance at December 31, 1998.................................. 14,653
Depreciation.................................................. 2,801
--------
Balance at December 31, 1999.................................. $ 17,454
========
(7) The aggregate gross cost for Federal income tax purposes as of December 31,
1999 is broken down as follows:
<CAPTION>
Federal tax
cost
------------
<S> <C>
1831 Chestnut Street.......................................... $ 46,222
1910 Pine Street.............................................. 3,632
Chestnut and 20th Street parking lots......................... 4,411
1701 Chestnut Street.......................................... 8,758
--------
Total....................................................... $ 63,023
========
</TABLE>
F-78
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of RightCHOICE Managed Care, Inc. and the
Board of Directors of Blue Cross and Blue Shield
of Missouri:
Our reports on the consolidated financial statements of RightCHOICE Managed
Care, Inc. and Blue Cross and Blue Shield of Missouri Historical Carve-Out are
included on pages F-42 and F-76, respectively of this document. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedules listed on pages F-43-F-45 and pages
F-77-F-78 of this document.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included.
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 9, 2000, except for Note
13 to the consolidated financial
statements of RightCHOICE Managed
Care, Inc. and Note 10 of the Blue
Cross and Blue Shield of Missouri
Historical Carve-Out financial
statements, for which the date is
March 9, 2000
F-79
<PAGE>
RIGHTCHOICE MANAGED CARE, INC. (a Delaware corporation)
BALANCE SHEET
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
June 30, 2000
(unaudited) March 14, 2000
------------- --------------
<S> <C> <C>
Assets:
Cash.............................................. $ 1 $ 1
--- ---
Total assets.................................. $ 1 $ 1
=== ===
Liabilities....................................... $ 0 $ 0
--- ---
Shareholders' equity:
Preferred stock, $0.01 par, 25,000,000 shares
authorized, no shares issued and outstanding...
Common stock, $0.01 par, 225,000,000 shares
authorized, 1 share issued and outstanding.....
Additional paid-in capital...................... 1 1
--- ---
Total shareholders' equity.................... 1 1
--- ---
Total liabilities and shareholders' equity.... $ 1 $ 1
=== ===
</TABLE>
See accompanying note to balance sheet.
F-80
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTE TO BALANCE SHEET
(dollars in thousands)
1. Organization
RightCHOICE Managed Care, Inc., a Delaware corporation (New RightCHOICE),
was incorporated on March 14, 2000. On March 14, 2000, New RightCHOICE issued
one share of its common stock to The Missouri Foundation For Health (the
Foundation) in exchange for $1. New RightCHOICE was formed for the sole purpose
of facilitating the reorganization of RightCHOICE Managed Care, Inc.
(RightCHOICE) and Blue Cross and Blue Shield of Missouri, both Missouri
corporations. The principal reason RightCHOICE and Blue Cross and Blue Shield
of Missouri are proposing the reorganization is to resolve litigation with the
Missouri Attorney General and the Missouri Department of Insurance.
It is expected that the reorganization will combine the business and
operations of RightCHOICE and Blue Cross and Blue Shield of Missouri. Both
RightCHOICE and Blue Cross and Blue Shield of Missouri, through a series of
steps in the reorganization, are expected to merge into New RightCHOICE.
Following completion of the reorganization, the current public shareholders of
RightCHOICE, who are the holders of RightCHOICE class A common stock, will own
approximately 20% of the outstanding shares of New RightCHOICE common stock and
The Missouri Foundation For Health will own approximately 80% of the
outstanding shares of New RightCHOICE common stock. Therefore, the public
shareholders of New RightCHOICE will have approximately 20% of the voting power
of New RightCHOICE and the Foundation will have approximately 80% of the voting
power of New RightCHOICE, although a voting trust will hold at least 95% of the
Foundation's shares of New RightCHOICE common stock until the shares are sold
as required by the voting trust and divestiture agreement. It is anticipated
that the reorganization will be completed before the end of 2000; however, no
assurances can be given that the reorganization will be completed or that it
will be completed within this timeframe. Any party to the reorganization
agreement may terminate the reorganization agreement if the reorganization is
not completed by December 31, 2000.
F-81
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of RightCHOICE Managed Care, Inc.,
a Delaware Corporation
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of RightCHOICE Managed Care, Inc., a
Delaware Corporation (herein referred to as "New RightCHOICE" or the
"Company"), at March 14, 2000, the date of incorporation, in conformity with
accounting principles generally accepted in the United States. This financial
statement is the responsibility of the Company's management; our responsibility
is to express an opinion on this financial statement based on our audit. We
conducted our audit of the balance sheet in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall balance sheet presentation. We believe that our
audit of the balance sheet provides a reasonable basis for the opinion
expressed above.
As discussed in Note 1 to the balance sheet, New RightCHOICE is being merged
with RightCHOICE Managed Care, Inc., a Missouri corporation, as part of a
Settlement Agreement with the State of Missouri.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 23, 2000
F-82
<PAGE>
Appendix A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
by and among
BLUE CROSS AND BLUE SHIELD OF MISSOURI,
a Missouri nonprofit health services corporation
RIGHTCHOICE MANAGED CARE, INC.,
a Missouri corporation
THE MISSOURI FOUNDATION FOR HEALTH,
a Missouri nonprofit public benefit corporation
and
RIGHTCHOICE MANAGED CARE, INC.,
a Delaware corporation
DATED MARCH 14, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <C> <S> <C>
ARTICLE I TERMS OF REORGANIZATION; CLOSING............................... A-3
Section 1.01. Sequence of Transactions................................ A-3
Section 1.02. Transfer and Assumption Transaction..................... A-3
(a) Assumption Reinsurance Agreement................... A-3
(b) Regulatory Approvals............................... A-3
(c) Consummation of Transaction........................ A-3
(d) Tax Consequences................................... A-3
Section 1.03. Charter Conversion Transaction.......................... A-3
(a) Filing of Articles of Incorporation; Bylaws........ A-3
(b) Effective Time..................................... A-4
(c) Issuance of Stock.................................. A-4
(d) Regulatory Approvals............................... A-4
(e) Directors and Officers............................. A-4
(f) Consummation of Transaction........................ A-4
(g) Tax Consequences................................... A-4
Section 1.04. Reincorporation Merger Transaction...................... A-4
(a) Structure of Merger................................ A-4
(b) Effective Time..................................... A-5
(c) Conversion of Shares............................... A-5
(d) Effects of Merger.................................. A-5
(e) Regulatory Approvals............................... A-5
(f) Certificate of Incorporation and Bylaws............ A-5
(g) Directors and Officers............................. A-5
(h) Consummation of Transaction........................ A-5
(i) Tax Consequences................................... A-5
(j) Dissenters' Rights................................. A-6
Section 1.05. RIT/New RIT Merger Transaction.......................... A-6
(a) Structure of Merger................................ A-6
(b) Effective Time..................................... A-6
(c) Conversion of Shares............................... A-6
(d) Treasury Shares.................................... A-6
(e) Dissenters' Rights................................. A-6
(f) Effects of Merger.................................. A-7
(g) Regulatory Approvals............................... A-7
(h) Certificate of Incorporation and Bylaws............ A-7
(i) New RIT Directors and Officers..................... A-7
(j) Exchange of Certificates........................... A-7
(1) Exchange Agent................................. A-7
(2) Exchange Procedure for Public Shareholders..... A-8
(3) Exchange Procedure for Foundation.............. A-8
(4) Distributions With Respect to Unexchanged
Shares............................................. A-8
(5) Transfers of Ownership......................... A-8
(6) No Liability................................... A-9
(7) Lost, Stolen or Destroyed Certificates......... A-9
(k) Stock Transfer Books............................... A-9
(l) Tax Consequences................................... A-9
(m) Consummation of Transaction........................ A-9
Section 1.06. Stock Options........................................... A-9
Section 1.07. Closing; Closing Date................................... A-10
</TABLE>
A-i
<PAGE>
<TABLE>
<C> <C> <S> <C>
ARTICLE II REPRESENTATIONS AND WARRANTIES................................. A-10
Section 2.01. Disclosure Schedule; Standard............................ A-10
(a) Disclosure Schedule................................. A-10
(b) Standard............................................ A-11
Section 2.02. Representations and Warranties of RIT.................... A-11
(a) Corporate Existence and Power....................... A-11
(b) Authorization; No Defaults.......................... A-11
(c) Capitalization...................................... A-12
(d) Financial Information............................... A-12
(e) Reports............................................. A-12
(f) Absence of Changes.................................. A-13
(g) Undisclosed Liabilities............................. A-13
Section 2.03. Representations and Warranties of BCBSMo................. A-13
(a) Authorization; No Defaults.......................... A-13
(b) Capitalization...................................... A-14
(c) Financial Information............................... A-14
(d) Reports............................................. A-14
(e) Absence of Changes.................................. A-14
(f) Undisclosed Liabilities............................. A-14
Section 2.04. Representations and Warranties of New RIT................ A-14
(a) Corporate Existence and Power....................... A-14
(b) Authorization; No Defaults.......................... A-15
(c) Capitalization...................................... A-15
Section 2.05. Representations and Warranties of the Foundation......... A-15
(a) Corporate Existence and Power....................... A-15
(b) Authorization; No Defaults.......................... A-15
ARTICLE III COVENANTS..................................................... A-16
Section 3.01. Pre-Closing Covenants of RIT............................. A-16
(a) Submission to Shareholders.......................... A-16
(b) Consummation of Reorganization...................... A-16
(c) Consents and Approvals.............................. A-16
Section 3.02. Pre-Closing Covenants of BCBSMo.......................... A-17
(a) Agreement to Vote in Favor.......................... A-17
(b) Consummation of Reorganization...................... A-17
(c) Consents and Approvals.............................. A-17
Section 3.03. Pre-Closing Covenants of New RIT......................... A-17
(a) Other Actions....................................... A-17
(b) Consummation of Reorganization...................... A-17
(c) Plans of Merger..................................... A-17
Section 3.04. Pre-Closing Covenants of Foundation...................... A-17
(a) No Sale or Transfer................................. A-17
(b) Agreements to Vote in Favor......................... A-17
(1) Reincorporation Merger Transaction.............. A-17
(2) RIT/New RIT Merger Transaction.................. A-18
(c) Consummation of Reorganization...................... A-18
(d) Tax Opinion......................................... A-18
Section 3.05. Proxy Statement/Prospectus; Registration Statement....... A-18
Section 3.06. Public Announcements..................................... A-18
Section 3.07. Registration Rights Agreement............................ A-18
Section 3.08. Indemnification Agreement................................ A-19
Section 3.09. Voting Trust and Divestiture Agreement................... A-19
</TABLE>
A-ii
<PAGE>
<TABLE>
<C> <C> <S> <C>
Section 3.10. Public Offering.......................................... A-19
Section 3.11. Indemnification and Insurance............................ A-19
Section 3.12. Accountants' Letters..................................... A-20
Section 3.13. Foundation Governance.................................... A-20
Section 3.14. Due Diligence............................................ A-20
Section 3.15. Payment to Foundation.................................... A-20
ARTICLE IV CONDITIONS PRECEDENT TO REORGANIZATION......................... A-20
Section 4.01. Conditions to Reorganization............................. A-20
(a) Injunction.......................................... A-20
(b) Regulatory and Shareholder Approval................. A-20
(c) Effective Registration Statement.................... A-21
(d) Tax Determination................................... A-21
(e) NYSE Listing........................................ A-21
(f) Resolution of Sarkis Litigation..................... A-21
Section 4.02. Conditions to Obligations of BCBSMo...................... A-21
(a) Representations and Warranties...................... A-21
(b) Compliance with Agreements.......................... A-21
(c) Delivery of Documents............................... A-21
(d) Other Consents...................................... A-21
(e) Comfort Letter...................................... A-21
(f) Favorable Ruling.................................... A-21
(g) Tax Opinions........................................ A-22
(h) BCBSMo Board Legal Opinion.......................... A-22
(i) Resolution of Pending Litigation.................... A-22
(j) Legal Opinions...................................... A-22
(k) Confirmation From Attorney General and DOI.......... A-23
Section 4.03. Conditions to Obligations of RIT......................... A-23
(a) Representations and Warranties...................... A-23
(b) Compliance with Agreements.......................... A-23
(c) Delivery of Documents............................... A-23
(d) Other Consents...................................... A-23
(e) Comfort Letter...................................... A-24
(f) Favorable Ruling.................................... A-24
(g) Tax Opinions........................................ A-24
(h) Association Approval................................ A-24
(i) Opinion of Financial Advisor to RIT................. A-24
(j) Confirmation From Attorney General and DOI.......... A-25
(k) Bank Approval....................................... A-25
(l) Legal Opinions...................................... A-25
Section 4.04. Conditions to Obligations of New RIT..................... A-25
(a) Representations and Warranties...................... A-25
(b) Compliance with Agreements.......................... A-25
(c) Delivery of Documents............................... A-25
(d) Comfort Letter...................................... A-25
(e) Legal Opinions...................................... A-25
Section 4.05. Conditions to Obligations of Foundation.................. A-25
(a) Representations and Warranties...................... A-25
(b) Compliance with Agreements.......................... A-26
(c) Delivery of Documents............................... A-26
(d) Other Consents...................................... A-26
(e) Comfort Letter...................................... A-26
(f) Favorable Ruling.................................... A-26
(g) Tax Opinions........................................ A-26
(h) Legal Opinions...................................... A-27
</TABLE>
A-iii
<PAGE>
<TABLE>
<C> <C> <S> <C>
ARTICLE V TERMINATION............. A-27
ARTICLE VI GENERAL PROVISIONS..... A-27
Fees and
Section 6.01. Expenses......... A-27
Nonsurvival of
Representations,
Warranties and
Section 6.02. Agreements....... A-27
Section 6.03. Notices.......... A-28
Section 6.04. Amendment........ A-28
Section 6.05. Waiver........... A-28
Entire
Section 6.06. Agreement........ A-28
Parties in
Section 6.07. Interest......... A-28
Section 6.08. Governing Law.... A-29
Section 6.09. Counterparts..... A-29
Section 6.10. Recitals......... A-29
Fair
Section 6.11. Construction..... A-29
Headings and
Section 6.12. Captions......... A-29
Section 6.13. Assignment....... A-29
</TABLE>
A-iv
<PAGE>
LIST OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
A........ Amended and Restated Settlement Agreement (without Exhibits thereto).
B........ Form of Assumption Reinsurance Agreement.
C........ Form of Articles of Incorporation of New BCBSMo.
D........ Form of Bylaws of New BCBSMo.
E........ Intercompany Liabilities.
F........ Certificate of Incorporation of New RIT.
G........ Bylaws of New RIT.
H........ Form of Foundation Reincorporation Merger Resolution.
I........ Form of Foundation RIT/New RIT Merger Resolution.
J........ Form of Registration Rights Agreement.
K........ Form of Indemnification Agreement.
L........ Form of Voting Trust and Divestiture Agreement.
</TABLE>
A-v
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM LOCATION
------------ -----------------
<S> <C>
Agreement................................................... Preamble
Ancillary Agreements........................................ Section 2.02(b)
Association................................................. Recital A
Assumption Reinsurance Agreement............................ Section 1.02(a)
Attorney General............................................ Recital D
Bank Approvals.............................................. Section 4.03(k)
BCBSMo...................................................... Preamble
BCBSMo Board................................................ Recital J
BCBSMo Disclosure Schedule.................................. Section 2.01(a)
BCBSMo Financial Statements................................. Section 2.03(c)
BCBSMo Independent Committee................................ Recital J
BCBSMo Legal Opinion........................................ Section 4.03(l)
BCBSMo/RIT Stock Option..................................... Section 1.06(a)
BCBSMo/RIT Stock Option Plans............................... Section 1.06(a)
Charter Conversion Effective Time........................... Section 1.03(b)
Charter Conversion Transaction.............................. Recital H(2)
Closing..................................................... Section 1.07
Closing Date................................................ Section 1.07
Code........................................................ Recital F
Delaware Corporate Law...................................... Section 1.04(a)
DOI......................................................... Recital D
Exchange Act................................................ Section 2.02(f)
Exchange Agent.............................................. Section 1.05(j)(1)
Existing Licenses........................................... Section 4.03(h)
Favorable Ruling............................................ Section 4.02(f)
Favorable Ruling Matter..................................... Section 4.02(f)
Foundation.................................................. Preamble
Foundation Legal Opinion.................................... Section 4.02(j)
Foundation Litigation Legal Opinion......................... Section 4.02(j)
Foundation Reincorporation Merger Resolution................ Section 3.04(b)(1)
Foundation RIT/New RIT Merger Resolution.................... Section 3.04(b)(2)
HALIC....................................................... Recital H(1)
Health Benefit Products..................................... Section 3.13
Indemnification Agreement................................... Section 3.08
Indemnified Party........................................... Section 3.11(a)
Litigation.................................................. Recital D
Marks....................................................... Recital A
Material Adverse Effect..................................... Section 2.01(b)
Missouri Corporate Law...................................... Section 1.03(a)
New BCBSMo.................................................. Recital H(2)
New BCBSMo Articles......................................... Section 1.03(a)
New BCBSMo Board............................................ Section 1.03(a)
New BCBSMo Bylaws........................................... Section 1.03(a)
New BCBSMo Stock............................................ Recital H(2)
New RIT..................................................... Preamble
New RIT Board............................................... Section 1.04(g)
New RIT Bylaws.............................................. Section 1.04(f)
New RIT Certificate of Incorporation........................ Section 1.04(f)
New RIT Certificates........................................ Section 1.05(j)(1)
</TABLE>
A-vi
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM LOCATION
------------ -----------------
<S> <C>
New RIT Legal Opinion....................................... Section 4.02(j)
New RIT Stock............................................... Recital G
NYSE........................................................ Recital C
Proxy Statement/Prospectus.................................. Section 3.05
Public Exchange Ratio....................................... Section 1.05(c)
Registration Rights Agreement............................... Section 3.07
Registration Statement...................................... Section 3.05
Regulatory Authority........................................ Section 2.02(e)
Reincorporation Merger Effective Time....................... Section 1.04(b)
Reincorporation Merger Transaction.......................... Recital H(3)
Reorganization.............................................. Recital I
RIT......................................................... Preamble
RIT Board................................................... Recital J
RIT Certificates............................................ Section 1.05(j)(2)
RIT Class A Stock........................................... Recital C
RIT Class B Stock........................................... Recital C
RIT Disclosure Schedule..................................... Section 2.01(a)
RIT Financial Statements.................................... Section 2.02(d)
RIT Independent Committee................................... Recital J
RIT Legal Opinion........................................... Section 4.02(j)
RIT Preferred Stock......................................... Section 2.02(c)
RIT Shareholders' Meeting................................... Section 3.01(a)
RIT Stock................................................... Recital C
RIT/New RIT Merger Effective Time........................... Section 1.05(b)
RIT/New RIT Merger Transaction.............................. Recital H(4)
SEC......................................................... Section 1.06(c)
Securities Act.............................................. Section 1.06(c)
Settlement Agreement........................................ Recital E
Transfer and Assumption Transaction......................... Recital H(1)
Voting Trust and Divestiture Agreement...................... Section 3.09
</TABLE>
A-vii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (this "Agreement"), dated as of
March 14, 2000, is made and entered into by and among Blue Cross and Blue
Shield of Missouri, a Missouri non-profit health services corporation
("BCBSMo"), RightCHOICE Managed Care, Inc., a Missouri corporation ("RIT"), The
Missouri Foundation For Health, a Missouri non-profit public benefit
corporation (the "Foundation"), and RightCHOICE Managed Care, Inc., a Delaware
corporation and wholly-owned subsidiary of the Foundation ("New RIT").
Recitals
A. BCBSMo is a Missouri non-profit non-stock health services corporation
that offers health benefits and related products and services. BCBSMo holds a
license from the Blue Cross and Blue Shield Association (the "Association") to
use the Blue Cross and Blue Shield names and service marks (the "Marks").
B. RIT is a Missouri general business corporation, doing business under the
name "Alliance Blue Cross Blue Shield," that provides health care products and
services. RIT also holds a license from the Association to use the Marks.
C. RIT has outstanding 3,710,653 shares of Class A Common Stock (the "RIT
Class A Stock") and 14,962,500 shares of Class B Common Stock (the "RIT Class B
Stock;" together with the RIT Class A Stock, the "RIT Stock"). Each share of
RIT Class A Stock has one vote per share, and each share of RIT Class B Stock
has ten votes per share. The issued and outstanding shares of RIT Class B
Stock, representing approximately 80.1% of the issued and outstanding shares of
RIT Stock and approximately 97.6% of the voting power of the issued and
outstanding shares of RIT Stock, are owned by BCBSMo. The issued and
outstanding shares of RIT Class A Stock, representing approximately 19.9% of
the issued and outstanding shares of RIT Stock and approximately 2.4% of the
voting power of the issued and outstanding shares of RIT Stock, are listed for
trading on the New York Stock Exchange, Inc. (the "NYSE").
D. RIT and BCBSMo were involved in the following litigation with the
Missouri Attorney General, Jeremiah W. "Jay" Nixon (the "Attorney General"),
the Director of the Missouri Department of Insurance, Jay B. Angoff, and the
Missouri Department of Insurance (together, the "DOI"): Blue Cross Blue Shield
of Missouri, Plaintiff v. Jay Angoff, Director of the Missouri Department of
Insurance, the Missouri Department of Insurance and Jeremiah W. "Jay" Nixon,
No. CV196-619CC, in the Circuit Court of Cole County, Missouri; and Blue Cross
Blue Shield of Missouri v. Jay Angoff, Director of the Missouri Department of
Insurance and Jeremiah W. "Jay" Nixon, No. 81172, in the Supreme Court of
Missouri (on transfer from Appeal WD 53798, in the Missouri Court of Appeals,
Western District (collectively, the "Litigation").
E. BCBSMo, RIT, the Attorney General and the DOI have entered into an
Amended and Restated Settlement Agreement, dated January 6, 2000 (the
"Settlement Agreement"), to resolve the Litigation. The Settlement Agreement is
specifically contingent upon the consummation of the transactions set forth in
this Agreement. The Settlement Agreement is attached hereto as Exhibit A.
F. The Foundation was recently organized pursuant to the Settlement
Agreement as a Missouri non-profit public benefit corporation that will apply
for an exemption from federal income tax under Section 501(c)(4) of the
Internal Revenue Code of 1986, as amended (the "Code"). The Foundation was
established to serve the purposes set forth in its Articles of Incorporation
and to, among other things, receive and hold for those purposes the New RIT
Stock (as defined in Recital G hereof) that it will receive upon consummation
of the Reorganization (as defined in Recital I hereof).
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G. New RIT was recently organized pursuant to the Settlement Agreement as a
Delaware corporation solely to facilitate the Reorganization. The one (1) share
of common stock of New RIT, par value $.01 per share (the "New RIT Stock"),
issued and outstanding as of the date hereof is owned by the Foundation.
H. The Reorganization shall be comprised of the following transactions,
which shall be consummated in the following order, and which shall be
conditioned upon the satisfaction (or, where permissible, waiver) of each of
the conditions set forth in Article IV of this Agreement:
(1) BCBSMo shall transfer certain assets, contracts and agreements,
including its existing contracts of insurance and certain other assets
required to satisfy policy liabilities and applicable statutory reserve and
Association capital requirements, to Healthy Alliance Life Insurance
Company ("HALIC"), a wholly-owned subsidiary of RIT, and HALIC shall assume
all liabilities related thereto (such transaction is referred to herein as
the "Transfer and Assumption Transaction" and is described in Section 1.02
hereof);
(2) BCBSMo shall change from a Missouri non-profit non-stock corporation
to a Missouri for-profit stock corporation by, among other things, amending
and restating its Amended and Restated Articles of Incorporation in
accordance with applicable law (such transaction is referred to herein as
the "Charter Conversion Transaction" and is described in Section 1.03
hereof). BCBSMo, upon its conversion to a stock form corporation pursuant
to the Charter Conversion Transaction, is referred to herein as "New
BCBSMo." As part of the Charter Conversion Transaction, New BCBSMo shall
issue one (1) share of its common stock, par value $.01 per share (the "New
BCBSMo Stock"), to the Foundation (which shall then be the sole shareholder
of New BCBSMo);
(3) New BCBSMo shall be reincorporated under the corporate laws of the
State of Delaware by means of the merger of New BCBSMo (which shall be
wholly-owned by the Foundation), with and into New RIT (which also shall be
wholly-owned by the Foundation), and New RIT shall be the surviving
corporation (such transaction is referred to herein as the "Reincorporation
Merger Transaction" and is described in Section 1.04 hereof). In the
Reincorporation Merger Transaction, (a) the one (1) issued and outstanding
share of New RIT Stock owned by the Foundation shall remain issued,
outstanding and unaffected, and (b) the one (1) issued and outstanding
share of New BCBSMo Stock owned by the Foundation shall be cancelled; and
(4) RIT shall merge with and into New RIT (which immediately prior to
such merger shall be wholly-owned by the Foundation), and New RIT shall be
the surviving corporation (such transaction is referred to herein as the
"RIT/New RIT Merger Transaction" and is described in Section 1.05 hereof).
In the RIT/New RIT Merger Transaction, (a) each issued and outstanding
share of RIT Class A Stock shall be converted into one (1) share of New RIT
Stock, (b) each issued and outstanding share of RIT Class B Stock (which
immediately prior to the RIT/New RIT Merger Transaction shall be owned by
New RIT) shall be cancelled, and (c) the one (1) issued and outstanding
share of New RIT Stock (which immediately prior to the RIT/New RIT Merger
Transaction shall be owned by the Foundation) shall be converted into a
number of shares of New RIT Stock equal to the number of shares of RIT
Class B Stock issued and outstanding immediately prior to the consummation
of the RIT/New RIT Merger Transaction.
I. The Transfer and Assumption Transaction, the Charter Conversion
Transaction, the Reincorporation Merger Transaction and the RIT/New RIT Merger
Transaction are referred to herein collectively as the "Reorganization." Upon
consummation of the Reorganization, (i) BCBSMo and RIT shall cease to exist as
separate entities, and (ii) the issued and outstanding shares of New RIT Stock
shall be owned (a) by the public in the same aggregate amount that the RIT
Class A Stock was owned by the public immediately prior to the Reorganization,
and (b) by the Foundation in the same aggregate amount that the RIT Class B
Stock was owned by BCBSMo immediately prior to the Reorganization.
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J. The Board of Directors of BCBSMo (the "BCBSMo Board") and the committee
comprised of the five members of the BCBSMo Board who are not employees or
officers of BCBSMo or RIT or directors of RIT (the "BCBSMo Independent
Committee"), on the one hand, and the Board of Directors of RIT (the "RIT
Board") and the committee comprised of four members of the RIT Board who are
not employees or officers of RIT or BCBSMo or directors of BCBSMo (the "RIT
Independent Committee"), on the other hand, have each determined that it is
advisable and in the best interests of BCBSMo and RIT, respectively, to enter
into this Agreement and to consummate the Reorganization and the other
transactions contemplated by this Agreement.
Agreement
In consideration of the foregoing and the mutual covenants and agreements
contained in this Agreement, BCBSMo, RIT, the Foundation and New RIT agree as
follows:
Article I
Terms of Reorganization; Closing
Section 1.01. Sequence of Transactions. The Reorganization shall be
accomplished by means of the Transfer and Assumption Transaction, the Charter
Conversion Transaction, the Reincorporation Merger Transaction and the RIT/New
RIT Merger Transaction, each of which shall be consummated in sequential order
on the Closing Date (as defined in Section 1.07 hereof).
Section 1.02. Transfer and Assumption Transaction. On the Closing Date,
BCBSMo shall consummate the Transfer and Assumption Transaction as provided
below in this Section 1.02.
(a) Assumption Reinsurance Agreement. BCBSMo shall, and RIT shall cause
HALIC to, sign on the date hereof the Assumption Reinsurance Agreement (the
"Assumption Reinsurance Agreement") in the form attached hereto as Exhibit
B and shall consummate the Transfer and Assumption Transaction in
accordance with the terms of the Assumption Reinsurance Agreement.
(b) Regulatory Approvals. BCBSMo and RIT shall file, or shall cause to
be filed, all necessary applications, notices, agreements and other
documents reasonably required to obtain the approval of the Association and
all Regulatory Authorities (as defined in Section 2.02(e) hereof) having
jurisdiction with respect to the Transfer and Assumption Transaction.
(c) Consummation of Transaction. BCBSMo and RIT shall take all
reasonable and lawful action and shall execute all documents, certificates
and other papers as may be necessary or appropriate in order to consummate
the Transfer and Assumption Transaction in accordance with this Agreement
and the Assumption Reinsurance Agreement.
(d) Tax Consequences. It is intended by the parties hereto that the
Transfer and Assumption Transaction shall constitute a tax-free transfer to
a controlled corporation.
Section 1.03. Charter Conversion Transaction. On the Closing Date,
immediately upon consummation of the Transfer and Assumption Transaction,
BCBSMo and the Foundation shall consummate the Charter Conversion Transaction
as provided below in this Section 1.03.
(a) Filing of Articles of Incorporation; Bylaws. BCBSMo shall, in
accordance with Section 351.025.2 of The General and Business Corporation
Law of Missouri (the "Missouri Corporate Law") and Section 354.065 of the
Missouri Health Services Corporations law, take all action reasonably
necessary to convert to a for-profit corporation governed by the Missouri
Corporate Law including, without limitation, filing amended and restated
Articles of
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Incorporation with the Missouri Secretary of State in substantially the
form of that attached hereto as Exhibit C (the "New BCBSMo Articles"). The
New BCBSMo Articles shall be the Articles of Incorporation of New BCBSMo
until thereafter amended in accordance with applicable law. At the Charter
Conversion Effective Time (as defined in Section 1.03(b) hereof), the Board
of Directors of New BCBSMo, as designated in the New BCBSMo Articles (the
"New BCBSMo Board"), shall adopt the Bylaws in substantially the form of
that attached hereto as Exhibit D (the "New BCBSMo Bylaws"). The New BCBSMo
Bylaws shall be the Bylaws of New BCBSMo until thereafter amended in
accordance with applicable law.
(b) Effective Time. The Charter Conversion Transaction shall become
effective (the "Charter Conversion Effective Time") upon approval of all
Regulatory Authorities having jurisdiction with respect to the Charter
Conversion Transaction and on the date and at the time that BCBSMo files a
certificate of acceptance of the Missouri Corporate Law with the Missouri
Secretary of State and the Missouri Secretary of State accepts the New
BCBSMo Articles for filing. BCBSMo shall use its best efforts to cause the
Charter Conversion Effective Time to occur immediately after consummation
of the Transfer and Assumption Transaction on the Closing Date.
(c) Issuance of Stock. At the Charter Conversion Effective Time, New
BCBSMo shall issue one (1) share of New BCBSMo Stock to the Foundation. The
Foundation shall be the sole shareholder of New BCBSMo immediately after
and following the Charter Conversion Effective Time.
(d) Regulatory Approvals. BCBSMo shall file, or shall cause to be filed,
all necessary applications, notices, agreements and other documents
reasonably required to obtain the approval of the Association and all
Regulatory Authorities having jurisdiction with respect to the Charter
Conversion Transaction.
(e) Directors and Officers. The persons who were serving as directors
and officers of BCBSMo immediately prior to the Charter Conversion
Effective Time shall resign as directors and officers of BCBSMo effective
as of the Charter Conversion Effective Time. The New BCBSMo Board shall
appoint the officers of New BCBSMo at the Charter Conversion Effective
Time.
(f) Consummation of Transaction. BCBSMo and the Foundation shall take
all reasonable and lawful action and shall execute all documents,
certificates and other papers as may be necessary or appropriate in order
to effectuate the Charter Conversion Transaction in accordance with this
Agreement and applicable law.
(g) Tax Consequences. It is intended by the parties hereto that the
Charter Conversion Transaction shall constitute a tax-free reorganization
within the meaning of Section 368(a)(1)(E) of the Code. The parties hereto
hereby adopt this Agreement as a "plan of reorganization" within the
meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
Section 1.04. Reincorporation Merger Transaction. On the Closing Date,
immediately upon consummation of the Charter Conversion Transaction, New
BCBSMo, New RIT and the Foundation shall consummate the Reincorporation Merger
Transaction as provided below in this Section 1.04.
(a) Structure of Merger. Subject to the terms and conditions of this
Agreement, the Delaware General Corporation Law (the "Delaware Corporate
Law") and the Missouri Corporate Law, New BCBSMo shall merge with and into
New RIT. New BCBSMo shall be the merging corporation in the Reincorporation
Merger Transaction and its corporate identity and existence, separate and
apart from New RIT, shall cease to exist upon consummation of the
Reincorporation Merger Transaction. New RIT shall be the surviving
corporation resulting from the Reincorporation Merger Transaction and shall
continue to be governed by the Delaware Corporate Law.
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(b) Effective Time. The Reincorporation Merger Transaction shall become
effective (the "Reincorporation Merger Effective Time") on the date and
time when the Certificate of Merger reflecting the Reincorporation Merger
Transaction becomes effective with the Delaware Secretary of State. New
BCBSMo and New RIT shall use their best efforts to cause the
Reincorporation Merger Effective Time to occur immediately after the
Charter Conversion Effective Time on the Closing Date.
(c) Conversion of Shares. At the Reincorporation Merger Effective Time,
by virtue of the Reincorporation Merger Transaction and without any action
on the part of New BCBSMo, New RIT or the shareholder of either New RIT and
New BCBSMo, (i) the one (1) share of New RIT Stock issued and outstanding
immediately prior to the Reincorporation Merger Effective Time shall remain
issued and outstanding and unaffected by the Reincorporation Merger
Transaction; and (ii) the one (1) share of New BCBSMo Stock issued and
outstanding immediately prior to the Reincorporation Merger Effective Time
shall be cancelled and retired and all rights with respect thereto shall
cease to exist without any conversion thereof.
(d) Effects of Merger. The Reincorporation Merger Transaction shall have
all of the effects provided for in this Agreement and under the Delaware
Corporate Law and the Missouri Corporate Law. Without limiting the
generality of the foregoing, and subject thereto, at the Reincorporation
Merger Effective Time, all property, rights and powers and franchises of
New BCBSMo and New RIT shall vest in New RIT, and all debts, liabilities
and duties of New BCBSMo and New RIT shall become the debts, liabilities
and duties of New RIT.
(e) Regulatory Approvals. BCBSMo and New RIT shall file, or shall cause
to be filed, all necessary applications, notices, agreements and other
documents reasonably required to obtain the approval of the Association and
all Regulatory Authorities having jurisdiction with respect to the
Reincorporation Merger Transaction.
(f) Certificate of Incorporation and Bylaws. No changes in the
Certificate of Incorporation of New RIT, attached hereto as Exhibit F (the
"New RIT Certificate of Incorporation"), or Bylaws of New RIT, attached
hereto as Exhibit G (the "New RIT Bylaws"), shall be effected by the
Reincorporation Merger Transaction.
(g) Directors and Officers. At the Reincorporation Merger Effective
Time, the Board of Directors of New RIT (the "New RIT Board") and the
officers of New RIT shall be identical to the Board of Directors and
officers of New RIT immediately prior to the Reincorporation Merger
Effective Time, and each such director and officer shall hold his or her
position until his or her resignation or removal or the election or
appointment of his or her successor in the manner provided by the New RIT
Certificate of Incorporation and the New RIT Bylaws and applicable law. The
persons who were serving as directors and officers of New BCBSMo
immediately prior to the Reincorporation Merger Effective Time shall resign
as directors and officers of the New BCBSMo effective as of the
Reincorporation Merger Effective Time.
(h) Consummation of Transaction. Each of New BCBSMo, New RIT and the
Foundation shall take all reasonable and lawful action and shall execute
all documents, certificates and other papers as may be necessary or
appropriate in order to effectuate the Reincorporation Merger Transaction
in accordance with this Agreement. If, at any time after the
Reincorporation Merger Transaction, any such further action is necessary or
desirable to carry out the purposes of this Agreement and to vest New RIT
with full right and title to and possession of all assets, property,
rights, privileges, powers, liabilities, obligations and franchises of New
BCBSMo, the responsible officers and directors of New RIT and New BCBSMo
are fully authorized to take, and shall take, all such lawful and necessary
action.
(i) Tax Consequences. It is intended by the parties hereto that the
Reincorporation Merger Transaction shall constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(F)
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of the Code. The parties hereto hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of
the United States Treasury Regulations.
(j) Dissenters' Rights. The Foundation, as the sole holder of New BCBSMo
Stock and New RIT Stock immediately prior to the Reincorporation Merger
Effective Time, shall not be entitled to dissent, and hereby waives any
right it may have to dissent, from the Reincorporation Merger Transaction.
Section 1.05. RIT/New RIT Merger Transaction. On the Closing Date,
immediately upon consummation of the Reincorporation Merger Transaction, RIT,
New RIT and the Foundation shall consummate the RIT/New RIT Merger Transaction
as provided below in this Section 1.05.
(a) Structure of Merger. Subject to the terms and conditions of this
Agreement, the Delaware Corporate Law and the Missouri Corporate Law, RIT
shall merge with and into New RIT. RIT shall be the merging corporation in
the RIT/New RIT Merger Transaction and its corporate identity and
existence, separate and apart from New RIT, shall cease to exist upon
consummation of the RIT/New RIT Merger Transaction. New RIT shall be the
surviving corporation resulting from the RIT/New RIT Merger Transaction and
shall continue to be governed by the Delaware Corporate Law.
(b) Effective Time. The RIT/New RIT Merger Transaction shall become
effective (the "RIT/New RIT Merger Effective Time") on the date and time
when the Certificate of Merger reflecting the RIT/New RIT Merger
Transaction becomes effective with the Delaware Secretary of State. RIT and
New RIT shall use their best efforts to cause the RIT/New RIT Merger
Effective Time to occur immediately after the Reincorporation Merger
Effective Time on the Closing Date.
(c) Conversion of Shares. At the RIT/New RIT Merger Effective Time, by
virtue of the RIT/New RIT Merger Transaction and without any action on the
part of RIT, New RIT or the shareholders of either of RIT or New RIT, (i)
each share of RIT Class A Stock issued and outstanding immediately prior to
the RIT/New RIT Merger Effective Time (other than shares of RIT Class A
Stock held in the treasury of RIT or by any direct or indirect subsidiary
of RIT (as provided in Section 1.05(d) hereof) or shares the holders of
which have duly exercised and perfected their dissenters' rights under the
Missouri Corporate Law (as provided in Section 1.05(e) hereof) shall cease
to be outstanding and shall be converted into the right to receive one (1)
share of New RIT Stock (the "Public Exchange Ratio"); (ii) each share of
RIT Class B Stock issued and outstanding immediately prior to the RIT/New
RIT Merger Effective Time shall cease to be outstanding and shall be
cancelled and retired and all rights with respect thereto shall cease to
exist without any conversion thereof; and (iii) the one (1) share of New
RIT Stock issued and outstanding immediately prior to the RIT/New RIT
Merger Effective Time shall cease to be outstanding and shall be converted
into the right to receive a number of shares of New RIT Stock equal to the
number of shares of RIT Class B Stock issued and outstanding immediately
prior to the RIT/New RIT Merger Effective Time.
(d) Treasury Shares. Each share, if any, of RIT Stock that is held as
treasury stock of RIT or held by any direct or indirect subsidiary of RIT
immediately prior to the RIT/New RIT Merger Effective Time shall, by virtue
of the RIT/New RIT Merger and without any action on the part of the holder
thereof, cease to be outstanding and shall be cancelled and retired without
payment of any consideration therefor and shall cease to exist.
(e) Dissenters' Rights. Holders of RIT Class A Stock shall be entitled
to dissent from the RIT/New RIT Merger Transaction pursuant to the
procedures set forth in the Missouri Corporate Law. Any shares of RIT Class
A Stock held by a dissenting holder shall not be converted as described in
Section 1.05(c) hereof but, from and after the RIT/New RIT Merger Effective
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Time, shall represent only the right to receive such consideration as may
be determined to be due such dissenting holder pursuant to the Missouri
Corporate Law. New RIT, as the holder of the RIT Class B Stock immediately
prior to the RIT/New RIT Merger Effective Time, shall not be entitled to
dissent, and hereby waives any rights it may have to dissent, from the
RIT/New RIT Merger Agreement.
(f) Effects of Merger. The RIT/New RIT Merger Transaction shall have all
of the effects provided for in this Agreement and under the Delaware
Corporate Law and the Missouri Corporate Law. Without limiting the
generality of the foregoing, and subject thereto, at the RIT/New RIT Merger
Effective Time, all of the property, rights, privileges, powers and
franchises of RIT and New RIT shall vest in New RIT, and all debts,
liabilities and duties of RIT and New RIT shall become the debts,
liabilities and duties of New RIT and all debts, liabilities and duties
owed by New RIT to RIT and by RIT to New RIT (including, without
limitation, certain agreements listed in Exhibit E attached hereto, which
shall be updated by RIT as of the Closing Date) shall terminate and be of
no effect.
(g) Regulatory Approvals. RIT and New RIT shall file, or shall cause to
be filed, all necessary applications, notices, agreements and other
documents reasonably required to obtain the approval of the Association and
all Regulatory Authorities having jurisdiction with respect to the RIT/New
RIT Merger Transaction.
(h) Certificate of Incorporation and Bylaws. No changes in the New RIT
Certificate of Incorporation or the New RIT Bylaws shall be affected by the
RIT/New RIT Merger Transaction.
(i) New RIT Directors and Officers. The directors of New RIT immediately
upon consummation of the RIT/New RIT Merger Transaction shall be those
persons designated by RIT and included on a list to be delivered by RIT to
New RIT and the Foundation on or before the date that the Proxy
Statement/Prospectus (as defined in Section 3.05 hereof) shall be mailed to
the shareholders of RIT in connection with the RIT Shareholders' Meeting
(as defined in Section 3.01(a) hereof), and such persons shall serve in
such capacities for New RIT after the RIT/New RIT Merger Effective Time and
until their resignation or removal or the election or appointment of their
successors in the manner provided in the New RIT Certificate of
Incorporation, the New RIT Bylaws and applicable law. The persons who were
serving as officers of RIT immediately prior to the Reincorporation Merger
Transaction shall serve in such capacities (retaining their respective
positions and terms of office) for New RIT after the RIT/New RIT Effective
Time and until their resignation or removal or the election or appointment
of their successors in the manner provided in the New RIT Bylaws and
applicable law. New RIT shall have such additional officers as may be
determined by the Board of Directors of New RIT after the RIT/New RIT
Merger Effective Time. The persons who were serving as directors and
officers of RIT and New RIT, respectively, immediately prior to the RIT/New
RIT Merger Effective Time shall resign as directors and officers of RIT and
New RIT, respectively, effective as of the RIT/New RIT Merger Effective
Time.
(j) Exchange of Certificates.
(1) Exchange Agent. As of the RIT/New RIT Merger Effective Time, New
RIT shall supply, or shall cause to be supplied, to or for the account
of a bank or trust company designated by RIT (the "Exchange Agent"), in
trust for the benefit of the holders of shares of RIT Class A Stock to
be exchanged through the Exchange Agent in accordance with this Section
1.05, certificates (the "New RIT Certificates") evidencing the shares
of New RIT Stock issuable in exchange for outstanding shares of RIT
Class A Stock pursuant to Section 1.05(c) hereof.
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(2) Exchange Procedure for Public Shareholders. As soon as
reasonably practicable after the RIT/New RIT Merger Effective Time, New
RIT shall instruct the Exchange Agent to mail to each holder of record
of a certificate or certificates which immediately prior to the RIT/New
RIT Merger Effective Time evidenced outstanding shares of RIT Class A
Stock (the "RIT Certificates") (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to
the RIT Certificates shall pass, only upon proper delivery of the RIT
Certificates to the Exchange Agent and shall be in such form and have
such other provisions as RIT may reasonably specify), and (ii)
instructions to effect the surrender of the RIT Certificates in
exchange for New RIT Certificates. Upon surrender of a RIT Certificate
for cancellation to the Exchange Agent together with such letter of
transmittal, duly executed, and such other customary documents as may
be required pursuant to such instructions, the holder of such RIT
Certificate shall be entitled to receive in exchange therefor New RIT
Certificate(s) evidencing that number of shares of New RIT Stock which
such holder has the right to receive in accordance with the Public
Exchange Ratio in respect of the shares of RIT Class A Stock formerly
evidenced by such RIT Certificate and the RIT Certificate so
surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of shares of RIT Class A Stock to a person who is not
registered in the transfer records of RIT as of the RIT/New RIT Merger
Effective Time, New RIT Stock may be issued and paid in accordance with
this Section 1.05(j) to a transferee of the registered shares if the
RIT Certificate evidencing such shares of RIT Class A Stock is
presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer pursuant to this Section 1.05(j)
and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered, each RIT Certificate that, prior to the
RIT/New RIT Merger Effective Time, represented outstanding shares of
RIT Class A Stock shall be deemed from and after the RIT/New RIT Merger
Effective Time, for all corporate purposes, other than the payment of
dividends, to evidence the ownership of the number of shares of New RIT
Stock into which such shares shall have been so converted.
(3) Exchange Procedure for Foundation. The Foundation authorizes and
directs New RIT to issue directly to the trustee designated by the
Voting Trust and Divestiture Agreement (as defined in Section 3.09
hereof) that number of shares of New RIT Stock issuable in exchange for
the outstanding share of New RIT Stock pursuant to Section 1.05(c)
hereof as is necessary to comply with Section 2.01 of the Voting Trust
and Divestiture Agreement, to be held in the voting trust established
by the Voting Trust and Divestiture Agreement. New RIT shall issue to
the Foundation a certificate or certificates representing the remaining
shares of New RIT Stock issuable in exchange for the outstanding shares
of New RIT Stock pursuant to Section 1.05(c) hereof.
(4) Distributions With Respect to Unexchanged Shares. No dividends
or other distributions, if any, declared or made after the RIT/New RIT
Merger Effective Time with respect to New RIT Stock with a record date
after the RIT/New RIT Merger Effective Time shall be paid to the holder
of any unsurrendered RIT Certificate with respect to the shares of New
RIT Stock such holder is entitled to receive pursuant to Section
1.05(c) hereof until the holder of such RIT Certificate shall surrender
such RIT Certificate. Subject to applicable law, following surrender of
any such RIT Certificate, there shall be paid to the record holder of
New RIT Certificates representing shares of New RIT Stock issued in
exchange therefor, without interest, at the time of such surrender, the
amount of dividends or other distributions with a record date after the
RIT/New RIT Merger Effective Time theretofore paid with respect to such
shares of New RIT Stock.
(5) Transfers of Ownership. If any New RIT Certificate is to be
issued in a name other than that in which the RIT Certificate
surrendered in exchange therefor is registered,
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it will be a condition of the issuance thereof that the RIT Certificate
so surrendered shall have been properly endorsed and otherwise in
proper form for transfer and that the person requesting such exchange
shall have paid to New RIT, or any agent designated by it, any transfer
or other taxes required by reason of the issuance of the New RIT
Certificate in any name other than that of the registered holder of the
RIT Certificate surrendered, or established to the satisfaction of New
RIT, or any agent designated by it, that such tax has been paid or is
not payable.
(6) No Liability. Neither RIT nor New RIT shall be liable to any
holder of shares of RIT Class A Stock or New RIT Stock for any RIT/New
RIT Merger Transaction consideration (or dividends or distributions
with respect thereto) delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(7) Lost, Stolen or Destroyed Certificates. In the event that any
RIT Certificates shall have been lost, stolen or destroyed, the
Exchange Agent shall issue in exchange for such lost, stolen or
destroyed RIT Certificate, upon the making of an affidavit of the fact
by the holder thereof, such shares of New RIT Stock as may be required
pursuant to Section 1.05(c); provided, however, that New RIT may, in
its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed RIT Certificate to
deliver a bond in such sum as it may reasonably direct as indemnity
against any claim that may be made against New RIT or the Exchange
Agent with respect to the RIT Certificate alleged to have been lost,
stolen or destroyed.
(k) Stock Transfer Books. At the RIT/New RIT Merger Effective Time, the
stock transfer books of RIT shall be closed, and there shall be no further
registration of transfers of shares of RIT Stock on the records of RIT.
(l) Tax Consequences. It is intended by the parties hereto that the
RIT/New RIT Merger Transaction shall constitute both (i) a tax free
liquidation of a subsidiary under Sections 332 and 337 of the Code as to
New RIT and RIT, and (ii) a tax-free reorganization within the meaning of
Section 368(a)(1)(A) of the Code. The parties hereto hereby adopt this
Agreement as (i) a plan of liquidation within the meaning of Section
332(b)(2) of the Code and Sections 1.332-2(a) and 1.332-6 of the United
States Treasury Regulations, and (ii) a "plan of reorganization" within the
meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
(m) Consummation of Transaction. Each of RIT and New RIT shall take all
reasonable and lawful action and shall execute all documents, certificates
and other papers as may be necessary or appropriate in order to effectuate
the RIT/New RIT Merger Transaction in accordance with this Agreement. If,
at any time after the RIT/New RIT Merger Effective Time, any such further
action is necessary or desirable to carry out the purposes of this
Agreement and to vest New RIT with full right and title to and possession
of all assets, property, rights, privileges, powers, liabilities,
obligations and franchises of RIT, the responsible officers and directors
of New RIT and RIT are fully authorized to take, and shall take, all such
lawful and necessary action.
Section 1.06. Stock Options.
(a) At the RIT/New RIT Merger Effective Time, each outstanding option (a
"BCBSMo/RIT Stock Option") to purchase shares of RIT Class A Stock issued,
granted or awarded pursuant to the RightCHOICE Managed Care, Inc. 1994 Equity
Incentive Plan, the RightCHOICE Managed Care, Inc. Nonemployee Directors' Stock
Option Plan or the Blue Cross and Blue Shield of Missouri Stock Option
Agreements, as the case may be (collectively, the "BCBSMo/RIT Stock Option
Plans"), whether or not exercisable or vested, shall cease to represent a right
to acquire shares of RIT Class A
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Stock and shall be converted automatically into an option to acquire, from and
after the RIT/New RIT Effective Time, on the same terms and conditions as were
applicable under such BCBSMo/RIT Stock Option, the number of shares of New RIT
Stock as the holder of such BCBSMo/RIT Stock Option would have been entitled
to receive pursuant to the RIT/New RIT Merger Transaction had such holder
exercised such option in full immediately prior to the RIT/New RIT Merger
Effective Time (determined by multiplying the aggregate number of shares of
RIT Class A Stock covered by such BCBSMo/RIT Stock Option by the Public
Exchange Ratio), at a price per share equal to the price per share under the
BCBSMo/RIT Stock Option. New RIT shall acknowledge and assume, from and after
the RIT/New RIT Merger Effective Time, all obligations of RIT and BCBSMo under
the BCBSMo/RIT Stock Option Plans as provided in this Section 1.06.
(b) As soon as practicable after the RIT/New RIT Merger Effective Time, New
RIT shall deliver to each holder of a BCBSMo/RIT Stock Option appropriate
notices setting forth such holders' rights with respect to such BCBSMo/RIT
Stock Option, and the BCBSMo/RIT Stock Option Plans shall continue in effect
on the same terms and conditions (subject to the conversion required by this
Section 1.06 after giving effect to the RIT/New RIT Merger Transaction and the
assumption by New RIT as provided herein). To the extent necessary to
effectuate the provisions of this Section 1.06, New RIT shall deliver new or
amended agreements reflecting the terms of each BCBSMo/RIT Stock Option
assumed by New RIT and amend the BCBSMo/RIT Stock Option Plans to reflect the
terms hereof.
(c) As soon as practicable after the RIT/New RIT Merger Effective Time, New
RIT shall file with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), a
registration statement on an appropriate form with respect to the shares of
New RIT Stock subject to such BCBSMo/RIT Stock Options and shall use its best
efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus or
prospectuses with respect thereto) for so long as such BCBSMo/RIT Stock
Options remain outstanding.
Section 1.07. Closing; Closing Date. The closing (the "Closing") of the
Reorganization shall take place at the offices of Lewis, Rice & Fingersh,
L.C., 500 North Broadway, Suite 2000, St. Louis, Missouri as promptly as
practicable (but in any event within five (5) days) after the last day upon
which each of the conditions described in Article IV is satisfied or waived by
the appropriate party (the "Closing Date").
Article II
Representations And Warranties
Section 2.01. Disclosure Schedule; Standard.
(a) Disclosure Schedule. BCBSMo has delivered to RIT, New RIT and the
Foundation a confidential schedule (the "BCBSMo Disclosure Schedule"),
executed by the parties hereto concurrently with the delivery and execution
hereof, and RIT has delivered to BCBSMo, New RIT and the Foundation a
confidential schedule (the "RIT Disclosure Schedule"), executed by the parties
hereto concurrently with the delivery and execution hereof. The BCBSMo
Disclosure Schedule and the RIT Disclosure Schedule set forth, among other
things, items the disclosure of which shall be necessary or appropriate either
in response to an express disclosure requirement contained in a provision
hereof or as an exception to one or more representations or warranties
contained in this Article II; provided, that (a) no such item shall be
required to be set forth in the BCBSMo Disclosure Schedule or the RIT
Disclosure Schedule, as the case may be, as an exception to a representation
or warranty if its absence would not be reasonably likely to result in the
related representation or
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warranty being deemed untrue or incorrect under the standard established by
Section 2.01(b) hereof, (b) the mere inclusion of an item in the BCBSMo
Disclosure Schedule or the RIT Disclosure Schedule, as the case may be, as an
exception to a representation or warranty shall not be deemed an admission by
BCBSMo or RIT, as the case may be, that such item represents a material
exception or fact, event or circumstance or that such item is reasonably likely
to result in a Material Adverse Effect (as defined in Section 2.01(b) hereof),
(c) any matter described in the public filings made by RIT with the SEC, the
DOI or the Attorney General shall be deemed incorporated by reference in the
RIT Disclosure Schedule, and (d) any matter described in the public filings
made by BCBSMo with the DOI or the Attorney General shall be deemed
incorporated by reference in the BCBSMo Disclosure Schedule.
(b) Standard. No representation or warranty of BCBSMo or RIT contained in
this Article II shall be deemed untrue or incorrect, and BCBSMo and RIT, as the
case may be, shall not be deemed to have breached a representation or warranty,
as a consequence of the existence of any fact, event or circumstance unless
such fact, circumstance or event, individually or taken together with all other
facts, events or circumstances inconsistent with any representation or warranty
contained in this Article II has had or is reasonably likely to have a Material
Adverse Effect on the party making such representation or warranty. The term
"Material Adverse Effect," as used herein, means, with respect to BCBSMo or
RIT, any effect that is, or is reasonably expected to be, material and adverse
to the financial position, results of operations or business of BCBSMo and its
subsidiaries taken as a whole, or RIT and its subsidiaries taken as a whole,
respectively; provided, however, that Material Adverse Effect shall not be
deemed to include the impact of (i) changes in laws, regulations and rules of
the United States and of the various states governing insurance company holding
systems, health maintenance organizations, health care service plans, third
party administrators, utilization review agents, preferred provider
organizations and managed healthcare organizations and similar laws of general
applicability or interpretations thereof by courts or Regulatory Authorities,
and (ii) changes in generally accepted accounting principles or regulatory
accounting requirements applicable to BCBSMo, RIT and their respective
subsidiaries, and (iii) the Litigation and the other matters covered by the
Settlement Agreement, and (iv) the litigation styled Blue Cross Blue Shield of
Missouri v. Jeremiah W. "Jay" Nixon, No. CV197-1558CC, pending in the Circuit
Court of Cole County, Missouri.
Section 2.02. Representations and Warranties of RIT. Subject to Section 2.01
hereof and except as disclosed in any portion of the RIT Disclosure Schedule,
RIT hereby makes the following representations and warranties with respect to
itself and its subsidiaries:
(a) Corporate Existence and Power. RIT is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Missouri and has the corporate power to own all of its property and assets,
incur all of its liabilities and to carry on its business as now being
conducted and to consummate the transactions contemplated hereby.
(b) Authorization; No Defaults. The RIT Board and the RIT Independent
Committee each have, by all appropriate action, approved this Agreement and
each of the other agreements contemplated hereby, described herein or
attached hereto (collectively, the "Ancillary Agreements") to which RIT is
or will be a party and authorized the execution hereof and thereof on RIT's
behalf by its duly authorized officers and the performance by RIT of its
obligations hereunder and thereunder. Except for the adoption and approval
of this Agreement and the transactions contemplated herein by RIT's
shareholders to the extent required by applicable law, NYSE rules and
regulations and as described herein, no other corporate proceedings on the
part of RIT are necessary to approve this Agreement and the Ancillary
Agreements to which it is a party and to consummate the transactions
contemplated hereby and thereby. Nothing contained in the Articles of
Incorporation, as amended, or Bylaws, as amended, of RIT or any other
agreement, instrument, decree, proceeding, law or regulation (except as
specifically referred to
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in or contemplated by this Agreement) by or to which it or any of its
subsidiaries are bound or subject would prohibit or inhibit RIT from
consummating this Agreement and the Ancillary Agreements to which it is or
will be a party and the transactions contemplated herein and therein on the
terms and conditions contained herein and therein. This Agreement has been
duly and validly executed and delivered by RIT and, assuming the due
authorization, execution and delivery hereof by the other parties hereto,
constitutes a legal, valid and binding obligation of RIT, enforceable
against RIT in accordance with its terms, except that such enforceability
may be subject to bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to or affecting
creditors' rights generally, and general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law).
(c) Capitalization. The authorized capital stock of RIT consists of
125,000,000 shares of RIT Class A Stock, 100,000,000 shares of RIT Class B
Stock and 25,000,000 shares of preferred stock, par value $.01 per share
(the "RIT Preferred Stock"). As of December 31, 1999, there were
outstanding: (i) 3,710,653 shares of RIT Class A Stock; (ii) 14,962,500
shares of RIT Class B Stock; and (iii) no shares of RIT Preferred Stock.
All outstanding shares of RIT Class A Stock and all outstanding shares of
RIT Class B Stock have been duly authorized and validly issued and are
fully paid and nonassessable and free from any preemptive rights. As of
December 31, 1999, RIT has outstanding stock options representing the right
to acquire not more than 972,583 shares of RIT Class A Stock. Except for
such stock options, there are no shares of capital stock or other equity
securities of RIT outstanding and no outstanding options, warrants, rights
to subscribe for, calls, or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable for,
shares of RIT Stock or RIT Preferred Stock or contracts, commitments,
understandings or arrangements by which RIT is or may be obligated to issue
additional shares of its RIT Stock or RIT Preferred Stock, and there are no
outstanding stock appreciation, phantom stock or similar rights. All of the
outstanding capital stock of, or other ownership interests in, each
subsidiary of RIT is owned by RIT, directly or indirectly, free and clear
of any material lien and free of any other material limitation or
restriction on its rights as owner thereof (including any restriction on
the right to vote, sell or otherwise dispose of such capital stock or other
ownership interests), other than those imposed by applicable law. There are
no existing options, calls or commitments of any character relating to the
issued or unissued capital stock or other securities or equity interests of
any subsidiaries of RIT.
(d) Financial Information. The consolidated balance sheets of RIT and
its subsidiaries as of December 31, 1998 and 1997, and related consolidated
statements of income, changes in shareholders' equity and cash flows for
the three (3) years ended December 31, 1998, together with the notes
thereto, included in RIT's Annual Report on Form 10-K for the year ended
December 31, 1998, as currently on file with the SEC, and the unaudited
consolidated balance sheets of RIT and its subsidiaries as of March 31,
1999, June 30, 1999 and September 30, 1999, and the related unaudited
consolidated income statements and statements of changes in shareholders'
equity and cash flows for the three (3) months, six (6) months and nine (9)
months, respectively, then ended included in RIT's Quarterly Reports on
Form 10-Q for the quarters then ended, as currently on file with the SEC
(the "RIT Financial Statements"), have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
(except as may be disclosed therein) and fairly present in all material
respects the consolidated financial position and the consolidated results
of operations, changes in shareholders' equity and cash flows of RIT and
its consolidated subsidiaries as of the dates and for the periods indicated
(subject, in the case of interim financial statements, to normal recurring
year-end adjustments, none of which shall be material).
(e) Reports. Since January 1, 1996, RIT and each of its subsidiaries
have filed all reports and statements, together with any amendments
required to be made with respect thereto, if any,
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that it was required to file with the SEC, the NYSE and any other
Regulatory Authority with jurisdiction over RIT or any of its subsidiaries,
and have paid all fees and assessments due and payable in connection
therewith. As of their respective dates, each of such reports and
documents, as amended, including any financial statements, exhibits and
schedules thereto, complied with the relevant statutes, rules and
regulations enforced or promulgated by the regulatory authority with which
they were filed, and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The term
"Regulatory Authority," as used herein, means any federal or state agency
charged with the supervision or regulation of insurance companies, health
maintenance organizations, healthcare services plans, third party
administrators or managed health care organizations and any other court,
administrative agency or commission or other governmental agency, authority
or instrumentality having supervisory or regulatory authority with respect
to BCBSMo, RIT or any of their respective subsidiaries.
(f) Absence of Changes. Since December 31, 1998, there has not been any
change in the financial condition, the results of operations or the
business of RIT and its subsidiaries which would have a Material Adverse
Effect on RIT, except as disclosed by RIT since December 31, 1998, in its
periodic reports filed with the SEC under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
(g) Undisclosed Liabilities. RIT and its subsidiaries do not have any
liability, whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether
liquidated or unliquidated, and whether due or to become due, including any
liability for taxes (and there is no past or present fact, situation,
circumstance, condition or other basis for any present or future action,
suit or proceeding, hearing, charge, complaint, claim or demand against RIT
or its subsidiaries giving rise to any such liability), except (i) for
liabilities set forth in the RIT Financial Statements, and (ii) normal
fluctuation in the amount of the liabilities referred to in clause (i)
above occurring in the ordinary course of business of RIT and its
subsidiaries since the date of the September 30, 1999 balance sheet
included in the RIT Financial Statements.
Section 2.03. Representations and Warranties of BCBSMo. Subject to Section
2.01 hereof and except as disclosed in any portion of the BCBSMo Disclosure
Schedule, BCBSMo hereby makes the following representations and warranties with
respect to itself and its subsidiaries (other than RIT and its subsidiaries):
(a) Authorization; No Defaults. The BCBSMo Board and the BCBSMo
Independent Committee each have, by all appropriate action, approved this
Agreement and each of the Ancillary Agreements to which BCBSMo is or will
be a party and authorized the execution hereof and thereof on its behalf by
its duly authorized officers and the performance by BCBSMo of its
obligations hereunder and thereunder. No other corporate proceedings on the
part of BCBSMo is necessary to approve this Agreement and the Ancillary
Agreements to which it is or will be a party and to consummate the
transactions contemplated hereby and thereby. Nothing contained in the
Amended and Restated Articles of Incorporation or Bylaws, as amended, of
BCBSMo or any other agreement, instrument, decree, proceeding, law or
regulation (except as specifically referred to in or contemplated by this
Agreement) by or to which it or any of its subsidiaries are bound or
subject would prohibit or inhibit BCBSMo from consummating this Agreement
and the Ancillary Agreements to which it is or will be a party and the
transactions contemplated herein on the terms and conditions contained
herein and therein. This Agreement has been duly and validly executed and
delivered by BCBSMo and, assuming the due authorization, execution and
delivery hereof by the other parties hereto, constitutes a legal, valid and
binding obligation of BCBSMo, enforceable against BCBSMo in accordance with
its terms,
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except that such enforceability may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting creditors' rights generally, and general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(b) Capitalization. BCBSMo has no authorized capital stock, and no
shares of BCBSMo capital stock are outstanding (until such time as the
Charter Conversion Transaction shall have been consummated as provided
herein).
(c) Financial Information. The consolidated balance sheets of BCBSMo and
its subsidiaries as of December 31, 1998 and 1997, and related consolidated
statements of income for the three (3) years ended December 31, 1998,
together with the notes thereto, as currently on file with the DOI, and the
unaudited consolidated balance sheets of BCBSMo and its subsidiaries as of
March 31, 1999, June 30, 1999, and September 30, 1999, and the related
unaudited consolidated income statements for the three (3) months, six (6)
months and nine (9) months, respectively, then ended, as currently on file
with the DOI (together, the "BCBSMo Financial Statements"), have been
prepared in accordance with regulatory accounting principles applied on a
consistent basis (except as may be disclosed therein) and fairly present in
all material respects the consolidated financial position and the
consolidated results of operations of BCBSMo and its consolidated
subsidiaries as of the dates and for the periods indicated (subject, in the
case of interim financial statements, to normal recurring year-end
adjustments, none of which shall be material).
(d) Reports. Since January 1, 1996, BCBSMo and each of its subsidiaries
have filed all reports and statements, together with any amendments
required to be made with respect thereto, if any, that it was required to
file with any Regulatory Authority with jurisdiction over BCBSMo or any of
its subsidiaries, and have paid all fees and assessments due and payable in
connection therewith. As of their respective dates, each of such reports
and documents, as amended, including any financial statements, exhibits and
schedules thereto, complied with the relevant statutes, rules and
regulations enforced or promulgated by the Regulatory Authority with which
they were filed, and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(e) Absence of Changes. Since December 31, 1998, there has not been any
change in the financial condition, the results of operations or the
business of BCBSMo and its subsidiaries which would have a Material Adverse
Effect on BCBSMo, except as disclosed by BCBSMo since December 31, 1998 in
its periodic reports filed with the DOI.
(f) Undisclosed Liabilities. BCBSMo and its subsidiaries do not have any
liability, whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether
liquidated or unliquidated, and whether due or to become due, including any
liability for taxes (and there is no past or present fact, situation,
circumstance, condition or other basis for any present or future action,
suit or proceeding, hearing, charge, complaint, claim or demand against
BCBSMo or its subsidiaries giving rise to any such liability), except (i)
for liabilities set forth in the BCBSMo Financial Statements, and (ii)
normal fluctuation in the amount of the liabilities referred to in clause
(i) above occurring in the ordinary course of business of BCBSMo and its
subsidiaries since the date of the September 30, 1999 balance sheet
included in the BCBSMo Financial Statements.
Section 2.04. Representations and Warranties of New RIT. New RIT hereby
makes the following representations and warranties:
(a) Corporate Existence and Power. New RIT is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate
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power to own all of its property and assets, incur all of its liabilities
and to carry on its business as now being conducted and to consummate the
transactions contemplated hereby.
(b) Authorization; No Defaults. The Board of Directors of New RIT has,
by all appropriate action, approved this Agreement and each of the
Ancillary Agreements to which New RIT is or will be a party and authorized
the execution hereof and thereof on New RIT's behalf by its duly authorized
officers and the performance by New RIT of its obligations hereunder and
thereunder. Except for the adoption and approval of this Agreement and the
transactions contemplated herein by the shareholders of New RIT (which the
Foundation, as the sole shareholder, shall do pursuant to Section 3.04(b)),
no other corporate proceedings on the part of New RIT are necessary to
approve this Agreement and the Ancillary Agreements to which it is or will
be a party and to consummate the transactions contemplated hereby and
thereby. Nothing contained in the New RIT Certificate of Incorporation or
the New RIT Bylaws, or any other agreement, instrument, decree, proceeding,
law or regulation (except as specifically referred to in or contemplated by
this Agreement) by or to which it is bound or subject would prohibit or
inhibit New RIT from consummating this Agreement and the Ancillary
Agreements to which it is or will be a party and the transactions
contemplated herein on the terms and conditions contained herein and
therein. This Agreement has been duly and validly executed and delivered by
New RIT and, assuming the due authorization, execution and delivery hereof
by the other parties hereto, constitutes a legal, valid and binding
obligation of New RIT, enforceable against New RIT in accordance with its
respective terms, except that such enforceability may be subject to
bankruptcy, insolvency, reorganization, moratorium or other similar laws
now or hereafter in effect relating to or affecting creditors' rights
generally, and general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(c) Capitalization. The authorized capital stock of New RIT consists of
225,000,000 shares of New RIT Stock and 25,000,000 shares of preferred
stock, par value $.01 per share. As of the date hereof, one (1) share of
New RIT Stock is issued and outstanding and owned beneficially and of
record by the Foundation. The outstanding share of New RIT Stock has been
duly authorized and validly issued and is fully paid and nonassessable and
free from any preemptive rights. There are no shares of capital stock or
other equity securities of New RIT outstanding and no outstanding options,
warrants, rights to subscribe for, calls, or commitments or any character
whatsoever relating to, or securities or rights convertible into or
exchangeable for, shares of New RIT Stock and, except as set forth herein,
no contracts, commitments, understandings or arrangements by which New RIT
is or may be obligated to issue additional shares of its New RIT Stock, and
there are no outstanding stock appreciation, phantom stock or similar
rights.
Section 2.05. Representations and Warranties of the Foundation. The
Foundation hereby makes the following representations and warranties:
(a) Corporate Existence and Power. The Foundation is a non-profit public
benefit corporation duly organized, validly existing and in good standing
under the laws of the State of Missouri and has the corporate power to own
all of its property and assets, incur all of its liabilities and to carry
on its business as now conducted, and as contemplated by this Agreement,
and to consummate the transactions contemplated hereby.
(b) Authorization; No Defaults. The Board of Directors of the Foundation
has, by all appropriate action, approved this Agreement and each of the
Ancillary Agreements to which the Foundation is or will be a party and
authorized the execution hereof and thereof on the Foundation's behalf by
its duly authorized officers and the performance by the Foundation of its
obligations hereunder. No other corporate proceedings on the part of the
Foundation are necessary to approve this Agreement and the Ancillary
Agreements to which it is or will be a
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party and to consummate the transactions contemplated hereby and thereby.
Nothing contained in the Articles of Incorporation or Bylaws of the
Foundation, or any other agreement, instrument, decree, proceeding, law or
regulation (except as specifically referred to in or contemplated by this
Agreement) by or to which it is bound or subject would prohibit or inhibit
the Foundation from consummating this Agreement and the Ancillary
Agreements to which it is or will be a party and the transactions
contemplated herein and therein on the terms and conditions contained
herein and therein. This Agreement has been duly and validly executed and
delivered by the Foundation and, assuming the due authorization, execution
and delivery hereof by the other parties hereto, constitutes a legal, valid
and binding obligation of the Foundation, enforceable against the
Foundation in accordance with its respective terms, except that such
enforceability may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally, and general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or
at law).
Article III
Covenants
Section 3.01. Pre-Closing Covenants of RIT. From the date hereof until the
earlier to occur of the RIT/New RIT Merger Effective Time or the termination of
this Agreement, RIT hereby agrees as follows:
(a) Submission to Shareholders. RIT shall cause to be duly called and
held, on a date selected by RIT as soon as reasonably practicable after the
date hereof, a special meeting of its shareholders (the "RIT Shareholders'
Meeting") for submission of this Agreement and the RIT/New RIT Merger
Transaction for approval of such RIT shareholders as required by the
Missouri Corporate Law; provided, however, that anything in the Missouri
Corporate Law or the Articles of Incorporation, as amended, of RIT to the
contrary notwithstanding, the adoption and approval of this Agreement and
the RIT/New RIT Merger Transaction shall require (i) the affirmative vote
of the holders of two-thirds of the issued and outstanding shares of the
RIT Stock and (ii) the affirmative vote of the holders of a majority of the
issued and outstanding shares of the RIT Class A Stock (excluding for these
purposes any shares of RIT Class A Stock owned by BCBSMo or by any
executive officer or director of BCBSMo or RIT), voting as a class separate
and apart from the RIT Class B Stock. In connection with the RIT
Shareholders' Meeting, RIT shall prepare and file a Proxy
Statement/Prospectus with the SEC and mail it to its shareholders, and the
RIT Board (subject to compliance with its fiduciary duties as advised by
counsel) and the RIT Independent Committee (subject to compliance with its
fiduciary duties as advised by counsel) shall recommend to the RIT
shareholders the approval of this Agreement and the RIT/New RIT Merger
Transaction contemplated by this Agreement and use their best efforts to
obtain such shareholder approval.
(b) Consummation of Reorganization. RIT shall use its best efforts to
perform and fulfill all conditions and obligations on its part to be
performed or fulfilled hereunder and shall use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all other
things necessary, proper or advisable to effect the Reorganization and the
other transactions contemplated hereby in accordance with the terms and
provisions hereof. RIT shall not take any action that would prevent
consummation of the Reorganization.
(c) Consents and Approvals. RIT shall use its best efforts to obtain all
necessary consents, waivers, approvals, authorizations and orders with
respect to all interests of RIT and its subsidiaries in the Marks and in
any other material agreements, leases, licenses, contracts, instruments and
rights which require the consent of another person (including, without
limitation, the Association and the Bank Approvals (as defined in Section
4.03(k) hereof)) for their transfer or assumption pursuant to the
Reorganization.
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Section 3.02. Pre-Closing Covenants of BCBSMo. From the date hereof until
the earlier to occur of the RIT/New RIT Merger Effective Time or the
termination of this Agreement, BCBSMo hereby agrees as follows:
(a) Agreement to Vote in Favor. BCBSMo shall vote all of the shares of
RIT Stock that it owns of record and beneficially in favor of this
Agreement and the RIT/New RIT Merger Transaction at the RIT Shareholders'
Meeting (and any postponements, adjournments or continuations thereof) and
against approval of any proposal made in opposition to, or in competition
with or contravention of, such transactions.
(b) Consummation of Reorganization. BCBSMo shall use its best efforts to
perform and fulfill all conditions and obligations on its part to be
performed or fulfilled hereunder and shall use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all other
things necessary, proper or advisable to effect the Reorganization and the
other transactions contemplated hereby in accordance with the terms and
provisions hereof. BCBSMo shall not take any action that would prevent
consummation of the Reorganization.
(c) Consents and Approvals. BCBSMo shall use its best efforts to obtain
all necessary consents, waivers, approvals, authorizations and orders with
respect to all interests of BCBSMo and its subsidiaries in the Marks and in
any other material agreements, leases, licenses, contracts, instruments and
rights which require the consent of another person (including, without
limitation, the Association) for their transfer or assumption pursuant to
the Reorganization.
Section 3.03. Pre-Closing Covenants of New RIT. From the date hereof until
the earlier to occur of the RIT/New RIT Merger Effective Time or the
termination of this Agreement, New RIT hereby agrees as follows:
(a) Other Actions. New RIT shall not take any action unless such action
is expressly permitted by this Agreement.
(b) Consummation of Reorganization. New RIT shall use its best efforts
to perform and fulfill all conditions and obligations on its part to be
performed or fulfilled hereunder and shall use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all other
things necessary, proper or advisable to effect the Reorganization and the
other transactions contemplated hereby in accordance with the terms and
provisions hereof. New RIT shall not take any action that would prevent
consummation of the Reorganization.
(c) Plans of Merger. At the request of BCBSMo, New RIT shall enter into
a separate plan of merger reflecting the terms of the Reincorporation
Merger Transaction, and, at the request of RIT, New RIT shall enter into a
separate plan of merger reflecting the terms of the RIT/New RIT Merger
Transaction, for purposes of satisfying any requirement of the Missouri
Corporate Law or the Delaware Corporate Law.
Section 3.04. Pre-Closing Covenants of Foundation. From the date hereof
until the earlier to occur of the RIT/New RIT Merger Effective Time or the
termination of this Agreement, the Foundation hereby agrees as follows:
(a) No Sale or Transfer. Except as contemplated hereby, the Foundation
shall not sell, transfer, pledge, encumber, or otherwise affect its
ownership in, or rights with respect to, the New BCBSMo Stock to be
received by it upon consummation of the Charter Conversion Transaction or
the New RIT Stock.
(b) Agreements to Vote in Favor.
(1) Reincorporation Merger Transaction. The Foundation, as the sole
shareholder of New BCBSMo upon consummation of the Charter Conversion
Transaction and the sole shareholder of New RIT, shall take all actions
necessary under applicable law to approve
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this Agreement and the Reincorporation Merger Transaction by, among
other things, adopting the stockholder resolutions substantially in the
form attached hereto as Exhibit H (together, the "Foundation
Reincorporation Merger Resolution") and shall vote against approval of
any proposal made in opposition to, or in competition with or
contravention of, such transaction.
(2) RIT/New RIT Merger Transaction. The Foundation, as the sole
stockholder of New RIT upon consummation of the Reincorporation Merger
Transaction, shall take all actions necessary under applicable law to
approve this Agreement and the RIT/New RIT Merger Transaction by, among
other things, adopting the stockholder resolution substantially in the
form attached hereto as Exhibit I (the "Foundation RIT/New RIT Merger
Resolution") and shall vote against approval of any proposal made in
opposition to, or in competition with or contravention of, such
transaction.
(c) Consummation of Reorganization. The Foundation shall use its best
efforts to perform and fulfill all conditions and obligations on its part
to be performed or fulfilled hereunder and shall use its best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done,
all other things necessary, proper or advisable to effect the
Reorganization and the other transactions contemplated hereby in accordance
with the terms and provisions hereof. The Foundation shall not take any
action that would prevent consummation of the Reorganization.
(d) Tax Opinion. In the event that the Foundation shall not receive the
opinions of PricewaterhouseCoopers LLP as provided in Section 4.05(g)
hereof, the Foundation shall use its best efforts to obtain the opinion of
such other tax professionals as are selected by the Foundation and
reasonably acceptable to RIT with respect to the matters described in
Section 4.05(g) hereof.
Section 3.05. Proxy Statement/Prospectus; Registration Statement. As soon as
reasonably practicable after the date hereof, RIT, BCBSMo and New RIT shall
prepare and file with the SEC preliminary proxy materials which shall
constitute the Proxy Statement of RIT and the Prospectus of New RIT with
respect to the shares of New RIT Stock to be issued in connection with the
RIT/New RIT Merger Transaction (the "Proxy Statement/Prospectus"). As soon as
practicable after comments are received from the SEC thereon, New RIT shall
file (with the assistance of RIT and BCBSMo) with the SEC a Registration
Statement on Form S-4 (or on such other form as shall be appropriate) (the
"Registration Statement") which shall include the Proxy Statement/Prospectus as
a part thereof, and New RIT, RIT and BCBSMo shall use all reasonable efforts to
cause the Registration Statement to become effective as soon thereafter as
practicable. RIT and BCBSMo shall each furnish all information about it
required to be included in the Proxy Statement/Prospectus and the Registration
Statement. New RIT also shall file any other documents or registration
statements necessary under the Securities Act, the Exchange Act, state
securities and "blue sky" statutes and the rules of the NYSE to consummate the
transactions contemplated hereby and cause the New RIT Stock to be listed for
trading on the NYSE as of the RIT/New RIT Merger Effective Time.
Section 3.06. Public Announcements. RIT, BCBSMo, New RIT and the Foundation
shall consult with each other before issuing any press release or other public
statement or announcement with respect to this Agreement or the Reorganization
and shall not issue any such press release or make any such public statement or
announcement without the prior consent of the others as to the content thereof,
which consent shall not be unreasonably withheld; provided, however, that any
one of such parties may, without the prior consent of the others, issue such
press release or make such public statement as may upon the advice of counsel
be required by law or the NYSE if it has used all reasonable efforts to consult
with the others.
Section 3.07. Registration Rights Agreement. On or before the Closing Date,
each of New RIT and the Foundation shall execute and deliver to the other that
certain Registration Rights
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Agreement substantially in the form of that attached hereto as Exhibit J (the
"Registration Rights Agreement"). The Registration Rights Agreement shall
become effective at the RIT/New RIT Merger Effective Time.
Section 3.08. Indemnification Agreement. On or before the Closing Date, each
of New RIT and the Foundation shall execute and deliver to the other that
certain Indemnification Agreement substantially in the form of that attached
hereto as Exhibit K (the "Indemnification Agreement"). The Indemnification
Agreement shall become effective at the RIT/New RIT Merger Effective Time.
Section 3.09. Voting Trust and Divestiture Agreement. On or before the
Closing Date, each of New RIT and the Foundation shall execute and deliver that
certain Voting Trust and Divestiture Agreement substantially in the form of
that attached hereto as Exhibit L (the "Voting Trust and Divestiture
Agreement"). The Voting Trust and Divestiture Agreement shall become effective
at the RIT/New RIT Merger Effective Time.
Section 3.10. Public Offering. The Foundation shall, at the request of RIT,
take all actions necessary to consummate, pursuant to the terms and conditions
of a Demand Registration (as such term is defined in the Registration Rights
Agreement), an underwritten public offering of New RIT Stock owned by the
Foundation on such date on or within six (6) months following the Closing Date
as the parties shall mutually select. The number of shares of New RIT Stock to
be included in such offering, and the other terms and provisions of such
offering, shall be as mutually agreed upon by RIT and the Foundation.
Section 3.11. Indemnification and Insurance.
(a) For the applicable statute of limitations period, New RIT shall
indemnify, defend and hold harmless the present and former officers, directors,
employees and agents of RIT and BCBSMo and their respective subsidiaries (each,
an "Indemnified Party") against all losses, expenses, claims, damages or
liabilities arising out of actions or omissions occurring on or prior to the
RIT/New RIT Merger Effective Time (including, without limitation, the
transactions contemplated by this Agreement and the Ancillary Agreements) to
the full extent provided under the articles of incorporation, bylaws and
indemnification agreements of RIT and BCBSMo, including provisions relating to
advancement of expenses incurred in the defense of any action or suit;
provided, however, that new RIT shall have no obligation to indemnify, defend
or hold harmless any present or former officer, director, employee or agent of
BCBSMo against any losses, expenses, claims, damages or liabilities against
which the Foundation has agreed to provide indemnity pursuant to the
Indemnification Agreement.
(b) For a period of six (6) years after the RIT/New RIT Merger Effective
Time, New RIT shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by BCBSMo and RIT
(provided that New RIT may substitute therefor policies of comparable coverage
from companies reasonably acceptable to the Foundation with respect to claims
arising from facts or events which occurred before the RIT/New RIT Merger
Effective Time). All such policies shall require the insurer to provide the
Foundation with thirty (30) days prior written notice of cancellation, and the
Foundation shall have the right, but not the obligation, to pay the premiums on
such policies if New RIT should fail to pay such premiums.
(c) This Section 3.11 shall survive any termination of this Agreement and
the consummation of the RIT/New RIT Merger Transaction at the RIT/New RIT
Merger Effective Time, and is intended to benefit the Indemnified Parties, and
shall be binding on all successors and assigns of New RIT and shall be
enforceable by the Indemnified Parties.
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Section 3.12. Accountants' Letters. Each of RIT and BCBSMo shall use its
reasonable best efforts to cause to be delivered to the other party, and to the
directors and officers who sign the Registration Statement, a letter of the
independent auditors for each, dated (i) the date on which the Registration
Statement shall become effective, and (ii) a date shortly prior to the Closing
Date, and addressed to such other party, and such directors and officers, in
form and substance customary for "comfort" letters delivered by independent
accountants in accordance with Statement of Accounting Standards No. 72.
Section 3.13. Foundation Governance. For so long as the Voting Trust and
Divestiture Agreement shall be in effect, the Foundation shall not take any
action to change, amend, repeal or replace any provision of the Articles of
Incorporation, Bylaws or other charter documents of the Foundation pertaining
to the governance of the Foundation if such change would increase the influence
or control of any governmental authority or its agents over the governance of
the Foundation over the level of influence and control provided in the Articles
of Incorporation and Bylaws of the Foundation on the date hereof.
Section 3.14. Due Diligence. The Foundation shall be entitled during the
period beginning on the date that this Agreement is signed by all parties
hereto and ending fifteen (15) days prior to the Closing Date to conduct a
reasonable due diligence investigation of BCBSMo and RIT for the purpose of
verifying the accuracy of the representations and warranties of BCBSMo and RIT
set forth herein provided that such due diligence shall be conducted during
normal business hours with minimal disruption to the business operations of
BCBSMo and RIT.
Section 3.15. Payment to Foundation. Immediately following the Closing, New
RIT shall pay One Hundred Seventy-Five Thousand Dollars ($175,000) to the
Foundation in partial satisfaction of any obligation of BCBSMo under Section
355.621 of The General and Business Corporation Law of Missouri resulting from
the Charter Conversion Transaction.
Article IV
Conditions Precedent to Reorganization
Section 4.01. Conditions to Reorganization. The respective obligations of
the parties hereto to effect the Reorganization shall be subject to the
satisfaction (or, where permissible, waiver) of each of the following
conditions:
(a) Injunction. No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of the
Reorganization shall be in effect, nor shall any proceeding by any
Regulatory Authority or other person seeking any of the foregoing be
pending. There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Reorganization which makes the consummation of the Reorganization illegal;
(b) Regulatory and Shareholder Approvals. All necessary regulatory
approvals, consents, authorizations and other approvals, including any
approval required under the Hart-Scott-Rodino Antitrust Improvement Act of
1976, and the requisite approval of this Agreement and the Reorganization
by the shareholders of New BCBSMo, New RIT and RIT (including the
shareholders of RIT pursuant to Section 3.01(a) and the Foundation pursuant
to the Foundation Reincorporation Merger Resolution and the Foundation
RIT/New RIT Merger Resolution), required by law or the NYSE for
consummation of the Reorganization shall have been obtained and all waiting
periods required by law shall have expired; provided, however, that nothing
in this Section 4.01(b) shall affect the obligations of the Foundation to
vote in favor of and approve the Reincorporation Merger Transaction and the
RIT/New RIT Merger Transaction as required under Section 3.04(b) hereof;
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(c) Effective Registration Statement. The Registration Statement shall
be effective under the Securities Act, and no stop orders suspending the
effectiveness of the Registration Statement shall be in effect or
proceedings for such purpose pending before or threatened by the SEC or any
state securities agency;
(d) Tax Determination. The Foundation shall have received a
determination letter from the Internal Revenue Service that it is a tax
exempt entity under Section 501(c)(4) of the Code;
(e) NYSE Listing. The shares of New RIT Stock issuable pursuant to the
RIT/New RIT Merger Transaction shall have been approved for listing on the
NYSE, subject to official notice of issuance; and
(f) Resolution of Sarkis Litigation. Each party hereto shall be
satisfied, in its sole and absolute discretion, with the final resolution
of the lawsuit styled Anthony Sarkis and James Hacking on behalf of
themselves and all others similarly situated v. Roy R. Heimburger, et al.,
No. 962-00938 in the Circuit Court of the City of St. Louis, Missouri,
currently pending in the Circuit Court for the City of St. Louis, Missouri.
Section 4.02. Conditions to Obligations of BCBSMo. The obligation of BCBSMo
to effect the Reorganization shall be subject to the satisfaction or waiver by
BCBSMo of each of the following conditions:
(a) Representations and Warranties. The representations and warranties
made by RIT, New RIT and the Foundation in this Agreement shall be true and
correct (subject to the standard in Section 2.01 hereof) on and as of the
Closing Date with the same effect as though such representations and
warranties had been made or given on and as of the Closing Date (except for
any such representations and warranties made only as of a specified date
which shall be true and correct (subject to the standard in Section 2.01
hereof) as of such date);
(b) Compliance with Agreements. RIT, New RIT and the Foundation shall
have performed and complied in all material respects with all of their
respective obligations and agreements required to be performed on or prior
to the Closing Date under this Agreement;
(c) Delivery of Documents. BCBSMo shall have received all documents
required to be received from RIT, New RIT and the Foundation on or prior to
the Closing Date (including, without limitation, the Ancillary Agreements),
all in form and substance reasonably satisfactory to BCBSMo;
(d) Other Consents. There shall have been obtained all other consents
and approvals of governmental authorities and private parties required
under law or contract except where the failure to have obtained such
consents and approvals would not have a Material Adverse Effect on RIT or
would not be material and adverse to the financial position, results of
operations or business of New RIT or the Foundation;
(e) Comfort Letter. BCBSMo shall have received the letter referred to in
Section 3.12 hereof from its independent auditor;
(f) Favorable Ruling. BCBSMo (or the appropriate party) shall have
received a private letter ruling (the "Favorable Ruling") from the Internal
Revenue Service that (i) gain or loss will not be recognized by BCBSMo,
RIT, HALIC, New RIT, the Foundation or the public shareholders of both RIT
and New RIT for federal income tax purposes pursuant to the Transfer and
Assumption Transaction; (ii) the Charter Conversion Transaction will
constitute a reorganization under Section 368(a) of the Code and will not
result in the recognition of gain or loss by BCBSMo, New BCBSMo or the
Foundation for federal income tax purposes, (iii) the Reincorporation
Merger Transaction will qualify as a reorganization under Section
368(a)(1)(F) of the Code and no gain or loss will be recognized by New
BCBSMo or New RIT for federal
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income tax purposes, (iv) the RIT/New RIT Merger Transaction will be both a
liquidation under Sections 332 and 337 of the Code and a reorganization
under Section 368(a)(1)(A) of the Code and no gain or loss will be
recognized by RIT, New RIT, the shareholders of both RIT and New RIT, or
the Foundation for federal income tax purposes, and (v) no gain will be
recognized by BCBSMo, New BCBSMo, RIT, New RIT, the shareholders of any of
the foregoing entities, or the Foundation under Section 337(b)(2) or (d) of
the Code ((i)--(v), each a "Favorable Ruling Matter"), and the Favorable
Ruling shall not have been revoked, withdrawn, amended or modified (in
whole or in part) and there shall have been no change in applicable law
(including, without limitation, the Code, judicial decisions,
administrative regulations and published rulings) with regard to matters
covered by the Favorable Ruling; provided, however, that in the event that
the Internal Revenue Service shall fail to include in the Favorable Ruling
any or all Favorable Ruling Matters for any reason (including but not
limited to no request for a private letter ruling is made or, if made, the
request is withdrawn in whole or in part, or the Internal Revenue Service
refuses to rule with respect to any Favorable Ruling Matter), the Favorable
Ruling Matter(s) not so included shall nonetheless be deemed to be included
in a Favorable Ruling for purposes of satisfying this condition provided
that BCBSMo shall have received the opinions provided in Section 4.02(g)
hereof on such excluded Favorable Ruling Matter(s) in form and substance
reasonably acceptable to BCBSMo;
(g) Tax Opinions. BCBSMo shall have received opinions of
PricewaterhouseCoopers LLP that (i) gain or loss will not be recognized by
BCBSMo, RIT, HALIC, New RIT, the Foundation or the public shareholders of
both RIT and New RIT for federal income tax purposes pursuant to the
Transfer and Assumption Transaction, except that BCBSMo could recognize
gain to the extent its basis in any assets transferred differs from the
fair market value; (ii) the Charter Conversion Transaction should be
treated as a recapitalization under Section 368(a)(1)(E) of the Code,
should not result in the recognition of gain or loss by the Foundation, and
will not result in the recognition of gain or loss by BCBSMo or New BCBSMo
for federal income tax purposes, (iii) the Reincorporation Merger
Transaction will qualify as a reorganization under Section 368(a) of the
Code and no gain or loss will be recognized by New BCBSMo, New RIT or the
Foundation for federal income tax purposes, (iv) the RIT/New RIT Merger
transaction will be both a liquidation under Sections 332 and 337 of the
Code and a reorganization under Section 368(a) of the Code and no gain or
loss will be recognized by RIT, New RIT, the shareholders of both RIT and
New RIT or the Foundation for federal income tax purposes, and (v) no gain
will be recognized by BCBSMo, New BCBSMo, RIT, New RIT, the shareholders of
any of the foregoing entities, or the Foundation under Section 337(b)(2) or
(d) of the Code. Such opinions shall be in form and substance reasonably
satisfactory to BCBSMo and may be based upon reasonable assumptions and
standard representations;
(h) BCBSMo Board Legal Opinion. The Board of Directors of BCBSMo shall
have received, on or before the Closing Date, in form and substance
reasonably satisfactory to such Board, the reaffirmation of the opinion of
Greensfelder, Hemker & Gale, P.C. dated January 6, 2000, to the effect that
(i) authorization and approval of the Reorganization by the Board of
Directors of BCBSMo is consistent with its fiduciary duties, (ii) the
Reorganization complies with the General Not For Profit Corporation Act of
Missouri, and (iii) the Indemnification Agreement, when duly executed and
delivered by the Foundation and New RIT, will be the valid and binding
obligation of the Foundation enforceable against the Foundation in
accordance with its terms;
(i) Resolution of Pending Litigation. All of the pending litigation
described in paragraph 2 of the Settlement Agreement shall have been
disposed of by all parties thereto as required under paragraph 7 thereof;
and
(j) Legal Opinions. BCBSMo shall have received, addressed to BCBSMo and
in form and substance reasonably satisfactory to BCBSMo (with such
qualifications and assumptions as
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are customary and reasonable), (i) the opinion of counsel for RIT, dated as
of the Closing Date, to the effect that all corporate acts and proceedings
required to be taken by RIT to authorize the execution, delivery and
performance of this Agreement, and the Ancillary Agreements to which RIT is
a party, and the consummation of the transactions contemplated hereby and
thereby, have been duly and properly taken and performed (the "RIT Legal
Opinion"); (ii) the opinion of counsel for New RIT, dated as of the Closing
Date, to the effect that (a) all corporate acts and proceedings required to
be taken by New RIT to authorize the execution, delivery and performance of
this Agreement, and the Ancillary Agreements to which New RIT is a party,
and the consummation of the transactions contemplated hereby and thereby,
have been duly and properly taken and performed, and (b) the shares of New
RIT Stock to be issued in the RIT/New RIT Merger Transaction, when issued
in exchange for RIT Stock as provided herein, will be duly and validly
authorized and issued and will be fully paid and nonassessable (the "New
RIT Legal Opinion"); (iii) the opinion of counsel for the Foundation, dated
as of the Closing Date, to the effect that all corporate acts and
proceedings required to be taken by the Foundation to authorize the
execution, delivery and performance of this Agreement, and the Ancillary
Agreements to which the Foundation is a party, and the consummation of the
transaction contemplated hereby and thereby, have been duly and properly
taken and performed (the "Foundation Legal Opinion"); and (iv) the opinion
of counsel for the Foundation to the effect that the Foundation will
receive the shares of New RIT Stock to be issued in the RIT/New RIT Merger
Transaction free and clear of claims that have been asserted or may in the
future be asserted arising out of or relating to the Reorganization and
arising out of or relating to either the status of BCBSMo as a mutual or
public benefit corporation under Missouri law or the ownership, beneficial
ownership, or rights to the assets, surplus or equity of BCBSMo or any
subsidiary or affiliate of BCBSMo (the "Foundation Litigation Legal
Opinion"); and
(k) Confirmation From Attorney General and DOI. BCBSMo shall have
received written notice from the Attorney General and DOI that the Sarkis
litigation condition precedent in Section 4.01(f) and the legal opinion
condition precedent in Section 4.05(h)(iii) have both either been satisfied
or waived.
Section 4.03. Conditions to Obligations of RIT. The obligations of RIT to
effect the Reorganization shall be subject to the satisfaction or waiver by
RIT of each of the following conditions:
(a) Representations and Warranties. The representations and warranties
made by BCBSMo, New RIT and the Foundation in this Agreement shall be true
and correct (subject to the standard in Section 2.01 hereof) on and as of
the Closing Date with the same effect as though such representations and
warranties had been made or given on and as of the Closing Date (except for
any such representations and warranties made only as of a specified date
which shall be true and correct (subject to the standard in Section 2.01
hereof) as of such date);
(b) Compliance with Agreements. BCBSMo, New RIT and the Foundation shall
have performed and complied in all material respects with all of their
respective obligations and agreements required to be performed on or prior
to the Closing Date under this Agreement;
(c) Delivery of Documents. RIT shall have received all documents
required to be received from BCBSMo, New RIT and the Foundation on or prior
to the Closing Date (including, without limitation, the Ancillary
Agreements), all in form and substance reasonably satisfactory to RIT;
(d) Other Consents. There shall have been obtained all other consents
and approvals of governmental authorities and private parties required
under law or contract except where the failure to have obtained such
consents and approvals would not have a Material Adverse Effect on RIT or
would not be material and adverse to the financial position, results of
operations or business of New RIT or the Foundation;
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(e) Comfort Letter. RIT shall have received the letter referred to in
Section 3.12 from its independent auditor;
(f) Favorable Ruling. RIT shall have received a copy of the Favorable
Ruling obtained pursuant to Section 4.02(f) hereof, and the Favorable
Ruling shall not have been revoked, withdrawn, amended or modified (in
whole or in part) and there shall have been no change in applicable law
(including, without limitation, the Code, judicial decisions,
administrative regulations and published rulings) with regard to matters
covered by the Favorable Ruling; provided, however, that in the event that
the Internal Revenue Service shall fail to include in the Favorable Ruling
any or all Favorable Ruling Matters for any reason (including but not
limited to no request for a private letter ruling is made or, if made, the
request is withdrawn in whole or in part, or the Internal revenue Service
refuses to rule with respect to any Favorable Ruling Matter), the Favorable
Ruling Matter(s) not so included shall nonetheless be deemed to be included
in the Favorable Ruling for purposes of satisfying this condition provided
that RIT shall have received the opinions provided in Section 4.03(g)
hereof on such excluded Favorable Ruling Matter(s) in form and substance
reasonably acceptable to RIT;
(g) Tax Opinions. RIT shall have received opinions of
PricewaterhouseCoopers LLP that (i) gain or loss will not be recognized by
BCBSMo, RIT, HALIC, New RIT, the Foundation or the public shareholders of
both RIT and New RIT for federal income tax purposes, pursuant to the
Transfer and Assumption Transaction, except that BCBSMo could recognize
gain to the extent its basis in any assets transferred differs from the
fair market value; (ii) the Charter Conversion Transaction should be
treated as a recapitalization under Section 368(a)(1)(E) of the Code,
should not result in the recognition of gain or loss by the Foundation, and
will not result in the recognition of gain or loss by BCBSMo or New BCBSMo
for federal income tax purposes, (iii) the Reincorporation Merger
Transaction will qualify as a reorganization under Section 368(a) of the
Code and no gain or loss will be recognized by New BCBSMo, New RIT or the
Foundation for federal income tax purposes, (iv) the RIT/New RIT Merger
transaction will be both a liquidation under Sections 332 and 337 of the
Code and a reorganization under Section 368(a) of the Code and no gain or
loss will be recognized by RIT, New RIT, the shareholders of both RIT and
New RIT or the Foundation for federal income tax purposes, and (v) no gain
will be recognized by BCBSMo, New BCBSMo, RIT, New RIT, the shareholders of
any of the foregoing entities, or the Foundation under Section 337(b)(2) or
(d) of the Code. Such opinions shall be in form and substance reasonably
satisfactory to RIT and may be based upon reasonable assumptions and
standard representations;
(h) Association Approval. RIT and all of its controlled affiliates that
presently have license agreements with the Association shall have entered
into new license agreements with the Association, acceptable to RIT, in its
sole discretion, providing for the use by New RIT and the same controlled
affiliates of the Marks on terms no less favorable to New RIT and such
controlled affiliates (including terms relating to termination and the
payment of royalties, other than terms arising out of the for-profit status
of New RIT, which status does not affect the rate of dues or royalties
payable) than the license agreements in effect on the date hereof (the
"Existing Licenses"), and only subject to the conditions to which the
Existing Licenses are subject (other than conditions arising out of the
for-profit status of New RIT acceptable to RIT);
(i) Opinion of Financial Advisor to RIT. RIT shall have received the
opinion of RIT's financial advisor, dated the date of this Agreement, as to
the fairness, from a financial point of view, of the Public Exchange Ratio
to the holders of RIT Class A Stock, and such opinion shall not have been
withdrawn or adversely modified in any material respect as of the date of
the mailing of the Proxy Statement/Prospectus to the shareholders of RIT in
connection with the RIT Shareholders' Meeting;
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(j) Confirmation From Attorney General and DOI. RIT shall have received
written notice from the Attorney General and DOI that the Sarkis litigation
condition precedent in Section 4.01(f) and the legal opinion condition
precedent in Section 4.05(h)(iii) have both either been satisfied or
waived.
(k) Bank Approval. RIT shall have received all necessary consents or
approvals of any financial institution under any credit facility or other
financing agreement between such financial institution and RIT to the
extent that the transactions contemplated by this Agreement require the
consent or approval of such financial institution (the "Bank Approvals");
and
(l) Legal Opinions. RIT shall have received, addressed to RIT and in
form and substance reasonably satisfactory to RIT (with such qualifications
and assumptions as are customary and reasonable), (i) the opinion of
counsel for BCBSMo, dated as of the Closing Date, to the effect that all
corporate acts and proceedings required to be taken by BCBSMo to authorize
the execution, delivery and performance of this Agreement, and the
Ancillary Agreements to which BCBSMo is a party, and the consummation of
the transactions contemplated hereby and thereby, have been duly and
properly taken and performed (the "BCBSMo Legal Opinion"); (ii) the New RIT
Legal Opinion; (iii) the Foundation Legal Opinion; and (iv) the Foundation
Litigation Legal Opinion.
Section 4.04. Conditions to Obligations of New RIT. The respective
obligations of New RIT to effect the Reorganization shall be subject to the
satisfaction or waiver by New RIT of each of the following conditions:
(a) Representations and Warranties. The representations and warranties
made by RIT, BCBSMo and the Foundation in this Agreement shall be true and
correct (subject to the standard in Section 2.01 hereof) on and as of the
Closing Date with the same effect as though such representations and
warranties had been made or given on and as of the Closing Date (except for
any such representations and warranties made only as of a specified date
which shall be true and correct (subject to the standard in Section 2.01
hereof) as of such date);
(b) Compliance with Agreements. RIT, BCBSMo and the Foundation shall
have performed and complied in all material respects with all of their
respective obligations and agreements required to be performed on or prior
to the Closing Date under this Agreement;
(c) Delivery of Documents. New RIT shall have received all documents
required to be received from BCBSMo, RIT and the Foundation on or prior to
the Closing Date (including, without limitation, the Ancillary Agreements),
all in form and substance reasonably satisfactory to New RIT; and
(d) Comfort Letter. New RIT shall have received copies of the letters
referred to in Section 3.12.
(e) Legal Opinions. New RIT shall have received, addressed to New RIT
and in form and substance reasonably satisfactory to New RIT (with such
qualifications and assumptions as are customary and reasonable) (i) the RIT
Legal Opinion; and (ii) the BCBSMo Legal Opinion.
Section 4.05. Conditions to Obligations of Foundation. The respective
obligations of the Foundation to effect the Reorganization shall be subject to
the satisfaction or waiver by the Foundation of each of the following
conditions:
(a) Representations and Warranties. The representations and warranties
made by RIT, BCBSMo and New RIT in this Agreement shall be true and correct
(subject to the standard in Section 2.01 hereof) on and as of the Closing
Date with the same effect as though such representations and warranties had
been made or given on and as of the Closing Date (except for any such
representations and warranties made only as of a specified date which shall
be true and correct (subject to the standard in Section 2.01 hereof) as of
such date);
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<PAGE>
(b) Compliance with Agreements. RIT, BCBSMo and New RIT shall have
performed and complied in all material respects with all of their
respective obligations and agreements hereunder required to be performed on
or prior to the Closing Date under this Agreement;
(c) Delivery of Documents. The Foundation shall have received all
documents required to be received from BCBSMo, RIT and New RIT on or prior
to the Closing Date (including, without limitation, the Ancillary
Agreements), all in form and substance reasonably satisfactory to the
Foundation;
(d) Other Consents. There shall have been obtained all other consents
and approvals of governmental authorities and private parties required
under law or contract except where the failure to have obtained such
consents and approvals would not be material and adverse to the financial
position, results of operations or business of New RIT or the Foundation;
(e) Comfort Letter. The Foundation shall have received copies of the
letters referred to in Section 3.12;
(f) Favorable Ruling. The Foundation shall have received a copy of the
Favorable Ruling obtained pursuant to Section 4.02(f) hereof, and the
Favorable Ruling shall not have been revoked, withdrawn, amended or
modified (in whole or in part) and there shall have been no change in
applicable law (including, without limitation, the Code, judicial
decisions, administrative regulations and published rulings) with regard to
matters covered by the Favorable Ruling; provided, however, that in the
event that the Internal Revenue Service shall fail to include in the
Favorable Ruling any or all Favorable Ruling Matters for any reason
(including but not limited to no request for a private letter ruling is
made or, if made, the request is withdrawn in whole or in part, or the
Internal Revenue Service refuses to rule with respect to any Favorable
Ruling Matter), the Favorable Ruling Matter(s) not so included shall
nonetheless be deemed to be included in the Favorable Ruling for purposes
of satisfying this condition provided that the Foundation shall have
received the opinions provided in Section 4.05(g) hereof on such excluded
Favorable Ruling Matter(s) in form and substance reasonably acceptable to
the Foundation; and
(g) Tax Opinions. The Foundation shall have received a copy of opinions
of PricewaterhouseCoopers LLP, or if PricewaterhouseCoopers LLP shall not
address the opinions identified in Section 4.03(g) hereof to the
Foundation, the Foundation shall have received the opinion of such other
tax professionals as are selected by the Foundation in accordance with
Section 3.04(d) hereof that (i) gain or loss will not be recognized by
BCBSMo, RIT, HALIC, New RIT, the Foundation or the public shareholders of
both RIT and New RIT for federal income tax purposes, pursuant to the
Transfer and Assumption Transaction, except that BCBSMo could recognize
gain to the extent its basis in any assets transferred differs from the
fair market value; (ii) the Charter Conversion Transaction should be
treated as a recapitalization under Section 368(a)(1)(E) of the Code,
should not result in the recognition of gain or loss by the Foundation, and
will not result in the recognition of gain or loss by BCBSMo or New BCBSMo
for federal income tax purposes; (iii) the Reincorporation Merger
Transaction will qualify as a reorganization under Section 368(a) of the
Code and no gain or loss will be recognized by New BCBSMo, New RIT or the
Foundation for federal income tax purposes; (iv) the RIT/New RIT Merger
transaction will be both a liquidation under Sections 332 and 337 of the
Code and a reorganization under Section 368(a) of the Code and no gain or
loss will be recognized by RIT, New RIT, the shareholders of both RIT and
New RIT or the Foundation for federal income tax purposes; and (v) no gain
will be recognized by BCBSMo, New BCBSMo, RIT, New RIT, the shareholders of
any of the foregoing entities, or the Foundation under Section 337(b)(2) or
(d) of the Code. Such opinions shall be in form and substance reasonably
satisfactory to the Foundation and may be based upon reasonable assumptions
and standard representations; and
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<PAGE>
(h) Legal Opinions. The Foundation shall have received, addressed to the
Foundation and in form and substance reasonably satisfactory to the
Foundation, and the Attorney General and Department of Insurance in the
case of the Foundation Litigation Legal Opinion (with such qualifications
and assumptions as are customary and reasonable), (i) the RIT Legal
Opinion; (ii) the BCBSMo Legal Opinion; and (iii) the Foundation Litigation
Legal Opinion.
Article V
Termination
This Agreement and the obligations of the parties hereunder may be
terminated at any time prior to the RIT/New RIT Merger Effective Time,
notwithstanding approval hereof by the shareholders of RIT as provided herein:
(a) by mutual written consent duly authorized by all parties (including
the RIT Independent Committee); or
(b) by any party, by giving notice to all other parties, if a court of
competent jurisdiction or any other Regulatory Authority shall have issued
a nonappealable final order, decree or ruling or taken any other action, in
each case having the effect of permanently restraining, enjoining or
otherwise prohibiting any one or more of the Transfer and Assumption
Transaction, the Charter Conversion Transaction, the Reincorporation Merger
Transaction and the RIT/New RIT Merger Transaction; or
(c) by any party, by giving notice to all other parties, if any of the
conditions to such party's obligations hereunder set forth in Article IV
hereof shall have not been satisfied (or waived, where permissible, by the
party entitled to the benefit thereof) on or before December 31, 2000; or
(d) by RIT, by giving notice to all other parties, if termination of
this Agreement shall be necessary to satisfy the fiduciary duties of the
RIT Board or the RIT Independent Committee as advised by legal counsel.
In the event that this Agreement shall be terminated pursuant to the
provisions of this Article V, no party hereto shall have any liability to any
other party hereto for costs, expenses, damages or otherwise, except as
provided in Section 6.01 hereof or as may be agreed to in writing by the party
that shall be obligated to pay such costs, expenses or damages.
Article VI
General Provisions
Section 6.01. Fees and Expenses. Each party shall each bear their own
expenses, including the fees and expenses of their own advisors, incurred in
connection with this Agreement and the transactions contemplated hereby,
provided, however, that RIT shall pay all SEC filing fees, NYSE listing fees,
and printing and mailing expenses incurred in connection with the Proxy
Statement/Prospectus and Registration Statement.
Section 6.02. Nonsurvival of Representations, Warranties and
Agreements. Except for and as provided in this Section 6.02, no representation,
warranty, covenant or agreement contained herein shall survive the RIT/New RIT
Effective Time or the earlier termination of this Agreement; provided, however,
that no such representation, warranty, covenant or agreement shall be deemed to
be terminated or extinguished so as to deprive any party hereto (or any
director, officer or controlling person thereof) of any defense in law or
equity which otherwise would be available against the
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<PAGE>
claims of any person, including, without limitation, any shareholder or former
shareholder of any party hereto; the aforesaid representations, warranties,
covenants and agreements being material inducements to the consummation by the
parties hereto of the transactions contemplated hereby. Notwithstanding the
foregoing, the covenants and agreements set forth in Sections 1.06, 3.10, 3.11,
3.13, 3.14 and 3.15 hereof and the agreements set forth in the Ancillary
Agreements shall survive the RIT/New RIT Merger Effective Time and shall be
enforceable as provided therein.
Section 6.03. Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered or mailed if delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by the like changes of address which shall be effective upon
receipt) or sent by electronic transmission, with confirmation received, to the
telecopy number specified below (a) if to the Foundation: Paul C. Wilson, Esq.,
Assistant Attorney General, 221 West High Street, Jefferson City, Missouri
65101, with a copy to: Eric Martin, Esq., General Counsel, Missouri Department
of Insurance, 301 West High Street, Suite 630, Jefferson City, Missouri 65101;
(b) if to New RIT: John A. O'Rourke, Chairman, 1831 Chestnut Street, St. Louis,
Missouri 63103-2275, Fax (314) 923-8958; with a copy to: Angela Fick Braly,
Esq., Secretary, 1831 Chestnut Street, St. Louis, Missouri 63103-2275, Fax
(314) 923-6607; (c) if to BCBSMo: John A. O'Rourke, President and Chief
Executive Officer, Blue Cross and Blue Shield of Missouri, 1831 Chestnut
Street, St. Louis, Missouri 63103-2275, Fax: (314) 923-8958; with a copy to:
Marvin O. Young, Esq., Gallop Johnson & Neuman L.C., 101 South Hanley, St.
Louis, Missouri 63105, Fax: (314) 862-1219; (d) if to RIT: John A. O'Rourke,
Chairman, President and Chief Executive Officer, RightCHOICE Managed Care,
Inc., 1831 Chestnut Street, St. Louis, Missouri 63103-2275, Fax: (314) 923-
8958; with a copy to: Lewis, Rice & Fingersh, L.C., 500 North Broadway, Suite
2000, St. Louis, Missouri 63102, Attn: John J. Riffle, Esq., Fax: (314) 444-
7788.
Section 6.04. Amendment. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective Boards of Directors (or
where such authority shall have been delegated to a special committee, by that
special committee) at any time prior to the Closing Date; provided, however,
that, after approval of the RIT/New RIT Merger Transaction by the requisite
shareholders of RIT as provided in Section 3.01(b) hereof, no amendment may be
made which by law requires further approval by such shareholders without such
further approval. This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.
Section 6.05. Waiver. At any time prior to the RIT/New RIT Merger Effective
Time, any party hereto may with respect to any other party hereto (a) extend
the time for the performance of any of the obligations or other acts, (b) waive
any inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant hereto, and (c) waive compliance with any of
the agreements or conditions contained herein. Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by the party or
parties to be bound thereby.
Section 6.06. Entire Agreement. This Agreement, and the other agreements and
instruments referenced herein, including the Ancillary Agreements, constitute
the entire understanding and agreements of the parties with respect to the
subject matter hereof and supersede all prior and contemporaneous agreements
and understandings, both written and oral, among the parties with respect
thereto or any of them, with respect to the subject matter hereof and, except
as otherwise expressly provided herein, are not intended to confer upon any
other person any rights or remedies hereunder.
Section 6.07. Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by
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<PAGE>
reason of this Agreement, other than Section 3.11 hereof (which is intended to
be for the benefit of the Indemnified Parties and may be enforced by such
Indemnified Parties).
Section 6.08. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Missouri, without regard
to the principles and conflicts of laws thereof.
Section 6.09. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
Section 6.10. Recitals. The Recitals to this Agreement shall be deemed to be
part of this Agreement and incorporated herein.
Section 6.11. Fair Construction. This Agreement is the product of
negotiations and shall be deemed to have been drafted by all of the parties. It
shall be construed in accordance with the fair meaning of its terms and its
language shall not be strictly construed against, nor shall ambiguities be
resolved against, any particular party.
Section 6.12. Headings and Captions. The captions of Articles and Sections
hereof are for convenience only and shall not control or affect the meaning or
construction of any provisions of this Agreement.
Section 6.13. Assignment. This Agreement may not be assigned by any of the
parties hereto.
[Signature page appears on next page]
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<PAGE>
In Witness Whereof, the parties have executed this Agreement as of the date
set forth above.
Blue Cross and Blue Shield of
Missouri, a Missouri nonprofit health
services corporation
/s/ John A. O'Rourke
_______________________________________
John A. O'Rourke,
President
Rightchoice Managed Care, Inc.,
a Missouri corporation
/s/ John A. O'Rourke
_______________________________________
John A. O'Rourke,
President and Chief Executive Officer
The Missouri Foundation For Health,
a Missouri nonprofit public benefit
corporation
/s/ Paul C. Wilson
_______________________________________
Paul C. Wilson
Chairman
Rightchoice Managed Care, Inc.,
a Delaware corporation
/s/ John A. O'Rourke
_______________________________________
John A. O'Rourke,
Chairman
A-30
<PAGE>
Appendix B
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--------------------------------------------------------------------------------
AMENDED AND RESTATED SETTLEMENT AGREEMENT
by and among
THE ATTORNEY GENERAL OF THE STATE OF MISSOURI,
THE MISSOURI DEPARTMENT OF INSURANCE,
BLUE CROSS AND BLUE SHIELD OF MISSOURI,
and
RIGHTCHOICE MANAGED CARE, INC.,
entered into
JANUARY 6, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
AMENDED AND RESTATED SETTLEMENT AGREEMENT
1. Parties. The parties (collectively, the "Parties" and individually, a
"Party") to this Amended and Restated Settlement Agreement (this "Agreement")
are:
(a) Jeremiah W. "Jay" Nixon, Attorney General of the State of Missouri
(the "Attorney General");
(b) The Missouri Department of Insurance and Keith A. Wenzel, its
Director (referred to collectively as the "Department of Insurance");
(c) Blue Cross and Blue Shield of Missouri ("Blue Cross Blue Shield"), a
Missouri not for profit health services corporation; and
(d) RightCHOICE Managed Care, Inc. ("RightCHOICE"), a Missouri for
profit general business corporation.
This Agreement amends, restates and supersedes in its entirety that certain
Settlement Agreement between the Parties dated September 20, 1998, and all
amendments thereto.
2. Pending Litigation. A purpose of this Agreement is to settle certain
civil actions. Those actions are:
(a) Blue Cross Blue Shield of Missouri, Plaintiff v. Jay Angoff,
Director of the Missouri Department of Insurance, the Missouri Department
of Insurance and Jeremiah W. "Jay" Nixon, No. CV196-619CC, in the Circuit
Court of Cole County, Missouri (the "Purposes Litigation"). The Purposes
Litigation arises from a series of transactions consummated in 1994 (the
"1994 Reorganization"). In those transactions, certain assets and
liabilities of Blue Cross Blue Shield were transferred to a newly formed
for-profit subsidiary, RightCHOICE, and a minority interest in RightCHOICE
was sold pursuant to a public stock offering; and
(b) Blue Cross Blue Shield of Missouri v. Jay Angoff, Director of the
Missouri Department of Insurance, the Missouri Department of Insurance and
Jeremiah W. "Jay" Nixon, No. 81172, in the Supreme Court of Missouri (on
transfer from Appeal WD 53798, in the Missouri Court of Appeals, Western
District) (collectively, the "Purposes Litigation Appeal").
3. Additional Purposes. Additional purposes of this Agreement include:
(a) Providing that the assets of Blue Cross Blue Shield will be used in
a manner which is consistent with Missouri law and the history and past
purposes of Blue Cross Blue Shield;
(b) Protecting the interests of all those who subscribe to the indemnity
and managed care plans of Blue Cross Blue Shield and its affiliates,
consistent with the contracts that define their rights and any additional
rights that they might have under law;
(c) Providing for the continuation, on the part of a successor to Blue
Cross Blue Shield, of its membership in the national Blue Cross and Blue
Shield Association and rights as a licensee of the Blue Cross and Blue
Shield names and marks;
(d) Fulfilling all duties owed by Blue Cross Blue Shield and its
directors and officers;
(e) Fulfilling all duties owed by RightCHOICE and its directors and
officers to its shareholders; and
(f) Providing for the reorganization of Blue Cross Blue Shield in
accordance with the Missouri General Not For Profit Corporation Law and the
Reorganization Agreement described below.
4. Payment for Public Purpose. On the Closing Date (as defined in Paragraph
8 below), but prior to and separate from the implementation of the
Reorganization Agreement (as defined
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<PAGE>
below), Blue Cross Blue Shield shall pay to the Foundation the amount of
$12,780,000 in partial satisfaction of claims by various parties, including the
Attorney General, Department of Insurance and amici curiae, that Blue Cross
Blue Shield has a public purpose obligation, which amount is to be used by the
Foundation (as defined below) to carry out its stated purposes.
5. Reorganization Agreement. As partial consideration for their mutual
undertakings in this Agreement, promptly following the dismissal of the
Purposes Litigation and Purposes Litigation Appeal in accordance with paragraph
7 hereof:
(a) the Attorney General and Department of Insurance shall (1) cause a
new Missouri not for profit public benefit corporation (the "Foundation")
to be organized and incorporated by filing with the Missouri Secretary of
State Articles of Incorporation in the form attached hereto as Exhibit A,
causing Bylaws in the form attached hereto as Exhibit B to be adopted as
the Bylaws of the Foundation, and appointing the initial members of the
Board of Directors of the Foundation, (2) cause a new Delaware for profit
corporation ("New RIT") to be organized and incorporated by filing with the
Secretary of State of Delaware a Certificate of Incorporation in the form
attached hereto as Exhibit C, causing one share of its common stock to be
issued to the Foundation, and causing Bylaws in the form attached as
Exhibit D to be adopted as the Bylaws of New RIT, (3) cause the Board of
Directors of the Foundation to authorize the Foundation to execute an
Agreement and Plan of Reorganization (the "Reorganization Agreement") in
the form attached as Exhibit E and fulfill all obligations and satisfy all
conditions thereunder, and take all other actions as are necessary or
appropriate to consummate the transactions contemplated by the
Reorganization Agreement in accordance with the Reorganization Agreement,
(4) cause the Board of Directors of New RIT to authorize New RIT to execute
the Reorganization Agreement and fulfill all obligations and satisfy all
conditions thereunder, and take all other actions as are necessary or
appropriate to consummate the transactions contemplated by the
Reorganization Agreement in accordance with the Reorganization Agreement,
and (5) cause the Foundation and New RIT to execute the Reorganization
Agreement; and
(b) Blue Cross Blue Shield and RightCHOICE shall execute the
Reorganization Agreement, and take all other actions necessary or
appropriate to consummate the transactions contemplated by the
Reorganization Agreement in accordance with the Reorganization Agreement.
The terms of the Reorganization Agreement and other agreements to be
executed in connection therewith control as to the rights of the parties and
steps to be taken thereunder. The Reorganization Agreement provides for the
consummation of a series of transactions (the "Reorganization") whereby Blue
Cross Blue Shield will be converted into a Missouri for profit general business
corporation, reincorporated in Delaware, and subsequently merged with
RightCHOICE. The Foundation will become the owner of the same percentage of the
issued and outstanding stock of the resulting entity ("New RightCHOICE") as
Blue Cross Blue Shield owns in RightCHOICE immediately prior to the
Reorganization. The public shareholders of RightCHOICE immediately prior to the
Reorganization will become the owners of the remainder of the issued and
outstanding stock of New RightCHOICE. Shares of New RightCHOICE owned by the
Foundation will be liquidated over time and the proceeds applied to purposes
stated in the Foundation's charter documents.
6. [This paragraph is intentionally left blank.]
7. Disposition of Litigation. In further consideration of their mutual
undertakings in this Agreement and the Reorganization Agreement, the Parties
shall dispose of certain pending litigation as follows:
(a) Immediately upon execution of this Agreement, the Parties who are
litigants in the Purposes Litigation shall file in the Circuit Court of
Cole County a Joint Notice of Dismissal (in the form attached hereto as
Exhibit F) of all pending claims in the Purposes Litigation;
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<PAGE>
(b) At such later time on or before February 8, 2000 as is agreed to by
the Parties, those Parties who are litigants in the Purposes Litigation
Appeal shall file a joint motion in the Supreme Court of Missouri in the
form attached hereto as Exhibit F for dismissal of all appeals pending in
the Purposes Litigation Appeal;
(c) No Party shall take any step to prosecute any claim that is now
asserted in the Purposes Litigation or the Purposes Litigation Appeal so
long as this Agreement remains in force and effect; provided, however, that
the undertaking of the Department of Insurance under this subparagraph is
subject to the limitations of R.S.Mo. (S) 374.217 (1994) if those
limitations are applicable to that undertaking; and
(d) On the Closing Date, if there remains pending any claims in the
Purposes Litigation or the Purposes Litigation Appeal that have not already
been dismissed, the Parties will stipulate to the dismissal with prejudice
of such claims.
8. Releases in Favor of Blue Cross Blue Shield and RightCHOICE. In further
consideration of their mutual undertakings in this Agreement and the
Reorganization Agreement, the Parties agree to the releases described in this
paragraph. The releases described in this paragraph shall become effective on
the date (referred to herein as the "Closing Date") after which all of the
conditions precedent to the Reorganization are satisfied or waived and on which
the Reorganization is consummated. Blue Cross Blue Shield and RightCHOICE will
not consummate the Reorganization unless and until they receive written notice
from the Attorney General and Director of the Department of Insurance that the
Sarkis litigation and legal opinion conditions precedent in Sections 4.01(f)
and 4.05(h)(iii), respectively, of the Reorganization Agreement have been
satisfied or waived.
(a) Subject to the exceptions contained in subparagraph 8(e), the
Attorney General and Department of Insurance on behalf of themselves, their
offices, and the State of Missouri (collectively, "the Paragraph 8
Releasors") release Blue Cross Blue Shield, RightCHOICE, their respective
present and past affiliated corporations, their successors and assigns,
their present and past directors, officers, agents, employees and
independent contractors (all of whom are collectively referred to as "the
Paragraph 8 Releasees") from any and all claims, causes of action,
liabilities and judgments arising out of or relating to the 1994
Reorganization or the operation of Blue Cross Blue Shield from the date of
the 1994 Reorganization through April 20, 1998.
(b) Subject to the exceptions contained in subparagraph 8(e), the
Paragraph 8 Releasors release the Paragraph 8 Releasees from all claims,
causes of action, liabilities and judgments that were asserted or might
have been asserted in the Purposes Litigation and Purposes Litigation
Appeal.
(c) Subject to the exceptions contained in subparagraph 8(e), the
Paragraph 8 Releasors release the Paragraph 8 Releasees from any and all
claims, causes of action, liabilities and judgments arising from or related
to the execution and performance of this Agreement, the Reorganization
Agreement, or the consummation of the Reorganization.
(d) Subject to the exceptions contained in subparagraph 8(e), the
Paragraph 8 Releasors release the Paragraph 8 Releasees from any and all
claims, causes of action, judgments, claims, disputes, investigations,
audits or complaints listed on Exhibit G attached hereto.
(e) Claims in the following classes are excluded from the releases given
in this paragraph 8:
(i) Any claim by consumers lodged with the Department of Insurance
or the Attorney General;
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<PAGE>
(ii) Any claims of criminal liability of any kind;
(iii) Any claims of liability from or on account of any conduct
which is finally adjudged to have been knowingly fraudulent,
deliberately dishonest or willful misconduct; and
(iv) Any claim for breach of this Agreement, the Reorganization
Agreement or any other agreement executed by any of the Paragraph 8
Releasees in connection with the consummation of the Reorganization.
9. Releases in Favor of the Attorney General and the Department of
Insurance. In further consideration of their mutual undertakings in this
Agreement and the Reorganization Agreement, the Parties agree to the releases
described in this paragraph. The releases described in this paragraph shall
become effective on the Closing Date.
(a) Subject to the exceptions contained in subparagraph 9(d), Blue Cross
Blue Shield and RightCHOICE, and their respective affiliated corporations,
successors and assigns (collectively, "the Paragraph 9 Releasors") release
the State of Missouri, the Attorney General, the Department of Insurance
and their respective present and past officers, agents, employees,
independent contractors, affiliates, successors and assigns (all of whom
are collectively referred to as "the Paragraph 9 Releasees") from any and
all claims, causes of action, liabilities and judgments arising out of or
relating to actions taken or statements made by the Attorney General or the
Department of Insurance or their past and present agents, employees or
independent contractors in connection with the 1994 Reorganization.
(b) Subject to the exceptions contained in subparagraph 9(d), the
Paragraph 9 Releasors release the Paragraph 9 Releasees from all claims,
causes of action, liabilities and judgments that were asserted or might
have been asserted in the Purposes Litigation and Purposes Litigation
Appeal.
(c) Subject to the exceptions contained in subparagraph 9(d), the
Paragraph 9 Releasors release the Paragraph 9 Releasees from any and all
claims, causes of action, liabilities and judgments arising out of or
related to the execution and performance of this Agreement, the
Reorganization Agreement, or the consummation of the Reorganization.
(d) Claims in the following classes are excluded from the releases given
in this paragraph 9:
(i) Any claims of liability from or on account of any conduct which
is finally adjudged to have been knowingly fraudulent, deliberately
dishonest or willful misconduct; and
(ii) Any claim for breach of this Agreement, the Reorganization
Agreement or any other agreement executed by any of the Paragraph 9
Releasees in connection with the consummation of the Reorganization.
10. Representation As To Existence of Claims. The Attorney General and the
Department of Insurance represent and warrant that, on April 20, 1998, except
as described on the list which is attached hereto as Exhibit G and as described
in Paragraph 8(e)(i) above, there were no claims, disputes, investigations,
audits or complaints pending against Blue Cross Blue Shield, RightCHOICE or any
of their affiliates, and to their knowledge there is no basis for any such
claims, disputes, investigations, audits or complaints. Blue Cross Blue Shield
represents and warrants to the Attorney General and the Department of Insurance
that, except as described on the list attached hereto as Exhibit H, it had no
knowledge as of September 20, 1998, of any pending or threatened claim that
will or might be subject to indemnity from the Foundation under the terms of
the Indemnification Agreement attached as Exhibit K to the Reorganization
Agreement.
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<PAGE>
11. Termination.
(a) This Agreement shall automatically terminate upon termination of the
Reorganization Agreement for any reason.
(b) This Agreement may be terminated by any Party hereto by giving written
notice to all other Parties in the event the Closing Date has not occurred on
or before December 31, 2000.
(c) This Agreement may be terminated at any time by written agreement
signed by all Parties.
(d) If any Party breaches its obligations under Paragraph 18(k) hereof, and
fails to cure such breach within thirty (30) days after written notice from
any other Party (the "Notifying Party") describing the alleged breach (or
fails to undertake to cure within such thirty (30) day period and to
diligently pursue to completion such cure as cannot reasonably be completed
within the thirty (30) day time period), the Notifying Party may terminate
this Agreement by giving written notice to all other Parties.
(e) If this Agreement terminates pursuant to subparagraph (a), or is
terminated pursuant to subparagraph (b), subparagraph (c), or subparagraph
(d), the Agreement shall thereafter be void and have no force or effect.
12. No Admission of Liability. This Agreement is a good faith, negotiated
resolution of disputed claims. Neither the Agreement nor any act performed or
document executed pursuant to or in furtherance of this Agreement is
admissible in any court proceeding, except those proceedings, if any, leading
to judicial approval of the transactions contemplated by this Agreement and
the Reorganization Agreement, and any proceeding brought to enforce this
Agreement or the Reorganization Agreement. No Party, by signing this
Agreement, admits liability or fault, or admits the validity of any claim made
by any other Party or person with respect to any matter that is the subject of
this Agreement or the Reorganization Agreement.
13. Binding Effect on Successors of Governmental Parties. This Agreement
shall be binding, to the fullest extent permissible under law, on the State of
Missouri, the Attorney General, the Department of Insurance, their respective
offices and departments, and all of their successors in office. Should the
State of Missouri, any Attorney General of Missouri or the Department of
Insurance take the position at any time that any of the commitments or
undertakings of the State of Missouri, the Attorney General, or the Department
of Insurance hereunder is not fully valid and enforceable, then Blue Cross
Blue Shield, RightCHOICE, and each of their corporate successors may, at the
sole option of any of them, declare this Agreement and the Reorganization
Agreement void and of no force or effect, in which event they will be
discharged from any further obligations thereunder, and may take such actions
(including but not limited to the commencement of a judicial proceeding
seeking a declaration of the rights of the parties, injunctive relief, and the
restoration of the status quo prior to the Reorganization) as are appropriate
to rescind this Agreement and the Reorganization, and restore the Parties to
the position that would have applied had the Reorganization not taken place or
this Agreement not been signed, including the restoration or repayment of all
consideration given or received by any Party, including all assets received by
the Foundation in connection with the Reorganization. As part of the
Reorganization, the Attorney General and Department of Insurance shall cause
the Foundation to execute an agreement to be bound by the provisions of this
paragraph 13.
14. Approval of Certain Stock Purchases. After consummation of the
Reorganization, New RightCHOICE will have certain options and rights of first
refusal to repurchase its shares from the Foundation in one or more
transactions that may require the prior approval of the Department of
Insurance under applicable law. The Department of Insurance shall not
disapprove any such transaction unless New RightCHOICE or one of its insurance
subsidiaries licensed in Missouri fails
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to meet Missouri regulatory capital and reserve requirements after consummation
of the transaction, or fails to satisfy any other objective criteria required
to be satisfied under Missouri law as a condition to obtaining approval of the
Department of Insurance.
15. Amendments to Charter Documents of the Foundation. From the date the
Foundation is incorporated until the Closing Date, and thereafter until the
Foundation owns less than five percent (5%) of the issued and outstanding
shares of capital stock of New RightCHOICE, the Attorney General shall not
consent to any amendment to the Articles of Incorporation or Bylaws of the
Foundation if the amendment would increase the influence or control of any
governmental authority or its agents over the governance of the Foundation over
the level of influence and control provided in the Articles of Incorporation
and Bylaws of the Foundation attached hereto as Exhibits A and B, respectively.
16. Amendments to Reorganization Agreement. Blue Cross Blue Shield and
RightCHOICE shall not consent to any amendment to the Reorganization Agreement
after it is signed without first obtaining the written consent of the Attorney
General and the Department of Insurance.
17. Nominating Committee Expenses. The Attorney General and Department of
Insurance will review, approve and then submit to Blue Cross Blue Shield for
payment, in an amount not to exceed $50,000 in the aggregate, the reasonable
and necessary costs incurred in connection with the search for qualified
candidates to serve on the Foundation Board to be conducted by the Nominating
Committee, and Blue Cross Blue Shield shall pay such amounts.
18. General Provisions.
(a) Captions contained in this Agreement have been inserted herein only as a
matter of convenience and in no way define, limit, extend or describe the scope
of this Agreement or the intent of any provision hereof.
(b) This Agreement may be executed by the Parties on any number of separate
counterparts, and all such counterparts so executed constitute one agreement
binding on all the Parties notwithstanding that all the Parties are not
signatories to the same counterpart.
(c) This Agreement and the Reorganization Agreement, including all exhibits
attached hereto and thereto, constitute the entire agreement among the Parties
pertaining to the subject matter hereof and supersede all prior agreements,
letters of intent, understandings, negotiations and discussions of the Parties,
whether oral or written.
(d) All of the exhibits attached to this Agreement are material and integral
parts hereof, and are fully incorporated herein by this reference.
(e) The Parties will execute and deliver such further documents and do such
further acts and things as may be required to carry out the intent and purpose
of this Agreement, including the execution of all documents necessary to
continue existing standstills of the litigation to be settled by this
Agreement, such standstills to continue until the earlier of the termination of
this Agreement or the Closing Date.
(f) This Agreement and the rights and obligations of the Parties hereunder
are to be governed by and construed and interpreted in accordance with the laws
of the State of Missouri applicable to contracts made and to be performed
wholly within Missouri, without regard to choice or conflict of laws rules.
(g) Blue Cross Blue Shield and RightCHOICE shall be solely responsible for
payment of all legal, accounting and investment banking fees and other costs
and expenses incurred by them in
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connection with this Agreement and the Reorganization and shall have no
responsibility or liability for payment of any fees, costs or expenses incurred
by any other Party.
(h) All notices, consents, requests, demands and other communications
hereunder are to be in writing, and are deemed to have been duly given or made:
(i) when delivered in person; (ii) three days after deposited in the United
States mail, first class postage prepaid; (iii) in the case of overnight
courier services, one business day after delivery to the overnight courier
service with payment provided; or (iv) in the case of telecopy or fax, when
sent, verification received; in each case addressed as follows:
If to Blue Cross Blue Shield:
John A. O'Rourke President and Chief Executive OfficerBlue Cross and
Blue Shield of Missouri 1831 Chestnut Street
St. Louis, Missouri 63103-2275 Fax: (314) 923-8958
with a copy to:
Joseph D. Lehrer, Esq. Greensfelder, Hemker & Gale, P.C. 2000 Equitable
Building 10 South Broadway St. Louis, Missouri 63102-1774 Fax: (314)
241-8624
If to RightCHOICE:
John A. O'Rourke Chairman, President and Chief Executive Officer
RightCHOICE Managed Care, Inc. 1831 Chestnut Street St. Louis, Missouri
63103-2275 Fax: (314) 923-8958
with a copy to:
John J. Riffle, Esq. Lewis, Rice & Fingersh, L.C. 500 North Broadway,
Suite 2000 St. Louis, MO 63102 Fax: (314) 612-1349
If to the Attorney General:
Jeremiah W. (Jay) Nixon P.O. Box 899 Jefferson City, MO 65102 Fax:
(573) 751-0774
If to the Department of Insurance:
Keith A. Wenzel P.O. Box 690 Jefferson City, MO 65102 Fax: (573) 526-
4898
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<PAGE>
or to such other address as any Party may designate by notice to the other
Parties in accordance with the terms of this paragraph.
(i) All provisions of this Agreement are binding upon, inure to the benefit
of and are enforceable by or against the Parties and their respective legal
representatives and successors and assigns.
(j) This Agreement is the product of negotiations and shall be deemed to
have been drafted by all of the Parties. It shall be construed in accordance
with the fair meaning of its terms and its language shall not be strictly
construed against, nor shall ambiguities be resolved against, any particular
Party.
(k) The Parties agree to the following:
(i) that it is their intent to carry out all of the terms of this
Agreement and to consummate the Reorganization; and
(ii) that they shall cooperate to the extent necessary to effectuate and
implement all terms and satisfy all of the conditions of the Agreement and,
with respect to Blue Cross Blue Shield and RightCHOICE, subject to their
fiduciary obligations, to exercise their best efforts promptly to
accomplish the terms and satisfy the conditions of the Reorganization
Agreement.
(l) The Parties executing this Agreement warrant and represent that they
have the full authority to do so and that they have the authority to take
appropriate action required or permitted to be taken pursuant to this Agreement
to effectuate its terms.
(m) Nothing in this Agreement shall be construed as preventing the
Department of Insurance or the Attorney General from taking regulatory action
against Blue Cross Blue Shield, RightCHOICE or New RightCHOICE based on (1)
acts or omissions occurring after April 20, 1998 that are not covered by the
releases described in Paragraph 8, (2) acts or omissions occurring prior to
April 20, 1998 that are not covered by the releases described in Paragraph 8,
and (3) claims described in Paragraph 8(e) of this Agreement.
[Remainder of page intentionally left blank]
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<PAGE>
Executed this 6th day of January,
2000.
/s/ Jeremiah W. Nixon
_____________________________________
Jeremiah W. (Jay) Nixon
Attorney General of Missouri
Missouri Department of Insurance
/s/ Keith A. Wenzel
By: _________________________________
Keith A. Wenzel
Director, Missouri Department of
Insurance
Blue Cross and Blue Shield of
Missouri
/s/ John A. O'Rourke
By: _________________________________
John A. O'Rourke
President
RightCHOICE Managed Care, Inc.
/s/ John A. O'Rourke
By: _________________________________
John A. O'Rourke
President and Chief Executive
Officer
LIST OF EXHIBITS
<TABLE>
<C> <S>
Exhibit A Articles of Incorporation of the Foundation
Exhibit B Bylaws of the Foundation
Exhibit C Certificate of Incorporation of New RIT
Exhibit D Bylaws of New RIT
Exhibit E Agreement and Plan of Reorganization
Exhibit F Joint Notice of Dismissal and Joint Motion to Dismiss
Exhibit G List of Known Claims as of April 20, 1998
Exhibit H List of Claims Prepared by Blue Cross and Blue Shield of Missouri
</TABLE>
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Appendix C
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FORM OF
VOTING TRUST AND DIVESTITURE AGREEMENT
by and among
RIGHTCHOICE MANAGED CARE, INC.,
a Delaware corporation
THE MISSOURI FOUNDATION FOR HEALTH,
a Missouri nonprofit public benefit corporation
and
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<PAGE>
FORM OF
VOTING TRUST AND DIVESTITURE AGREEMENT
This Voting Trust and Divestiture Agreement (this "Agreement") is made and
entered into as of the day of , 2000, by and among RightCHOICE Managed
Care, Inc., a Delaware corporation (the "Company"), The Missouri Foundation For
Health, a Missouri non-profit corporation (the "Beneficiary"), and
, [to be determined by RIT prior to signing] a
corporation, as trustee (the "Trustee").
Recitals
A. Pursuant to the terms of that certain Agreement and Plan of
Reorganization (the "Reorganization Agreement"), dated as of March 14, 2000, by
and among Blue Cross and Blue Shield of Missouri, a Missouri non-profit health
services corporation, RightCHOICE Managed Care, Inc., a Missouri corporation,
the Beneficiary, and the Company, the Beneficiary has acquired, contemporaneous
with the execution of this Agreement, 14,962,500 shares of common stock, par
value $.01 per share, of the Company (the "Common Stock"), representing
approximately 80.1% of the issued and outstanding shares of Common Stock.
B. The Company became a licensee of the Blue Cross and Blue Shield
Association (the "BCBSA") upon consummation of the transactions contemplated by
the Reorganization Agreement, thereby enabling the Company to use the "Blue
Cross" and "Blue Shield" names and related rights (the "Marks").
C. The Beneficiary wishes for its investment in the Company to be as
valuable as possible for so long as such investment is maintained and believes
that the Company's license to use the Marks will contribute substantially to
the Company's value and its future prospects.
D. The BCBSA has conditioned the Company's license to continue to use the
Marks upon the Company maintaining certain provisions set forth in this
Agreement and in its Certificate of Incorporation (as defined below) (the
"Basic Protections") which are intended by the BCBSA to enable the Company to
remain independent of the Beneficiary and any other Person (as defined below)
who may in the future acquire shares of Capital Stock (as defined below) in
excess of the Ownership Limit (as defined below) applicable to such Person.
E. The Beneficiary has agreed to be bound by the Basic Protections,
including (i) a requirement that the Beneficiary deposit into the voting trust
established by this Agreement (the "Voting Trust") all of the shares of Capital
Stock Beneficially Owned (as defined below) by the Beneficiary in excess of the
Voting Trust Ownership Limit (as defined below), and (ii) a requirement that
the Beneficiary reduce its Beneficial Ownership (as defined below) of each
class of Capital Stock to less than fifty percent (50%) of the issued and
outstanding shares of each class of Capital Stock within three (3) years
following the Closing Date (as defined below), subject to possible extension as
provided herein, and reduce its Beneficial Ownership of each class of Capital
Stock to less than twenty percent (20%) of the issued and outstanding shares of
each class of Capital Stock within five (5) years following the Closing Date,
subject to possible extension as provided herein.
Agreement
In consideration of the foregoing and the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties agree as follows:
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Article I
Definitions
For purposes of this Agreement, the following terms shall have the following
meanings:
(a) "Acquisition Proposal" means any tender or exchange offer, proposal for
a merger, consolidation or other business combination involving the Company or
any of its subsidiaries or affiliates or any proposal or offer to acquire in
any manner any equity interest in, or any portion of the assets of, the Company
or any of its subsidiaries or affiliates.
(b) "Agreement" has the meaning set forth in the Preamble hereof.
(c) "Affiliate," as used with respect to the Beneficiary, has the meaning
ascribed to such term in Rule 12b-2 of the Securities and Exchange Act of 1934,
as amended, and in effect on November 17, 1993, but shall be deemed to not
include the Company and its subsidiaries.
(d) "BCBSA" has the meaning set forth in Recital B hereof.
(e) "Basic Protections" has the meaning set forth in Recital D hereof.
(f) "Beneficial Ownership", "Beneficially Own" or "Beneficial Owner" have
the meaning set forth in Section 1 of Article VII of the Certificate of
Incorporation.
(g) "Beneficiary" has the meaning set forth in the Preamble hereof.
(h) "Blackout Period" has the meaning set forth in Section 1 of the
Registration Rights Agreement.
(i) "Board of Directors" means the Board of Directors of the Company.
(j) "Bylaws" means the Bylaws of the Company as in effect at the time that
reference is made thereto.
(k) "Capital Stock" has the meaning set forth in Section 1 of Article VII of
the Certificate of Incorporation.
(l) "Certificate of Incorporation" means the Certificate of Incorporation of
the Company as in effect at the time that reference is made thereto.
(m) "Change of Control Proposal" means any agreement, plan or proposal
involving any merger, consolidation or other business combination that, if
consummated in accordance with its terms, would result in the holders of the
voting Capital Stock of the Company immediately prior to such merger,
consolidation or other business combination owning less than 50.1% of the
outstanding voting securities of the resulting entity arising out of such
merger, consolidation or other business combination.
(n) "Closing Date" has the meaning provided therefor in the Reorganization
Agreement.
(o) "Company" has the meaning set forth in the Preamble hereof.
(p) "Common Stock" has the meaning set forth in Recital A hereof.
(q) "Delinquent Shares" means any and all shares of Capital Stock
Beneficially Owned by the Beneficiary in excess of the number of shares of
Capital Stock that the Beneficiary may Beneficially Own at the Three Year
Divestiture Deadline or the Five Year Divestiture Deadline, as the case may
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be, or at any date to which either the Three Year Divestiture Deadline or the
Five Year Divestiture Deadline, as the case may be, may be extended pursuant
to Section 6.03 or Section 6.04 hereof.
(r) "Demand" has the meaning set forth in Section 1 of the Registration
Rights Agreement.
(s) "Five Year Divestiture Deadline" means the fifth anniversary of the
Closing Date, extended day for day, up to a maximum of seven hundred thirty
(730) days, for each day the Company is not required to file a Registration
Statement (i) in response to an actual Demand pursuant to Section 2(d)(iii) of
the Registration Rights Agreement as a result of the Company having previously
effected a registration of Common Stock, provided that there shall be no such
extension if the Company is not required to file a Registration Statement
pursuant to said Section 2(d)(iii) because the Company previously effected a
registration of Common Stock wherein the Beneficiary exercised its Share-
Rights and received proceeds from the sale of its shares; or (ii) as a result
of the pendency of any Blackout Period.
(t) "Indemnified Party" has the meaning set forth in Section 8.06 hereof.
(u) "Independent Board Majority" has the meaning set forth in Section 4.B.3
of Article IV of the Certificate of Incorporation.
(v) "Marks" has the meaning set forth in Recital B hereof.
(w) "Ownership Limit" has the meaning set forth in Section 1 of Article VII
of the Certificate of Incorporation.
(x) "Person" means any individual, firm, partnership, corporation
(including, without limitation, a business trust), limited liability company,
trust, unincorporated association, joint stock company, joint venture or other
entity, and shall include any successor (by merger or otherwise) of any such
entity.
(y) "Registration Rights Agreement" means that certain Registration Rights
Agreement, of even date herewith, by and between the Company and the
Beneficiary.
(z) "Registration Statement" has the meaning set forth in Section 1 of the
Registration Rights Agreement.
(aa) "Reorganization Agreement" has the meaning set forth in Recital A
hereof.
(bb) "Share-Rights" has the meaning set forth in Section 1 of the
Registration Rights Agreement.
(cc) "Successor Trustee" has the meaning set forth in Section 8.04 hereof.
(dd) "Three Year Divestiture Deadline" means the third anniversary of the
Closing Date, extended day for day, up to a maximum of three hundred sixty
five (365) days, for each day the Company is not required to file a
Registration Statement (i) in response to an actual Demand pursuant to Section
2(d)(iii) of the Registration Rights Agreement as a result of the Company
having previously effected a registration of Common Stock, provided that there
shall be no such extension if the Company is not required to file a
Registration Statement pursuant to said Section 2(d)(iii) because the Company
previously effected a registration of Common Stock wherein the Beneficiary
exercised its Share-Rights and received proceeds from the sale of its shares;
or (ii) as a result of the pendency of any Blackout Period.
(ee) "Trustee" has the meaning set forth in Preamble hereof.
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(ff) "Voting Power" has the meaning set forth in Section 1 of Article VII of
the Certificate of Incorporation.
(gg) "Voting Trust" has the meaning set forth in Recital E hereof.
(hh) "Voting Trust Ownership Limit" means that number of shares of Capital
Stock one share lower than the number of shares of Capital Stock which would
represent five percent (5%) of the Voting Power of all shares of Capital Stock
issued and outstanding at the time of determination.
Article II
Deposit of Stock
Section 2.01 Delivery of Capital Stock. Beneficiary shall make such
contributions to the Voting Trust of shares of Capital Stock that Beneficiary
may Beneficially Own such that the number of shares of Capital Stock
Beneficially Owned by the Beneficiary outside of the Voting Trust shall never
exceed the Voting Trust Ownership Limit. The Trustee acknowledges receipt of
[insert number of shares contributed at closing pursuant to the
Reorganization Agreement] shares of Capital Stock acquired by Beneficiary
pursuant to the Reorganization Agreement. The Company shall pay any taxes and
costs imposed upon the transfer of the shares of Capital Stock Beneficially
Owned by the Beneficiary to the Voting Trust at the time of transfer.
Section 2.02 Certificate Book and Inspection of Agreement. The Trustee shall
keep at the address set forth in Section 10.04 hereof correct books of account
of all the Trustee's business and transactions relating to the Voting Trust,
and a book setting forth the number of shares of Capital Stock held by the
Voting Trust. A duplicate of this Agreement and any extension thereof shall be
filed with the Secretary of the Company and shall be open to inspection by a
stockholder upon the same terms as the record of stockholders of the Company is
open to inspection.
Article III
Beneficiary's Interest in Capital Stock
Section 3.01 Retained Interest. Subject to the powers, duties and rights of
the Company and the Trustee set forth herein and further subject to the terms
of this Agreement, the Registration Rights Agreement, the Certificate of
Incorporation and the Bylaws, the Beneficiary shall retain the entire economic
and beneficial ownership rights in all of the shares of Capital Stock held in
the Voting Trust.
Section 3.02 Withdrawal of Shares from Trust. The Beneficiary shall not be
entitled to withdraw any shares of Capital Stock from the Voting Trust except
to sell its entire Beneficial Ownership interest in such shares of Capital
Stock provided that (i) such shares of Capital Stock shall be registered in the
name of the purchaser thereof before being withdrawn from the Voting Trust,
(ii) such sale of shares of Capital Stock shall not be to an Affiliate of the
Beneficiary, (iii) such sale of shares of Capital Stock shall not be made to
any Person Beneficially Owning any shares of Capital Stock in excess of the
Ownership Limit applicable to such Person, (iv) such sale of shares of Capital
Stock shall not result in any Person Beneficially Owning any shares of Capital
Stock in excess of the Ownership Limit applicable to such Person, and (v) such
sale of shares of Capital Stock shall otherwise be permitted pursuant to this
Agreement, the Registration Rights Agreement, the Certificate of Incorporation
and the Bylaws. The Beneficiary shall not transfer any of its retained rights
or interest in shares of Capital Stock held in the Voting Trust. Any shares of
Capital Stock withdrawn in accordance with this Section 3.02 shall, upon
withdrawal, cease to be subject to the terms and conditions of this Agreement.
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Article IV
Trustee's Powers and Duties
Section 4.01 Limits on Trustee's Powers. The Trustee shall have only the
powers set forth in this Agreement. It is expressly understood and agreed by
the parties hereto that under no circumstances shall the Trustee be personally
liable for the payment of any indebtedness or expenses of this Agreement or be
liable for the breach or failure of any obligation, representation, warranty or
covenant made or undertaken by the Trustee under this Agreement, except as set
forth in this Agreement.
Section 4.02 Right to Vote. With respect to all shares of Capital Stock held
in the Voting Trust, the Trustee shall have the exclusive and absolute right in
respect of such shares of Capital Stock to vote, assent or consent such shares
of Capital Stock at all times during the term of this Agreement, subject to
Section 4.03 hereof, including, without limitation, the right to vote at any
election of directors and in favor of or in opposition to any resolution,
dissolution, liquidation, merger or consolidation of the Company, any sale of
all or substantially all of the Company's assets, any issuance or authorization
of securities, or any action of any character whatsoever which may be presented
at any meeting or require the consent of the stockholders of the Company.
Section 4.03 Voting on Particular Matters. In exercising the Trustee's
powers and duties under this Agreement, the Trustee shall at all times vote,
assent or consent all shares of Capital Stock held in the Voting Trust as
follows:
(a) if the matter concerned is the election of directors of the Company, the
Trustee shall vote, assent or consent the whole number of shares of Capital
Stock held by the Voting Trust in favor of each nominee to the Board of
Directors whose nomination has been approved by an Independent Board Majority
and vote against any candidate for the Board of Directors for whom no competing
candidate has been nominated or selected by an Independent Board Majority;
(b) unless such action is initiated by or with the consent of an Independent
Board Majority, the Trustee shall (i) vote against removal of any director of
the Company, (ii) vote against any alteration, amendment, change or addition to
or repeal of the Bylaws or Certificate of Incorporation, (iii) not nominate any
candidate to fill any vacancy on the Board of Directors, (iv) not call any
special meeting of the stockholders of the Company, and (v) not take any action
by voting shares of Capital Stock held by the Voting Trust that would be
inconsistent with or would have the effect, directly or indirectly, of
defeating or subverting the voting requirements contained in Section 4.03(a)
hereof or this Section 4.03(b);
(c) to the extent not covered by Section 4.03(a) or Section 4.03(b) hereof,
on any action, proposal or resolution requiring prior approval of the Board of
Directors as a prerequisite to become effective, the Trustee shall vote in
accordance with the recommendation of the Board of Directors, provided,
however, that on any Change of Control Proposal approved by the Board of
Directors and submitted by the Board of Directors to the stockholders of the
Company for a vote thereon, the Trustee shall vote on such Change of Control
Proposal as directed by the Beneficiary; and
(d) to the extent not covered by Section 4.03(a) or Section 4.03(b) hereof,
on any action, proposal or resolution not requiring prior approval of the Board
of Directors as a prerequisite to become effective, the Trustee shall vote in
accordance with the recommendation of the Board of Directors.
Section 4.04 Presence at Meetings. The Trustee shall ensure, with respect to
the shares of Capital Stock held in the Voting Trust hereunder, that such
shares of Capital Stock are counted as being present for the purposes of any
quorum required for stockholder action of the Company and to
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vote, assent or consent as set forth in this Article IV so long as the Trustee
has reasonable notice of the time to vote, assent or consent (and the Trustee
shall be deemed to have reasonable notice if it shall receive notice within the
time periods under the applicable provisions of the Delaware General
Corporation Law).
Section 4.05 Sales. The Trustee shall have no authority to sell any of the
shares of Capital Stock deposited pursuant to the provisions of this Agreement,
unless expressly permitted pursuant to the terms hereof. Upon the sale of
shares of Capital Stock in accordance with the terms hereof, the Trustee shall
deliver or cause to be delivered certificates representing such shares of
Capital Stock to the Person entitled thereto.
Section 4.06 Contrary Instructions. The Trustee shall have no obligation
whatsoever to follow any instruction of the Beneficiary if such instruction is
contrary to the terms of this Agreement, unless such contrary instruction shall
be agreed to in writing by the Beneficiary and the Company.
Section 4.07 Execution by Trustee. The Trustee shall execute all documents
as follows:
"By: , not in its individual capacity, but solely as Trustee
By: ." [to be provided by Trustee prior to signing]
Article V
Standstill
Section 5.01 Acquisition of Capital Stock. Throughout the term of this
Agreement, the Beneficiary shall not, directly or indirectly, (i) individually,
or as part of a group, acquire, offer or propose to acquire, or agree to
acquire, by purchase or otherwise, Beneficial Ownership of any shares of
Capital Stock, or direct or indirect rights or options to acquire (through
purchase, exchange, conversion or otherwise) Beneficial Ownership of any shares
of Capital Stock (except by reason of stock dividends, stock splits, spinoffs,
mergers, recapitalizations, combinations, conversions, exchanges of shares, or
the like), or (ii) enter into any agreement, arrangement or understanding,
other than for the sale of shares of Capital Stock in accordance with Section
3.02 hereof and the Registration Rights Agreement, with any Person, other than
the Company, that would have the effect of increasing such Person's or the
Beneficiary's Beneficial Ownership in any shares of Capital Stock.
Section 5.02 Sale of Capital Stock. Notwithstanding anything in this
Agreement to the contrary, the Beneficiary shall not sell or otherwise dispose
of any shares of Capital Stock to any Person, whether in a private placement,
pursuant to a registered offering of securities or otherwise, if (i) such
Person Beneficially Owns an amount of Capital Stock in excess of the Ownership
Limit applicable to such Person, or (ii) the effect of such sale or other
disposition would be to cause such Person to Beneficially Own an amount of
Capital Stock which would exceed the Ownership Limit applicable to such Person.
Section 5.03 Nomination of Directors. The Beneficiary shall not itself, nor
shall it initiate, suggest or otherwise encourage the Board of Directors or any
other Person to, (i) nominate any individual as a candidate for election to the
Board of Directors, or (ii) appoint any individual to fill any vacancy on the
Board of Directors. The Beneficiary shall not support, endorse or otherwise
encourage the election of any candidate for election to the Board of Directors
other than a candidate or candidates nominated by an Independent Board
Majority.
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Section 5.04 Acquisition Proposals. The Beneficiary shall not solicit or
encourage inquiries or proposals with respect to, or provide any confidential
information to, or have any discussions, meetings or other communications with,
any Person relating to an Acquisition Proposal or a Change of Control Proposal,
provided, however, that the Beneficiary may have discussions with the counter-
party to any Change of Control Proposal after such Change of Control Proposal
shall have been approved by the Board of Directors and submitted to the
stockholders of the Company for a vote thereon, and provided further, however,
that the Beneficiary may have discussions with any Person concerning the sale
or disposal of shares of Capital Stock Beneficially Owned by the Beneficiary in
accordance with Section 3.02 hereof and the Registration Rights Agreement.
Section 5.05 Contacts. Subject to Section 5.04 hereof, the Beneficiary shall
not meet or otherwise communicate with any Person that is seeking to acquire
shares of Capital Stock in excess of the Ownership Limit applicable to such
Person to the extent that such meeting or other communication relates to such
acquisition of shares of Capital Stock or Acquisition Proposal. The Beneficiary
shall promptly advise the Company in writing if the Beneficiary or any of its
representatives shall have received a communication, contact or inquiry
relating to an Acquisition Proposal and shall promptly advise the Company of
all information available to the Beneficiary concerning such communication,
contact or inquiry relevant to such Acquisition Proposal.
Section 5.06 Litigation. The Beneficiary shall not join as a party in any
litigation, suit or cause of action that alleges (i) that any of the Basic
Protections or any provisions of the Certificate of Incorporation or Bylaws are
not enforceable in accordance with their terms, (ii) that the Board of
Directors should not enforce the Basic Protections or provisions of the
Certificate of Incorporation or Bylaws in any particular case or circumstance,
or (iii) that the Board of Directors should approve, adopt, disapprove or
abandon any particular Acquisition Proposal or Change of Control Proposal;
provided, however, that nothing in this Section 5.06 shall prevent the
Beneficiary from joining as a party in any litigation, suit or cause of action
that alleges that the Board of Directors should solicit Acquisition Proposals
or Change of Control Proposals, or initiate a bidding process seeking proposals
to acquire all of the outstanding stock of the Company.
Section 5.07 Communications. For so long as the Beneficiary Beneficially
Owns twenty percent (20%) or more of the issued and outstanding shares of
Common Stock, the Company shall consult with the Beneficiary prior to
soliciting any Change of Control Proposal and shall consult with the
Beneficiary in the event that the Company shall receive any Change of Control
Proposal. Beneficiary shall comply with the same confidentiality and non-
disclosure obligations that apply to directors and officers of the Company with
respect to all information obtained by Beneficiary in connection with any such
consultation. Nothing in this Agreement shall be construed to limit the rights
of a Beneficiary as a shareholder of the Company from communicating with the
Board of Directors of the Company regarding Change of Control Proposals or,
except as otherwise provided in Section 5.03 hereof, any other matter
pertaining to the Company. The Company and the Beneficiary shall keep
confidential the contents of all such communications from the Beneficiary,
provided that either party may disclose the contents of such communications if
required by law.
Article VI
Agreement to Divest Shares of Capital Stock
Section 6.01 Sale of Beneficiary's Capital Stock by Third Anniversary. The
Beneficiary hereby covenants and agrees that it shall sell, convey, or
otherwise dispose of shares of Capital Stock (so that the Beneficiary is no
longer a Beneficial Owner of such shares of Capital Stock) so that the
Beneficiary Beneficially Owns less than fifty percent (50%) of the issued and
outstanding shares of each class of Capital Stock on or prior to the Three Year
Divestiture Deadline. Any such disposition
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shall comply with the terms of this Agreement, the Registration Rights
Agreement, the Certificate of Incorporation and the Bylaws.
Section 6.02 Sale of Beneficiary's Capital Stock by Fifth Anniversary. The
Beneficiary hereby covenants and agrees that it shall sell, convey or otherwise
dispose of shares of Capital Stock (so that the Beneficiary is no longer a
Beneficial Owner of such shares of Capital Stock) so that the Beneficiary
Beneficially Owns less than twenty percent (20%) of the issued and outstanding
shares of each class of Capital Stock on or prior to the Five Year Divestiture
Deadline. Any such disposition shall comply with the terms of this Agreement,
the Registration Rights Agreement, the Certificate of Incorporation and the
Bylaws.
Section 6.03 Extension of Divestiture Deadlines Sought by
Beneficiary. Notwithstanding Section 6.01 or Section 6.02 hereof, the Company
shall extend the Three Year Divestiture Deadline or the Five Year Divestiture
Deadline, as the case may be, if (i) the Beneficiary makes a good faith and
reasonable determination (and provides the reasons therefor) that compliance
with Section 6.01 or Section 6.02 hereof, as the case may be, would have a
material adverse affect on the Beneficiary, (ii) the Beneficiary advises the
Company of such determination (and provides the reasons therefor) and makes a
reasonable request for an extension of the Three Year Divestiture Deadline or
the Five Year Divestiture Deadline, as the case may be, and (iii) the Company
receives written confirmation from the BCBSA that the extension of the Three
Year Divestiture Deadline or the Five Year Divestiture Deadline, as the case
may be, requested by the Beneficiary would not cause a violation of the license
agreements governing the Company's use of the Marks. The Company shall not
oppose the Beneficiary's request for an extension of the Three Year Divestiture
Deadline or the Five Year Divestiture Deadline, as the case may be, and shall
take reasonable steps, as reasonably requested by the Beneficiary, to assist
the Beneficiary in its efforts to obtain an extension of the Three Year
Divestiture Deadline or the Five Year Divestiture Deadline, as the case may be;
provided that the Company shall have no obligation to, among other things,
incur any fees or expenses for its own account in connection with such
assistance. The Beneficiary acknowledges that, notwithstanding the scope or
degree of assistance provided by the Company, the BCBSA shall have the sole and
absolute authority and discretion to determine whether to consent to an
extension of the Three Year Divestiture or the Five Year Divestiture Deadline,
as the case may be, but shall have no obligation to grant such consent, and
that in no event shall the Company have any liability to the Beneficiary or any
other Person in the event that the BCBSA shall determine to deny any such
extension request.
Section 6.04 Extension of Divestiture Deadlines Sought by
Company. Notwithstanding Section 6.01 or Section 6.02 hereof, the Company shall
extend the Three Year Divestiture Deadline or the Five Year Divestiture
Deadline, as the case may be, if (i) the Company makes a good faith
determination that compliance with Section 6.01 or Section 6.02 hereof, as the
case may be, would have an adverse affect on the Company, or any of its
stockholders other than the Beneficiary, and (ii) the Company receives written
confirmation from BCBSA that the extension of the Three Year Divestiture
Deadline or the Five Year Divestiture Deadline, as the case may be, requested
by the Company would not cause a violation of the license agreement governing
the Company's use of the Marks. The Beneficiary and the Company acknowledge
that the BCBSA shall have the sole and absolute authority and discretion to
determine whether to consent to an extension of the Three Year Divestiture or
the Five Year Divestiture Deadline, as the case may be, but shall have no
obligation to grant such consent, and that in no event shall the Company have
any liability to the Beneficiary or any other Person in the event that the
BCBSA shall determine to deny any such extension request.
Section 6.05 Failure to Meet Divestiture Deadlines. In the event that the
Beneficiary shall fail to meet either the Three Year Divestiture Deadline or
the Five Year Divestiture Deadline, as the case may be, and an extension
thereof shall not have been granted pursuant to Section 6.03 or Section 6.04
hereof, or shall fail to meet any extended Three Year Divestiture Deadline or
Five Year
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Divestiture Deadline, as the case may be, that may have been granted pursuant
to Section 6.03 or Section 6.04 hereof, then the Company shall arrange for the
sale of the Delinquent Shares in a manner and at such time or times as shall be
commercially reasonable under the circumstances (giving effect to, among other
things, market conditions and related matters) and, subject to the foregoing,
the Company shall have no liability to the Beneficiary or any other Person on
the grounds that the Company failed to take actions which could have produced
higher proceeds for the sale of the Delinquent Shares. In either such case, the
Beneficiary shall promptly take all action reasonably requested by the Company
in order to facilitate the sale of the Delinquent Shares, and the Company shall
be entitled to receive customary representations and warranties from the
Beneficiary regarding the Delinquent Shares (including representations
regarding good title to such shares, free and clear of all liens, claims,
security interests and other encumbrances). Until sold, the Delinquent Shares
shall be voted by the Trustee in the manner required by Section 4.03 of this
Agreement, provided however, that on any Change of Control Proposal approved by
the Board of Directors and submitted by the Board of Directors to the
stockholders of the Company for a vote thereon, the Trustee shall vote the
Delinquent Shares in the exact proportion as all shares of Capital Stock not
held in the Voting Trust shall have been voted upon such Change of Control
Proposal. Upon the sale of the Delinquent Shares, the Trustee shall deliver the
shares to the purchaser thereof as directed by the Company, and all proceeds
from such sale, less all expenses incurred by the Company, shall be distributed
to the Beneficiary as soon as practicable.
Article VII
Dividends and Distributions
Section 7.01 Cash. The Beneficiary shall be entitled to receive payments
equal to the amount of cash dividends, if any, collected or received by the
Trustee or its successor upon the number of shares of Capital Stock held in the
Voting Trust, subject to deduction in respect of expenses, charges or fees
pursuant to Section 8.02 or 8.03 hereof. The Trustee and the Company shall
arrange for the direct payment by the Company of all or a portion (as provided
in the preceding sentence) of such cash dividends to the Beneficiary.
Section 7.02 Stock. In the event that the Trustee shall receive, as a
dividend or other distribution upon any shares of Capital Stock held by the
Trustee under this Agreement, any shares of stock or securities convertible
into stock of the Company, the Trustee shall hold the same and said shares
shall be subject to all of the terms and conditions of this Agreement to the
same extent as if originally deposited hereunder.
Section 7.03 Other Distributions. In the event that, at any time during the
term of this Agreement, the Trustee shall receive or collect any monies through
a distribution by the Company to its stockholders, other than in payment of
cash dividends, or shall receive any property (other than shares of Capital
Stock or securities convertible into Capital Stock) through a distribution by
the Company to its stockholders, the Trustee shall distribute the same to the
Beneficiary, subject to deduction in respect of expenses, charges or fees
pursuant to Section 8.02 or 8.03 hereof.
Article VIII
The Trustee
Section 8.01 Use of Proxies. The Trustee may vote, assent or consent with
respect to all shares of Capital Stock held in the Voting Trust in person or by
such person or persons as it may from time to time select as its proxy,
provided that the Trustee shall at all times do so in conformity with the
provisions of Section 4.03 hereof.
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Section 8.02 Expenses. The Trustee is expressly authorized to incur and pay
such reasonable expenses and charges, to employ and pay such agents, attorneys
and counsel, and to incur and pay such other charges and expenses as the
Trustee may deem reasonably necessary and proper for administering this
Agreement. The Beneficiary and the Company shall reimburse the Trustee equally
for any such expense and charges, and any such expenses or charges may be
deducted from the cash dividends or other monies received by the Trustee on the
shares of Capital Stock deposited hereunder, to the extent unreimbursed by the
Beneficiary.
Section 8.03 Compensation. The Beneficiary and the Company shall compensate
the Trustee equally for its services as Trustee hereunder as provided in the
Trustees' fee schedule, attached hereto as Exhibit A, and any such fees may be
deducted from the cash dividends or other monies received by Trustee on the
shares of Capital Stock deposited in the Voting Trust, to the extent otherwise
unpaid by the Beneficiary.
Section 8.04 Successor Trustee. The Trustee may resign after giving thirty
(30) days' advance written notice of its resignation to the Company and the
Beneficiary, provided that such resignation shall not become effective until a
reasonably competent alternate (the "Successor Trustee") shall have become
bound by this Agreement. The Company may in addition terminate the Trustee
after giving thirty (30) days' advance written notice thereof to the Trustee,
provided that such termination of the Trustee shall not become effective until
a Successor Trustee shall have become bound by this Agreement. If the Trustee
shall resign or be so terminated by the Company, the Trustee shall be replaced
by a Successor Trustee. The Successor Trustee shall be designated by the
Company. The Successor Trustee shall enjoy all the rights, powers, interests
and immunities of the Trustee originally designated and shall agree in writing
to be bound by this Agreement.
Section 8.05 Qualifications of Trustee. Throughout the term of the Voting
Trust, the Trustee or Successor Trustee, as the case may be, must satisfy each
of the following qualifications: (i) the Trustee or Successor Trustee, as the
case may be, must be an institution duly authorized to act as such a Trustee or
Successor Trustee under the laws of the State of Delaware; (ii) the Trustee or
Successor Trustee, as the case may be, must, either on an individual basis or
on a consolidated basis together with its subsidiaries and affiliates, have
minimum stockholders' equity of $500,000,000; (iii) the Trustee or Successor
Trustee, as the case may be, must not own for its own account more than one
percent (1%) of the issued and outstanding securities of either the Company or
the Beneficiary; and (iv) no director or officer of the Trustee or any
Successor Trustee, as the case may be, may serve as a director or officer of
the Company or the Beneficiary (and no director or officer of the Company or
the Beneficiary shall serve as a director or officer of the Trustee or
Successor Trustee, as the case may be). In the event that the Trustee or
Successor Trustee, as the case may be, shall fail to meet any of the conditions
set forth in this Section 8.05, the Company shall replace the Trustee or the
Successor Trustee, as the case may be, as provided in Section 8.04 hereof.
Section 8.06 Trustee's Liability. The Trustee shall not be liable for any
act or omission undertaken in connection with its powers and duties under this
Agreement, except for any willful misconduct or gross negligence by Trustee. No
Successor Trustee shall be liable for actions or omissions of the Trustee or
any other Successor Trustee. The Trustee shall not be liable in acting on any
notice, request, consent, certificate, instruction, or other paper or document
or signature reasonably believed by it to be genuine and to have been signed by
the proper party. The Trustee may consult with legal counsel (reasonably
competent for the purpose) and any act or omission undertaken by it in good
faith in accordance with the opinion of such legal counsel shall not result in
any liabilities of the Trustee. The Beneficiary covenants and agrees to
indemnify and hold harmless the Trustee and its affiliates, directors,
officers, employees, agents and advisors (each an "Indemnified Party"), without
duplication, from and against any and all claims, damages, losses, liability,
obligations, actions, suits, costs, disbursements and expenses (including
without limitation reasonable
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fees and expenses of counsel) incurred by any Indemnified Party, in any way
relating to or arising out of or in connection with or by reason of the
preparation for a defense of any investigation, litigation or proceeding
arising out of this Agreement or the shares of Capital Stock held pursuant to
this Agreement, the administration of this Agreement or the action or inaction
of the Trustee hereunder; except to the extent such claim, damage, loss,
liability, obligation, action, suit, cost, disbursement or expense results from
such Indemnified Parties' gross negligence or willful misconduct. The indemnity
set forth in this Section 8.06 shall be in addition to any other obligation or
liabilities of the Beneficiary hereunder or at common law or otherwise and
shall survive the termination of this Agreement.
Article IX
Termination
Section 9.01 Termination. This Agreement shall terminate upon the joint
written notice by the Beneficiary and the Company to the Trustee that the
Beneficiary Beneficially Owns less than five percent (5%) of the issued and
outstanding shares of Common Stock and less than five percent (5%) of the
issued and outstanding shares of every other class of Capital Stock. Otherwise,
the Voting Trust is hereby expressly declared to be and shall be irrevocable.
Section 9.02 Delivery of Stock Certificate(s). As soon as practicable after
the termination of this Agreement, the Trustee shall deliver to the Beneficiary
stock certificate(s), with the appropriate legend as provided in the
Certificate of Incorporation, representing the number of shares of Capital
Stock Beneficially Owned by the Beneficiary at the date of termination, if any,
held by the Voting Trust and upon payment by the Beneficiary of any and all
taxes and other expenses relating to the transfer or delivery of such
certificates.
Article X
Miscellaneous
Section 10.01 Ownership; Authority. The Beneficiary represents, warrants and
covenants to the Company that (i) as of the effective date of this Agreement,
the Beneficiary is the Beneficial Owner of 14,962,500 shares of Common Stock,
(ii) the Beneficiary does not Beneficially Own any shares of Capital Stock
other than 14,962,500 shares of Common Stock, and (iii) the Beneficiary has
full power and authority to make, enter into and carry out the terms of this
Agreement.
Section 10.02 Merger, Consolidation, Sale of Assets. If the Company shall
merge into or consolidate with another corporation or corporations, or if all
or substantially all of the assets of the Company are transferred to another
corporation, the shares of which are issued to stockholders of the Company in
connection with such merger, consolidation or transfer, then the terms
"RightCHOICE Managed Care, Inc." or the "Company" shall be construed, so long
as the Marks continue to be licensed by such entity from BCBSA, to include such
successor corporation, and the Trustee shall receive and hold under this
Agreement any shares of such successor corporation received by it on account of
its ownership as Trustee of shares of Capital Stock held by it hereunder prior
to such merger, consolidation or transfer.
Section 10.03 Successors. This Agreement shall bind and inure to the benefit
of the Trustee and each and all of its respective heirs, executors,
administrators, successors and assigns. Notwithstanding any provision of this
Agreement, the provisions of this Agreement shall not be binding on any
transferee or purchaser from the Beneficiary (other than a Person who is an
Affiliate of the Beneficiary and except that any and all shares of Capital
Stock sold in violation of this
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Agreement, the Registration Rights Agreement, the Certificate of Incorporation
or the Bylaws shall remain subject to this Agreement). In case at any time the
Trustee shall resign and no Successor Trustee shall have been appointed within
thirty (30) days after notice of such resignation has been filed and mailed as
required by Section 8.04 hereof, the resigning Trustee may forthwith apply to a
court of competent jurisdiction for the appointment of a Successor Trustee.
Such court may thereupon, after such notice, if any, as it may deem proper and
appropriate, appoint a Successor Trustee.
Section 10.04 Notices. All notices, consents, requests, demands and other
communications hereunder shall be in writing, and shall be deemed to have been
duly given or made: (i) when delivered in person; (ii) three (3) days after
deposited in the United States mail, first class postage prepaid; (iii) in the
case of telegraph or overnight courier services, one (1) business day after
delivery to the telegraph company or overnight courier service with payment
provided; or (iv) in the case of telex or telecopy or fax, when sent,
verification received; in each case addressed as follows:
if to the Company:
John A. O'Rourke
Chairman, President and Chief Executive Officer
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, Missouri 63103
Fax: (314) 923-8958
with a copy to:
John J. Riffle, Esq.
Lewis, Rice & Fingersh, L.C.
500 North Broadway, Suite 2000
St. Louis, Missouri 63102
Fax: (314) 444-7788
if to the Beneficiary: [to be determined by Foundation prior to signing]
---------------------------------
---------------------------------
---------------------------------
---------------------------------
with a copy to: [to be determined by Foundation prior to signing]
---------------------------------
---------------------------------
---------------------------------
---------------------------------
if to the Trustee: [to be determined by Trustee prior to signing]
---------------------------------
---------------------------------
---------------------------------
---------------------------------
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with a copy to: [to be determined by Trustee prior to signing]
---------------------------------
---------------------------------
---------------------------------
---------------------------------
Section 10.05 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
reference to conflicts of laws principles.
Section 10.06 Attorneys' Fees. In the event of any suit or other proceeding
between the Company and the Beneficiary with respect to any of the transactions
contemplated hereby or the subject matter hereof, the prevailing party shall,
in addition to such other relief as the court may award, be entitled to recover
reasonable attorneys' fees, expenses and costs of investigation, all as
actually incurred, including, without limitation, attorneys' fees, costs and
expenses of investigation incurred in appellate proceedings or in any action or
participation in, or in connection with, any case or proceeding under Chapters
7, 11 and 13 of the United States Bankruptcy Code or any successor thereto.
Section 10.07 Fair Construction. This Agreement is the product of
negotiation and shall be deemed to have been drafted by all of the parties. It
shall be construed in accordance with the fair meaning of its terms and its
language shall not be strictly construed against, nor shall ambiguities be
resolved against, any particular party.
Section 10.08 Entire Agreement. This Agreement contains the entire agreement
between the parties hereto regarding the subject matter hereof, and may not be
amended, altered or modified except by a writing signed by the parties hereto.
This Agreement supersedes all prior agreements, representations, warranties,
statements, promises, information, arrangements and understandings, whether
oral or written, express or implied, with respect to the subject matter hereof,
all of which are specifically integrated into this Agreement. No party hereto
shall be bound by or charged with any oral or written agreements,
representations, warranties, statements, promises, information, arrangements or
understandings, express or implied, not specifically set forth herein; and the
parties hereto further acknowledge and agree that in entering into this
Agreement they have not in any way relied and will not rely in any way on any
of the foregoing not specifically set forth herein.
Section 10.09 Counterparts. This Agreement may be executed in two (2) or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one (1) and the same instrument.
[signatures appear on next page]
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In Witness Whereof, the parties have executed this Agreement on the day and
year first above written.
Rightchoice Managed Care, Inc., a
Delaware corporation
The Missouri Foundation For Health,
a Missouri corporation
[Trustee]
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EXHIBIT A
Trustee Fee Schedule
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Appendix D
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FORM OF
REGISTRATION RIGHTS AGREEMENT
by and between
RIGHTCHOICE MANAGED CARE, INC.,
a Delaware corporation
and
THE MISSOURI FOUNDATION FOR HEALTH,
a Missouri nonprofit public benefit corporation
--------------------------------------------------------------------------------
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<PAGE>
FORM OF
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement"), dated as of ,
2000, is made and entered into by and between RightCHOICE Managed Care, Inc.,
a Delaware corporation (the "Company"), and The Missouri Foundation For
Health, a Missouri non-profit corporation (the "Foundation").
Recitals
A. Pursuant to the terms of a certain Agreement and Plan of Reorganization
(the "Reorganization Agreement"), dated as of March 14, 2000, by and among
Blue Cross and Blue Shield of Missouri, a Missouri non-profit health services
corporation, RightCHOICE Managed Care, Inc., a Missouri corporation, the
Foundation and the Company, the Foundation has acquired, contemporaneous with
the execution of this Agreement, 14,962,500 shares of common stock, par value
$.01 per share, of the Company (the "Common Stock"), representing
approximately 80.1% of the issued and outstanding shares of Common Stock.
B. The Company has agreed to provide certain registration rights to the
Foundation with respect to the shares of Common Stock owned by the Foundation,
subject to the terms and conditions contained in this Agreement.
Agreement
In consideration of the foregoing and the mutual covenants and agreements
contained in this Agreement, the Company and the Foundation agree as follows:
Section 1. Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
(a) "Affiliate", as used with respect to the Foundation, has the meaning
ascribed to such term in Rule 12b-2 of the Exchange Act, and in effect on
November 17, 1993, but shall be deemed to not include the Company and its
subsidiaries.
(b) "Agreement" has the meaning set forth in the Preamble hereof.
(c) "Beneficially Own" has the meaning set forth in Section 1 of Article
VII of the Certificate of Incorporation.
(d) "Blackout Period" has the meaning specified in Section 6 hereof.
(e) "Business Day" means a day other than a Saturday, Sunday or other
day on which commercial banks are authorized to close under the laws of the
State of Missouri and the United States of America.
(f) "Bylaws" means the Bylaws of the Company as in effect at the time
that reference is made thereto.
(g) "Certificate of Incorporation" means the Certificate of
Incorporation of the Company as in effect at the time that reference is
made thereto.
(h) "Closing Date" has the meaning provided therefor in the
Reorganization Agreement.
(i) "Common Stock" has the meaning set forth in Recital A hereof.
(j) "Company" has the meaning set forth in the Preamble hereof.
(k) "Continuing Option" has the meaning specified in Section 4(a)
hereof.
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(l) "Continuing Option Notice" has the meaning specified in Section 4(a)
hereof.
(m) "Continuing Option Price" has the meaning specified in Section 4(a)
hereof.
(n) "Continuing Option Securities" has the meaning specified in Section
4(a) hereof.
(o) "Current Market Value" means the product of the number of
Registrable Securities at issue multiplied by the closing sale price of a
share of Common Stock on the NYSE on the date that the Current Market Value
is to be determined.
(p) "Demand" has the meaning specified in Section 2(a) hereof.
(q) "Demand Option" has the meaning specified in Section 2(b) hereof.
(r) "Demand Option Notice" has the meaning specified in Section 2(b)
hereof.
(s) "Demand Option Securities" has the meaning specified in Section 2(b)
hereof.
(t) "Demand Registration" has the meaning specified in Section 2(a)
hereof.
(u) "Effective Period" means the period commencing on the date of this
Agreement and ending on the first date on which there shall no longer exist
any Registrable Securities.
(v) "Excess Shares" has the meaning set forth in Section 1 of Article
VII of the Certificate of Incorporation.
(w) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder, all as the
same shall be in effect at the time that reference is made thereto.
(x) "Foundation" has the meaning set forth in the Preamble hereof.
(y) "Initial Continuing Option Exercise Date" means the first date on
which the Foundation holds less than fifty percent (50%) of the issued and
outstanding shares of Common Stock.
(z) "Inspectors" has the meaning specified in Section 8(k) hereof.
(aa) "NASD" means the National Association of Securities Dealers, Inc.
(bb) "NYSE" means the New York Stock Exchange, Inc.
(cc) "Ownership Limit" has the meaning set forth in Section 1 of Article
VII of the Certificate of Incorporation.
(dd) "Person" means any individual, firm, partnership, corporation
(including, without limitation, a business trust), limited liability
company, joint stock company, trust, unincorporated association, joint
venture or other entity, and shall include any successor (by merger or
otherwise) of any such entity.
(ee) "Piggy-Back Request" has the meaning set forth in Section 3(c)
hereof.
(ff) "Piggy-Back Rights" has the meaning set forth in Section 3(b)
hereof.
(gg) "Private Placement Notice" has the meaning specified in Section 11
hereof.
(hh) "Private Placement Option" has the meaning specified in Section 11
hereof.
(ii) "Private Placement Option Notice" has the meaning specified in
Section 11 hereof.
(jj) "Private Placement Securities" has the meaning specified in Section
11 hereof.
(kk) "Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement, with
respect to the terms of the
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offering of any portion of the Registrable Securities covered by any
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material
incorporated by reference in such prospectus.
(ll) "Records" has the meaning specified in Section 8(k) hereof.
(mm) "Registrable Securities" means any and all of (i) the shares of
Common Stock held by the Foundation as of the date of this Agreement, and
(ii) any securities issuable or issued or distributed in respect of any of
the securities identified in clause (i) by way of stock dividend or stock
split or in connection with a combination of shares, recapitalization,
reorganization, merger, consolidation or otherwise. Registrable Securities
shall cease to be Registrable Securities when and to the extent that (i)
they shall have been transferred, sold, distributed or otherwise disposed
of by the Foundation (whether pursuant to an underwritten public offering,
a private placement transaction, Rule 144 or otherwise), (ii) they shall
have ceased to be outstanding, or (iii) they shall have become Delinquent
Shares (as defined in the Voting Trust and Divestiture Agreement).
(nn) "Registration Expenses" means any and all reasonable expenses
incident to performance of or compliance with this Agreement, including,
without limitation, (i) all SEC, NASD and securities exchange registration
and filing fees, (ii) all fees and expenses of complying with state
securities or "blue sky" laws (including fees and disbursements of counsel
for any underwriters in connection with blue sky qualifications of the
Registrable Securities), (iii) all processing, printing, copying, messenger
and delivery expenses, (iv) all fees and expenses incurred in connection
with the listing of the Registrable Securities on any securities exchange
pursuant to Section 8(h) hereof, (v) all fees and disbursements of counsel
for the Company and of its independent public accountants, and (vi) the
reasonable fees and expenses of any special experts retained in connection
with a registration under this Agreement, but excluding (A) any
underwriting discounts and commissions and transfer taxes relating to the
sale or disposition of Registrable Securities pursuant to a Registration
Statement, and (B) any fees, expenses or disbursements of counsel and other
advisers to the Foundation.
(oo) "Registration Statement" means any registration statement
(including a Shelf Registration) of the Company referred to in Sections 2
or 3 hereof, including any Prospectus, amendments and supplements to any
such registration statement, including post-effective amendments, and all
exhibits and all material incorporated by reference in any such
registration statement.
(pp) "Reorganization Agreement" has the meaning set forth in Recital A
hereof.
(qq) "Rule 144" means Rule 144 under the Securities Act, 17 C.F.R. (S)
230.144, or any similar or successor rules or regulations hereafter adopted
by the SEC.
(rr) "SEC" means the United States Securities and Exchange Commission
and any successor federal agency having similar powers.
(ss) "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder, all as the same shall be
in effect at the time that reference is made thereto.
(tt) "Share-Rights" has the meaning specified in Section 3(b) hereof.
(uu) "Shelf Registration" means a "shelf" registration statement on an
appropriate form pursuant to Rule 415 under the Securities Act (or any
successor rule that may be adopted by the SEC).
(vv) "Underwritten Offering" means an offering in which securities of
the Company are sold to an underwriter for reoffering to the public
pursuant to an effective Registration Statement under the Securities Act.
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(ww) "Voting Trust and Divestiture Agreement" means that certain Voting
Trust and Divestiture Agreement, of even date herewith, by and among the
Company, the Foundation and the trustee named therein.
Section 2. Demand Registration Rights.
(a) Throughout the Effective Period, the Foundation may, at any time
from and after the Closing Date and subject to the terms hereof, request
the Company in writing (each, a "Demand") to effect a registration with the
SEC under and in accordance with the provisions of the Securities Act of
all or part of the Registrable Securities (a "Demand Registration"). The
Demand shall specify the aggregate number of shares of Registrable
Securities requested to be so registered. Any request received by the
Company from the Foundation as provided in this Section 2(a) shall be
deemed to be a "Demand" for purposes of this Agreement unless the Company
shall have notified the Foundation in writing, prior to its receipt of such
request from the Foundation, of its intention to register securities with
the SEC, in which case the request from the Foundation shall be governed by
Section 3 hereof, not this Section 2.
(b) Following its receipt of a Demand, the Company shall have the right,
but not the obligation (the "Demand Option"), exercisable by providing
written notice thereof (the "Demand Option Notice") to the Foundation
within fifteen (15) days, to purchase all or (subject to the penultimate
sentence of this Section 2(b)) any portion of the Registrable Securities
that are the subject of such Demand (the "Demand Option Securities") at a
cash price per share equal to the average closing sale price per share of
the Common Stock on the NYSE during the ten (10) consecutive trading days
ending on the second (2nd) trading day immediately preceding the date of
the Demand. The Demand Option Notice shall state the number of Demand
Option Securities that the Company shall purchase pursuant to the Demand
Option, the aggregate purchase price therefor, and the closing date of the
Company's purchase of the Demand Option Securities, which shall take place
no later than thirty (30) days after the date of the Demand Option Notice.
The Company shall pay for the Demand Option Securities that it shall
purchase pursuant to the Demand Option at the closing thereof by wire
transfer of immediately available funds to a bank account designated by the
Foundation. At such closing, the Foundation shall deliver or cause to be
delivered to the Company the certificate or certificates representing the
number of Demand Option Securities purchased by the Company as specified in
the Demand Option Notice, free and clear of all liens, claims, security
interests and other encumbrances. The Company shall be entitled to receive
customary representations and warranties from the Foundation regarding such
sale of Demand Option Securities (including representations regarding good
title to such shares, free and clear of all liens, claims, security
interests and other encumbrances). Notwithstanding anything in this Section
2(b) to the contrary, unless the Foundation shall consent thereto, the
Company shall not have the right to purchase less than all of the Demand
Option Securities pursuant to a Demand Option if the Current Market Value
(determined as of the date of the original Demand by the Foundation) of the
Demand Option Securities that the Company shall have elected not to
purchase shall be less than Thirty Million Dollars ($30,000,000). In the
event that the Company shall purchase all of the Demand Option Securities
in accordance with this Section 2(b), then the requested Demand
Registration related thereto shall not be deemed to count as a Demand
Registration described in Section 2(d)(i) or Section 2(d)(ii) hereof.
(c) If the Company does not elect to exercise the Demand Option, or
elects to purchase less than all of the Demand Option Securities, the
Company shall use its best efforts to file a Registration Statement for the
Registrable Securities, or remainder thereof, identified in such Demand as
soon as practicable and to cause such Registration Statement to become
effective.
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(d) Notwithstanding anything in this Agreement to the contrary, the
Company shall not be required to file a Registration Statement for the
Registrable Securities identified in a Demand:
(i) if the Company shall have previously effected a Demand
Registration at any time during the immediately preceding one hundred
eighty (180) day period;
(ii) if the Company shall have previously effected a Demand
Registration at any time during the calendar year in which the Demand
was received;
(iii) if the Company shall have previously effected a registration
of Common Stock to be issued and sold by the Company at any time during
the immediately preceding one hundred twenty (120) day period (other
than a registration on Form S-4, Form S-8 or Form S-3 (with respect to
dividend reinvestment plans and similar plans) or any successor forms
thereto);
(iv) if the number of Registrable Securities identified in the
Demand shall have a Current Market Value (determined as of the date of
such Demand) of less than Thirty Million Dollars ($30,000,000), unless
such Registrable Securities identified in the Demand constitute all
remaining Registrable Securities; or
(v) during the pendency of any Blackout Period.
(e) The Company shall be permitted to satisfy its obligations under this
Section 2 by amending (to the extent permitted by applicable law) any Shelf
Registration previously filed by the Company under the Securities Act so
that such Shelf Registration (as amended) shall permit the disposition (in
accordance with the intended methods of disposition specified as aforesaid)
of all of the Registrable Securities for which a Demand shall have been
made. If the Company shall so amend a previously filed Shelf Registration,
it shall be deemed to have effected one (1) Demand Registration.
(f) A requested Demand Registration shall not be deemed to count as a
Demand Registration described in Section 2(d)(i) or Section 2(d)(ii) hereof
if: (i) such registration has not been declared effective by the SEC or
does not become effective in accordance with the Securities Act, (ii) after
becoming effective, such registration is materially interfered with by any
stop order, injunction or similar order or requirement of the SEC or other
governmental agency or court for any reason not attributable to the
Foundation and does not thereafter become effective, (iii) the conditions
to closing specified in the underwriting agreement, if any, entered into in
connection with such Demand Registration are not satisfied or waived due to
a failure on the part of the Company, or (iv) the Foundation shall have
withdrawn its Demand or otherwise determined not to pursue such
registration prior to the filing of the Registration Statement with the SEC
for such Demand, provided that the Foundation shall have reimbursed the
Company for all of its out-of-pocket expenses incurred in connection with
such Demand.
(g) Should a Registration Statement filed pursuant to a Demand not
become effective due to the failure of the Foundation to perform its
obligations under this Agreement or the inability of the Foundation to
reach agreement with the underwriter(s) on price or other customary terms
for such transaction, or in the event the Foundation determines to withdraw
or does not pursue a request for registration pursuant to a Demand (in each
of the foregoing cases, provided that at such time the Company shall be in
compliance in all material respects with its obligations under this
Agreement), then such registration shall be deemed to count as a Demand
Registration described in Section 2(d)(i) and Section 2(d)(ii) hereof,
unless the Foundation shall have reimbursed the Company for all of its
Registration Expenses incurred in connection with such demand.
(h) The Company shall have the right, but not the obligation, to include
any securities to be issued and sold by the Company in any Registration
Statement (including a Shelf Registration
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referred to in Section 2(e) hereof) filed pursuant to a Demand without the
prior consent of the Foundation.
(i) If the lead managing underwriter (selected by the Company as
provided in Section 5 hereof) of an Underwritten Offering made pursuant to
a Demand shall advise the Company in writing (with a copy to the
Foundation) that marketing or other factors require a limitation on the
number of shares of Common Stock which can be sold in such offering within
a price range acceptable to the Foundation, then (i) if the Company shall
have elected to include any securities to be issued and sold by the Company
in such Registration Statement pursuant to Section 2(h) hereof, then the
Company shall reduce the number of securities the Company shall intend to
issue and sell pursuant to such Registration Statement such that the total
number of securities being sold by the Foundation and the Company shall be
equal to the number which can be sold in such offering within a price range
acceptable to the Foundation, and (ii) if the Company shall not have
elected to include any securities in such Registration Statement pursuant
to Section 2(h) hereof or if the reduction referred to in the previous
clause (i) shall not be sufficient, then, notwithstanding Section 2(d)(iv)
hereof, the Foundation shall reduce the number of Registrable Securities
requested to be included in such offering to the number that the lead
managing underwriter advises can be sold in such offering within such price
range and such Demand shall count as a Demand Registration described in
Section 2(d)(i) or Section 2(d)(ii) hereof, provided that at least
$10,000,000 in gross sale proceeds shall have been received by the
Foundation pursuant to such offering, otherwise such requested Demand
Registration shall not be deemed to count as a Demand Registration
described in Section 2(d)(i) or Section 2(d)(ii) hereof (provided that the
Foundation shall have reimbursed the Company for all of its out-of-pocket
expenses incurred in the preparation, filing and processing of the
Registration Statement).
Section 3. Piggy-Back Registration Rights.
(a) The Company shall not file a Registration Statement relating to the
public offering of Common Stock for sale for cash for its own account for a
period of one hundred eighty (180) days following the Closing Date without
the prior written consent of the Foundation, which consent shall not be
unreasonably withheld.
(b) Whenever the Company shall propose to file a Registration Statement
under the Securities Act relating to the public offering of Common Stock
for sale for cash for its own account, the Company shall give written
notice to the Foundation at least fifteen (15) Business Days prior to the
anticipated filing thereof, specifying the approximate date on which the
Company proposes to file such Registration Statement and the intended
method of distribution in connection therewith, and advising the Foundation
of the Foundation's right to have any or all of the Registrable Securities
then held by the Foundation included among the securities to be covered by
such Registration Statement (the "Piggy-Back Rights") and the Foundation's
right, until such time as the Foundation holds less than fifty percent
(50%) of the issued and outstanding shares of Common Stock, to have any or
all of the Registrable Securities then held by the Foundation included
among the securities to be covered by such Registration Statement such that
the Foundation shall be entitled to receive, at its option, up to fifty
percent (50%) of the proceeds from the sale of shares of Common Stock to
the public (the "Share-Rights").
(c) Subject to Section 3(d) and Section 3(e) hereof, in the event that
the Foundation has and shall elect to utilize its Piggy-Back Rights or
Share-Rights, the Company shall include in the Registration Statement the
Registrable Securities identified by the Foundation in a written request
(the "Piggy-Back Request") given to the Company not later than ten (10)
Business Days prior to the proposed filing date of the Registration
Statement. The Registrable Securities identified in the Piggy-Back Request
shall be included in the Registration Statement on the same
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<PAGE>
terms and conditions as the other shares of Common Stock included in the
Registration Statement.
(d) Notwithstanding anything in this Agreement to the contrary, the
Foundation shall not have Piggy-Back Rights or Share-Rights with respect to
(i) a Registration Statement on Form S-4 or Form S-8 or Form S-3 (with
respect to dividend reinvestment plans and similar plans) or any successor
forms thereto, (ii) a Registration Statement filed in connection with an
exchange offer or an offering of securities solely to existing stockholders
or employees of the Company, (iii) a Registration Statement filed in
connection with an offering by the Company of securities convertible into
or exchangeable for Common Stock, (iv) a Registration Statement filed in
connection with the redistribution of shares of Common Stock held by the
Foundation in excess of the Ownership Limit pursuant to Article VI of the
Voting Trust and Divestiture Agreement, or (v) a Registration Statement
filed in connection with a private placement of securities of the Company
(whether for cash or in connection with an acquisition by the Company or
one of its subsidiaries).
(e) If the lead managing underwriter selected by the Company for an
Underwritten Offering for which Piggy-Back Rights are requested determines
that marketing or other factors require a limitation on the number of
shares of Common Stock to be offered and sold in such offering, then (i)
such underwriter shall provide written notice thereof to each of the
Company and the Foundation, and (ii) there shall be included in the
offering, first, all shares of Common Stock proposed by the Company to be
sold for its account (or such lesser amount as shall equal the maximum
number determined by the lead managing underwriter as aforesaid) and,
second, only that number of Registrable Securities requested to be included
in such Registration Statement by the Foundation that such lead managing
underwriter reasonably and in good faith believes will not substantially
interfere with (including, without limitation, adversely affect the pricing
of) the offering of all the shares of Common Stock that the Company desires
to sell for its own account.
(f) Nothing contained in this Section 3 shall create any liability on
the part of the Company to the Foundation if the Company for any reason
should decide not to file a Registration Statement for which Piggy-Back
Rights or Share-Rights are available or to withdraw such Registration
Statement subsequent to its filing, regardless of any action whatsoever
that the Foundation may have taken, whether as a result of the issuance by
the Company of any notice hereunder or otherwise.
(g) A request made by the Foundation pursuant to its Piggy-Back Rights
or Share-Rights to include Registrable Securities in a Registration
Statement shall not be deemed to be a Demand Registration described in
Section 2(d)(i) or Section 2(d)(ii) hereof.
Section 4. Continuing Option.
(a) At any time and from time to time after the Initial Continuing
Option Exercise Date and thereafter during the Effective Period, the
Company shall have the right, but not the obligation (the "Continuing
Option"), exercisable by providing written notice thereof (the "Continuing
Option Notice") to the Foundation, to purchase from the Foundation all or
any portion of the Registrable Securities (the "Continuing Option
Securities") at a cash price per share equal to the Continuing Option Price
(as defined below in this Section 4(a)). The Continuing Option Notice shall
state the number of Continuing Option Securities that the Company shall
purchase pursuant to the Continuing Option, the aggregate purchase price
therefor, and the closing date of the Company's purchase of the Continuing
Option Securities, which shall take place within thirty (30) days of the
date of the Continuing Option Notice. The Company shall pay for the
Continuing Option Securities that it shall purchase pursuant to the
Continuing Option at the closing thereof by wire transfer of immediately
available funds to a bank account designated by
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<PAGE>
the Foundation. At such closing, the Foundation shall deliver to the
Company a certificate or certificates representing the number of Continuing
Option Securities purchased by the Company as specified in the Continuing
Option Notice, free and clear of all liens, claims, security interests and
other encumbrances. The Company shall be entitled to receive customary
representations and warranties from the Foundation regarding such sale of
Continuing Option Securities (including representations regarding good
title to such shares, free and clear of all liens, claims, security
interests and other encumbrances). The term "Continuing Option Price", as
used herein, shall mean (i) prior to the consummation of a Demand
Registration or an offering pursuant to a Piggy-Back Request, the greater
of "A", "B" or "C", and (ii) from and after the consummation of a Demand
Registration or an offering pursuant to a Piggy-Back Request, the greater
of "A", or "B", where, for purposes of the foregoing clauses (i) and (ii),
"A" shall mean the average closing sale price per share of Common Stock on
the NYSE during the ten (10) consecutive trading days ending on the date
that the Continuing Option Notice with respect to such Continuing Option
shall have been provided, "B" shall mean the average closing sale price per
share of Common Stock on the NYSE during the ten (10) consecutive trading
days ending on the forty-fifth (45th) day prior to the date that the
Continuing Option Notice with respect to such Continuing Option shall have
been provided, and "C" shall equal the price per share received by the
Foundation in its most recent sale of Private Placement Securities pursuant
to Section 11 hereof (regardless of whether such Private Placement
Securities shall have been sold to qualified investors or to the Company).
(b) If the Company shall purchase Continuing Option Securities pursuant
to Section 4(a) hereof, it shall not, for a period of forty-five (45) days
thereafter, sell shares of Common Stock for cash in public or private
transactions (except that the Company shall be permitted, during such
period, to issue Common Stock pursuant to benefit, stock option and
dividend reinvestment plans for its directors, officers, employees and
shareholders).
Section 5. Selection of Underwriters.
(a) In connection with any Underwritten Offering made pursuant to a
Demand, the Company shall have the right to select the lead managing
underwriter and any other managing underwriter to administer the
Underwritten Offering, so long as each such underwriter shall be reasonably
satisfactory to the Foundation. Each underwriter selected by the Company
shall be deemed reasonably satisfactory to the Foundation unless the
Foundation sends a written notice of objection to the Company within five
(5) Business Days following receipt of written notice from the Company of
the selection of the underwriter.
(b) The Foundation acknowledges and agrees that Salomon Smith Barney
shall be reasonably satisfactory to the Foundation to serve as a managing
underwriter for any Underwritten Offering made pursuant to a Demand.
Section 6. Blackout Periods. If the Company determines in good faith that
the registration and distribution of Registrable Securities (or the use of the
Registration Statement or related Prospectus) resulting from a Demand received
from the Foundation would (i) materially and adversely interfere with any
previously announced business combination transaction involving the Company
pursuant to which the Company would issue, in connection with such transaction,
shares of Common Stock to some or all of the equity owners of the counter-party
to such business combination transaction, or (ii) result in the premature
disclosure of any pending financing, acquisition, corporate reorganization or
any other corporate development involving the Company or any of its
subsidiaries, and, in either such event, the Company shall promptly give the
Foundation written notice of such determination, then the Company shall be
entitled to (x) postpone the filing of the Registration Statement otherwise
required to be prepared and filed by the Company pursuant to Section 2 hereof,
or (y) elect that the effective Registration Statement not be used, in either
case for a reasonable
D-8
<PAGE>
period of time, but not to exceed one hundred twenty (120) days after the date
that the Demand was made (a "Blackout Period"). Any such written notice shall
contain a general statement of the reasons for such postponement or restriction
on use and an estimate of the anticipated delay. The Company shall promptly
notify the Foundation of the expiration or earlier termination of such Blackout
Period.
Section 7. Holdback.
(a) If (i) during the Effective Period, the Company shall file a
Registration Statement (other than a registration on Form S-4, Form S-8 or
Form S-3 (with respect to dividend reinvestment plans and similar plans) or
any successor forms thereto) with respect to any shares of its capital
stock, and (ii) upon reasonable prior notice (A) the Company (in the case
of a non-underwritten offering pursuant to such Registration Statement)
advises the Foundation in writing that a sale or distribution of
Registrable Securities would adversely affect such offering, or (B) the
managing underwriter or underwriters (in the case of an Underwritten
Offering) advise the Company in writing (in which case the Company shall
notify the Foundation) that a sale or distribution of Registrable
Securities would adversely impact such offering, then the Foundation shall,
to the extent not inconsistent with applicable law, refrain from effecting
any sale or distribution of Registrable Securities, including sales
pursuant to Rule 144, during the period commencing on the date of such
notice and continuing until the ninetieth (90th) day after the effective
date of such Registration Statement.
(b) During the thirty (30) day period commencing on the effective date
of a Registration Statement filed by the Company on behalf of the
Foundation in connection with an Underwritten Offering pursuant to a
Demand, the Company shall not effect (except pursuant to registrations on
Form S-4 or Form S-8 or Form S-3 (with respect to dividend reinvestment
plans and similar plans) or any successor forms thereto and except pursuant
to Section 2(h) hereof) any public sale or distribution of Common Stock or
of preferred stock or securities convertible into or exercisable for Common
Stock.
Section 8. Registration Procedures. If and whenever the Company shall be
required to use its best efforts to effect or cause the registration of any
Registrable Securities under the Securities Act as provided in this Agreement,
the Company shall and, with respect to Sections 8(m) and 8(n), the Foundation
shall:
(a) prepare and file with the SEC a Registration Statement with respect
to such Registrable Securities on any form for which the Company then
qualifies or that counsel for the Company shall deem appropriate, and which
form shall be available for the sale of the Registrable Securities in
accordance with the intended methods of distribution thereof, and use its
best efforts to cause such Registration Statement to become and remain
effective;
(b) prepare and file with the SEC amendments and post-effective
amendments to such Registration Statement and such amendments and
supplements to the Prospectus used in connection therewith as may be
necessary to maintain the effectiveness of such registration or as may be
required by the rules, regulations or instructions applicable to the
registration form utilized by the Company or by the Securities Act for a
Shelf Registration or otherwise necessary to keep such Registration
Statement effective for at least ninety (90) days and cause the Prospectus
as so supplemented to be filed pursuant to Rule 424 under the Securities
Act, and to otherwise comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement until the earlier of (x) such 90th day or (y) such time as all
Registrable Securities covered by such Registration Statement shall have
ceased to be Registrable Securities (it being understood that the Company
at its option may determine to maintain such effectiveness for a longer
period, whether pursuant to a Shelf Registration or otherwise); provided,
however, that a reasonable time before filing a Registration Statement or
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Prospectus, or any amendments or supplements thereto (other than reports
required to be filed by it under the Exchange Act), the Company shall
furnish to the Foundation, the managing underwriter and their respective
counsel for review and comment, copies of all documents proposed to be
filed;
(c) furnish to the Foundation and to any underwriter in connection with
an Underwritten Offering such number of conformed copies of such
Registration Statement and of each amendment and post-effective amendment
thereto (in each case including all exhibits) and such number of copies of
any Prospectus or Prospectus supplement and such other documents as the
Foundation or underwriter may reasonably request in order to facilitate the
disposition of the Registrable Securities by the Foundation or underwriter
(the Company hereby consenting to the use (subject to the limitations set
forth in Section 8(n) hereof) of the Prospectus or any amendment or
supplement thereto in connection with such disposition);
(d) use its best efforts to register or qualify such Registrable
Securities covered by such Registration Statement under such other
securities or "blue sky" laws of such jurisdictions as the Foundation shall
reasonably request, except that the Company shall not for any such purpose
be required to qualify generally to do business as a foreign corporation in
any jurisdiction where, but for the requirements of this Section 8(d), it
would not be obligated to be so qualified, to subject itself to taxation in
any such jurisdiction, or to consent to general service of process in any
such jurisdiction;
(e) notify the Foundation, at any time when a Prospectus relating
thereto is required to be delivered under the Securities Act within the
appropriate period mentioned in Section 8(b) hereof, of the Company's
becoming aware that the Prospectus included in such Registration Statement,
as then in effect, includes an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances then
existing, and, at the request of the Foundation, prepare and furnish to the
Foundation a reasonable number of copies of an amendment or supplement to
such Registration Statement or related Prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such Registrable
Securities, such Prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances then existing;
(f) notify the Foundation at any time:
(1) when the Prospectus or any Prospectus supplement or post-
effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same
has become effective;
(2) of any request by the SEC for amendments or supplements to the
Registration Statement or the Prospectus or for additional information;
(3) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or any order preventing the
use of a related Prospectus, or the initiation (or any overt threats)
of any proceedings for such purposes;
(4) of the receipt by the Company of any written notification of the
suspension of the qualification of any of the Registrable Securities
for sale in any jurisdiction or the initiation (or overt threats) of
any proceeding for that purpose; and
(5) if at any time the representations and warranties of the Company
contemplated by paragraph (i) below cease to be true and correct in all
material respects;
(g) otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC, and make available to its security holders an
earnings statement that shall satisfy the
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provisions of Section 11(a) of the Securities Act, provided that the
Company shall be deemed to have complied with this Section 8(g) if it shall
have complied with Rule 158 under the Securities Act;
(h) use its best efforts to cause all such Registrable Securities to be
listed on the NYSE, The Nasdaq Stock Market or any other national
securities exchange or automated quotation system on which the class of
Registrable Securities being registered is then listed, if such Registrable
Securities are not already so listed and if such listing is then permitted
under the rules of such exchange, and to provide a transfer agent and
registrar for such Registrable Securities covered by such Registration
Statement no later than the effective date of such Registration Statement;
(i) enter into agreements (including an underwriting agreement in the
form customarily entered into by the Company in a comparable Underwritten
Offering) and take all other appropriate and all commercially reasonable
actions in order to expedite or facilitate the disposition of such
Registrable Securities and in such connection, whether or not an
underwriting agreement shall be entered into and whether or not the
registration shall be an underwritten registration:
(i) make such representations and warranties to the Foundation and
the underwriters, if any, in form, substance and scope as are
customarily made by the Company to underwriters in comparable
Underwritten Offerings;
(ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions shall be reasonably satisfactory (in form,
scope and substance) to the managing underwriters, if any, and the
Foundation) addressed to the Foundation and the underwriters covering
the matters customarily covered in opinions requested in comparable
Underwritten Offerings by the Company;
(iii) obtain "comfort letters" and updates thereof from the
Company's independent certified public accountants addressed to the
Foundation and the underwriters, if any, such letters to be in
customary form and covering matters of the type customarily covered in
"comfort letters" by independent accountants in connection with
comparable underwritten offerings on such date or dates as may be
reasonably requested by the managing underwriter;
(iv) provide the indemnification in accordance with the provisions
and procedures of Section 11 hereof to all parties to be indemnified
pursuant to such Section 11; and
(v) deliver such documents and certificates as may be reasonably
requested by the Foundation and the managing underwriters, if any, to
evidence compliance with clause (f) above and with any customary
conditions contained in the underwriting agreement or other agreement
entered into by the Company:
(j) cooperate with the Foundation and the managing underwriter or
underwriters to facilitate, to the extent reasonable under the
circumstances, the timely preparation and delivery of certificates
representing the securities to be sold under such Registration Statement,
and enable such securities to be in such denominations and registered in
such names as the managing underwriter or underwriters, if any, or the
Foundation may request and/or in a form eligible for deposit with the
Depository Trust Company;
(k) make available to the Foundation, any underwriter participating in
any disposition pursuant to such Registration Statement, and any attorney,
accountant or other agent retained by the Foundation or underwriter
(collectively, the "Inspectors"), reasonable access to appropriate officers
of the Company and the Company's subsidiaries to ask questions and to
obtain information reasonably requested by such Inspector and all financial
and other records and other
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information, pertinent corporate documents and properties of any of the
Company and its subsidiaries and affiliates (collectively, the "Records"),
as shall be reasonably necessary to enable them to exercise their due
diligence responsibility; provided, however, that the Records that the
Company determines, in good faith, to be confidential and which it notifies
the Inspectors in writing are confidential shall not be disclosed to any
Inspector unless such Inspector signs a confidentiality agreement
reasonably satisfactory to the Company or either (i) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission of a
material fact in such Registration Statement, or (ii) the release of such
Records is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction; provided, further, that any decision regarding the
disclosure of information pursuant to subclause (i) shall be made only
after consultation with counsel for the applicable Inspectors; and
provided, further, that the Foundation agrees that it shall, promptly after
learning that disclosure of such Records is sought in a court having
jurisdiction, give notice to the Company and allow the Company, at the
Company's expense, to undertake appropriate action to prevent disclosure of
such Records;
(l) in the event of the issuance of any stop order suspending the
effectiveness of the Registration Statement or of any order suspending or
preventing the use of any related Prospectus or suspending the
qualification of any Registrable Securities included in the Registration
Statement for sale in any jurisdiction, the Company shall use all
commercially reasonable efforts promptly to obtain its withdrawal;
(m) the Foundation shall furnish the Company with such information
regarding the Foundation and pertinent to the disclosure requirements
relating to the registration and the distribution of such securities as the
Company may from time to time reasonably request in writing; and
(n) the Foundation shall, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 8(e) hereof,
forthwith discontinue disposition of Registrable Securities pursuant to the
Prospectus or Registration Statement covering such Registrable Securities
until the Foundation shall have received copies of the supplemented or
amended Prospectus contemplated by Section 8(e) hereof, and, if so directed
by the Company, the Foundation shall deliver to the Company (at the
Company's expense) all copies, other than permanent file copies then in the
Foundation's possession, of the Prospectus covering such Registrable
Securities current at the time of receipt of such notice.
Section 9. Registration Expenses. Except as otherwise provided herein, in
connection with all registrations of Registrable Securities made pursuant to a
Demand Registration, Piggy-Back Rights or Share-Rights, the Company shall pay
all Registration Expenses.
Section 10. Rule 144. The Company shall take such measures and file such
information, documents and reports as shall be required by the SEC as a
condition to the availability of Rule 144. The Foundation shall not be
permitted to sell any Registrable Securities pursuant to Rule 144 until such
time as the Foundation shall have sold Registrable Securities to non-Affiliates
of the Foundation and shall have received in exchange therefor aggregate
proceeds of at least Fifty Million Dollars ($50,000,000). Thereafter, the
Foundation shall not be permitted to sell any Registrable Securities pursuant
to Rule 144 if (i) such sale shall be to any Person that Beneficially Owns any
shares of Common Stock in excess of the Ownership Limit applicable to such
Person; (ii) such sale shall cause any Person to Beneficially Own any shares of
Common Stock in excess of the Ownership Limit applicable to such Person; or
(iii) such sale would violate the terms of this Agreement, the Voting Trust and
Divestiture Agreement, the Certificate of Incorporation or the Bylaws.
Section 11. Private Placements. Subject to the terms of this Agreement, the
Voting Trust and Divestiture Agreement, the Certificate of Incorporation, the
Bylaws and the right of first refusal
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in favor of the Company described below in this Section 11, the Foundation
shall have the right at all times to sell shares of Registrable Securities in
one or more private placements (the "Private Placement Securities") to
qualified investors provided that the Foundation provides written notice to the
Company at least forty-five (45) Business Days prior to making any such
proposed private placement advising the Company of the terms and conditions of
such proposed private placement (the "Private Placement Notice"), and provided
further that the consummation of such proposed private placement would not
cause any Person to Beneficially Own any shares of Common Stock in excess of
the Ownership Limit applicable to such Person. The Private Placement Notice
shall contain the identity of the proposed private placement purchaser, the
price at which the Private Placement Securities shall be sold to the proposed
private placement purchaser, the number of Private Placement Securities to be
sold to the proposed private placement purchaser, and all other material terms
and conditions of the proposed private placement. Following its receipt of the
Private Placement Notice, the Company shall have the right, but not the
obligation (the "Private Placement Option"), exercisable by providing written
notice thereof (the "Private Placement Option Notice") to the Foundation within
thirty (30) Business Days, to purchase all (but not less than all) of the
Private Placement Securities on the same terms and conditions contained in the
Private Placement Notice. The Private Placement Option Notice shall state the
number of Private Placement Securities that the Company shall purchase pursuant
to the Private Placement Option, the aggregate purchase price therefor, and the
closing date of the Company's purchase of the Private Placement Securities,
which shall take place no later than sixty (60) days after the date of the
Private Placement Option Notice. The Company shall pay for the Private
Placement Securities that it shall purchase pursuant to the Private Placement
Option at the closing thereof by wire transfer of immediately available funds
to a bank account designated by the Foundation. At such closing, the Foundation
shall deliver to the Company a certificate or certificates representing the
number of Private Placement Securities, free and clear of all liens, claims,
security interests and other encumbrances. The Company shall be entitled to
receive customary representations and warranties from the Foundation regarding
such sale of Private Placement Securities (including representations regarding
good title to such shares free and clear of all liens, claims, security
interests and other encumbrances). If the Company shall elect not to exercise
the Private Placement Option, the Foundation may sell the Private Placement
Securities identified in the Private Placement Notice at the time and subject
to all of the terms and the conditions contained in the Private Placement
Notice.
Section 12. Covenants of Foundation. The Foundation hereby covenants and
agrees that it shall not sell any Registrable Securities in violation of the
Securities Act and this Agreement, the Voting Trust and Divestiture Agreement,
the Certificate of Incorporation and the Bylaws.
Section 13. Indemnification; Contribution.
(a) The Company shall indemnify and hold harmless the Foundation, its
officers and directors, and any agent or investment adviser thereof against
all losses, claims, damages, liabilities and expenses (including reasonable
attorneys' fees and expenses) incurred by such party pursuant to any actual
or threatened action, suit, proceeding or investigation arising out of or
based upon (i) any untrue or alleged untrue statement of material fact
contained in any Registration Statement, any Prospectus or preliminary
Prospectus, or any amendment or supplement to any of the foregoing, or (ii)
any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein (in the
case of a Prospectus or a preliminary Prospectus, in light of the
circumstances then existing) not misleading, except in each case insofar as
the same arise out of or are based upon, any such untrue statement or
omission made in reliance on and in conformity with information with
respect to the Foundation furnished to the Company by the Foundation or its
counsel expressly for use therein. In connection with an Underwritten
Offering, the Company shall indemnify the
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underwriters thereof, their officers, directors and agents and each Person
who controls such underwriters (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) to the same extent as
provided above with respect to the indemnification of the Foundation.
Notwithstanding the foregoing provisions of this Section 11(a), the Company
shall not be liable to the Foundation, any Person who participates as an
underwriter in the offering or sale of Registrable Securities or any other
Person, if any, who controls any such underwriter (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act), under
this Section 11 for any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense that arises out of an untrue
statement or alleged untrue statement or omission or alleged omission in
the preliminary Prospectus if the Foundation, or other Person on behalf of
the Foundation, failed to send or deliver a copy of a final Prospectus to
the Person asserting the claim prior to the written confirmation of the
sale of the Registrable Securities to such Person and such statement or
omission was corrected in such final Prospectus and the Company had
previously and timely furnished sufficient copies thereof to the Foundation
in accordance with this Agreement.
(b) In connection with any registration of Registrable Securities
pursuant to this Agreement, the Foundation shall furnish to the Company and
any underwriter in writing such information, including the name, address
and the amount of Registrable Securities held by the Foundation, as the
Company or any underwriter reasonably requests for use in the Registration
Statement relating to such registration or the related Prospectus and
agrees to indemnify and hold harmless the Company, any underwriter, each
such party's officers and directors and each Person who controls each such
party (within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act), and any agent or investment adviser thereof against
all losses, claims, damages, liabilities and expenses (including reasonable
attorneys' fees and expenses) incurred by each such party pursuant to any
actual or threatened action, suit, proceeding or investigation arising out
of or based upon (i) any untrue or alleged untrue statement of material
fact contained in any Registration Statement, any Prospectus or preliminary
Prospectus, or any amendment or supplement to any of the foregoing, or (ii)
any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein (in the
case of a Prospectus or a preliminary Prospectus, in light of the
circumstances then existing) not misleading, but only to the extent that
any such untrue statement or omission is made in reliance on and in
conformity with information with respect to the Foundation furnished to the
Company or any underwriter by the Foundation or its counsel specifically
for inclusion therein. Notwithstanding the foregoing provisions of this
Section 13(b), the Foundation shall not be liable to the Company, any
underwriter, each such parties' officers or directors, any other Person who
controls any such party (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act), or any agent or investment advisor
thereof, if the Foundation had provided information curing any untrue
statement or omission in time reasonably sufficient to prevent the
inclusion of such untrue statement or omission in the Registration
Statement.
(c) Any Person entitled to indemnification hereunder agrees to give
prompt written notice to the indemnifying party after the receipt by such
indemnified party of any written notice of the commencement of any action,
suit, proceeding or investigation or threat thereof made in writing for
which such indemnified party may claim indemnification or contribution
pursuant to this Section 11 (provided that failure to give such
notification shall not affect the obligations of the indemnifying party
pursuant to this Section 11 except to the extent the indemnifying party
shall have been actually prejudiced as a result of such failure). In case
any such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party (who shall
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<PAGE>
not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under this
Section 11 for any legal expenses of other counsel or any other expenses,
in each case subsequently incurred by such indemnified party, in connection
with the defense thereof other than reasonable costs of investigation.
Notwithstanding the foregoing, if (i) the indemnifying party shall not have
employed counsel reasonably satisfactory to such indemnified party to take
charge of the defense of such action within a reasonable time after notice
of commencement of such action (so long as such failure to employ counsel
is not the result of an unreasonable determination by such indemnified
party that counsel selected pursuant to the immediately preceding sentence
is unsatisfactory) or if the indemnifying party shall not have demonstrated
to the reasonable satisfaction of the indemnified party its ability to
finance such defense, or (ii) the actual or potential defendants in, or
targets of, any such action include both the indemnifying party and such
indemnified party and such indemnified party shall have reasonably
concluded that there may be legal defenses available to it which are
different from or additional to those available to the indemnifying party
which, if the indemnifying party and such indemnified party were to be
represented by the same counsel, could result in a conflict of interest for
such counsel or materially prejudice the prosecution of the defenses
available to such indemnified party, then such indemnified party shall have
the right to employ separate counsel, in which case the fees and expenses
of one counsel or firm of counsel (plus one local or regulatory counsel or
firm of counsel) selected by a majority in interest of the indemnified
parties shall be borne by the indemnifying party and the fees and expenses
of all other counsel retained by the indemnified parties shall be paid by
the indemnified parties. No indemnified party shall consent to entry of any
judgment or enter into any settlement without the consent (which consent,
in the case of an action, suit, claim or proceeding exclusively seeking
monetary relief, shall not be unreasonably withheld) of each indemnifying
party.
(d) If the indemnification from the indemnifying party provided for in
this Section 11 is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages, liabilities or expenses referred to
therein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities
and expenses in such proportion as is appropriate to reflect the relative
fault of the indemnifying party and indemnified party in connection with
the actions which resulted in such losses, claims, damages, liabilities and
expenses, as well as any other relevant equitable considerations. The
relative fault of such indemnifying party and indemnified party shall be
determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact, has been
made by, or relates to information supplied by, such indemnifying party or
indemnified party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 11(c) hereof, any legal and
other fees and expenses reasonably incurred by such indemnified party in
connection with any investigation or proceeding. The parties hereto agree
that it would not be just and equitable if contribution pursuant to this
Section 11(d) were determined by pro rata allocation or by any other method
of allocation which does not take account of the equitable considerations
referred to above in this Section 11(d). Notwithstanding the provisions of
this Section 11(d), no underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Registrable Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission and the Foundation
shall not be required to
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<PAGE>
contribute any amount in excess of the amount by which the total price at
which the Registrable Securities of the Foundation were offered to the
public exceeds the amount of any damages which the Foundation has otherwise
been required to pay by reason of such untrue or alleged untrue statement
or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any Person who was not guilty
of such fraudulent misrepresentation. If indemnification is available under
this Section 11, the indemnifying parties shall indemnify each indemnified
party to the fullest extent provided in Section 11(a) or (b) hereof, as the
case may be, without regard to the relative fault of such indemnifying
parties or indemnified party or any other equitable consideration provided
for in this Section 11(d).
(e) The provisions of this Section 11 shall be in addition to any
liability which any party may have to any other party and shall survive any
termination of this Agreement. The indemnification provided by this Section
11 shall remain in full force and effect irrespective of any investigation
made by or on behalf of an indemnified party, so long as such indemnified
party is not guilty of acting in a fraudulent, reckless or grossly
negligent manner.
Section 14. Participation in Underwritten Offerings. The Foundation may not
participate in any Underwritten Offering hereunder unless the Foundation (a) in
the case of a registration pursuant to Section 3 hereof, agrees to sell the
Foundation's securities on the basis provided in any underwriting arrangements
approved by the Company in its reasonable discretion, and (b) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements.
Section 15. Injunctions. Each party acknowledges and agrees that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. Therefore, each party shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically the terms and provisions hereof in any court having
jurisdiction, such remedy being in addition to any other remedy to which such
party may be entitled at law or in equity.
Section 16. Amendments and Waivers. No amendment, modification, supplement,
termination, consent or waiver of any provision of this Agreement, nor consent
to any departure herefrom, shall in any event be effective unless the same is
in writing and is signed by the party against whom enforcement of the same is
sought. Any waiver of any provision of this Agreement and any consent to any
departure from the terms of any provision of this Agreement shall be effective
only in the specific instance and for the specific purpose for which given.
Section 17. Notices. All notices, consents, requests, demands and other
communications hereunder must be in writing, and shall be deemed to have been
duly given or made: (i) when delivered in person; (ii) three (3) days after
deposited in the United States mail, first class postage prepaid; (iii) in the
case of telegraph or overnight courier services, one (1) Business Day after
delivery to the telegraph company or overnight courier service with payment
provided; or (iv) in the case of telex or telecopy or fax, when sent,
verification received; in each case addressed as follows:
if to the Company:
John A. O'Rourke
Chairman, President and Chief Executive Officer
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, Missouri 63103
Fax: (314) 923-8958
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with copy to:
John J. Riffle, Esq.
Lewis, Rice & Fingersh, L.C.
500 North Broadway, Suite 2000
St. Louis, Missouri 63102
Fax: (314) 444-7788
if to the Foundation: [to be determined by Foundation prior to
signing]
_________________________
_________________________
_________________________
with copy to: [to be determined by Foundation prior to signing]
_________________________
_________________________
_________________________
Section 18. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors of each of the parties. This
Agreement and the provisions of this Agreement that are for the benefit of the
Foundation shall not be assignable by the Foundation to any Person and any such
purported assignment shall be null and void.
Section 19. Counterparts. This Agreement may be executed in one (1) or more
counterparts, all of which shall be considered one (1) and the same agreement
and shall become effective when one (1) or more counterparts have been signed
by each of the parties and delivered to the other parties.
Section 20. Descriptive Headings. The descriptive headings used herein are
inserted for convenience of reference only and are not intended to be part of
or to affect the meaning or interpretation of this Agreement.
Section 21. Governing Law. This Agreement and the rights and obligations of
the parties hereunder shall be governed by and construed in accordance with the
laws of the State of Delaware, without regard to choice or conflict of laws
rules.
Section 22. Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances,
shall be held invalid, illegal or unenforceable in any respect for any reason,
the validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any
way impaired thereby, it being intended that all remaining provisions contained
herein shall not be in any way impaired thereby.
Section 23. Entire Agreement. This Agreement, including any exhibits or
attachments referred to herein, is intended by the parties as a final
expression and a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter hereof.
There are no restrictions, promises, warranties or undertakings with respect to
the subject matter hereof, other than those set forth or referred to herein.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
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Section 24. Further Actions; Best Efforts. The Foundation shall use its best
efforts to take or cause to be taken all appropriate action and to do or cause
to be done all things reasonably necessary, proper or advisable under
applicable law and regulations to assist the Company in the performance of its
obligations hereunder, including, without limitation, the preparation and
filing of any Registration Statements pursuant to any Demand.
Section 25. Fair Construction. This Agreement is the product of negotiation
and shall be deemed to have been drafted by all of the parties. It shall be
construed in accordance with the fair meaning of its terms and its language
shall not be strictly construed against, nor shall ambiguities be resolved
against, any particular party.
[signatures appear on next page]
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<PAGE>
In Witness Whereof, the parties have executed this Agreement as of the date
first set forth above.
Rightchoice Managed Care, Inc., a
Delaware corporation
_____________________________________
The Missouri Foundation For Health,
a Missouri nonprofit corporation
_____________________________________
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Appendix E
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FORM OF
INDEMNIFICATION AGREEMENT
by and between
RIGHTCHOICE MANAGED CARE, INC.,
a Delaware corporation
and
THE MISSOURI FOUNDATION FOR HEALTH,
a Missouri nonprofit public benefit corporation
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
FORM OF
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") is made and entered into
this day of , 2000, by and between RightCHOICE Managed Care, Inc., a
Delaware corporation and the successor by merger to Blue Cross and Blue Shield
of Missouri (the "Company"), and The Missouri Foundation For Health, a Missouri
non-profit corporation (the "Foundation").
Recitals
A. In 1994, Blue Cross and Blue Shield of Missouri, a Missouri non-profit
health services corporation ("BCBSMo") consummated a series of transactions
(the "1994 Reorganization") pursuant to which certain assets and liabilities of
BCBSMo were transferred to a newly formed for-profit subsidiary, RightCHOICE
Managed Care, Inc., a Missouri corporation ("Old RIT"), and a minority interest
in Old RIT was sold to the public.
B. Pursuant to the terms of a certain Agreement and Plan of Reorganization
(the "Reorganization Agreement"), dated as of March 14, 2000, by and among
BCBSMo, Old RIT, the Foundation and the Company, the Foundation has acquired,
contemporaneous with the execution of this Agreement, 14,962,500 shares of
common stock, par value $.01 per share, of the Company, representing
approximately 80.1% of the issued and outstanding shares of common stock of the
Company.
C. In contemplation of the transactions provided for under the
Reorganization Agreement, BCBSMo (or the appropriate party) [received]
[requested] a private letter ruling from the Internal Revenue Service (the
"IRS"), dated , 2000 (the "IRS Ruling"), that, among other things, (i) gain
or loss will not be recognized by BCBSMo, Old RIT, HALIC (as defined in the
Reorganization Agreement), the Company, the Foundation or the public
shareholders of both Old RIT and the Company for federal income tax purposes
pursuant to the Transfer and Assumption Transaction (as defined in the
Reorganization Agreement); (ii) the Charter Conversion Transaction (as defined
in the Reorganization Agreement) will constitute a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code") and will
not result in the recognition of gain or loss by BCBSMo, New BCBSMo (as defined
in the Reorganization Agreement) or the Foundation for federal income tax
purposes, (iii) the Reincorporation Merger Transaction (as defined in the
Reorganization Agreement) will qualify as a reorganization under Section
368(a)(1)(F) of the Code and no gain or loss will be recognized by New BCBSMo
or the Company for federal income tax purposes, (iv) the RIT/New RIT Merger
Transaction (as defined in the Reorganization Agreement) will be both a
liquidation under Sections 332 and 337 of the Code and a reorganization under
Section 368(a)(1)(A) of the Code and no gain or loss will be recognized by Old
RIT, the Company, the shareholders of both Old RIT and the Company, or the
Foundation for federal income tax purposes, and (v) no gain will be recognized
by BCBSMo, New BCBSMo, Old RIT, the Company, the shareholders of any of the
foregoing entities, or the Foundation under Section 337(b)(2) or (d) of the
Code. The various transactions contemplated by the Reorganization Agreement are
hereinafter referred to collectively as the "Current Reorganization."
D. In order to induce Old RIT and the Company to enter into the
Reorganization Agreement and agree to succeed to certain liabilities of BCBSMo
as a result of the Current Reorganization, the Foundation has agreed to enter
into this Agreement to provide indemnification to certain entities and
individuals against liabilities that the parties have determined should be
assumed by the Foundation as the successor to and beneficiary of the principal
assets of BCBSMo, including certain tax liabilities that may arise as a result
of the consummation of the Current Reorganization.
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Agreement
In consideration of the foregoing and the covenants and agreements set forth
herein and in the Reorganization Agreement, and intending to be legally bound,
the parties hereto agree as follows:
Section 1. Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
(a) "1994 Reorganization" has the meaning specified in Recital A hereof.
(b) "BCBSMo" has the meaning set forth in the Preamble hereof.
(c) "Charter Conversion Transaction" has the meaning provided therefor
in the Reorganization Agreement.
(d) "Company" has the meaning set forth in the Preamble hereof.
(e) "Conversion Claims" means all claims, demands, rights, liabilities,
damages, losses, and causes of action, direct or indirect, or derivative,
individual or representative, of every nature and description whatsoever,
that have been asserted or may in the future be asserted (i) in the Sarkis
Litigation, or (ii) both arising out of or relating to either the 1994
Reorganization or the Current Reorganization, and arising out of or
relating to either the status of BCBSMo as a mutual benefit or public
benefit corporation under Missouri law or the ownership, beneficial
ownership, or rights to the assets, surplus or equity of BCBSMo or any
subsidiary or affiliate of BCBSMo.
(f) "Current Reorganization" has the meaning specified in Recital C
hereof.
(g) "Current Reorganization Claims" means any and all claims, demands,
rights, liabilities, damages, losses, and causes of action, direct or
indirect, or derivative, individual or representative, of every nature and
description whatsoever, arising out of or relating to the Current
Reorganization.
(h) "Foundation" has the meaning set forth in the Preamble hereof.
(i) "Income Tax Indemnified Parties" means the Company, all of its
subsidiaries and affiliates, and all of the directors, officers, agents and
employees of the Company, or any of its subsidiaries or affiliates.
(j) "Indemnified Parties" means each and every Income Tax Indemnified
Party, Section 3(a) Indemnified Party and Section 3(c) Indemnified Party.
(k) "IRS Ruling" has the meaning set forth in Recital C hereof.
(l) "Old RIT" has the meaning set forth in Recital A hereof.
(m) "Reincorporation Merger Transaction" as the meaning provided
therefor in the Reorganization Agreement.
(n) "Reorganization Agreement" has the meaning set forth in Recital B
hereof.
(o) "RIT/New RIT Merger Transaction" has the meaning provided therefor
in the Reorganization Agreement.
(p) "Sarkis Litigation" means, collectively, the private putative class
action pending in the Circuit Court for the City of St. Louis styled
Anthony J. Sarkis, Sr., and James Hacking v. Roy R. Heimberger, et al., No.
962-00938, and the action pending in the Circuit Court of Cole County
styled Blue Cross and Blue Shield of Missouri v. Jeremiah W. "Jay" Nixon,
Cause No. CV197-1558CC.
(q) "Section 3 Indemnified Parties" means, collectively, the Section
3(a) Indemnified Parties and the Section 3(c) Indemnified Parties.
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(r) "Section 3(a) Indemnified Parties" means each and every past and
present director, officer, agent, employee and independent contractor of
BCBSMo or of any subsidiary of BCBSMo. For purposes of this definition, Old
RIT and its subsidiaries shall not be deemed subsidiaries of BCBSMo.
(s) "Section 3(c) Indemnified Parties" means the Company, all of its
subsidiaries and affiliates, and each and every past and present director,
officer, agent, employee and independent contractor of the Company or of
any of its subsidiaries or affiliates.
(t) "Transfer and Assumption Transaction" has the meaning provided
therefor in the Reorganization Agreement.
Section 2. Income Tax Indemnity.
(a) The Foundation shall unconditionally, irrevocably and absolutely
indemnify, defend and hold harmless the Income Tax Indemnified Parties from
and against the net amount of Federal, state and local income tax
liabilities (together with any penalties, interest, fines, additions to
tax, costs and expenses, including attorneys' and other professional fees
incurred in connection with the defense, settlement or compromise thereof),
including those tax liabilities, if any, resulting from the receipt of
indemnity payments by the Company pursuant to this Agreement (the "Tax
Indemnification Amount"), incurred by any of the Income Tax Indemnified
Parties, as a result of a determination by the IRS or other appropriate
state or local authority that the Transfer and Assumption Transaction, the
Charter Conversion Transaction, the Reincorporation Merger Transaction, or
the RIT/New RIT Merger Transaction constitutes a taxable transaction and/or
result in the recognition of gain for Federal income tax purposes under any
section of the Code, including under section 337(d) of the Code (each of
such transactions is referred to herein as a "Tax Indemnification
Transaction"), or for state or local income tax purposes under any
comparable provisions of state or local income tax laws. The Tax
Indemnification Amount shall be calculated as if the Tax Indemnification
Transaction(s) which cause(s) a Tax Indemnification Amount to be incurred
by an Income Tax Indemnified Party creates the only item of taxable income
(determined without deduction for expenses incurred in the year in issue)
of the Income Tax Indemnified Party for the year in issue and is taxable at
the highest maximum applicable rate. The Tax Indemnification Amount shall
not be reduced by carryovers from prior years of credits, net operating
losses or similar tax benefits. Notwithstanding the foregoing, the
Foundation shall have no obligation to indemnify any of the Income Tax
Indemnified Parties as set forth in this Section 2(a) if in connection with
the imposition of tax liability under any section of the Code, including
under section 337(d) of the Code, or under state or local tax laws, it is
determined that such imposition is a result of the Reorganization not being
consummated in accordance with the terms of the Reorganization Agreement.
(b) An Income Tax Indemnified Party shall promptly notify the Foundation
in writing of any assertion by the IRS or any appropriate state or local
authority of a tax liability for which such Income Tax Indemnified Party
may be indemnified under this Agreement (provided that failure to give such
notification shall not affect the obligations of the Foundation pursuant to
this Section 2 except to the extent the Foundation shall have been actually
prejudiced as a result of such failure), and the Foundation shall have the
opportunity, at the Foundation's sole expense, to participate jointly with
the Income Tax Indemnified Party in contesting or settling any such
asserted tax liability. The Foundation shall have thirty days following the
receipt of such notice from an Income Tax Indemnified Party to notify the
Income Tax Indemnified Party of its election to participate in contesting
or settling the tax liability. If the Foundation shall elect to participate
as provided in the preceding sentence, no decision (procedural or
substantive) shall be made unless and until discussions have been held
between the Income Tax Indemnified Party and the Foundation regarding same;
provided, however, the Income Tax Indemnified Party shall have the primary
responsibility for determining the manner in which the tax liability shall
be contested or settled. Each proposed settlement that the Income Tax
Indemnified Party desires to
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accept and that could result in a payment by the Foundation under this
Section 2 shall be submitted to the Foundation by the Income Tax
Indemnified Party for the Foundation's prior approval. The Foundation shall
have ten days following the date of submission of a proposed settlement to
approve or disapprove of such settlement. If no approval or disapproval
shall have been received by the Income Tax Indemnified Party within such
ten day period, then the Foundation shall be deemed to have approved the
proposed settlement. The settlement or payment of any claim which would
result in a payment by the Foundation under this Section 2 without the
Foundation's prior approval as set forth in this Section 2(b) shall
constitute a waiver of the right to indemnity. The Foundation shall not
unreasonably withhold its approval of any settlement proposal.
(c) If the Foundation does not approve a proposed settlement submitted
to it by an Income Tax Indemnified Party, the representatives of the Income
Tax Indemnified Party and the Foundation having first-hand knowledge of the
dispute(s) shall endeavor to resolve the dispute through good faith
discussions, such discussions to take place in a timely fashion so as not
to permit the proposed settlement to expire. If the good faith discussions
to take place pursuant to the preceding sentence of this Section 2(c) do
not produce an agreement within fifteen (15) days of the date the proposed
settlement is disapproved or deemed disapproved, the matter may be
submitted to binding arbitration by written request of either the Income
Tax Indemnified Party or the Foundation, as provided herein. All
arbitrations will be conducted in St. Louis, Missouri, or at another
location mutually approved by the parties, pursuant to the Commercial
Arbitration Rules of the American Arbitration Association, except as
otherwise provided herein. The arbitrator will be the then current
president of the St. Louis Chapter of the American Institute of Certified
Public Accountants or his/her designee and the decision of the arbitrator
shall be final and binding on all parties thereto. All arbitrations will be
undertaken pursuant to the Federal Arbitration Act, where applicable, and
the decision of the arbitrator is enforceable in any court of competent
jurisdiction. The arbitrator is directed by this Agreement to conduct the
hearing and render a decision within a time period so as not to permit the
proposed settlement under dispute to expire. Each party will pay its own
fees and expenses in connection with the arbitration and the nonprevailing
party shall pay the fees and expenses of the arbitrator.
Section 3. Nontax Indemnity.
(a) Subject to the limitations in Section 3(b) below, the Foundation
shall unconditionally, irrevocably and absolutely indemnify, defend and
hold harmless the Section 3(a) Indemnified Parties from and against (i)
Current Reorganization Claims whenever they accrue to the same extent that
BCBSMo was required to provide indemnity against such Claims to the Section
3(a) Indemnified Parties under its Articles of Incorporation and Bylaws as
in effect on April 20, 1998, and (ii) Conversion Claims. The foregoing
indemnity shall include all attorneys' fees and costs incurred in defending
or responding to any claim covered by the indemnity.
(b) The obligations of the Foundation to provide indemnity to the
Section 3(a) Indemnified Parties under Section 3(a) above shall be limited
as follows:
(i) The Foundation shall have no obligation to indemnify any of the
Section 3(a) Indemnified Parties under this Agreement from or on
account of any conduct that shall be finally adjudged by a court of
competent jurisdiction to have been knowingly fraudulent or
deliberately dishonest or willful misconduct;
(ii) The Foundation shall have no obligation under this Agreement to
indemnify Section 3(a) Indemnified Parties against claims asserted
against them by the Company; and
(iii) The Foundation shall have no obligation under this Agreement
to indemnify lawyers, accountants, or other professionals engaged as
independent contractors against claims arising out of opinions rendered
or advice given by them in connection with the Current Reorganization.
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(c) The Foundation shall unconditionally, irrevocably and absolutely
indemnify, defend and hold harmless the Section 3(c) Indemnified Parties
from and against (i) Conversion Claims, and (ii) any claim or demand
asserted by any of the Section 3(a) Indemnified Parties seeking indemnity
from any Section 3(c) Indemnified Party for any of the matters for which
the Foundation is obligated to provide such indemnity under Section 3(a)
above.
(d) The obligations of the Foundation to provide indemnity to the
Section 3(c) Indemnified Parties under Section 3(c) above shall be limited
as follows:
(i) the Foundation shall have no obligation to indemnify any of the
Section 3(c) Indemnified Parties under this Agreement from or on
account of any conduct that shall be finally adjudged by a court of
competent jurisdiction to have been knowingly fraudulent or
deliberately dishonest or willful misconduct; and
(ii) the Foundation shall have no obligation under this Agreement to
indemnify lawyers, accountants, or other professionals engaged as
independent contractors against Conversion Claims.
(e) Any Section 3 Indemnified Party entitled to indemnification under
this Section 3 agrees to give prompt written notice to the Foundation after
the receipt by such Section 3 Indemnified Party of any written notice of
the commencement of any action, suit, proceeding or investigation or threat
thereof made in writing for which such Section 3 Indemnified Party may
claim indemnification or contribution pursuant to this Section 3 (provided
that failure to give such notification shall not affect the obligations of
the Foundation pursuant to this Section 3 except to the extent the
Foundation shall have been actually prejudiced as a result of such
failure). In case any such action shall be brought against any Section 3
Indemnified Party and it shall notify the Foundation of the commencement
thereof, the Foundation shall be entitled to participate therein and, to
the extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such Section 3 Indemnified Party (who shall not, except
with the consent of the Section 3 Indemnified Party be counsel to the
Foundation), and after notice from the Foundation to such Section 3
Indemnified Party of its election so to assume the defense thereof, the
Foundation shall not be liable to such Section 3 Indemnified Party under
this Section 3 for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such Section 3 Indemnified
Party, in connection with the defense thereof other than reasonable costs
of investigation. Notwithstanding the foregoing, if (i) the Foundation
shall not have employed counsel reasonably satisfactory to such Section 3
Indemnified Party to take charge of the defense of such action within a
reasonable time after notice of commencement of such action (so long as
such failure to employ counsel is not the result of an unreasonable
determination by such Section 3 Indemnified Party that counsel selected
pursuant to the immediately preceding sentence is unsatisfactory), (ii) the
actual or potential defendants in, or targets of, any such action include
both the Foundation and such Section 3 Indemnified Party and such Section 3
Indemnified Party shall have reasonably concluded that there may be legal
defenses available to it which are different from or additional to those
available to the Foundation which, if the Foundation and such Section 3
Indemnified Party were to be represented by the same counsel, could result
in a conflict of interest for such counsel or materially prejudice the
prosecution of the defenses available to such Section 3 Indemnified Party,
or (iii) the Foundation is unable to demonstrate to the reasonable
satisfaction of the Section 3(a) Indemnified Party that it has sufficient
financial resources to fund the defense, then such Section 3 Indemnified
Party shall have the right to employ separate counsel reasonably
satisfactory to the Foundation, in which case the fees and expenses of one
counsel or firm of counsel (plus one local or regulatory counsel or firm of
counsel) selected by a majority in interest of the Section 3 Indemnified
Parties shall be borne by the Foundation and the fees and expenses of all
other counsel retained by the Section 3 Indemnified Party shall be paid by
the Section 3 Indemnified Party. No Section 3 Indemnified
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Party shall consent to entry of any judgment or enter into any settlement
without the consent (which consent, in the case of an action, suit, claim
or proceeding exclusively seeking monetary relief, shall not be
unreasonably withheld) of the Foundation.
(f) In determining the amount of the obligations of the Foundation to a
Section 3 Indemnified Party under this Section 3, net amounts paid to or
recovered by a Section 3 Indemnified Party under third party insurance
policies (excluding self-insurance), shall reduce the amount payable by the
Foundation to such Section 3 Indemnified Party under this Section 3 (and
the Section 3 Indemnified Parties shall use reasonable efforts to file and
support claims therefor short of litigation), as shall the actual net tax
effect of damages and other amounts paid by a Section 3 Indemnified Party
seeking indemnity therefor on the tax liability of the Section 3
Indemnified Party. Notwithstanding anything to the contrary contained in
the charter documents of the Company, the Reorganization Agreement, or any
other agreement to which the Company is a party, the Foundation
acknowledges and agrees that, as between the Company and the Foundation,
the Company shall have no obligation, directly or indirectly, to indemnify
any of the Section 3 Indemnified Parties against any of the matters for
which Section 3 Indemnified Parties shall be entitled to seek indemnity
from the Foundation hereunder, and any amounts which the Company shall be
obligated to pay in such regard (either directly or indirectly through its
subsidiaries) shall be reimbursed to the Company by the Foundation pursuant
to the indemnification obligations of the Foundation hereunder. The
Foundation further agrees that it shall not have any right to recover from
the Company or any other Section 3 Indemnified Party for any amounts paid
under this Section 3, and shall not file any claim against the Company or
any other Section 3 Indemnified Party seeking to recover any amounts
properly paid under this Section 3.
Section 4. D&O Liability Insurance. Under the Reorganization Agreement, the
Company is required, for a period of six years following the closing of the
Reorganization, to cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by BCBSMo (provided
that the Company may substitute therefor comparable coverage from companies
reasonably acceptable to the Foundation) as in effect on April 20, 1998
covering the persons who are at that time covered by such insurance policies
with respect to acts and omissions occurring prior to and including the closing
of the Current Reorganization. The Foundation shall reimburse the Company
promptly upon request for the premiums paid by the Company to maintain such
policies during such six year period. Such policies shall require the insurer
to notify the Foundation at least thirty (30) days prior to cancellation. The
Foundation shall have the right, but not the obligation, to pay the premiums
necessary to maintain such policies in force and effect if the Company fails to
do so, in which event the Company shall reimburse the Foundation promptly upon
request for any penalties or interest attributable to the late premium payment.
In the event the Company fails to maintain policies of directors' and officers'
liability insurance as required under this Section 4, the Foundation shall have
no obligation to provide indemnity against damages or losses that would have
been covered by such insurance policies if they were maintained in force and
effect.
Section 5. Net Worth. The Foundation shall maintain a net worth (computed in
accordance with generally accepted accounting practices, applied on a
consistent basis, except that the Company's common stock shares shall be valued
at the end of each calendar quarter on the basis of the average closing price
on the New York Stock Exchange for the last ten trading days of the calendar
quarter) of not less than $[insert estimated potential tax liability based upon
difference between tax basis of RIT stock owned by BCBSMo and market price on
date Reorganization closes] for the six years following the filing of the
BCBSMo Federal Income Tax Return for the year in which the Current
Reorganization shall have been consummated. With the prior written consent of
the Company, the Foundation may secure its obligations hereunder through one or
more alternative means that may be proposed by the Foundation from time to
time. The Company shall not
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unreasonably withhold its consent to any proposed alternative that leaves the
Company in no worse position to enforce the obligations of the Foundation
hereunder than a minimum net worth covenant.
Section 6. Further Agreements. Until this Agreement terminates as provided
in Section 7 hereof, the Foundation shall (i) maintain its status as a tax-
exempt organization under section 501(c)(4) of the Code, and (ii) not take any
action or refrain from taking any action that would cause it to qualify as a
"private foundation" as defined under section 509(a) of the Code. No party to
this Agreement shall take any position inconsistent with the IRS Ruling.
Section 7. Termination. This Agreement shall automatically terminate on the
date on which the last to expire of the applicable statutes of limitations
relating to the matters for which the Foundation has agreed to indemnify any
Indemnified Party under Sections 2 and 3 of this Agreement (including the
period during which any applicable statute of limitations may toll or be
extended in the event a controversy arises to which an indemnity relates) shall
have expired.
Section 8. No Setoff. No payment required to be made pursuant to this
Agreement shall be subject to any right of setoff, counterclaim, defense,
abatement, suspension, deferment or reduction on an unrelated claim, provided
that the Foundation may setoff against amounts due hereunder the amount of any
undisputed claim against the payee and the amount of any claim against the
payee that has been reduced to a final judgment.
Section 9. Amendments. Neither this Agreement nor any term hereof may be
changed, waived, discharged or terminated orally or in writing, except that any
term of this Agreement may be amended by a writing signed by each of the
parties hereto, and the observance of any such term may be waived (either
generally or in a particular instance and either retroactively or
prospectively) by a writing signed by the party against whom such waiver is to
be asserted.
Section 10. Notices. All notices and other communications provided for or
permitted hereunder shall be made in accordance with the notice provisions of
the Reorganization Agreement.
Section 11. Successors and Assigns. This Agreement (or any right or
obligation hereunder) may not be assigned by any party without the prior
written consent of the other party, except that the Company may assign its
rights and obligations under this Agreement, whether by a writing or operation
of law, to a successor to all or substantially all of its business without such
consent, in which event this Agreement shall inure to the benefit of, and be
binding upon, the successor.
Section 12. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Missouri applicable to agreements
made and to be performed wholly within such state.
Section 13. Waiver, Remedies. No delay on the part of any party hereto or
any Indemnified Party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any
party hereto or any Indemnified Party of any right, power or privilege
hereunder operate as a waiver of any other right, power, or privilege
hereunder, nor shall any single or partial exercise of any right, power or
privilege hereunder, preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder. The waiver or
consent (whether express or implied) by any party or any Indemnified Party of
the breach of any term or condition of this Agreement shall not prejudice any
remedy of any other party or any Indemnified Party in respect of any continuing
or other breach of the terms and conditions hereof, and shall not be construed
as a bar to any right or remedy which any party would otherwise have on any
future occasion under this Agreement.
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Section 14. Attorneys' Fees. In any action or proceeding brought to enforce
any provision of this Agreement, or where any provision hereof shall have been
validly asserted as a defense, the successful party shall be entitled to
recover reasonable attorneys' fees and costs in addition to any other available
remedy.
Section 15. Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances,
shall be held invalid, illegal or unenforceable in any respect for any reason,
the validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired
or affected, it being intended that all other rights and privileges shall be
enforceable to the fullest extent permitted by law.
Section 16. Third Party Beneficiary. The Indemnified Parties other than the
Company are third party beneficiaries of this Agreement, and have the right to
enforce the provisions of this Agreement directly against the Foundation.
In Witness Whereof, the parties hereto have executed this Agreement as of
the date first above written.
Rightchoice Managed Care, Inc.
_____________________________________
The Missouri Foundation for Health
_____________________________________
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Appendix F
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CERTIFICATE OF INCORPORATION
OF
RIGHTCHOICE MANAGED CARE, INC.
a Delaware corporation
--------------------------------------------------------------------------------
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<PAGE>
CERTIFICATE OF INCORPORATION
OF
RIGHTCHOICE MANAGED CARE, INC.
The undersigned, being a natural person, for the purpose of organizing a
corporation under the General Corporation Law of the State of Delaware, hereby
certifies that:
Article I
Name
The name of the corporation is RightCHOICE Managed Care, Inc. (the
"Corporation").
Article II
Purpose
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware, as from time to
time amended (the "DGCL").
Article III
Authorized Capital Stock
Section 1. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is two hundred fifty million
(250,000,000) shares consisting of (a) two hundred twenty-five million
(225,000,000) shares of common stock, $.01 par value per share (the "Common
Stock"), and (b) twenty-five million (25,000,000) shares of preferred stock,
$.01 par value per share (the "Preferred Stock").
Section 2. The powers, designations, rights, preferences, privileges and
restrictions of the Common Stock and the Preferred Stock are as follows:
A. Common Stock.
1. General. The Common Stock shall have such rights (i) as are provided by
the DGCL and as are customarily attendant to shares of common stock, and (ii)
the rights set forth below in this Paragraph A.
2. Dividends. Subject to any other provisions of this Certificate of
Incorporation, holders of Common Stock shall be entitled to receive, to the
extent permitted by law, such dividends and other distributions in cash, stock
or property of the Corporation as may be declared thereon from time to time by
the Board of Directors of the Corporation out of assets or funds of the
Corporation legally available therefor.
3. Voting. At every meeting of the stockholders of the Corporation, each
holder of Common Stock shall be entitled to one (1) vote in person or by proxy
for each share of Common Stock standing in his or her name on the transfer
books of the Corporation.
B. Preferred Stock. Shares of Preferred Stock may be issued in one or more
series as determined from time to time by the Board of Directors of the
Corporation. All shares of any one series of Preferred Stock shall be
identical, except as to the dates of issue and the dates from which dividends
on shares of the series issued on different dates shall cumulate, if dividends
on the shares
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of such series are cumulative. Authority is hereby expressly granted to the
Board of Directors of the Corporation to authorize the issuance of one or more
series of Preferred Stock, and to fix by one or more resolutions providing for
the issuance of each such series the voting powers, designations, preferences
and relative, participating, optional, redemption, conversion, exchange or
other special rights, qualifications, limitations or restrictions of such
series, and the number of shares in such series, to the full extent now or
hereafter permitted by law.
Article IV
Board of Directors and Stockholder Meetings
Section 1. Except as may be otherwise specifically provided by the DGCL,
all powers of management, direction and control of the Corporation shall be,
and hereby are, vested in the Board of Directors of the Corporation.
Section 2. A majority of the whole Board of Directors of the Corporation
shall constitute a quorum for the transaction of business and, except as
otherwise provided in this Certificate of Incorporation or the Bylaws of the
Corporation, the vote of a majority of the directors present at a meeting at
which a quorum is then present shall be the act of the Board of Directors of
the Corporation. The term "whole Board of Directors of the Corporation," as
used in this Certificate of Incorporation, means the total number of directors
which the Corporation would have as of the date of such determination if the
Board of Directors of the Corporation had no vacancies.
Section 3. The Board of Directors of the Corporation shall consist of no
less than 3 or more than 21 directors, the exact number of directors to be
determined in accordance with the Bylaws of the Corporation. The directors
shall be divided into three classes, designated Class I, Class II and Class
III. Each class shall consist, as nearly as may be possible, of one-third of
the total number of directors constituting the whole Board of Directors of the
Corporation. At each annual meeting of stockholders beginning in 2001,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible,
but in no case shall a decrease in the number of directors shorten the term of
any incumbent director. A director shall hold office until the annual meeting
for the year in which his or her term shall expire and until his or her
successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office.
Section 4.
A. Qualifications. No person shall be elected or appointed to the Board of
Directors of the Corporation unless either (i) such person would qualify as an
Independent Director (as defined in Paragraph B.1 of this Section 4 of Article
IV), or (ii) immediately after giving effect to such election or appointment,
at least 80% of the members of the whole Board of Directors of the Corporation
would qualify as Independent Directors.
B. Definitions.
1. "Independent Director" means any person who, during the entirety of any
term of service on the Board of Directors of the Corporation, satisfies each
of the following conditions: (i) he or she shall have affirmed in writing
that, at the time of his or her election or appointment for such term, he or
she was Independent (as defined in Paragraph B.2 of this Section 4 of Article
IV), and (ii) he or she shall have agreed to serve only in the capacity of an
Independent Director for such term.
2. "Independent" means a person who, at any given time, (i) shall not be a
Major Participant
(as defined in Paragraph B.4 of this Section 4 of Article IV), (ii) shall not
have been nominated to
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the Board of Directors of the Corporation at the initiative of a Major
Participant, (iii) shall not have announced a commitment to any proposal made
by a Major Participant that has not been approved by an Independent Board
Majority (as defined in Paragraph B.3 of this Section 4 of Article IV), and
(iv) shall not have been determined by an Independent Board Majority to have
been subject to any relationship, arrangement or circumstance (including any
relationship with a Major Participant) which, in the judgment of such
Independent Board Majority, is reasonably possible or likely to interfere to an
extent deemed unacceptable by such Independent Board Majority with his or her
exercise of independent judgment as a director.
3. "Independent Board Majority" means a group of directors comprised of (i)
a majority of all directors who qualify as Independent Directors at the time of
such determination, and (ii) a majority of all directors at the time of such
determination.
4. "Major Participant" means: (i) the Foundation (as defined in Section 1 of
Article VII hereof) or a Person (as defined in Section 1 of Article VII hereof)
who shall, in the judgment of an Independent Board Majority, succeed to the
position held by the Foundation, (ii) a Person who, except as provided in the
next sentence, is an Excess Owner (as defined in Section 1 of Article VII
hereof), (iii) a Person that has filed proxy materials with the SEC (as defined
in Section 1 of Article VII hereof) supporting a candidate for election to the
Board of Directors of the Corporation in opposition to candidates approved by
an Independent Board Majority, (iv) a Person that has made a proposal, made a
filing with the SEC or taken other actions in which such Person indicates that
such Person may seek to become a Major Participant or which in the judgment of
an Independent Board Majority indicates that it is reasonably possible or
likely that such Person will seek to become a Major Participant, or (v) such
Person is an affiliate or associate (as defined in Section 1 of Article VII
hereof) of a Major Participant. Notwithstanding the foregoing, in the event
that an Independent Board Majority shall have approved an acquisition of
outstanding Capital Stock (as defined in Section 1 of Article VII hereof) of
the Corporation, prior to the time such acquisition shall occur, which would
otherwise render a Person a Major Participant and such Person (a) shall not
have made any subsequent acquisition of outstanding Capital Stock of the
Corporation not approved by an Independent Board Majority and (b) shall not
have subsequently taken any of the actions specified in the preceding sentence
without the prior approval of an Independent Board Majority, then such Person
shall not be deemed a Major Participant; provided that the Foundation shall
always be deemed a Major Participant notwithstanding any approval of any
acquisition of Capital Stock of the Corporation or any other development or
fact of any kind. In the event there shall be any question as to whether a
particular Person is a Major Participant, the determination of an Independent
Board Majority shall be binding upon all parties concerned.
Section 5. Each election of directors shall be by plurality vote except that
an individual shall not be elected to the Board of Directors of the Corporation
if such election is prohibited by Section 4 of this Article IV or the
individual does not meet the qualifications which may be required by the Bylaws
of the Corporation as constituted at the time of such election. The Board of
Directors of the Corporation shall have the right to adopt Bylaw provisions to
implement and apply the provisions in the preceding sentence and to achieve the
outcome prescribed and intended thereby. The election of directors need not be
by ballot unless the Bylaws of the Corporation shall so require.
Section 6. Any newly created directorships resulting from any increase in
the number of directors or from the removal, resignation or death of a director
may be filled only by the affirmative vote of an Independent Board Majority and
any directors so chosen shall hold office until the next election of the class
for which such directors shall have been chosen and until their successors
shall be elected and qualified or until their respective earlier resignation,
removal or death.
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Section 7. Stockholders of the Corporation shall have no right to remove any
director or the whole Board of Directors of the Corporation unless such removal
is for Cause (as defined below in
this Section 7 of Article IV) and unless the holders of at least seventy-five
percent (75%) of the
issued and outstanding shares of Common Stock then entitled to vote at an
election of directors shall have voted in favor of such removal for Cause
(notwithstanding the fact that some lesser percentage may be specified by the
DGCL). "Cause," as used in this Section 7, means conviction of a felony or a
finding by a court of competent jurisdiction of liability for gross negligence,
or willful misconduct, in the performance of the director's duty to the
Corporation in a matter of substantial importance to the Corporation, where
such adjudication is no longer subject to direct appeal.
Section 8. Whenever the holders of any series of Preferred Stock issued by
the Corporation or of any other securities of the Corporation shall have the
right, voting separately by series, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of this
Certificate of Incorporation then applicable thereto.
Section 9. Meetings of the stockholders of the Corporation for any purpose
or purposes may be held within or without the State of Delaware, as the Bylaws
of the Corporation may provide.
Section 10. No action required or permitted to be taken at any annual or
special meeting of stockholders of the Corporation may be taken by written
consent without a meeting of such stockholders.
Section 11. Subject to the rights, if any, of the holders of Preferred Stock
or any series thereof, special meetings of the stockholders of the Corporation
for any purpose or purposes may be called at any time only by the Chairman of
the Board of the Corporation, the Chief Executive Officer of the Corporation,
the President of the Corporation, or an Independent Board Majority. Special
meetings of the stockholders of the Corporation may not be called by any other
person or persons or in any other manner.
Article V
Indemnification
Section 1. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director or an
officer of the Corporation, or is or was a director or an officer of the
Corporation and is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including, but not
limited to, attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding to the fullest extent and in the manner set forth in and
permitted by the DGCL and other applicable law, as from time to time in effect.
To the maximum extent permitted by the DGCL, the Corporation shall advance
expenses (including attorneys' fees) incurred by any person indemnified
hereunder in defending any civil, criminal, administrative or investigative
action, suit or proceeding upon an undertaking by or on behalf of such person
to repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Corporation. Such rights of indemnification
and advancement of expenses shall not be deemed to be exclusive of any other
rights to which such director or officer may be entitled apart from the
foregoing provisions. The foregoing provisions of this Section 1 of Article V
shall be deemed to be a contract between the Corporation and each director and
officer who serves in such capacity at any time while this Section 1 of Article
V and the relevant provisions of the DGCL and other applicable law, if any, are
in effect, and any repeal or modification thereof
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shall not affect any rights or obligations then existing, with respect to any
state of facts then or theretofore existing, or any action, suit or proceeding
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts.
Section 2. The Corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was an employee or
agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including, but not limited to, attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him or her in connection
with such action, suit or proceeding to the extent and in the manner set forth
in and permitted by the DGCL and other applicable law as from time to time in
effect. Such right of indemnification shall not be deemed to be exclusive of
any other rights to which any such person may be entitled apart from the
foregoing provisions.
Article VI
Liability for Breach of Fiduciary Duty
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of his or her duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which he or she derived any improper personal benefit. In no
event shall any director be deemed to breach any fiduciary duty or other
obligation owed to any stockholders of the Corporation or any other person by
reason of (i) his or her failure to vote for (or by reason of such director's
vote against) any proposal or course of action that in such director's judgment
would breach any requirement imposed by the Blue Cross and Blue Shield
Association (or its then successor) (the "BCBSA") or could lead to termination
of any license granted by the BCBSA to the Corporation or any subsidiary or
affiliate of the Corporation, or (ii) his or her decision to vote in favor of
any proposal or course of action that in such director's judgment is necessary
to prevent a breach of any requirement imposed by the BCBSA or could prevent
termination of any license granted by the BCBSA to the Corporation or any
subsidiary or affiliate of the Corporation. If the DGCL is hereafter amended to
authorize, with the approval of a corporation's stockholders, further
reductions in the liability of a corporation's directors for breach of
fiduciary duty, then a director of the Corporation shall not be liable for any
such breach to the fullest extent permitted by the DGCL as so amended. Any
repeal or modification of the foregoing provisions of this Article VI by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
Article VII
Restriction on Transfer
Section 1. The following definitions shall apply with respect to this
Article VII:
(a) "affiliate" and "associate" have the respective meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act.
(b) a Person shall be deemed to "Beneficially Own," be the "Beneficial
Owner" of or have "Beneficial Ownership" of any Capital Stock:
(1) in which such Person shall then have a direct or indirect
beneficial ownership interest;
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(2) in which such Person shall have the right to acquire any direct
or indirect beneficial ownership interest pursuant to any option or
other agreement (either immediately or after the passage of time or the
occurrence of any contingency);
(3) which such Person shall have the right to vote;
(4) in which such Person shall hold any other interest which would
count in determining whether such Person would be required to file a
Schedule 13D or Schedule 13G under Regulation 13D-G under the Exchange
Act; or
(5) which shall be Beneficially Owned (under the concepts provided
in the preceding clauses) by any affiliate or associate of the
particular Person or by any other Person with whom the particular
Person or any such affiliate or associate has any agreement,
arrangement or understanding (other than customary agreements with and
between underwriters and selling group members with respect to a bona
fide public offering of securities and other than pursuant to the
Registration Rights Agreement);
provided, however, that
(6) a Person shall not be deemed to Beneficially Own, be the
Beneficial Owner of, or have Beneficial Ownership of Capital Stock by
reason of possessing the right to vote if (i) such right arises solely
from a revocable proxy or consent given to such Person in response to a
public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations promulgated under
the Exchange Act, and (ii) such Person is not the Excess Owner of any
Excess Shares, is not named as holding a beneficial ownership interest
in any Capital Stock in any filing on Schedule 13D or Schedule 13G, and
is not an affiliate or associate of any such Excess Owner or named
Person;
(7) a member of a national securities exchange or a registered
depositary shall not be deemed to Beneficially Own, be the Beneficial
Owner of or have Beneficial Ownership of Capital Stock held directly or
indirectly by it on behalf of another Person (and not for its own
account) solely because such member or depositary is the record holder
of such Capital Stock, and (in the case of such member), pursuant to
the rules of such exchange, such member may direct the vote of such
Capital Stock without instruction on matters which are uncontested and
do not affect substantially the rights or privileges of the holders of
the Capital Stock to be voted, but is otherwise precluded by the rules
of such exchange from voting such Capital Stock without instruction on
either contested matters or matters that may affect substantially the
rights or the privileges of the holders of such Capital Stock to be
voted;
(8) a Person who in the ordinary course of business is a pledgee of
Capital Stock under a written pledge agreement shall not be deemed to
Beneficially Own, be the Beneficial Owner of or have Beneficial
Ownership of such pledged Capital Stock solely by reason of such pledge
until the pledgee has taken all formal steps which are necessary to
declare a default or has otherwise acquired the power to vote or to
direct to vote such pledged Capital Stock, provided that:
(A) the pledge agreement is bona fide and was not entered into
with the purpose nor with the effect of changing or influencing the
control of the Corporation, nor in connection with any transaction
having such purpose or effect, including any transaction subject to
Rule 13d-3(b) promulgated under the Exchange Act; and
(B) the pledge agreement does not grant to the pledgee the right
to vote or to direct the vote of the pledged securities prior to
the time the pledgee has taken all formal steps which are necessary
to declare a default;
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(9) a Person engaged in business as an underwriter or a placement
agent for securities who enters into an agreement to acquire or
acquires Capital Stock solely by reason of its participation in good
faith and in the ordinary course of its business in the capacity of
underwriter or placement agent in any underwriting or agent
representation registered under the Securities Act, as a bona fide
private placement, a resale under Rule 144A promulgated under the
Securities Act, or in any foreign or other offering exempt from the
registration requirements under the Securities Act shall not be deemed
to Beneficially Own, be the Beneficial Owner of or have Beneficial
Ownership of such securities until the expiration of forty (40) days
after the date of such acquisition so long as (i) such Person does not
vote such Capital Stock during such period, and (ii) such participation
is not with the purpose or with the effect of changing or influencing
control of the Corporation, nor in connection with or facilitating any
transaction having such purpose or effect, including any transaction
subject to Rule 13d-3(b) promulgated under the Exchange Act;
(10) if the Corporation shall sell shares in a transaction not
involving any public offering, then each purchaser in such offering
shall be deemed to obtain Beneficial Ownership in such offering of the
shares purchased by such purchaser, but no particular purchaser shall
be deemed to Beneficially Own or have acquired Beneficial Ownership or
be the Beneficial Owner in such offering of shares purchased by any
other purchaser solely by reason of the fact that all such purchasers
are parties to customary agreements relating to the purchase of equity
securities directly from the Corporation in a transaction not involving
a public offering, provided that:
(A) all the purchasers are persons specified in Rule 13d-
l(b)(l)(ii) promulgated under the Exchange Act;
(B) the purchase is in the ordinary course of each purchaser's
business and not with the purpose nor with the effect of changing
or influencing control of the Corporation, nor in connection with
or as a participant in any transaction having such purpose or
effect, including any transaction subject to Rule 13d- 3(b)
promulgated under the Exchange Act;
(C) there is no agreement among or between any purchasers to act
together with respect to the Corporation or its securities except
for the purpose of facilitating the specific purchase involved; and
(D) the only actions among or between any purchasers with
respect to the Corporation or its securities subsequent to the
closing date of the nonpublic offering are those which are
necessary to conclude ministerial matters directly related to the
completion of the offer or sale of the securities sold in such
offering;
(11) the Share Escrow Agent shall not be deemed to be the Beneficial
Owner of any Excess Share held by such Share Escrow Agent pursuant to
an Excess Share Escrow Agreement, nor shall any such Excess Shares be
aggregated with any other shares of Capital Stock held by affiliates or
associates of such Share Escrow Agent; and
(12) a Person shall not be deemed to Beneficially Own, be the
Beneficial Owner of, or have Beneficial Ownership of Capital Stock by
reason of the fact that such Person shall have entered into an
agreement with the Corporation pursuant to which such Person, or its
associates or affiliates, shall, upon consummation of the transaction
described in such agreement, acquire, directly or indirectly, all of
the Capital Stock of the Corporation (by means of a merger,
consolidation, stock purchase or otherwise), provided that:
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(A) such agreement shall have been approved by an Independent
Board Majority prior to the execution thereof by the Corporation;
(B) neither such Person nor its associates or affiliates shall
have been the Excess Owner of any Excess Shares immediately prior
to the execution of such agreement;
(C) the consummation of the transaction described in such
agreement shall be subject to the approval of the holders of
Capital Stock of the Corporation entitled to vote thereon under the
DGCL or pursuant to other applicable law or the rules of the New
York Stock Exchange, Inc. or any other national securities exchange
or automated quotation system on which any of the Capital Stock
shall then be listed or quoted; and
(D) neither such Person nor its associates or affiliates shall
have made any acquisition of Capital Stock after the execution of
such agreement other than pursuant to the terms of such agreement.
Anything herein to the contrary notwithstanding, a Person shall continue to
be deemed to Beneficially Own, be the Beneficial Owner of, and have Beneficial
Ownership of, such Person's Excess Shares which shall have been conveyed, or
shall be deemed to have been conveyed, to the Share Escrow Agent in accordance
with this Article VII until such time as such Excess Shares shall have been
sold by the Share Escrow Agent as provided in this Article VII.
(c) "BCBSA" has the meaning set forth in Article VI hereof.
(d) "Capital Stock" means shares (or any basic unit) of any class or series
of any equity security, voting or non-voting, common or preferred, which the
Corporation may at any time issue or be authorized to issue.
(e) "Common Stock" has the meaning set forth in Section 1 of Article III
hereof.
(f) "Excess Owner" means a Person who Beneficially Owns Excess Shares.
(g) "Excess Shares" means (i) with respect to any Institutional Investor,
all the shares of Capital Stock Beneficially Owned by such Institutional
Investor in excess of the Institutional Investor Ownership Limit, (ii) with
respect to any Noninstitutional Investor, all the shares of Capital Stock
Beneficially Owned by such Noninstitutional Investor in excess of the
Noninstitutional Investor Ownership Limit, and (iii) with respect to any
Person, all the shares of Capital Stock Beneficially Owned by such Person in
excess of the General Ownership Limit; provided, however, that in the event
the Excess Shares with respect to such Person results from the Beneficial
Ownership of Capital Stock of such Person being aggregated with the Beneficial
Ownership of Capital Stock of any other Person, then the number of Excess
Shares with respect to such Person shall be allocated pro rata in proportion
to each Person's total Beneficial Ownership (as calculated without giving
effect to this Article VII). All Excess Shares shall be deemed to be issued
and outstanding shares of Capital Stock even when subject to or held pursuant
to this Article VII.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended or
supplemented and any other federal law which the BCBSA shall reasonably judge
to have replaced or supplemented the coverage of the Exchange Act.
(i) "Foundation" means The Missouri Foundation For Health, a Missouri
nonprofit corporation.
(j) "General Ownership Limit" means (i) that number of shares of Common
Stock one share lower than the number of shares of Common Stock which would
represent 20% of all shares of Common Stock issued and outstanding at the time
of determination, or (ii) any combination of shares of Capital Stock in any
series or class that represents 20% of the ownership interest in the
Corporation at the time of determination; provided, however, that the General
Ownership Limit may be revised from time to time pursuant to Section 15 of
this Article VII. Unless an Independent Board
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Majority otherwise determines pursuant to the authority granted in Section 15
of this Article VII, the manner in which shares in different classes or series
of Capital Stock shall be counted to determine the ownership interest
represented by any particular combination of those shares of Capital Stock
pursuant to clause (ii) above shall be the same manner prescribed by the BCBSA
under the License Agreements. So long as Common Stock (carrying identical
voting rights per share) shall be the only class of Capital Stock issued by the
Corporation, the General Ownership Limit shall be irrelevant for purposes of
this Article VII because the Institutional Investor Ownership Limit shall
exclusively determine whether any shares of Common Stock owned by any
Institutional Investor constitute Excess Shares and the Noninstitutional
Investor Ownership Limit shall exclusively determine whether any shares of
Common Stock owned by any Noninstitutional Investor constitute Excess Shares.
If, however, the Corporation were to issue a series of Preferred Stock or other
class of Capital Stock other than Common Stock, then (i) shares Beneficially
Owned by an Institutional Investor in excess of either the Institutional
Investor Ownership Limit or the General Ownership Limit would constitute Excess
Shares, and (ii) shares Beneficially Owned by a Noninstitutional Investor in
excess of either the Noninstitutional Investor Ownership Limit or the General
Ownership Limit would constitute Excess Shares.
(k) "Institutional Investor" means any Person that is an entity or group
identified in Rule 13d-1(b)(1)(ii) under the Exchange Act as constituted on
June 1, 1997, provided that every filing made by such Person with the SEC under
Regulation 13D-G (or any successor Regulation) under the Exchange Act with
respect to such Person's Beneficial Ownership of Capital Stock by such Person
shall have contained a certification identical to the one required by Item 10
of Schedule 13G constituted on June 1, 1997, or such other affirmation as shall
be approved by the BCBSA and the Board of Directors.
(l) "Institutional Investor Ownership Limit" means that number of shares of
Capital Stock one share lower than the number of shares of Capital Stock which
would represent 10% of the Voting Power of all shares of Capital Stock issued
and outstanding at the time of determination; provided, however, that the
Institutional Investor Ownership Limit may be revised from time to time
pursuant to Section 15 of this Article VII.
(m) "License Agreements" means the license agreements as constituted from
time to time between the Corporation or any of its subsidiaries or affiliates
and the BCBSA, including any and all addenda thereto, with respect to, among
other things, the "Blue Cross" and "Blue Shield" names and marks.
(n) "Noninstitutional Investor" means any Person that is not an
Institutional Investor.
(o) "Noninstitutional Investor Ownership Limit" means that number of shares
of Capital Stock one share lower than the number of shares of Capital Stock
which would represent 5% of the Voting Power of all shares of Capital Stock
issued and outstanding at the time of determination; provided, however, that
the Noninstitutional Investor Ownership Limit may be revised from time to time
pursuant to Section 15 of this Article VII.
(p) "Ownership Limit" means each of the General Ownership Limit, the
Institutional Investor Ownership Limit and the Noninstitutional Investor
Ownership Limit, as each may be revised from time to time pursuant to Section
15 of this Article VII.
(q) "Permitted Transferee" means a Person whose acquisition of Capital Stock
will not violate any Ownership Limit applicable to such Person.
(r) "Person" means any individual, firm, partnership, corporation, limited
liability company, trust, association, joint venture or other entity, and shall
include any successor (by merger or otherwise) or of any such entity.
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<PAGE>
(s) "Registration Rights Agreement" means that certain Registration Rights
Agreement, between the Corporation and the Foundation, referred to in the
Agreement and Plan of Reorganization described in Section 14 of this Article
VII.
(t) "Schedule 13D" means a report on Schedule 13D under Regulation 13D-G
under the Exchange Act and any report which may be required in the future under
any requirements which the BCBSA shall reasonably judge to have any of the
purposes served by Schedule 13D.
(u) "Schedule 13G" means a report on Schedule 13G under Regulation 13D-G
under the Exchange Act and any report which may be required in the future under
any requirements which the BCBSA shall reasonably judge to have any of the
purposes served by Schedule 13G.
(v) "SEC" means the United States Securities and Exchange Commission and any
successor federal agency having similar powers.
(w) "Securities Act" means the Securities Act of 1933, as amended or
supplemented, and any other federal law which the BCBSA shall reasonably judge
to have replaced or supplemented the coverage of the Securities Act.
(x) "Share Escrow Agent" means the Person appointed by the Corporation to
act as escrow agent with respect to the Excess Shares.
(y) "Transfer" means any of the following which would affect the Beneficial
Ownership of Capital Stock: (a) any direct or indirect sale, transfer, gift,
hypothecation, pledge, assignment, devise or other disposition of Capital Stock
(including (i) the granting of any option or entering into any agreement for
the sale, transfer or other disposition of Capital Stock, or (ii) the sale,
transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for Capital Stock), whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise, and (b) any other transaction or event,
including without limitation a merger, consolidation, or acquisition of any
Person, the expiration of a voting trust which is not renewed, or the
aggregation of the Capital Stock Beneficially Owned by one Person with the
Capital Stock Beneficially Owned by any other Person.
(z) "Voting Power" means the voting power attributable to the shares of
Capital Stock issued and outstanding at the time of determination and shall be
equal to the number of all votes which could be cast in any election of any
director which could be accounted for by all shares of Capital Stock issued and
outstanding at the time of determination. If, in connection with an election
for any particular position on the Board of Directors of the Corporation,
shares in different classes or series are entitled to be voted together for
purposes of such election, then in determining the number of "all votes which
could be cast" in the election for that particular position for purposes of the
preceding sentence, the number shall be equal to the number of votes which
could be cast in the election for that particular position if all shares
entitled to be voted in such election (regardless of series or class) were in
fact voted in such election. For any particular Person, the Voting Power of
such Person shall be equal to the quotient, expressed as a percentage, of the
number of votes that may be cast with respect to shares of Capital Stock
Beneficially Owned by such Person (including, for these purposes, any Excess
Shares Beneficially Owned by such Person and held and/or voted by the Escrow
Share Agent) divided by the total number of votes that could be cast by all
stockholders of the Corporation (including such particular Person) based upon
the issued and outstanding shares of Capital Stock at the time of
determination. If the Corporation shall issue any series or class of shares for
which positions on the Board of Directors of the Corporation are reserved or
shall otherwise issue shares which have voting rights which can arise or vary
based upon terms governing that class or series, then the percentage of the
voting power represented by the shares of Capital Stock Beneficially Owned by
any particular Person shall be the highest percentage of the total votes which
could be accounted for by those shares in any election of any director.
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(aa) "Voting Trust Divestiture Agreement" means that certain Voting Trust
and Divestiture Agreement by and between the Corporation and the Foundation and
the trustee named therein, referred to in the Agreement and Plan or
Reorganization described in Section 14 of this Article VII.
Section 2.
(a) No Institutional Investor shall Beneficially Own shares of Capital Stock
in excess of the Institutional Investor Ownership Limit. No Noninstitutional
Investor shall Beneficially Own shares of Capital Stock in excess of the
Noninstitutional Investor Ownership Limit. No Person shall Beneficially Own
shares of Capital Stock in excess of the General Ownership Limit.
(b) The occurrence of any Transfer which would cause any Person to
Beneficially Own Capital Stock in excess of any Ownership Limit applicable to
such Person shall have the following legal consequences: (i) such Person shall
receive no rights to the Excess Shares resulting from such Transfer (other than
as specified in this Article VII), and (ii) the Excess Shares resulting from
such Transfer immediately shall be deemed to be conveyed to the Share Escrow
Agent.
(c) Notwithstanding the foregoing, a Person's Beneficial Ownership of
Capital Stock shall not be deemed to exceed any Ownership Limit applicable to
such Person if (A) the Excess Shares with respect to such Person do not exceed
the lesser of 1% of the Voting Power of the Capital Stock or 1% of the
ownership interest in the Corporation, and (B) within fifteen (15) days of the
time when such Person becomes aware of the existence of such Excess Shares such
Person transfers or otherwise disposes of sufficient shares of Capital Stock so
that such Person's Beneficial Ownership of Capital Stock shall not exceed any
Ownership Limit.
Section 3. Any Excess Owner who acquires or attempts to acquire shares of
Capital Stock in violation of Section 2 of this Article VII, or any Excess
Owner who is a transferee such that any shares of Capital Stock are deemed
Excess Shares, shall immediately give written notice to the Corporation of such
event and shall provide to the Corporation such other information as the
Corporation may request.
Section 4. The Corporation shall have the right to take such actions as it
deems necessary to give effect to the transfer of Excess Shares to the Share
Escrow Agent, including refusing to give effect to the Transfer or any
subsequent Transfer of Excess Shares by the Excess Owner on the books of the
Corporation. Excess Shares so held or deemed held by the Share Escrow Agent
shall be issued and outstanding shares of Capital Stock. An Excess Owner shall
have no rights in such Excess Shares except as expressly provided in this
Article VII and the administration of the Excess Shares escrow shall be
governed by the terms of an Excess Share Escrow Agreement to be entered into
between the Corporation and the Share Escrow Agent and having such terms as the
Corporation shall deem appropriate.
Section 5. The Share Escrow Agent, as record holder of Excess Shares, shall
be entitled to receive all dividends and distributions as may be declared by
the Board of Directors of the Corporation with respect to Excess Shares (the
"Excess Share Dividends") and shall hold the Excess Share Dividends until
disbursed in accordance with the provisions of Section 9 of this Article VII.
In the event an Excess Owner receives any Excess Share Dividends (including
without limitation Excess Share Dividends received prior to the time the
Corporation determines that Excess Shares exist with respect to such Excess
Owner) such Excess Owner shall repay such Excess Share Dividends to the Share
Escrow Agent or the Corporation. The Corporation shall take all measures that
it determines reasonably necessary to recover the amount of any Excess Share
Dividends paid to an Excess Owner, including, if necessary, withholding any
portion of future dividends or distributions payable on shares of Capital Stock
Beneficially Owned by any Excess Owner (including future dividends on
distributions on shares of Capital Stock which fall below the Ownership Limit
as well as on Excess Shares), and, as soon as practicable following the
Corporation's receipt or withholding thereof, shall pay over to the Share
Escrow Agent the dividends so received or withheld, as the case may be.
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Section 6. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of, or any distribution of the assets of, the
Corporation, the Share Escrow Agent shall be entitled to receive, ratably with
each other holder of Capital Stock of the same class or series, that portion of
the assets of the Corporation that shall be available for distribution to the
holders of such class or series of Capital Stock. The Share Escrow Agent shall
distribute to the Excess Owner the amounts received upon such liquidation,
dissolution or winding up or distribution in accordance with the provisions of
Section 9 of this Article VII.
Section 7. The Share Escrow Agent shall be entitled to vote all Excess
Shares. The Share Escrow Agent shall vote, consent, or assent Excess Shares as
follows:
(a) to vote in favor of each nominee to the Board of Directors of the
Corporation whose nomination has been approved by an Independent Board
Majority and to vote against any candidate for the Board of Directors of
the Corporation for whom no competing candidate has been nominated or
selected by an Independent Board Majority;
(b) unless such action is initiated by or with the consent of the Board
of Directors of the Corporation, (i) to vote against removal of any
director of the Corporation, (ii) to vote against any alteration,
amendment, change or addition to or repeal (collectively, "Change") of the
Bylaws or this Certificate of Incorporation, (iii) not to nominate any
candidate to fill any vacancy of the Board of Directors of the Corporation,
(iv) not to call any special meeting of the stockholders of the
Corporation, and (v) not take any action by voting such Excess Shares that
would be inconsistent with or would have the effect, directly or
indirectly, of defeating or subverting the voting requirements contained in
Section 7(a) of this Article VII or this Section 7(b) of Article VII;
(c) to the extent not covered by clauses (a) and (b) above, on any
action, proposal or resolution requiring the approval of the Board of
Directors of the Corporation as a prerequisite to entitle the stockholders
of the Corporation to vote thereon and as a prerequisite to become
effective, to vote in the same proportion as all other votes represented by
shares of Capital Stock are cast with respect to such action, proposal or
resolution; and
(d) to the extent not covered by clauses (a), (b) and (c) above, to vote
as recommended by the Board of Directors of the Corporation.
Section 8.
(a) The Share Escrow Agent shall hold all Excess Shares until such time as
they are sold in accordance with this Section 8 of Article VII.
(b) The Share Escrow Agent shall sell or cause the sale of Excess Shares at
such time or times and on such terms as shall be determined by the Corporation.
The Share Escrow Agent shall have the right to take such actions as the
Corporation shall deem appropriate to ensure that sales of Excess Shares shall
be made only to Permitted Transferees.
(c) The Share Escrow Agent shall have the power to convey to the purchaser
of any Excess Shares sold by the Share Escrow Agent ownership of such Excess
Shares free of any interest of the Excess Owner of those Excess Shares and free
of any other adverse interest arising through the Excess Owner. The Share
Escrow Agent shall be authorized to execute any and all documents sufficient to
transfer title to any Permitted Transferee.
(d) Upon acquisition by any Permitted Transferee of any Excess Shares sold
by the Share Escrow Agent or the Excess Owner, such shares shall upon such sale
cease to be Excess Shares and shall become regular shares of Capital Stock in
the class or series to which such Excess Shares otherwise belong, and the
purchaser of such shares shall acquire such shares free of any claims of the
Share Escrow Agent or the Excess Owner.
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(e) To the extent permitted by the DGCL or other applicable law, neither the
Corporation, the Share Escrow Agent nor anyone else shall have any liability to
the Excess Owner or anyone else by reason of any action or inaction the
Corporation or the Share Escrow Agent or any director, officer or agent of the
Corporation shall take which any of them shall in good faith believe to be
within the scope of their authority under this Article VII or by reason of any
decision as to when or how to sell any Excess Shares or by reason of any other
action or inaction in connection with the activities permitted under this
Article VII which does not constitute gross negligence or willful misconduct.
Without limiting by implication the scope of the preceding sentence, to the
extent permitted by law, neither the Share Escrow Agent nor the Corporation nor
any director, officer or agent of the Corporation (a) shall have any liability
on grounds that any of them failed to take actions which would or could have
produced higher proceeds for any of the Excess Shares or by reason of the
manner or timing for any disposition of any Excess Shares, and (b) shall be
deemed to be a fiduciary or agent of any Excess Owner.
Section 9. The proceeds from the sale of the Excess Shares and any Excess
Share Dividends shall be distributed as follows: (i) first, to the Share Escrow
Agent for any costs and expenses incurred in respect of its administration of
the Excess Shares that have not theretofore been reimbursed by the Corporation;
(ii) second, to the Corporation for all costs and expenses incurred by the
Corporation in connection with the appointment of the Share Escrow Agent, the
payment of fees to the Share Escrow Agent with respect to the services provided
by the Share Escrow Agent in respect of the escrow and for any other direct or
indirect and out of pocket expenses incurred by the Corporation in connection
with the Excess Shares, including any litigation costs and expenses, and all
funds expended by the Corporation to reimburse the Share Escrow Agent for costs
and expenses incurred by the Share Escrow Agent in respect of its
administration of the Excess Shares and for all fees, disbursements and
expenses incurred by the Share Escrow Agent in connection with the sale of the
Excess Shares; and (iii) third, the remainder thereof (as the case may be) to
the Excess Owner; provided, however, if the Corporation shall have any
questions as to whether any security interest or other interest adverse to the
Excess Owner shall have existed with respect to any Excess Shares, neither the
Share Escrow Agent, the Corporation nor anyone else shall have the obligation
to disburse proceeds for those shares until the Share Escrow Agent shall be
provided with such evidence as the Corporation shall deem necessary to
determine the parties who shall be entitled to such proceeds.
Section 10. Each certificate for Capital Stock shall bear the following
legend:
"The shares of stock represented by this certificate are subject to
restrictions on ownership and transfer. All capitalized terms in this
legend have the meanings ascribed to them in the Corporation's Certificate
of Incorporation, as the same may be amended from time to time, a copy of
which, including the restrictions on ownership and transfer, shall be sent
without charge to each stockholder who so requests. No Person shall
Beneficially Own shares of Capital Stock in excess of any Ownership Limit
applicable to such Person. Subject to certain limited specific exemptions,
(i) Beneficial Ownership of that number of shares of Capital Stock by an
Institutional Investor which would represent 10% or more of the Voting
Power would exceed the Institutional Investor Ownership Limit, (ii)
Beneficial Ownership of that number of shares of Capital Stock by a
Noninstitutional Investor which would represent 5% or more of the Voting
Power would exceed the Noninstitutional Investor Ownership Limit, and (iii)
Beneficial Ownership of (a) 20% or more of the issued and outstanding
shares of Common Stock or (b) any combination of shares in any series or
class of Capital Stock that represents 20% or more of the ownership
interest in the Corporation (determined as provided in the Corporation's
Certificate of Incorporation) would exceed the General Ownership Limit. Any
Person who attempts to Beneficially Own shares of Capital Stock in
violation of this limitation must immediately notify the Corporation. Upon
the occurrence of any event that would cause any Person to exceed any
Ownership Limit applicable to such Person (including without limitation
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the expiration of a voting trust that entitled such Person to an exemption
from any Ownership Limit applicable to such Person), all shares of Capital
Stock Beneficially Owned by such Person in excess of any Ownership Limit
applicable to such Person shall automatically be deemed Excess Shares and
shall be transferred immediately to the Share Escrow Agent and shall be
subject to the provisions of the Corporation's Certificate of
Incorporation. The foregoing summary of the restrictions on ownership and
transfer is qualified in its entirety by reference to the Corporation's
Certificate of Incorporation."
The legend may be amended from time to time to reflect amendments to this
Certificate of Incorporation, or revisions to the Ownership Limits in
accordance with Section 15 of this Article VII.
Section 11. Subject to Section 12 of this Article VII, nothing contained in
this Article VII or in any other provision of this Certificate of Incorporation
shall limit the authority of the Corporation to take such other action as it
deems necessary or advisable to protect the Corporation and the interests of
its stockholders.
Section 12. Nothing contained in this Certificate of Incorporation shall
preclude the settlement of any transactions entered into through the facilities
of the New York Stock Exchange, Inc. or any other exchange or through the means
of any automated quotation system now or hereafter in effect.
Section 13. Except in the case of manifest error, any interpretation of this
Article VII by the Board of Directors of the Corporation shall be conclusive
and binding; provided, however, that in making any such interpretation, the
Board of Directors of the Corporation shall consider, wherever relevant, the
Corporation's obligations to the BCBSA.
Section 14. This Article VII shall not be applicable with respect to any
shares of Capital Stock owned by the Foundation which were (i) issued by the
Corporation to the Foundation upon the incorporation of the Corporation, or
(ii) issued by the Corporation to the Foundation pursuant to that certain
Agreement and Plan of Reorganization, dated as of March 14, 2000, among the
Corporation, Blue Cross and Blue Shield of Missouri, RightCHOICE Managed Care,
Inc., a Missouri corporation, and the Foundation (such shares of Capital Stock
being referred to as "Exchange Shares"), or (iii) acquired by the Foundation
with respect to Exchange Shares as a result of a stock dividend, stock split,
conversion, recapitalization, exchange of shares or the like, so long as such
shares of Capital Stock shall be Beneficially Owned by the Foundation or by a
trustee for the account of the Foundation and subject to the terms of the
Voting Trust and Divestiture Agreement. Upon the Transfer of any Beneficial
Ownership interest in any Exchange Shares (and such other shares of Capital
Stock received by the Foundation or by a trustee for the account of the
Foundation as a result of a stock dividend, stock split, conversion,
recapitalization, exchange of shares or the like relating to such Exchange
Shares) from the Foundation or trustee thereof or the voting trust established
by the Voting Trust and Divestiture Agreement to any transferee, those shares
of Capital Stock shall become fully subject to this Article VII from and at all
times after such transfer.
Section 15. An Independent Board Majority shall have the right to revise the
definition of one or more Ownership Limits to change the percentage ownership
of Capital Stock under such Ownership Limit to conform the definition to a
change to the terms of the License Agreements or as required or permitted by
the BCBSA. In the event the Corporation issues any series or class of Capital
Stock other than Common Stock, then an Independent Board Majority shall have
the power to determine the manner in which each class or series of Capital
Stock shall be counted for purposes of determining each Ownership Limit. Any
such revision to the definition of any Ownership Limit shall not be deemed a
Change to this Certificate of Incorporation, and shall not require stockholder
approval under Article XII hereof; provided, however, that no such revision
shall be effective until such time as the Corporation shall have notified the
stockholders of such revision in such manner as
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it shall deem appropriate under the circumstances (provided that notification
of any such revision by means of a filing by the Corporation describing such
revision with the SEC under the Exchange Act or with the Secretary of State of
the State of Delaware under the DGCL shall be deemed appropriate notice under
all circumstances).
Article VIII
By laws
Section 1. The Bylaws shall govern the management and affairs of the
Corporation, the rights and powers of the directors, officers, employees and
stockholders of the Corporation in accordance with its terms and shall govern
the rights of all persons concerned relating in any way to the Corporation
except that if any provision in the Bylaws shall be irreconcilably inconsistent
with any provision in this Certificate of Incorporation, the provision in this
Certificate of Incorporation shall control.
Section 2. The Board of Directors of the Corporation shall have the power to
amend or replace the Bylaws of the Corporation by the vote of a majority of the
whole Board of Directors of the Corporation, except that the approval of an
Independent Board Majority shall be required to amend or replace any provision
of the Bylaws of the Corporation which, pursuant to the terms thereof, may now
or hereafter require the approval of an Independent Board Majority. The
stockholders of the Corporation shall not have the power to Change (as defined
in Section 7 of Article VII hereof) the Bylaws of the Corporation unless such
Change shall be approved by the holders of at least seventy-five percent (75%)
of the then issued and outstanding shares of Common Stock entitled to vote
thereon.
Article IX
No Preferential Rights
No stockholder of the Corporation shall, by reason of his, her or its
holding shares of any class or series, have any preemptive or preferential
rights to purchase or subscribe to any shares of Capital Stock of the
Corporation now or hereafter to be authorized, or any notes, debentures, bonds
or other securities convertible into or carrying options or warrants to
purchase shares of any class now or hereafter to be authorized (whether or not
the issuance of any such shares or such notes, debentures, bonds or other
securities would adversely affect the dividend or voting rights of such
stockholder) other than such rights, if any, as the Board of Directors of the
Corporation in its discretion from time to time may grant and at such price as
the Board of Directors of the Corporation may fix; and the Board of Directors
of the Corporation may issue shares of Capital Stock of the Corporation or any
notes, debentures, bonds or other securities, convertible into or carrying
options or warrants to purchase shares of Capital Stock without offering any
such shares of Capital Stock, either in whole or in part, to the existing
stockholders.
Article X
No Cumulative Voting
There shall be no cumulative voting by stockholders of any class or series
of Capital Stock in the election of directors of the Corporation.
Article XI
Books and Records
The books and records of the Corporation may be kept (subject to any
provision contained in the DGCL or other applicable law) at such place or
places as may be designated from time to time by the Board of Directors of the
Corporation or in the Bylaws of the Corporation.
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Article XII
Right to Amend Certificate of Incorporation
The Corporation reserves the right to Change (as defined in Section 7 of
Article VII hereof) any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by the DGCL or other
applicable law and this Certificate of Incorporation, and all rights conferred
upon stockholders herein are granted subject to this reservation; provided,
however, that notwithstanding anything contained in this Certificate of
Incorporation to the contrary, (a) the approval of an Independent Board
Majority shall be required for the Board of Directors to approve and authorize
any Change to Sections 1, 3, 4, 5, 6, 7, 10 and 11 of Article IV, Article V,
Article VI, Article VII, Article VIII, Article X or this Article XII, and (b)
the affirmative vote of the holders of at least seventy-five percent (75%) of
the then issued and outstanding shares of Common Stock entitled to vote thereon
shall be required to Change Sections 1, 3, 4, 5, 6, 7, 10, and 11 of Article
IV, Article V, Article VI, Article VII, Article VIII, Article X or this Article
XII (the "Supermajority Stockholder Vote"); and provided further, however, that
(i) the Supermajority Stockholder Vote shall become ineffective and shall be of
no further force and effect with respect to a Change to Article VII hereof in
the event that each and every License Agreement to which the Corporation shall
be subject shall have been terminated; and (ii) the Supermajority Stockholder
Vote shall not apply to (1) any Change to Article VII to conform Article VII
hereof to a change to the terms of any License Agreement, (2) any Change to
Article VII hereof required or permitted by the BCBSA (whether or not
constituting a change to the terms of any License Agreement), or (3) any Change
to Article VII hereof approved by an Independent Board Majority in connection
with a proposal to acquire (by means of a merger, consolidation or otherwise)
all of the outstanding Capital Stock of the Corporation. The affirmative vote
of the holders of at least the percentage of the issued and outstanding Capital
Stock entitled to vote thereon required by the DGCL or other applicable law
shall be required to Change any provisions of this Certificate of Incorporation
that shall not require the Supermajority Stockholder Vote under this Article
XII.
Article XIII
Registered Agent
The address of the registered office of the corporation in the state of
Delaware is 1013 Centre Road, Wilmington, Delaware 19805 in the County of New
Castle. The name of its registered agent at such address is Corporation Service
Company.
Article XIV
Compromise
Whenever a compromise or arrangement is proposed between the Corporation and
its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under (S) 291 of Title
8 of the Delaware Code or on the application of trustees in dissolution or of
any receiver or receivers appointed for the Corporation under (S) 279 of Title
8 of the Delaware Code under a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three fourths ( 3/4) in value of the creditors
or class of creditors, and/or of the stockholders or class of stockholders of
the Corporation, as the case may be, agree to any compromise or arrangement and
to
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any reorganization of the Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
Article XV
Incorporator
The name and mailing address of the incorporator is as follows:
John A. O'Rourke
1831 Chestnut Street
St. Louis, Missouri 63103
In Witness Whereof, the undersigned duly executed this Certificate of
Incorporation on this 3rd day of February, 2000.
/s/ John A. O'Rourke
_____________________________________
John A. O'Rourke,
Incorporator
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<PAGE>
Appendix G
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--------------------------------------------------------------------------------
BYLAWS
OF
RIGHTCHOICE MANAGED CARE, INC.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I--OFFICES AND RECORDS............................................. G-1
ARTICLE II--SHAREHOLDERS................................................... G-1
ARTICLE III--BOARD OF DIRECTORS............................................ G-6
ARTICLE IV--OFFICERS....................................................... G-14
ARTICLE V--INDEMNIFICATION................................................. G-17
ARTICLE VI--STOCK.......................................................... G-19
ARTICLE VII--CORPORATE FINANCE............................................. G-20
ARTICLE VIII--GENERAL PROVISIONS........................................... G-21
</TABLE>
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Article I
Offices and Records
Section 1.1 Registered Office and Registered Agent. The location of the
registered office and the name of the registered agent of the Corporation in
the State of Delaware shall be as stated in the Certificate of Incorporation of
the Corporation (as the same may be further amended and/or restated) (the
"Certificate of Incorporation") or as shall be determined from time to time by
the Board of Directors and on file in the appropriate office of the State of
Delaware pursuant to applicable provisions of law. Unless otherwise permitted
by law, the address of the registered office of the Corporation and the address
of the business office of the registered agent shall be identical.
Section 1.2 Corporate Offices. The Corporation may have such corporate
offices anywhere within or without the State of Delaware as the Board of
Directors from time to time may determine or the business of the Corporation
may require.
Section 1.3 Books and Records. The Corporation shall keep correct and
complete books and records of account, including the amount of its assets and
liabilities, minutes of its proceedings of its stockholders and Board of
Directors (and any committee having the authority of the Board of Directors)
and the names and places of residence of its officers. The Corporation shall
keep at its registered office or principal place of business in the State of
Missouri, or at the office of its transfer agent in the State of Missouri, if
any, books and records in which shall be recorded the number of shares
subscribed, the names of the owners of the shares, the numbers owned by them
respectively, the amount of shares paid, and by whom, and the transfer of such
shares with the date of transfer.
Section 1.4 Inspection of Records. A stockholder may, upon written demand
under oath stating the proper purpose thereof, inspect the records of the
Corporation, pursuant to any statutory or other legal right, during the usual
and customary hours of business and in such manner as will not unduly interfere
with the regular conduct of the business of the Corporation. A stockholder may
delegate such stockholder's right of inspection to a certified or public
accountant on the condition, to be enforced at the option of the Corporation,
that the stockholder and accountant agree with the Corporation to furnish to
the Corporation promptly a true and correct copy of each report with respect to
such inspection made by such accountant. No stockholder shall use, permit to be
used or acquiesce in the use by others of any information so obtained to the
detriment competitively of the Corporation, nor shall such stockholder furnish
or permit to be furnished any information so obtained to any competitor or
prospective competitor of the Corporation. The Corporation as a condition
precedent to any stockholder's inspection of the records of the Corporation may
require the stockholder to indemnify the Corporation, in such manner and for
such amount as may be determined by the Board of Directors, against any loss or
damage which may be suffered by it arising out of or resulting from any
unauthorized disclosure made or permitted to be made by such stockholder of
information obtained in the course of such inspection.
Article II
Shareholders
Section 2.1 Place of Meetings. Meetings of stockholders shall be held at any
place within or outside the State of Delaware designated by the Board of
Directors. In the absence of any such designation by the Board of Directors,
stockholders' meetings shall be held at the principal place of business of the
Corporation.
Section 2.2 Annual Meetings. An annual meeting of the stockholders of the
Corporation for the election of directors shall be held on the second Tuesday
in May of each year, if not a legal
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holiday, and if a legal holiday, then on the next business day following, at
10:00 a.m., or at such other date and time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at
which the stockholders entitled to vote thereon shall elect directors to serve
until expiration of their respective term of office as specified in Section 3
of Article IV of the Certificate of Incorporation and until their respective
successors are duly elected and qualified, or until their respective earlier
resignation, removal or death, and shall transact such other business as may
properly come before the meeting as provided herein.
Section 2.3 Special Meetings. Special meetings of stockholders may be called
only by the Chairman of the Board, the Chief Executive Officer, the President,
or an Independent Board Majority (as defined in Section 4.B.3 of Article IV of
the Certificate of Incorporation). The Chairman of the Board, the Chief
Executive Officer, the President, or an Independent Board Majority, as the case
may be, shall have the right to determine the business to be transacted at any
special meeting and no issue or matter may be acted upon by any stockholders at
any special meeting unless such issue or matter has been approved by the Board
of Directors for vote by stockholders at such meeting.
Section 2.4 Notice; Waiver of Notice; Affidavit of Notice.
(a) Written or printed notice of each meeting of the stockholders, whether
annual or special, stating the place, day and hour of the meeting and, in case
of a special meeting, the purpose or purposes thereof and that no other
business may be transacted, and, in the case of an annual meeting, those
matters which the Board of Directors, at the time of giving the notice, intends
to present for action by the stockholders, shall be delivered or given to each
stockholder entitled to vote at such meeting, as determined in accordance with
Section 2.8 of these Bylaws, not less than ten (10) days or more than sixty
(60) days before the date of the meeting, either personally or by mail, by or
at the direction of the President, the Secretary, or the officer or persons
calling the meeting pursuant to Section 2.3 of these Bylaws, unless, as to a
particular matter, other or further notice is required by the General
Corporation Law of the State of Delaware (the "DGCL") or other applicable law,
in which case such other or further notice shall be given.
(b) Any notice to a stockholder of a stockholders' meeting sent by mail
shall be deemed to be delivered when deposited in the United States mail with
postage thereon prepaid and addressed to the stockholder at such stockholder's
address as it appears on the records of the Corporation.
(c) Whenever any notice is required to be given to any stockholder under the
provisions of these Bylaws, or of the Certificate of Incorporation or of the
DGCL or other applicable law, a written waiver thereof, signed by the
stockholder entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
(d) To the extent provided by the DGCL or other applicable law, attendance
of a stockholder at any meeting shall constitute a waiver of notice of such
meeting except where a stockholder attends a meeting for the express purpose of
objecting to the transaction of any business because the meeting is not
lawfully called or convened.
(e) An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting shall be executed by the Secretary, the Assistant
Secretary, or any transfer agent of the Corporation giving the notice, and
shall be filed and maintained in the minute book of the Corporation.
Section 2.5 Presiding Officials. Every meeting of the stockholders, for
whatever purpose, shall be convened by the President, the Secretary or the
officer or any of the persons who called the meeting pursuant to Section 2.3 of
these Bylaws. The meeting shall be presided over by the officers specified in
Sections 4.7, 4.8 and 4.9 of these Bylaws as provided therein.
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Section 2.6 Quorum; Adjournment. Unless otherwise provided by the DGCL or
other applicable law, the Certificate of Incorporation or these Bylaws, the
constitution of a quorum at any meeting of the stockholders shall require a
majority of the outstanding shares of the Corporation's capital stock entitled
to vote at such meeting, represented in person or by proxy; provided, however,
that in the event that less than a quorum is represented at a meeting, the
shares so represented, by a majority vote, shall have the right successively to
adjourn the meeting, without notice to any stockholder not present at the
meeting, to a specified date no later than 90 days after such adjournment. In
all matters, every decision of a majority of the outstanding shares then
entitled to vote on the subject matter and represented in person or by proxy at
a meeting at which a quorum is present shall be valid as an act of the
stockholders, unless a larger vote is required by the DGCL or other applicable
law, by the Certificate of Incorporation or by these Bylaws; provided, however,
that if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of a majority (or
such higher proportion as may be required by the DGCL or other applicable law
or the Certificate of Incorporation or these Bylaws) of the shares of each such
class must be voted affirmatively to approve any matter requiring such separate
class vote. Shares represented by a proxy which directs that the shares be
voted to abstain or to withhold a vote on a matter shall be deemed to be
represented at the meeting as to such matter. At any subsequent session of an
adjourned meeting at which a quorum is present in person or by proxy, any
business may be transacted which could have been transacted at the initial
session of the meeting if a quorum had been present.
Section 2.7 Proxies. Every person entitled to vote for directors or on any
other matter shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with the
Secretary of the Corporation. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the stockholder or the
stockholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by
a writing delivered to the Corporation stating that the proxy is revoked, or by
a subsequent proxy executed by, or attendance at the meeting and voting in
person by, the person executing the proxy; or (ii) written notice of the death
or incapacity of the maker of that proxy is received by the Corporation before
the vote pursuant to that proxy is counted; provided, however, that no proxy
shall be valid after the expiration of three (3) years from the date of the
proxy, unless otherwise provided in the proxy. The revocability of a proxy that
states on its face that it is irrevocable shall be governed by the provisions
of Section 212 of the DGCL.
Section 2.8 Voting.
(a) Each stockholder shall have the number of votes provided in the
Certificate of Incorporation for each share of stock entitled to vote under the
provisions of the Certificate of Incorporation and registered in such
stockholder's name on the books of the Corporation.
(b) Cumulative voting is not permitted with respect to the election of
directors, and thus no stockholder entitled to vote in the election of
directors shall have the right to cast as many votes in the aggregate as shall
equal the number of votes held by the stockholder in the Corporation,
multiplied by the number of directors to be elected at the election, for one
candidate, or distribute them among two or more candidates.
(c) In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of shares or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) days
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nor less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any other action. A determination of stockholders of
record entitled to notice of, or to vote at, a meeting of stockholders shall
apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
(d) If the Board of Directors does not close the transfer books or set a
record date for the determination of its stockholders entitled to notice of, or
to vote at, a meeting of stockholders in accordance with Section 2.8(d) of
these Bylaws, only those persons who are stockholders of record at the close of
business on the day preceding the next day on which notice of such meeting is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which such meeting is held, shall be entitled to notice
of, and to vote at, such meeting and any adjournment of such meeting; except
that, if prior to such meeting written waivers of notice of such meeting are
signed and delivered to the Corporation by all of the stockholders of record at
the time such meeting is convened, only those persons who are stockholders of
record at the time such meeting is convened shall be entitled to vote at such
meeting and any adjournment thereof.
Section 2.9 Stockholders' Lists. A complete list of the stockholders
entitled to vote at each meeting of the stockholders, arranged in alphabetical
order, with the address of and the number of voting shares of each class owned
of record by each stockholder of record as of the date determined pursuant to
Sections 2.8(d) or (e) of these Bylaws as the case may be, shall be prepared by
the officer of the Corporation having charge of the stock transfer books of the
Corporation, and shall, for a period of ten (10) days prior to the meeting, be
kept on file at a place within the city where the meeting is to be held and
shall at any time during the usual hours for business be subject to inspection
by any stockholder. Such list or a duplicate thereof shall also be produced and
kept open at the time and place of the meeting and shall be subject to the
inspection of any stockholder during the whole time of the meeting. The
original share ledger or transfer book, or a duplicate thereof kept in the
State of Missouri, shall be prima facie evidence as to who are the stockholders
entitled to examine such list, share ledger or transfer book or to vote at any
meeting of stockholders.
Section 2.10 Conduct of Stockholder Meetings. The date and time of the
opening and the closing of the polls for each matter upon which the
stockholders will vote at a meeting shall be announced at the meeting by the
person presiding over the meeting. The Board of Directors of the Corporation
may, to the extent not prohibited by the DGCL or other applicable law, adopt by
resolution such rules and regulations for the conduct of the meetings or any
meeting of stockholders as it shall deem appropriate. Except to the extent
inconsistent with such rules and regulations, the Chairman of the meeting may
prescribe such rules, regulations and procedures and do all such acts as, in
the judgment of such Chairman, are appropriate for the proper conduct of the
meeting. Such rules, regulations or procedures, whether adopted by the Board of
Directors or prescribed by the Chairman of the meeting, may, to the extent not
prohibited by the DGCL or other applicable law, include, without limitation,
the following: (i) the establishment of an agenda for the meeting; (ii) the
maintenance of order at the meeting; (iii) limitations on attendance at or
participation in the meeting to stockholders of record of the Corporation,
their duly authorized proxies and such other persons as shall be determined;
(iv) restrictions on entry to the meeting after a specified time; (v)
limitation on the time allotted to questions or comments by participants; (vi)
a determination of whether the proponent of any proposal is entitled to obtain
a vote by stockholders on that proposal at that meeting under the standards
prescribed in these Bylaws and such other standards as the Chairman of the
meeting shall determine to be applicable; (vii) the taking and counting of
votes at such meetings; and (viii) the resolution of any other questions which
may be raised at such meeting. Unless otherwise determined by the Board of
Directors or the Chairman of the meeting, meetings of stockholders shall not be
required to be held in accordance with any rules of parliamentary procedure.
Section 2.11 Stockholder Action By Written Consent without a Meeting. No
action required or permitted to be taken at any annual or special meeting of
stockholders of the Corporation may be taken by written consent without a
meeting of such stockholders.
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Section 2.12 Inspectors of Election. Before any meeting of stockholders, the
Board of Directors shall appoint a person (other than nominees for office,
directors or stockholders) to act as inspectors of election at the meeting or
its adjournment. If any person appointed as inspector fails to appear or fails
or refuses to act, the Chairman of the meeting shall appoint a person to fill
such vacancy. The inspector shall: (a) determine the number of shares
outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, and the authenticity, validity, and effect
of proxies; (b) receive votes or ballots; (c) hear and determine all challenges
and questions in any way arising in connection with the right to vote; (d)
count and tabulate all votes; (e) determine when the polls shall close; (f)
determine the result; and (g) do any other acts that may be proper to conduct
the election or vote with fairness to all stockholders.
Section 2.13 Stockholder Proposals.
(a) Stockholders shall be entitled to submit proposals to be voted upon by
stockholders at an annual meeting of the Corporation provided that they comply
with the procedures set forth in this Section 2.13. Only those proposals which
satisfy all requirements specified in this Section 2.13 shall be deemed
"Qualified Stockholder Proposals."
(b) In order for a proposal to constitute a "Qualified Stockholder
Proposal," all of the following requirements must be satisfied:
(1) The proposal must be made for submission at an annual meeting of
stockholders;
(2) The proposal must be a proper subject for stockholder action. The
Board of Directors shall be entitled to determine that any proposal which
the stockholder is not entitled to have included in the Corporation's proxy
statement for the annual meeting under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the regulations issued by the
Securities and Exchange Commission (which are collectively referred to
herein as the "SEC Proxy Rules") is not a proper subject for stockholder
action;
(3) The proposal must be made by a stockholder who shall be the record
holder on the record date for such annual meeting and at that meeting of
shares entitled to be voted for the proposal (a "Proposing Stockholder");
(4) The Proposing Stockholder must deliver a written notice identifying
such proposal to the office of the Corporation's Corporate Secretary at the
Corporation's principal place of business which provides the information
required by these Bylaws which is timely under the standards given in
Section 3.5(e)(4) of these Bylaws;
(5) Such Proposing Stockholder's proposal notice shall: (i) contain a
description of the proposal, the reasons for the proposal and any material
interest in such proposal by the Proposing Stockholder or the beneficial
owner of the stockholder's record shares; (ii) contain an affirmation by
the Proposing Stockholder that the stockholder satisfies the requirements
specified in this Section 2.13 for presentation of such proposal; and (iii)
as to the Proposing Stockholder and the beneficial owner, if any, on whose
behalf the proposal is made (x) the name and address of such Proposing
Stockholder, as they appear on the Corporation's books, and of such
beneficial owner and the telephone number at which each may be contacted
during normal business hours through the time for which the meeting is
scheduled, and (y) the class and number of shares of the Corporation which
are owned beneficially and of record by such Proposing Stockholder and such
beneficial owner; and
(6) The Proposing Stockholder and the beneficial owner shall provide
such other information as any officer of the Corporation shall reasonably
deem relevant within such time limits as any officer of the Corporation
shall reasonably impose for such information.
(c) Nothing in these Bylaws shall be deemed to prohibit a stockholder from
including any proposals in the Corporation's proxy statement to the extent such
inclusion shall be required by the
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SEC Proxy Rules or to lessen any obligation by any stockholder to comply with
the SEC Proxy Rules; provided, however, that neither the fact that a
stockholder's nominee qualifies as a Qualified Candidate (as defined in Section
3.5 of these Bylaws) nor the fact that a Proposing Stockholder's proposal
qualifies as a Qualified Stockholder Proposal under this Section 2.13 shall
obligate the Corporation to endorse that candidate or proposal or (except to
the extent required by the SEC Proxy Rules) to provide a means to vote on that
proposal on proxy cards solicited by the Corporation or to include information
about that proposal in the Corporation's proxy statement. To the extent this
Section 2.13 shall be deemed by the Board of Directors or the Securities and
Exchange Commission, or adjudged by a court of competent jurisdiction, to be
inconsistent with the rights of stockholders to request inclusion of a proposal
in the Corporation's proxy statement pursuant to the SEC Proxy Rules, the SEC
Proxy Rules shall prevail.
Article III
Board of Directors
Section 3.1 General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. In
addition to the powers and authorities expressly conferred upon it by these
Bylaws, the Board of Directors may exercise all such powers of the Corporation
and do all such lawful acts and things as are not directed or required to be
exercised or done exclusively by the stockholders by the DGCL or other
applicable law or by the Certificate of Incorporation or by these Bylaws.
Section 3.2 Number of Directors. Until otherwise determined by the Board of
Directors acting pursuant to Section 3.4 of these Bylaws, the number of
positions on the Board of Directors shall be three (3).
Section 3.3 Division of the Board of Directors into Classes. The Board of
Directors shall be divided into three classes in accordance with the
Certificate of Incorporation. The positions within each class shall be the same
in number as reasonably practicable. Directors within a given class shall be
designated as the "Class of [Year]," with the entry for "Year" being the year
in which the next triennial election for directors in that class is scheduled
to occur.
Section 3.4 Board of Directors' Power to Alter the Number of Directors and
the Size of Classes. The Board of Directors shall have the power (within the
limitations prescribed by the Certificate of Incorporation) by a resolution
adopted by an Independent Board Majority at the time of such adoption to alter
at any time and from time to time (i) the total number of directorship
positions on the Board of Directors, and (ii) the number of directorship
positions in any of the three classes of directors established by the
Certificate of Incorporation. Except as otherwise expressly provided in the
Certificate of Incorporation, from the adoption of any particular resolution in
the manner provided in the preceding sentence until the adoption in the manner
prescribed by the preceding sentence of any subsequent resolution altering the
results of the particular resolution, (i) the total number of directorship
positions on the Board of Directors shall be equal to the number specified in
the particular resolution, and (ii) the number of directorship positions in
each of the three classes of directors established by the Certificate of
Incorporation shall be the number established in the particular resolution.
Section 3.5 Election of Directors by Stockholders.
(a) Qualified Candidates (as defined below in this Section 3.5) for election
as directors at any meeting of the stockholders of the Corporation shall be
elected by plurality vote. (Under plurality voting, if five positions on the
Board of Directors were up for election at any particular stockholders'
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meeting, then the five Qualified Candidates who receive more votes than any
other Qualified Candidates shall be deemed elected at that meeting. It shall
not, therefore, be necessary for election to the Board of Directors that a
candidate receive a majority of the votes comprising the quorum for the meeting
so long as the individual receives a number of votes sufficient for election
under the terms hereof.)
(b) Only Qualified Candidates may be elected to the Board of Directors at
any particular stockholders' meeting. Votes cast in favor of an individual who
is not a Qualified Candidate shall not be effective to elect that individual to
the Board of Directors regardless of whether (i) that individual receives a
greater number of votes than Qualified Candidates who are elected to the Board
of Directors under the preceding provisions of this Section 3.5, or (ii) no
other individual receives any votes at that meeting.
(c) An individual shall be deemed a "Qualified Candidate" for election to
the Board of Directors at any particular stockholders' meeting if that
individual (i) shall have been nominated for election by the affirmative vote
of an Independent Board Majority or shall have been nominated for election in a
manner which satisfies all of the requirements specified in Section 3.5(e)
hereof, and (ii) is not disqualified under the provisions of Section 3.5(d)
hereof.
(d) The term "Non-Independent Candidate," as used with respect to any
particular election of directors, means an individual who satisfies the
conditions of clause (i) of Section 3.5(c) hereof but who does not qualify as
an "Independent Director" as defined in Section 4.B.1 of Article IV of the
Certificate of Incorporation. In the event that, in any particular election of
directors, some but not all of the Non-Independent Candidates for director at
such election may be eligible for election to the Board of Directors pursuant
to Section 4.A of Article IV of the Certificate of Incorporation, then the Non-
Independent Candidates shall be treated as Qualified Candidates until all
positions available for Non-Independent Candidates at such election pursuant to
Section 4.A of Article IV of the Certificate of Incorporation shall have been
elected in the manner set forth in this Section 3.5. The remaining Non-
Independent Candidates shall, in accordance with Section 3.5(b), be deemed to
not be Qualified Candidates.
(e) An individual who is not nominated for election by the affirmative vote
of an Independent Board Majority, and who would otherwise qualify as a
Qualified Candidate as provided in Sections 3.5(c) and 3.5(d) hereof, shall be
a Qualified Candidate if all of the following requirements are satisfied:
(1) The nomination must be made for an election to be held at an annual
meeting of stockholders or a special meeting of stockholders in which the
Board of Directors has determined that candidates will be elected by the
issued and outstanding shares of the Corporation's common stock to one or
more positions on the Board of Directors;
(2) The individual must be nominated by a stockholder who shall be the
record owner on the record date for such meeting and at that meeting of
shares entitled to be voted at that meeting for the election of directors
(a "Nominating Stockholder");
(3) The Nominating Stockholder must deliver a timely written nomination
notice to the office the Corporation's Corporate Secretary at the
Corporation's principal place of business which provides the information
required by this Section 3.5(e);
(4) To be timely for an annual meeting, a Nominating Stockholder's
notice must be actually delivered to the Corporate Secretary at the
Corporation's principal place of business not later than the close of
business on the 60th day nor earlier than the close of business on the 90th
day prior to the first anniversary of the preceding year's annual meeting;
provided, however, that: (i) if the date of the annual meeting is more than
30 days before or more than 60 days after such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier
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than the close of business on the 90th day prior to such annual meeting and
not later than the close of business on the later of the 60th day prior to
such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made by the Corporation,
and (ii) if the number of directors to be elected to the Board of Directors
is increased and there is no public announcement by the Corporation naming
all of the nominees for director or specifying the size of the increased
Board of Directors at least 70 days prior to the first anniversary of the
preceding year's annual meeting, a Nominating Stockholder's nominating
notice required by this Section 3.5(e) shall also be considered timely, but
only with respect to nominees for any new positions created by such
increase, if (x) the Nominating Stockholder shall have nominated candidates
in accordance with the requirements in this Section 3.5(e) for all Board of
Directors positions not covered by such increase, and (y) the nomination
notice for candidates to fill the expanded positions shall be actually
delivered to the Corporate Secretary at the Corporation's principal place
of business not later than the close of business on the 10th day following
the day on which such public announcement is first made by the Corporation;
(5) If the election is to be held at a special stockholders' meeting, a
Nominating Stockholder's nominating notice required by this Section 3.5(e)
shall be considered timely for such meeting if it shall be actually
delivered to the Corporate Secretary at the Corporation's principal place
of business not later than the close of business on the 10th day following
the day on which the Corporation shall first publicly announce the date of
the special meeting and that a vote by stockholders shall be taken at such
meeting to elect one or more directors;
(6) In no event shall the public announcement of an adjournment of an
annual meeting commence a new time period for the giving of a Nominating
Stockholder's notice as described above. "Public Announcement" means, for
these purposes, disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(7) Such Nominating Stockholder's nomination notice shall: (i) set forth
as to each person whom the Nominating Stockholder proposes to nominate for
election or reelection as a director 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 Exchange Act, and Rule 14a-
11 thereunder; (ii) be accompanied by each nominee's written consent to
being named in the proxy statement as a nominee and to serving as a
director if elected; (iii) set forth the name and address of the
stockholder giving the notice and the beneficial owner of the shares owned
of record by the beneficial owner, and the telephone number at which the
Corporation will be able to contact the stockholder, the beneficial owner
and each nominee during usual business hours during the period through the
meeting at which the nomination is to take place; and (iv) set forth the
class and number of shares of the Corporation which are owned beneficially
and of record by such Nominating Stockholder and such beneficial owner;
(8) The Nominating Stockholder, the beneficial owner and each nominee
shall provide such other information as any officer of the Corporation
shall reasonably deem relevant within such time limits as any officer of
the Corporation shall reasonably impose for such information.
Section 3.6 Vacancies. Neither the provisions of Section 3.5 nor any other
provision set forth herein shall diminish the right granted to the Directors to
elect individuals to fill any vacancy which shall occur for any reason as
provided in the Certificate of Incorporation.
Section 3.7 Meetings of the Newly Elected Board of Directors. The members of
each newly elected Board of Directors (i) shall meet at such time and place,
either within or without the State of Delaware, as shall be provided for by
resolution of the stockholders at the annual meeting, and no
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notice of such meeting shall be necessary to the newly elected directors in
order legally to constitute the meeting, provided a quorum shall be present, or
(ii) if not so provided for by resolution of the stockholders, or if a quorum
shall not be present, may meet at such time and place as shall be consented to
in writing by a majority of the newly elected directors, provided that written
or printed notice of such meeting shall be given to each of the other directors
in the same manner as provided in these Bylaws with respect to the giving of
notice for special meetings of the Board of Directors, except that it shall not
be necessary to state the purpose of the meeting in such notice, or (iii)
regardless of whether or not the time and place of such meeting shall be
provided for by resolution of the stockholders at the annual meeting, may meet
at such time and place as shall be consented to in writing by all of the newly
elected directors.
Each director of the Corporation, upon such director's election, shall
qualify by accepting the office of director, and such director's attendance at,
or written approval of the minutes of, any meeting of the Board of Directors
subsequent to such director's election shall constitute such director's
acceptance of such office; or such director may execute such acceptance by a
separate writing, which shall be placed in the minute book.
Section 3.8 Notice of Meeting; Waiver of Notice.
(a) Regular Meetings. Regular meetings of the Board of Directors may be held
without notice at such times and places either within or without the State of
Delaware as shall from time to time be fixed by resolution adopted by the whole
Board of Directors (as defined in Section 2 of Article IV of the Certificate of
Incorporation). Any business may be transacted at a regular meeting.
(b) Special Meetings.
(i) Except as otherwise required by the DGCL or other applicable law and
subject to the rights of the holders of Preferred Stock or any series
thereof, special meetings of the Board of Directors may be called at any
time by the Chairman of the Board, the President or the Board of Directors
pursuant to a resolution approved by a majority of the whole Board of
Directors and shall be called by the Secretary on the written request of
any of the foregoing. The place may be within or without the State of
Delaware as designated in the notice.
(ii) Written or printed notice of each special meeting of the Board of
Directors, stating the place, day and hour of the meeting and the purpose
or purposes thereof, shall be mailed to each director at least three (3)
days before the day on which the meeting is to be held, or shall be
delivered to such director personally or sent to such director by telegram
or facsimile at least two (2) days before the day on which the meeting is
to be held. If mailed, such notice shall be deemed to be delivered when it
is deposited in the United States mail with postage thereon prepaid,
addressed to the director at such director's residence or usual place of
business. If given by telegraph, such notice shall be deemed to be
delivered when it is delivered to the telegraph company. If given by
facsimile, such notice shall be deemed delivered upon receipt of
verification. The notice may be given by any person having authority to
call the meeting.
(iii) "Notice" and "call" with respect to such meetings shall be deemed
to be synonymous.
(c) Waiver of Notice. Whenever any notice is required to be given to any
director under the provisions of the DGCL or other applicable law, the
Certificate of Incorporation or these Bylaws, a waiver thereof in writing
signed by such director, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice. Attendance of a director at
any meeting shall constitute a waiver of notice of the meeting except where a
director attends such meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular meeting of the Board of Directors need be specified in the notice or
waiver of notice of the meeting.
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Section 3.9 Meetings by Conference Telephone or Similar Communications
Equipment. Unless otherwise prohibited by the DGCL or other applicable law, the
Certificate of Incorporation or these Bylaws, members of the Board of Directors
of the Corporation, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors or committee by means of
conference telephone or similar communications equipment whereby all persons
participating in the meeting can hear each other, and participation in a
meeting in such manner shall constitute presence in person at the meeting.
Section 3.10 Action Without a Meeting. Any action which is required to be or
may be taken at a meeting of the directors, or of the executive committee or
any other committee of the directors, may be taken without a meeting if
consents in writing, setting forth the action so taken, are signed by all of
the members of the Board of Directors or of the committee as the case may be.
The consents shall have the same force and effect as a unanimous vote at a
meeting duly held. The Secretary shall file such consents with the minutes of
the meetings of the Board of Directors or of the committee as the case may be.
Section 3.11 Quorum and Voting. At all meetings of the Board of Directors, a
majority of the whole Board of Directors shall, unless a greater number as to
any particular matter is required by the DGCL or other applicable law, the
Certificate of Incorporation or these Bylaws, constitute a quorum for the
transaction of business. The act of a majority of the directors present at any
meeting of the Board of Directors at which a quorum is present shall be the act
of the Board of Directors, subject to the provisions of Section 144 of the DGCL
(as to approval of contracts or transactions in which a director has a direct
or indirect material financial interest), Section 141 of the DGCL (as to
appointment of committees), and Section 145 of the DGCL (as to indemnification
of directors), and unless the act of a greater number is required by the DGCL
or other applicable law, the Certificate of Incorporation or these Bylaws.
Section 3.12 Committees.
(a) The Board of Directors may, by resolution or resolutions adopted by a
majority of the whole Board of Directors, designate two or more directors of
the Corporation to constitute one or more committees (including, without
limitation, an executive committee). Each such committee, to the extent
provided in such resolution or resolutions, shall have and may exercise all of
the authority of the Board of Directors in the management of the Corporation;
provided, however, that the designation of each such committee and the
delegation thereto of authority shall not operate to relieve the Board of
Directors, or any member thereof, of any responsibility imposed upon it or such
member by law.
(b) Each such committee shall keep regular minutes of its proceedings, which
minutes shall be recorded in the minute book of the Corporation. The Secretary
or an Assistant Secretary of the Corporation may act as Secretary for each such
committee if the committee so requests.
Section 3.13 Audit Committee.
(a) The Board of Directors at the annual or any regular or special meeting
of the directors shall, by resolution adopted by a majority of the whole Board
of Directors, designate and elect two or more directors to constitute an Audit
Committee and appoint one of the directors so designated as the chairman of the
Audit Committee. Membership on the Audit Committee shall be restricted to those
directors who are independent of the management of the Corporation and are free
from any relationship that, in the opinion of the Board of Directors, would
interfere with the exercise of independent judgment as a member of the
committee. Vacancies in the Audit Committee may be filled by the Board of
Directors at any meeting thereof. Each member of the Audit Committee shall hold
office until such Audit Committee member's successor has been duly elected and
qualified, or until such Audit Committee member's resignation or removal from
the Audit Committee by the
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Board of Directors, or until such Audit Committee member otherwise ceases to be
a director. Any member of the Audit Committee may be removed from the Audit
Committee by resolution adopted by a majority of the whole Board of Directors.
The compensation, if any, of members of the Audit Committee shall be
established by resolution of the Board of Directors.
(b) The Audit Committee shall be responsible for: recommending to the Board
of Directors the appointment or discharge of independent auditors; reviewing
with the management and the independent auditors the terms of engagement of
independent auditors, including the fees, scope and timing of the audit and any
other services rendered by the independent auditors; reviewing with the
independent auditors and management the Corporation's policies and procedures
with respect to internal auditing, accounting and financial controls; reviewing
with the management the independent statements; audit results and reports and
the recommendation made by any of the auditors with respect to changes in
accounting procedures and internal controls; reviewing the results of studies
of the Corporation's system of internal accounting controls; and performing any
other duties or functions deemed appropriate by the Board of Directors. The
Audit Committee shall have the powers and rights necessary or desirable to
fulfill these responsibilities, including the power and right to consult with
legal counsel and to rely upon the opinion of legal counsel. The Audit
Committee is authorized to communicate directly with the Corporation's
financial officers and employees, internal auditors and independent auditors as
it deems desirable and to have the internal auditors or independent auditors
perform any additional procedures as it deems appropriate.
(c) All actions of the Audit Committee shall be reported to the Board of
Directors at the next meeting of the Board of Directors. The minute books of
the Audit Committee shall at all times be open to the inspection of any
director.
(d) The Audit Committee shall meet at the call of its chairman or of any two
members of the Audit Committee (or if there shall be only one other member,
then at the call of that member). A majority of the Audit Committee shall
constitute a quorum for the transaction of business (or if there shall only be
two members, then both must be present), and the act of a majority of those
present at any meeting at which a quorum is present (or if there shall be only
two members, then they must act unanimously) shall constitute the act of the
Audit Committee.
Section 3.14 Compensation Committee.
(a) The Board of Directors at the annual or any regular or special meeting
shall, by resolution adopted by a majority of the whole Board of Directors,
designate and elect two or more directors to constitute a Compensation
Committee. Membership on the Compensation Committee shall be restricted to
disinterested persons which for this purpose shall mean any director who,
during the time such director is a member of the Compensation Committee is not
eligible, and has not at any time within one year prior thereto been eligible,
for selection to participate (other than in a manner as to which the
Compensation Committee has no discretion) in any of the compensation plans
administered by the Compensation Committee. Vacancies in the Compensation
Committee may be filled by the Board of Directors at any meeting. Each member
of the Compensation Committee shall hold office until such Compensation
Committee member's successor has been duly elected and qualified, or until such
Compensation Committee member's resignation or removal from the Compensation
Committee by the Board of Directors, or until such Compensation Committee
member otherwise ceases to be a director or a disinterested person. Any member
of the Compensation Committee may be removed by resolution adopted by a
majority of the whole Board of Directors. The compensation, if any, of the
members of the Compensation Committee shall be established by resolution of the
Board of Directors.
(b) The Compensation Committee shall, from time to time, recommend to the
Board of Directors the compensation and benefits of the executive officers of
the Corporation. The
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Compensation Committee shall have the power and authority vested in the Board
of Directors by any benefit plan of the Corporation. The Compensation Committee
shall also make recommendations to the Board of Directors with regard to the
compensation of the Board of Directors and its committees, with the exception
of the Compensation Committee.
(c) All actions of the Compensation Committee shall be reported to the Board
of Directors at the next meeting of the Board of Directors. The minute books or
the Compensation Committee shall at all times be open to the inspection of any
director.
(d) The Compensation Committee shall meet at the call of the chairman of the
Compensation Committee or of any two members of the Compensation Committee (or
if there shall be only one other member, then at the call of that member). A
majority of the Compensation Committee shall constitute a quorum for the
transaction of business (or if there shall be only two members, then both must
be present), and the act of a majority of those present at any meeting at which
a quorum is present (or if there shall be only two members, then they must act
unanimously) shall be the act of the Compensation Committee.
Section 3.15 Nominating Committee.
(a) The Board of Directors at the annual or any regular or special meeting
of the directors shall, by resolution adopted by a majority of the whole Board
of Directors, designate and elect two or more directors to constitute a
Nominating Committee and appoint one of the directors so designated as the
chairman of the Nominating Committee. Membership on the Nominating Committee
shall be restricted to Independent Directors (as defined in Section 4.B.1 of
Article IV of the Certificate of Incorporation). Vacancies in the Nominating
Committee may be filled by the Board of Directors at any meeting thereof. Each
member of the Nominating Committee shall hold office until such Nominating
Committee member's successor has been duly elected and qualified, or until such
Nominating Committee member's resignation or removal from the Nominating
Committee by the Board of Directors, or until such Nominating Committee member
otherwise ceases to be a director. Any member of the Nominating Committee may
be removed from the Nominating Committee by resolution adopted by a majority of
the whole Board of Directors. The compensation, if any, of members of the
Nominating Committee shall be established by resolution of the Board of
Directors.
(b) The Nominating Committee shall be responsible for: recommending to the
Board of Directors a slate of directors to be presented for election by
stockholders at each annual meeting of the stockholders of the Corporation and
any other duties or functions deemed appropriate by the Board of Directors. The
Nominating Committee shall have the powers and rights necessary or desirable to
fulfill these responsibilities, including the power and right to consult with
legal counsel and to rely upon the opinion of legal counsel.
(c) All actions of the Nominating Committee shall be reported to the Board
of Directors at the next meeting of the Board of Directors. The minute books of
the Nominating Committee shall at all times be open to the inspection of any
director.
(d) The Nominating Committee shall meet at the call of its chairman or of
any two members of the Nominating Committee (or if there shall be only one
other member, then at the call of that member). A majority of the Nominating
Committee shall constitute a quorum for the transaction of business (or if
there shall be only two members, then both must be present), and the act of a
majority of those present at any meeting at which a quorum is present (or if
there shall be only two members, then they must act unanimously) shall be the
act of the Nominating Committee.
Section 3.16 Alternate Committee Members. The Board of Directors, by
resolution adopted by a majority of the whole Board of Directors, may designate
one or more additional directors as
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alternate members of any committee to replace any absent or disqualified member
at any meeting of that committee, and at any time may change the membership of
any committee or amend or rescind the resolution designating the committee. In
the absence or disqualification of a member or alternate member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not the member or members constitute a quorum, may
unanimously appoint another director to act at the meeting in the place of any
such absent or disqualified member, provided that the director so appointed
meets any qualifications stated in these Bylaws or the resolution designating
the committee or any amendment thereto.
Section 3.17 Committee Procedures. Unless otherwise provided in these Bylaws
or in the resolution designating any committee, any committee may fix its rules
or procedures and fix the time and place of its meetings and specify what
notice of meetings, if any, shall be given.
Section 3.18 Limitation of Committee Powers. Notwithstanding any other
provision of these Bylaws, no committee of the Board of Directors shall have
the power or authority of the Board of Directors with respect to (i) amending
the Certificate of Incorporation, (ii) approving any action which under the
DGCL or other applicable law, also requires stockholders' approval or approval
of the outstanding shares, (iii) approving or recommending to the stockholders
a dissolution of the Corporation or a revocation of a dissolution, (iv)
amending these Bylaws, (v) declaring a dividend or making any other
distribution to the stockholders, (vi) authorizing the issuance of stock
otherwise than pursuant to (the grant or exercise of a stock option under
employee stock options of the Corporation or in connection with a public
offering of securities registered under the Securities Act of 1933, (vii)
filling vacancies on the Board of Directors or any committee thereof, or (viii)
amending or repealing any resolution of the Board of Directors.
Section 3.19 Compensation of Directors and Committee Members. Directors and
members of all committees shall not receive any stated salary for their
services as such, unless authorized by resolution of the Board of Directors. By
resolution of the Board of Directors a fixed sum and expenses of attendance, if
any, also may be allowed for attendance at each regular or special meeting of
the Board of Directors or any committee. Nothing herein contained shall be
construed to preclude any director or committee member from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 3.20 Resignations. Any director may resign at any time upon written
notice to the Corporation. Such resignation shall take effect at the time
specified therein or, if no time is specified therein, upon receipt thereof by
the Corporation, and, unless otherwise specified therein, the acceptance of
such resignation by the Corporation shall not be necessary to make such
resignation effective.
Section 3.21 Removal of Directors. Directors may be removed only in the
manner provided in the Certificate of Incorporation.
Section 3.22 Stakeholder Interests. The Board of Directors shall have the
authority to make its decisions based on a long term perspective and in doing
so shall be entitled to make decisions which may produce short term outcomes
less favorable than alternatives which may be available to the Corporation or
its stockholders. The Board of Directors, in making its decisions, shall be
entitled to consider the interests of stakeholders in the Company other than
stockholders, including employees, areas in which the Corporation maintains
operations, creditors, and other persons who in the Board of Directors' sole
judgment have a legitimate stake in the Board of Directors' decision. The Board
of Directors shall have discretion to determine how to balance any interests of
stockholders and other stakeholders in arriving at any decision.
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Article IV
Officers
Section 4.1 Designations.
(a) The officers of the Corporation shall be a Chairman of the Board, a Vice
Chairman of the Board, a President, one or more Executive Vice Presidents, one
or more Vice Presidents, a Secretary, a Treasurer, one or more Assistant
Secretaries and one or more Assistant Treasurers. The Board of Directors shall
elect a Chairman of the Board, a Vice Chairman of the Board, a President, a
Treasurer and a Secretary at its first meeting after each annual meeting of the
stockholders. The Board of Directors then, or from time to time, may also elect
one or more of the other prescribed officers as it shall deem advisable, but
need not elect any officers other than a Chairman of the Board, a Vice Chairman
of the Board, a President, a Treasurer and a Secretary. The Board of Directors
may, if it desires, elect or appoint additional officers and may further
identify or describe any one or more of the officers of the Corporation.
(b) The Chairman and the Vice Chairman of the Board shall be chosen from
among the Board of Directors, but the other officers of the Corporation need
not be members of the Board of Directors. Any two or more offices may be held
by the same person.
(c) An officer shall be deemed qualified when such person enters upon the
duties of the office to which such person has been elected or appointed and
furnishes any bond required by the Board of Directors; but the Board of
Directors may also require such person's written acceptance and promise
faithfully to discharge the duties of such office.
Section 4.2 Term of Office. Each officer of the Corporation shall hold such
person's office at the pleasure of the Board of Directors or for such other
period as the Board of Directors may specify at the time of such person's
election or appointment, or until such person's resignation, removal by the
Board of Directors or death, whichever first occurs. In any event, each officer
of the Corporation who is not reelected or reappointed at the annual election
of officers by the Board of Directors next succeeding such person's election or
appointment shall be deemed to have been removed by the Board of Directors,
unless the Board of Directors provides otherwise at the time of such person's
election or appointment.
Section 4.3 Other Agents. The Board of Directors from time to time may
appoint such other agents for the Corporation as the Board of Directors shall
deem necessary or advisable, each of whom shall serve at the pleasure of the
Board of Directors or for such period as the Board of Directors may specify and
shall exercise such powers, have such titles and perform such duties as shall
be determined from time to time by the Board of Directors or by an officer
empowered by the Board of Directors to make such determinations.
Section 4.4 Removal. Any officer or agent elected or appointed by the Board
of Directors, and any employee, may be removed or discharged by the Board of
Directors whenever in its judgment the best interests of the Corporation would
be served thereby, but such removal or discharge shall be without prejudice to
the contract rights, if any, of the person so removed or discharged.
Section 4.5 Salaries and Compensation. Salaries and compensation of all
elected officers of the Corporation shall be fixed, increased or decreased by
the Board of Directors, but this power, except as to the salary or compensation
of the Chairman of the Board and the President, may, unless prohibited by law,
be delegated by the Board of Directors to the Chairman of the Board, the
President or a committee. Salaries and compensation of all appointed officers,
agents and employees of the Corporation may be fixed, increased and decreased
by the Board of Directors, but until action
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is taken with respect thereof by the Board of Directors, the same may be fixed,
increased or decreased by the President or by such other officer or officers as
may be empowered by the Board of Directors to do so.
Section 4.6 Delegation of Authority to Hire, Discharge and Designate
Duties. The Board of Directors from time to time may delegate to the Chairman
of the Board, the President or other officer or executive employees of the
Corporation, authority to hire and discharge and to fix and modify the duties
and salary or other compensation of employees of the Corporation under the
jurisdiction of such person, and the Board of Directors may delegate to such
officer or executive employee similar authority with respect to obtaining and
retaining for the Corporation the services of attorneys, accountants and other
experts.
Section 4.7 Chairman of the Board. If a Chairman of the Board is elected,
such Chairman of the Board shall preside at all meetings of the stockholders
and directors at which such Chairman of the Board may be present and shall
perform such other duties and have such other powers, responsibilities and
authority as may be prescribed elsewhere in these Bylaws. The Board of
Directors may delegate such other powers, responsibilities and authority and
assign such additional duties to the Chairman of the Board, other than those
conferred by law exclusively upon the President or other officer, as the Board
of Directors may from time to time determine, and, to the extent permissible by
law, the Board of Directors may designate the Chairman of the Board as the
chief executive officer of the Corporation with all of the duties, powers,
responsibilities and authority otherwise conferred upon the President of the
Corporation under Section 4.8 of these Bylaws, or the Board of Directors may
from time to time divide the duties, powers, responsibilities and authority for
the general control and management of the Corporation's business and affairs
between the Chairman of the Board and the President. If the Chairman of the
Board is designated as the chief executive officer of the Corporation or to
have the powers of the chief executive officer coextensively with the
President, notice thereof shall be given to the extent and in the manner as may
be required by law.
Section 4.8 President.
(a) Unless the Board of Directors otherwise provides, the President shall be
the chief executive officer of the Corporation with such general executive
duties, powers, responsibilities and authority of supervision and management as
are usually vested in the office of the Chief Executive Officer of a
corporation, and such President shall carry into effect all directions and
resolutions of the Board of Directors. In the absence of the Chairman of the
Board, or if there is no Chairman of the Board, the President shall preside at
all meetings of the stockholders and the Board of Directors.
(b) The President may execute all bonds, notes, debentures, mortgages and
other contracts requiring the seal of the Corporation, may cause the seal to be
affixed thereof, and may execute all other instruments, for and in the name of
the Corporation.
(c) Unless the Board of Directors otherwise provides, the President, or any
person designated in writing by the President, shall have full power and
authority on behalf of the Corporation to (i) attend and to vote or take action
at any meeting of the holders of securities of corporations in which the
Corporation may hold securities, and at such meeting shall possess and may
exercise any and all rights and powers incident to being a holder of such
securities, and (ii) execute and deliver waivers of notice and proxies for and
in the name of this Corporation with respect to securities of any such
corporation held by this Corporation.
(d) The President shall, unless the Board of Directors otherwise provides,
be an ex officio member of all standing committees.
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(e) The President shall perform such other duties and have such other
powers, responsibilities and authority as may be prescribed elsewhere in these
Bylaws or from time to time by the Board of Directors.
(f) If a Chairman of the Board is elected and designated as the chief
executive officer of the Corporation, as provided in Section 4.7 of these
Bylaws, the President shall perform such duties and have such powers,
responsibilities and authority as may be specifically delegated to the
President by the Board of Directors or are conferred by law exclusively upon
the President and, in the absence or disability of the Chairman of the Board or
in the event of the Chairman of the Board's inability or refusal to act, the
President shall perform the duties and exercise the powers of the Chairman of
the Board.
Section 4.9 Executive Vice Presidents and Vice Presidents. In the absence or
disability of the President, or in the event of the President's inability or
refusal to act, any Executive Vice President or Vice President may perform the
duties and exercise the powers of the President, including presiding at
meetings of the stockholders of the Corporation and meetings of the Board of
Directors in the absence of the Chairman of the Board, until the Board of
Directors otherwise provides. Executive Vice Presidents and Vice Presidents
shall perform such other duties and have such other powers, responsibilities
and authority as the Board of Directors may from time to time prescribe.
Section 4.10 Secretary and Assistant Secretaries.
(a) The Secretary shall attend all meetings of the Board of Directors and,
except as otherwise provided for in Section 2.5 of these Bylaws, all meetings
of the stockholders. The Secretary shall prepare minutes of all proceedings at
such meetings and shall preserve them in a minute book of the Corporation. The
Secretary shall perform similar duties for each standing or temporary committee
when requested by the Board of Directors or such committee.
(b) The Secretary shall see that all books, records, lists and information,
or duplicates, required to be maintained at the registered or other office of
the Corporation in the State of Missouri, or elsewhere, are so maintained.
(c) The Secretary shall keep in safe custody the seal of the Corporation,
and shall have authority to affix the seal of the Corporation to any instrument
requiring a corporate seal and, when so affixed, the Secretary may attest the
seal by the Secretary's signature.
(d) The Secretary shall have the general duties, powers, responsibilities
and authority of a secretary of a corporation and shall perform such other
duties and have such other powers, responsibilities and authority as may be
prescribed elsewhere in these Bylaws or from time to time by the Board of
Directors or the chief executive officer of the Corporation, under whose direct
supervision the secretary shall be.
(e) In the absence or disability of the Secretary or in the event of the
Secretary's inability or refusal to act, any Assistant Secretary may perform
the duties and exercise the powers of the Secretary until the Board of
Directors otherwise provides. Assistant Secretaries shall perform such other
duties and have such other powers, responsibilities and authority as the Board
of Directors may from time to time prescribe.
Section 4.11 Treasurer and Assistant Treasurers.
(a) The Treasurer shall have responsibility for the safekeeping of the funds
and securities of the Corporation, shall keep or cause to be kept full and
accurate accounts of receipts and disbursements
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in books belonging to the Corporation and shall keep or cause to be kept all
other books of account and accounting records of the Corporation. The Treasurer
shall deposit or cause to be deposited all moneys and other valuable effects in
the name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors or by any officer of the Corporation to
whom such authority has been granted by the Board of Directors.
(b) The Treasurer shall disburse, or permit to be disbursed, the funds of
the Corporation as may be ordered, or authorized generally, by the Board of
Directors, and shall render to the chief executive officer of the Corporation
and the directors, whenever they may require, an account of all transactions as
treasurer and of those under the Treasurer's jurisdiction, and of the financial
condition of the Corporation.
(c) The Treasurer shall have the general duties, powers, responsibilities
and authority of a treasurer of a corporation and shall, unless otherwise
provided by the Board of Directors, be the chief financial and accounting
officer of the Corporation. The Treasurer shall perform such other duties and
shall have such other powers, responsibilities and authority as may be
prescribed elsewhere in these Bylaws or from time to time by the Board of
Directors.
(d) If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in a sum and with one or more sureties satisfactory to the
Board of Directors for the faithful performance of the duties of the
Treasurer's office and for the restoration to the Corporation, in the case of
the Treasurer's death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in the
Treasurer's possession or under the Treasurer's control which belong to the
Corporation.
(e) In the absence or disability of the Treasurer or in the event of the
Treasurer's inability or refusal to act, any Assistant Treasurer may perform
the duties and exercise the powers of the Treasurer until the Board of
Directors otherwise provides. Assistant Treasurers shall perform such other
duties and have such other powers, responsibilities and authority as the Board
of Directors may from time to time prescribe.
Section 4.12 Duties of Officers May Be Delegated. If any officer of the
Corporation is absent or unable to act, or for any other reason that the Board
of Directors may deem sufficient, the Board of Directors may delegate, for the
time being, some or all of the functions, duties, powers, responsibilities and
authority of any officer to any other officer, or to any other agent or
employee of the Corporation or other responsible person, provided a majority of
the whole Board of Directors concurs.
Article V
Indemnification
Section 5.1 Indemnification of Directors and Officers. The Corporation shall
be required, to the maximum extent permitted by the DGCL and the Certificate of
Incorporation, to indemnify each of its directors and officers and any director
or officer who is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, limited liability company or other enterprise against
expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was a director or an officer of the Corporation
or is or was serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust,
limited liability company or other enterprise.
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Section 5.2 Indemnification of Other Agents. The Corporation may, in its
absolute discretion, up to the maximum extent permitted by the DGCL and the
Certificate of Incorporation, indemnify each person who is not required to be
indemnified under Section 5.1 against expenses, judgments, fines, settlements,
and other amounts actually and reasonably incurred in connection with any
proceeding arising by reason of the fact that any such person is or was an
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, limited liability company or other
enterprise.
Section 5.3 Indemnification of Fiduciaries. The Corporation shall indemnify
any director, officer, employee, or other agent of the Corporation against
expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was a trustee, investment manager, or other
fiduciary under any employee benefit plan of the Corporation. The provisions of
this Section 5.3 shall be deemed to constitute a contract between the
Corporation and any such indemnified person, or for the benefit of any such
indemnified person.
Section 5.4 Advances of Expenses. To the extent permitted by the DGCL and
the Certificate of Incorporation, expenses incurred in defending any proceeding
in the case described in Section 5.1 of these Bylaws shall be advanced by the
Corporation prior to the final disposition of such proceeding upon receipt of
any undertaking by or on behalf of such person to repay such amount if it shall
be determined ultimately that he or she is not entitled to be indemnified by
the Corporation.
Section 5.5 Non-Exclusivity. The indemnification and the advancement of
expenses provided by this Article V shall not be exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any statute, the Certificate of Incorporation, these Bylaws or
any agreement, vote of stockholders or disinterested directors, policy of
insurance or otherwise, both as to action in their official capacity and as to
action in another capacity while holding their respective offices, and shall
not limit in any way any right which the Corporation may have to provide
additional indemnification with respect to the same or different persons or
classes of persons. The indemnification and advancement of expenses provided by
this Article V shall continue as to a person who has ceased to serve in a
capacity that entitles such person to indemnity under this Article V (an
"Indemnifiable Capacity") and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 5.6 Insurance. Upon resolution passed by the Board of Directors, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was serving in an Indemnifiable Capacity against any liability asserted
against such person and incurred by such person in any such capacity, or
arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under the
provisions of this Article V. Notwithstanding anything in this Article V to the
contrary: (i) the Corporation shall not be obligated to indemnify any person
serving in an Indemnifiable Capacity for any amounts which have been paid
directly to such person by any insurance maintained by the Corporation; and
(ii) any indemnification provided pursuant to this Article V (A) shall not be
used as a source of contribution to, or as a substitute for, or as a basis for
recoupment of any payments pursuant to, any indemnification obligation or
insurance coverage which is available from any Other Enterprise, and (B) shall
become operative, and payments shall be required to be made thereunder, only in
the event and to the extent that the amounts in question have not been fully
paid by any indemnification obligation or insurance coverage which is available
from any Other Enterprise.
Section 5.7 Vesting of Rights. The rights granted or created hereby shall be
vested in each person entitled to indemnification hereunder as a bargained-for
contractual condition of such person's serving or having served in an
Indemnifiable Capacity and, while this Article V may be amended or
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repealed, no such amendment or repeal shall release, terminate or adversely
affect the rights of such person under this Article V with respect to any act
taken or the failure to take any act by such person prior to such amendment or
repeal or with respect to any action, suit or proceeding with respect to such
act or failure to act filed after such amendment or repeal.
Section 5.8 Severability. If any provision of this Article V or the
application of any such provision to any person or circumstance is held
invalid, illegal or unenforceable for any reason whatsoever, the remaining
provisions of this Article V and the application of such provision to other
persons or circumstances shall not be affected thereby and, to the fullest
extent possible, the court finding such provision invalid, illegal or
unenforceable shall modify and construe the provision so as to render it valid
and enforceable as against all persons or entities and to give the maximum
possible protection to persons subject to indemnification hereby within the
bounds of validity, legality and enforceability. Without limiting the
generality of the foregoing, if any person who is or was serving in an
Indemnifiable Capacity is entitled under any provision of this Article V to
indemnification by the Corporation for some or a portion of the judgments,
amounts paid in settlement, attorneys' fees, ERISA excise taxes or penalties,
fines or other expenses actually and reasonably incurred by any such person in
connection with any threatened, pending or completed action, suit or proceeding
(including, without limitation, the investigation, defense, settlement or
appeal of such action, suit or proceeding), whether civil, criminal,
administrative, investigative or appellate, but not, however, for all of the
total amount thereof, the Corporation shall nevertheless indemnify such person
for the portion thereof to which such person is entitled.
Article VI
Stock
Section 6.1 Payment for Shares of Stock. The Corporation shall not issue
shares of stock of the Corporation except for money paid, labor done or
property actually received or in consideration of valid bona fide antecedent
debts. No note or obligation given by any stockholder, whether secured by deed
of trust, mortgage or otherwise, shall be considered as payment of any part or
any share or shares, and no loan of money for the purpose of such payment shall
be made by the Corporation.
Section 6.2 Certificates Representing Shares of Stock. The certificates
representing shares of stock of the Corporation shall be issued in numerical
order and shall be in such form as may be prescribed by the Board of Directors
in conformity with the Certificate of Incorporation, the DGCL or other
applicable law. The issuance of shares shall be entered in the stock books of
the Corporation as they are issued. Such entries shall show the name and
address of the person, firm, partnership, corporation or association to whom
each certificate is issued. Each certificate shall have printed, typed or
written thereon the name or the person, firm, partnership, corporation or
association to whom it is issued and the number of shares represented thereby.
It shall be signed by the President, an Executive Vice President or a Vice
President and by the Secretary, an Assistant Secretary, the Treasurer or an
Assistant Treasurer of the Corporation, and sealed with the seal of the
Corporation. Any or all signatures on such certificate may be facsimiles and
the seal may be facsimile, engraved or printed. In case any such officer,
transfer agent or registrar who has signed or whose facsimile signature has
been placed upon any such certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, such certificate
may nevertheless be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
Section 6.3 Transfers of Shares--Transfer Agent--Registrar. Transfers of
shares of stock shall be made on the stock record or transfer books of the
Corporation only by the person named in the stock certificate, or by such
stockholder's attorney lawfully constituted in writing, and upon
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surrender of the certificate therefor. The stock record book and other
transfer records shall be in the possession of the Secretary or of a transfer
agent for the Corporation. The Corporation, by resolution of the Board of
Directors, may from time to time appoint a transfer agent and, if desired, a
registrar, under such arrangements and upon such terms and conditions as the
Board of Directors deems advisable, but until and unless the Board of
Directors appoints some other person, firm or corporation as its transfer
agent (and upon the revocation of any such appointment, thereafter until a new
appointment is similarly made) the Secretary of the Corporation shall be the
transfer agent of the Corporation without the necessity of any formal action
of the Board of Directors, and the Secretary, or any person designated by the
Secretary, shall perform all of the duties of such transfer agent.
Section 6.4 Closing of Transfer Books. The Board of Directors shall have
power to close the stock transfer books of the Corporation for a period not
exceeding sixty (60) days preceding the date of any meeting of the
stockholders, or the date of payment of any dividend, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
shares shall go into effect; provided, however, that in lieu of closing the
stock transfer books, the Board of Directors may fix in advance a date, not
exceeding sixty (60) days preceding the date of any meeting of stockholders,
or the date for the payment of any dividend, or the date for the allotment of
rights, or the date when any change or conversion or exchange of shares shall
go into effect, as a record date for the determination of the stockholders
entitled to notice of, and to vote at, any such meeting and any adjournment
thereof, or entitled to receive payment of any such dividend, or entitled to
any such allotment of rights, or entitled to exercise the rights in respect of
any such change, conversion or exchange of shares. In such case only the
stockholders who are stockholders of record on the date of closing of the
transfer books or on the record date so fixed shall be entitled to notice of,
and to vote at, such meeting, and any adjournment thereof, or to receive
payment of such dividend, or to receive such allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the Corporation after such date of closing of the
transfer books or such record date fixed as aforesaid.
Section 6.5 Lost or Destroyed Certificates. In case of the loss or
destruction of any certificate for shares of stock of the Corporation, another
may be issued in its place upon proof of such loss or destruction and upon the
giving of a satisfactory bond of indemnity to the Corporation and the transfer
agent and registrar, if any, in such sum as the Board of Directors may
provide; provided, however, that a new certificate may be issued without
requiring a bond when in the judgment of the Board of Directors it is proper
to do so.
Section 6.6 Regulations. The Board of Directors shall have power and
authority to make all such rules and regulations as it may deem expedient
concerning the issue, transfer, conversion and registration of certificates
for shares of stock of the Corporation, not inconsistent with the DGCL and
other applicable law, the Certificate of Incorporation or these Bylaws.
Article VII
Corporate Finance
Section 7.1 Fixing of Capital--Transfers of Surplus. Except as may be
specifically otherwise provided in the Certificate of Incorporation, the Board
of Directors is expressly empowered to exercise all authority conferred upon
it or the Corporation by any law or statute, and in conformity therewith,
relative to: (a) determining what part of the consideration received for
shares of the Corporation shall be stated capital; (b) increasing or
decreasing stated capital; (c) transferring surplus to stated capital; (d)
transferring stated capital to surplus; (e) determining the consideration to
be received by the Corporation for its shares; and (f) determining all similar
or related matters; provided, however, that any concurrent action or consent
by or of the Corporation and its stockholders, required
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to be taken or given pursuant to the DGCL and other applicable law, shall be
duly taken or given in connection therewith.
Section 7.2 Dividend.
(a) Dividends on the outstanding shares of the Corporation, subject to the
provisions of the Certificate of Incorporation and the DGCL and other
applicable law, may be declared by the Board of Directors at any meeting.
Dividends may be paid in cash, property or shares of the Corporation's stock.
(b) Liquidating dividends or dividends representing a distribution of paid-
in surplus or a return of capital shall be made only when and in the manner
permitted by law.
(c) A member of the Board of Directors shall be fully protected in relying
in good faith upon the books of account of the Corporation or statements
prepared by any of the Corporation's officials as to the value and amount of
the assets, liabilities and earnings of the Corporation, or any facts pertinent
to the existence and amount of surplus or other funds from which dividends
might properly be declared and paid.
Section 7.3 Creation of Reserves. Before the payment of any dividend, there
may be set aside out of any funds of the Corporation available for dividends
such sum or sums as the Board of Directors from time to time deems proper as a
reserve fund or funds to meet contingencies or for equalizing dividends,
repairing or maintaining any property of the Corporation or any other purpose
deemed by the Board of Directors to be conducive to the interests of the
Corporation, and the Board of Directors may abolish any such reserve in the
manner in which it was created.
Article VIII
General Provisions
Section 8.1 Fiscal Year. The Board of Directors shall have power to fix and
from time to time change the fiscal year of the Corporation. In the absence of
action by the Board of Directors, the fiscal year of the Corporation shall end
each year on the date which the Corporation treated as the close of its first
fiscal year, until such time, if any, as the fiscal year shall be changed by
the Board of Directors.
Section 8.2 Corporate Seal. The corporate seal shall have inscribed thereon
the name of the Corporation and the words: "Corporate Seal--Delaware." The
corporate seal may be used by causing it, or a facsimile thereof, to be
impressed or affixed or in any manner reproduced. As provided in Section
4.10(c) of these Bylaws, the Secretary of the Corporation shall have the
authority to affix and attest the corporate seal. The Board of Directors may
give general authority to any other officer of the Corporation to affix the
corporate seal and, when so affixed, to attest the seal by such officer's
signature.
Section 8.3 Depositories. The moneys of the Corporation shall be deposited
in the name of the Corporation in such bank or banks or other depositories as
the Board of Directors shall designate, and shall be drawn out only by check or
draft signed by persons designated by resolution adopted by the Board of
Directors. Notwithstanding the foregoing, the Board of Directors may by
resolution authorize an officer or officers of the Corporation to designate any
bank or banks or other depositories in which moneys of the Corporation may be
deposited, and to designate the persons who may sign checks or drafts on any
particular account or accounts of the Corporation, whether created by direct
designation of the Board of Directors or by an authorized officer or officers
as aforesaid.
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Section 8.4 Amendments of the Bylaws.
(a) The Board of Directors shall have the power to amend these Bylaws by the
vote of a majority of the directors present at a meeting at which a quorum is
then present except that any amendment to Sections 2.3, 2.8(b), 2.11, 2.13,
3.3, 3.5, 8.4 or 8.5 or Article V of these Bylaws shall require the approval of
an Independent Board Majority.
(b) The holders of the Corporation's capital stock shall not have the power
to amend or replace these Bylaws in whole or in part unless such amendment or
replacement shall be approved by the holders of at least seventy-five percent
(75%) of the issued and outstanding shares of Common Stock of the Corporation.
Section 8.5 Inconsistent Provisions. The Board of Directors shall have the
authority to interpret these Bylaws and to resolve any question or issue which
may arise under these Bylaws. Whenever possible, each provision of these Bylaws
shall be interpreted in such manner as to be valid and enforceable under
applicable law and the provision of the Certificate of Incorporation, but if
any provision of these Bylaws shall be held to be prohibited by or
unenforceable under or to be in irreconcilable conflict with applicable law or
the Certificate of Incorporation, (i) such provision shall be applied to
accomplish the objectives of the provision as originally written to the fullest
extent permitted by law, and (ii) all other provisions of these Bylaws shall
remain in full force and effect.
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APPENDIX H
[LETTERHEAD OF WARBURG DILLON READ LLC]
January 31, 2000
The Board of Directors and the Independent Committee
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, Missouri 63103
Members of the Board of Directors and the Independent Committee:
We understand that RightCHOICE Managed Care, Inc., a Missouri corporation
("RIT"), is considering a transaction whereby, among other things, (i) Blue
Cross and Blue Shield of Missouri ("BCBSMo"), the majority shareholder of RIT,
will transfer certain assets, contracts and agreements, including existing
contracts of insurance and certain other assets required to satisfy applicable
statutory reserve requirements, to a wholly owned subsidiary of RIT ("RIT Sub")
and RIT Sub will assume all related liabilities (the "Asset Transfer" and, such
assets, the "Transferred Assets"), (ii) BCBSMo will undergo a conversion from a
non-profit non-stock corporation to a for-profit stock corporation ("New
BCBSMo") of which The Missouri Foundation for Health, a non-profit public
benefit corporation (the "Foundation"), will be the sole shareholder (the
"Conversion"), (iii) New BCBSMo will reincorporate from the State of Missouri
to the State of Delaware by means of a merger of New BCBSMo with and into
RightCHOICE Managed Care, Inc., a Delaware corporation and wholly owned
subsidiary of the Foundation ("New RIT" and, such reincorporation, the
"Reincorporation") as a result of which New RIT will succeed to all of the
assets and liabilities of BCBSMo other than those transferred to and assumed by
RIT Sub pursuant to the Asset Transfer and (iv) RIT will merge with and into
New RIT (the "Merger") pursuant to which (a) each outstanding share of the
Class A common stock, par value $0.01 per share, of RIT (the "RIT Class A
Stock") will be converted into one share (the "Class A Exchange Ratio") of the
common stock, par value $0.01 per share, of New RIT (the "New RIT Stock"), (b)
each outstanding share of Class B common stock, par value $0.01 per share, of
RIT (the "RIT Class B Stock"), which immediately prior to the Merger will be
owned by New RIT, will be cancelled and (c) the outstanding share of New RIT
Stock, which immediately prior to the Merger will be owned by the Foundation,
will be converted into a number of shares of New RIT Stock equal to the number
of shares of RIT Class B Stock outstanding immediately prior to consummation of
the Merger (the Asset Transfer, Conversion, Reincorporation and Merger being
collectively referred to herein as the "Reorganization"). The terms and
conditions of the Reorganization are more fully set forth in an Agreement and
Plan of Reorganization (the "Reorganization Agreement") to be entered into
among BCBSMo, RIT, the Foundation and New RIT. Representatives of RIT have
advised us that, upon consummation of the Reorganization, the outstanding
shares of New RIT Stock will be owned by (x) the public in the same aggregate
amount that the RIT Class A Stock was owned by the public immediately prior to
the Reorganization and (y) by the Foundation in the same aggregate amount that
the RIT Class B Stock was owned by BCBSMo immediately prior to the
Reorganization.
You have requested our opinion as to the fairness, from a financial point of
view, of the Class A Exchange Ratio to the holders of RIT Class A Stock.
Warburg Dillon Read LLC ("WDR") has acted as financial advisor to RIT with
respect to this opinion and will receive a fee for its services, a portion of
which is payable upon delivery of this opinion. WDR has in the past provided
services to RIT and certain of its affiliates with respect to
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matters related to the Reorganization, and may provide services to New RIT and
the Foundation in the future, for which services WDR has received and would
receive compensation. In the ordinary course of business, WDR, its successors
and affiliates may trade the securities of RIT and/or New RIT for our own
account and for the accounts of our customers and, accordingly, may at any time
hold a long or short position in such securities.
Our opinion does not address RIT's underlying business decision to effect
the Reorganization or constitute a recommendation to any stockholder as to how
such stockholder should vote with respect to any matter relating to the
Reorganization. At your direction, we have not been asked to, nor do we, offer
any opinion as to the material terms of the Reorganization Agreement and the
obligations thereunder, or the form of the Reorganization. We express no
opinion as to what the value of the New RIT Stock will be when issued pursuant
to the Merger or the price at which the New RIT Stock will trade or otherwise
be transferable subsequent to the Merger. In rendering this opinion, we have
assumed, with your consent, that each of RIT, BCBSMo, the Foundation and New
RIT will comply with all material terms of the Reorganization Agreement, as
applicable, and that the Reorganization will be validly consummated in
accordance with its terms. In connection with our engagement, we were not
requested to, and we did not, participate in the negotiation or structuring of
the Reorganization, nor were we requested to, and we did not, solicit third
party indications of interest with respect to the acquisition of all or a part
of RIT.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to RIT and certain available business and historical financial
information relating to the Transferred Assets; (ii) reviewed certain internal
financial information and other data relating to the business and financial
prospects of RIT and the Transferred Assets, including estimates and financial
forecasts prepared by the managements of RIT and BCBSMo, that were provided to
us by RIT and BCBSMo and not publicly available; (iii) conducted discussions
with members of the senior managements of RIT and BCBSMo with respect to the
operations, financial condition, history and prospects of RIT and the
Transferred Assets; (iv) reviewed historical prices and trading volumes for the
RIT Class A Stock; (v) reviewed publicly available financial and stock market
data with respect to certain other companies in lines of business we believe to
be generally comparable to those of RIT and the Transferred Assets; (vi)
compared the financial terms of the Reorganization with the publicly available
financial terms of certain other transactions which we believe to be generally
relevant; (vii) evaluated the potential pro forma financial impact of the
Reorganization on New RIT; (viii) reviewed drafts dated January 5, 2000 of the
Reorganization Agreement and certain related documents attached as exhibits to
the Amended and Restated Settlement Agreement, dated January 6, 2000, by and
among the Attorney General of the State of Missouri, the Missouri Department of
Insurance, BCBSMo and RIT; and (ix) conducted such other financial studies,
analyses, and investigations, and considered such other information as we
deemed necessary or appropriate.
In connection with our review, with your consent, we have not assumed any
responsibility for independent verification of any of the information provided
to or reviewed by us for the purpose of this opinion and have, with your
consent, relied on its being complete and accurate in all material respects. In
addition, at your direction, we have not made any independent evaluation or
appraisal of the Transferred Assets or any of the assets or liabilities
(contingent or otherwise and including, without limitation, reserves) of RIT
nor have we been furnished with any such evaluation or appraisal. We have been
advised, and at your direction have assumed, that there are no material
liabilities associated with the Transferred Assets other than those reflected
in the financial statements of BCBSMo provided to or discussed with us by the
managements of RIT and BCBSMo, and that RIT Sub and New RIT will be fully
indemnified against certain other contingent liabilities as specified in
certain agreements to be entered into in connection with the transactions
contemplated by the Reorganization. With respect to the financial forecasts and
estimates referred to above, we have
H-2
<PAGE>
assumed, at your direction, that they have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
managements of RIT and BCBSMo as to the future performance of RIT and the
Transferred Assets and will be realized in the amounts and at the times
contemplated thereby. We also have assumed, with your consent, that the Asset
Transfer will qualify as a tax-free transfer and the Conversion, the
Reincorporation and the Merger will be treated as tax-free reorganizations, for
federal income tax purposes. In addition, we have assumed, at your direction,
that the final terms of the Reorganization will not vary materially from those
set forth in the drafts of the Reorganization Agreement and related documents
reviewed by us. Our opinion is necessarily based on economic, monetary, market
and other conditions as in effect on, and the information made available to us
as of, the date of this letter.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Class A Exchange Ratio is fair, from a financial point of
view, to the holders of RIT Class A Stock.
Very truly yours,
Warburg Dillon Read LLC
H-3
<PAGE>
APPENDIX I
Section 351.455 of The General and Business Corporation
Law of Missouri
351.455. Shareholder who objects to merger may demand value of shares,
when.--1. If a shareholder of a corporation which is a party to a merger or
consolidation shall file with such corporation, prior to or at the meeting of
shareholders at which the plan of merger or consolidation is submitted to a
vote, a written objection to such plan of merger or consolidation, and shall
not vote in favor thereof, and such shareholder, within twenty days after the
merger or consolidation is effected, shall make written demand on the surviving
or new corporation for payment of the fair value of his shares as of the day
prior to the date on which the vote was taken approving the merger or
consolidation, the surviving or new corporation shall pay to such shareholder,
upon surrender of his certificate or certificates representing said shares, the
fair value thereof. Such demand shall state the number and class of the shares
owned by such dissenting shareholder. Any shareholder failing to make demand
within the twenty day period shall be conclusively presumed to have consented
to the merger or consolidation and shall be bound by the terms thereof.
2. If within thirty days after the date on which such merger or
consolidation was effected the value of such shares is agreed upon between the
dissenting shareholder and the surviving or new corporation, payment therefor
shall be made within ninety days after the date on which such merger or
consolidation was effected, upon the surrender of his certificate or
certificates representing said shares. Upon payment of the agreed value the
dissenting shareholder shall cease to have any interest in such shares or in
the corporation.
3. If within such period of thirty days the shareholder and the surviving
or new corporation do not so agree, then the dissenting shareholder may, within
sixty days after the expiration of the thirty day period, file a petition in
any court of competent jurisdiction within the county in which the registered
office of the surviving or new corporation is situated, asking for a finding
and determination of the fair value of such shares, and shall be entitled to
judgment against the surviving or new corporation for the amount of such fair
value as of the day prior to the date on which such vote was taken approving
such merger or consolidation, together with interest thereon to the date of
such judgment. The judgment shall be payable only upon and simultaneously with
the surrender to the surviving or new corporations of the certificate or
certificates representing said shares. Upon the payment of the judgment, the
dissenting shareholder shall cease to have any interest in such shares, or in
the surviving or new corporation. Such shares may be held and disposed of by
the surviving or new corporation as it may see fit. Unless the dissenting
shareholder shall file such petition within the time herein limited, such
shareholder and all persons claiming under him shall be conclusively presumed
to have approved and ratified the merger or consolidation, and shall be bound
by the terms thereof.
4. The right of a dissenting shareholder to be paid the fair value of his
shares as herein provided shall cease if and when the corporation shall abandon
the merger or consolidation.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The certificate of incorporation and bylaws of New RightCHOICE Managed Care,
Inc., a Delaware corporation ("New RightCHOICE") contain a provision for
directors and officers of the company who are or were parties to any
threatened, pending or completed civil, criminal, administrative or
investigative action to be indemnified against expenses, judgements, fines and
amounts paid in settlement to the fullest extent permitted by Delaware law.
Pursuant to Delaware law, a director or officer will be indemnified against
liability, provided he or she acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the company. Furthermore, a
director or officer will be indemnified against criminal action expenses and
fines, provided he or she had no reasonable cause to believe his or her conduct
was unlawful. However, a director or officer who is involved in litigation
initiated by or in the right of the company who is adjudged to be liable to the
company will not be entitled to indemnification, unless (i) he or she acted in
good faith and in a manner he or she reasonably believed to be in the best
interests of the company, or in a criminal action he or she had no reasonable
cause to believe his or her conduct was unlawful, and (ii) the court in which
the finding of liability was rendered determines that despite the adjudication
of liability, the director of officer is fairly and reasonably entitled to
indemnification.
To the extent that a director or officer is successful on the merits in
defense of a suit or proceeding brought against him or her by reason of the
fact that he or she is or was a director or officer of the company, or serves
or served any other enterprise or organization at the request of New
RightCHOICE, he or she will be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred in connection with such
action. Additionally, the company may advance funds to a director or officer
prior to a final disposition of the matter, provided the director or officer
agrees to repay any such advancements if it is determined that the director or
officer is not entitled to indemnification by the company.
New RightCHOICE's bylaws also authorize it to obtain insurance to protect
officers and directors from certain liabilities, including liabilities against
which the company cannot indemnify its directors and officers. New RightCHOICE
currently has in effect a directors' and officers' liability insurance policy.
The bylaws also provide for the company to indemnify persons other than its
officers and directors to the fullest extent permitted by Delaware law,
however, any such indemnification is at the company's absolute discretion.
In addition to the provision for indemnification discussed above, New
RightCHOICE's certificate of incorporation contains a provision that eliminates
the personal liability of a director of New RightCHOICE and its stockholders
for monetary damages resulting from a breach of his or her fiduciary duty.
However, a director is not relieved from liability for (a) any breach of the
duty of loyalty to the company or its shareholders, (b) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) payment of an improper dividend or improper repurchase of New
RightCHOICE's common stock under Section 174 of the Delaware General
Corporation Law, or (d) any transaction from which the director derived an
improper personal benefit.
Under the terms of an Indemnification Agreement between New RightCHOICE and
The Missouri Foundation For Health, The Missouri Foundation For Health will
indemnify all directors and officers of New RightCHOICE from any income tax
liabilities which may arise in the reorganization as well as for any claims
arising out of the reorganization of RightCHOICE Managed Care Inc., a Missouri
corporation, or the events that gave rise to the litigation between Blue Cross
and Blue Shield of Missouri and the State of Missouri.
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<PAGE>
Item 21. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this registration statement
or incorporated by reference herein:
<TABLE>
<CAPTION>
<C> <S> <C>
(2) Agreement and Plan of Reorganization, dated as of March
14, 2000, by and among Blue Cross and Blue Shield of
Missouri, a Missouri nonprofit health services
corporation, RightCHOICE Managed Care, Inc., a Missouri
corporation, The Missouri Foundation For Health, a
Missouri nonprofit public benefit corporation, and
RightCHOICE Managed Care, Inc., a Delaware corporation
(included as Appendix A to Proxy Statement/Prospectus);
(3)(a) Certificate of Incorporation of RightCHOICE Managed
Care, Inc., a Delaware corporation (included as Appendix
F to Proxy Statement/Prospectus);
(3)(b) Bylaws of RightCHOICE Managed Care, Inc., a Delaware
corporation (included as Appendix G to Proxy
Statement/Prospectus);
(5) Opinion of Lewis, Rice & Fingersh, L.C. as to the
legality of the securities being issued;*
(8) Opinion of PricewaterhouseCoopers LLP as to tax
matters;*
(9) Form of Voting Trust and Divestiture Agreement, to be
entered into by and among RightCHOICE Managed Care,
Inc., a Delaware corporation, The Missouri Foundation
For Health, a Missouri nonprofit public benefit
corporation, and the trustee to be named therein
(included as Appendix C to Proxy Statement/Prospectus);
(10)(a) Amended and Restated Settlement Agreement, dated January
6, 2000, by and among Jeremiah W. "Jay" Nixon, Attorney
General of the State of Missouri, the Missouri
Department of Insurance and Keith A. Wenzel, its
Director, Blue Cross and Blue Shield of Missouri, a
Missouri nonprofit health services corporation, and
RightCHOICE Managed Care, Inc., a Missouri corporation
(included as Appendix B to Proxy Statement/Prospectus);
(10)(b) Form of Registration Rights Agreement, to be entered
into by and between RightCHOICE Managed Care, Inc., a
Delaware corporation, and The Missouri Foundation For
Health, a Missouri nonprofit public benefit corporation
(included as Appendix D to Proxy Statement/Prospectus);
(10)(c) Form of Indemnification Agreement, to be entered into by
and between RightCHOICE Managed Care, Inc., a Delaware
corporation, and The Missouri Foundation For Health, a
Missouri nonprofit public benefit corporation (included
as Appendix E to Proxy Statement/Prospectus);
(10)(d) Directors' Stock Option Plan of RightCHOICE Managed
Care, Inc., a Missouri corporation (incorporated by
reference to Exhibit 10.18 to Registration Statement on
Form S-1 of RightCHOICE Managed Care, Inc., a Missouri
corporation (File No. 33-77798));
(10)(e) Equity Incentive Plan of RightCHOICE Managed Care, Inc.,
a Missouri corporation (incorporated by reference to
Exhibit 10.19 to Registration Statement on Form S-1 of
RightCHOICE Managed Care, Inc., a Missouri corporation
(File No. 33-77798));
(10)(f) Amendment to Equity Incentive Plan of RightCHOICE
Managed Care, Inc., a Missouri corporation (incorporated
by reference to Exhibit 10.19.1 to Form 10-K for the
period ending December 31, 1994 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
(10)(g) Form of Indemnification Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and its
Directors and Officers (incorporated by reference to
Exhibit 10.22 to Registration Statement on Form S-1 of
RightCHOICE Managed Care, Inc., a Missouri corporation
(File No. 33-77798));
(10)(h) Supplemental Executive Retirement Plan of RightCHOICE
Managed Care, Inc., a Missouri corporation, as restated
(incorporated by reference to Exhibit 10.22.1 to Form
10-K for the period ending December 31, 1999 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(i) Nonqualified Executive Deferred Compensation Plan of
RightCHOICE Managed Care, Inc., a Missouri corporation
(incorporated by reference to Exhibit 10.24 to
Registration Statement on Form S-1 of RightCHOICE
Managed Care, Inc., a Missouri corporation (File No. 33-
77798));
(10)(j) Amendment No. 1 to Nonqualified Executive Deferred
Compensation Plan of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to
Exhibit 10.23.1 to Form 10-K for the period ending
December 31, 1999 of RightCHOICE Managed Care, Inc., a
Missouri corporation);
(10)(k) Basic Program Document for the Nonqualified Executive
Deferred Compensation Program of RightCHOICE Managed
Care, Inc., a Missouri corporation (incorporated by
reference to Exhibit 10.5 to Form 10-Q for the period
ending June 30, 1999 of RightCHOICE Managed Care, Inc.,
a Missouri corporation);
(10)(l) Adoption Agreement for the Nonqualified Executive
Deferred Compensation Program of RightCHOICE Managed
Care, Inc., a Missouri corporation (incorporated by
reference to Exhibit 10.6 to Form 10-Q for the period
ending June 30, 1999 of RightCHOICE Managed Care, Inc.,
a Missouri corporation);
(10)(m) Amended Nonemployee Director Deferred Compensation Plan
of RightCHOICE Managed Care, Inc., a Missouri
corporation (incorporated by reference to Exhibit 10.26
to Form 10-K for the period ending December 31, 1994 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(n) Amendment No. 1 to Amended Nonemployee Director Deferred
Compensation Plan of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to
Exhibit 10.24.1 to Form 10-K for the period ending
December 31, 1999 of RightCHOICE Managed Care, Inc., a
Missouri corporation);
(10)(o) Adoption Agreement for Nonemployee Director Deferred
Compensation Plan of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to
Exhibit 10.7 to Form 10-Q for the period ending June 30,
1999 of RightCHOICE Managed Care, Inc., a Missouri
corporation);
(10)(p) Executive Employment Agreement of John A. O'Rourke dated
February 27, 1997 (incorporated by reference to Exhibit
10.51 to Form 10-Q for the period ending September 30,
1997 of RightCHOICE Managed Care, Inc., a Missouri
corporation);
(10)(q) First Amendment to Executive Employment Agreement of
John A. O'Rourke dated December 28, 1999 (incorporated
by reference to Exhibit 10.45.1 to Form 10-K for the
period ending December 31, 1999 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
(10)(r) Executive Severance Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and Sandra
A. Van Trease (incorporated by reference to Exhibit
10.47 to Form 10-K for the period ending December 31,
1997 of RightCHOICE Managed Care, Inc., a Missouri
corporation);
(10)(s) Executive Severance Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and Herbert
B. Schneiderman (incorporated by reference to Exhibit
10.48 to Form 10-K for the period ending December 31,
1997 of RightCHOICE Managed Care, Inc., a Missouri
corporation);
(10)(t) Officer Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Sandra A. Van
Trease (incorporated by reference to Exhibit 10.50 to
Form 10-K for the period ending December 31, 1997 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(u) Officer Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Herbert B.
Schneiderman (incorporated by reference to Exhibit 10.51
to Form 10-K for the period ending December 31, 1997 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(v) Form of Executive Severance Agreement between
RightCHOICE Managed Care, Inc., a Missouri corporation,
and certain senior vice presidents of RightCHOICE
Managed Care, Inc., a Missouri corporation (incorporated
by reference to Exhibit 10.52 to Form 10-K for the
period ending December 31, 1997 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
(10)(w) Form of Amendment No. 1 to Executive Severance Agreement
between RightCHOICE Managed Care, Inc., a Missouri
corporation, and certain senior vice presidents of
RightCHOICE Managed Care, Inc., a Missouri corporation
(incorporated by reference to Exhibit 10.52.2 to Form
10-K for the period ending December 31, 1999 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(x) Form of Officer Severance Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and certain
senior vice presidents of RightCHOICE Managed Care,
Inc., a Missouri corporation (incorporated by reference
to Exhibit 10.53 to Form 10-K for the period ending
December 31, 1997 of RightCHOICE Managed Care, Inc., a
Missouri corporation);
(10)(y) Form of Officer Severance Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and certain
vice presidents of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to
Exhibit 10.54 to Form 10-K for the period ending
December 31, 1997 of RightCHOICE Managed Care, Inc., a
Missouri corporation);
(10)(z) 2000 Alliance Blue Cross Blue Shield Incentive Plan
between RightCHOICE Managed Care, Inc., a Missouri
corporation, and Herbert B. Schneiderman (incorporated
by reference to Exhibit 10.5 to Form 10-Q for the period
ending March 31, 2000 of RightCHOICE Managed Care, Inc.,
a Missouri corporation);
(10)(a)(a) 2000 Alliance Blue Cross Blue Shield Incentive Plan
between RightCHOICE Managed Care, Inc., a Missouri
corporation, and Michael Fulk (incorporated by reference
to Exhibit 10.4 to Form 10-Q for the period ending March
31, 2000 of RightCHOICE Managed Care, Inc., a Missouri
corporation);
(10)(b)(b) 2000 Alliance Blue Cross Blue Shield/Blue Cross Blue
Shield of Missouri Incentive Plan between RightCHOICE
Managed Care, Inc., a Missouri corporation, and John A.
O'Rourke (incorporated by reference to Exhibit 10.1 to
Form 10-Q for the period ending March 31, 2000 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
(10)(c)(c) 2000 Alliance Blue Cross Blue Shield Incentive Plan
between RightCHOICE Managed Care, Inc., a Missouri
corporation, and Sandra A. Van Trease (incorporated by
reference to Exhibit 10.2 to Form 10-Q for the period
ending March 31, 2000 of RightCHOICE Managed Care, Inc.,
a Missouri corporation);
(10)(d)(d) 2000 Alliance Blue Cross Blue Shield Incentive Plan
between RightCHOICE Managed Care, Inc., a Missouri
corporation, and Angela F. Braly (incorporated by
reference to Exhibit 10.3 to Form 10-Q for the period
ending March 31, 2000 of RightCHOICE Managed Care, Inc.,
a Missouri corporation);
(10)(e)(e) Executive Severance Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and Michael
Fulk (incorporated by reference to Exhibit 10.69 to Form
10-K for the period ending December 31, 1998 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(f)(f) Officer Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Michael Fulk
(incorporated by reference to Exhibit 10.69 to Form 10-K
for the period ending December 31, 1998 of RightCHOICE
Managed Care, Inc., a Missouri corporation);
(10)(g)(g) Executive Severance Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and Angela
F. Braly (incorporated by reference to Exhibit 10.71 to
Form 10-K for the period ending December 31, 1999 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(h)(h) Officer Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Angela F. Braly
(incorporated by reference to Exhibit 10.72 to Form 10-K
for the period ending December 31, 1999 of RightCHOICE
Managed Care, Inc., a Missouri corporation);
(23)(a) Consent of Lewis, Rice & Fingersh, L.C. regarding
legality opinion (included in Opinion);
(23)(b) Consent of PricewaterhouseCoopers LLP regarding tax
matters opinion (included in Opinion);
(23)(c) Consent of PricewaterhouseCoopers regarding RightCHOICE
Managed Care, Inc., a Missouri corporation, Blue Cross
and Blue Shield of Missouri, and RightCHOICE Managed
Care, Inc., a Delaware corporation;
(23)(d) Consent of Persons About to Become Directors;*
(23)(e) Consent of Greensfelder, Hemker & Gale, P.C. regarding
legal opinion to Blue Cross and Blue Shield of
Missouri;*
(23)(f) Consent of PricewaterhouseCoopers LLP regarding
discussion of tax opinion;*
(24) Powers of Attorney;*
(27) Financial Data Schedule;*
(99)(a) Consent of Warburg Dillon Read LLC.*
</TABLE>
*Previously filed.
(b) No financial statement schedules are required to be filed herewith
pursuant to Item 21(b) or (c) of this Form.
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
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<PAGE>
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration or any material
change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933, as amended,
and will be governed by the final adjudication of such issue.
(5) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through the use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(6) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended,
and is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
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<PAGE>
(7) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated document by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(8) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of St. Louis, State of
Missouri, on October 2, 2000.
RIGHTCHOICE MANAGED CARE, INC.,
a Delaware corporation
/s/ John A. O'Rourke
By: _________________________________
John A. O'Rourke,
Chairman of the Board and
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on October 2, 2000.
<TABLE>
<CAPTION>
Signature Title/Position
--------- --------------
<S> <C>
/s/ John A. O'Rourke Chairman of the Board and President
___________________________________________ (principal executive officer)
John A. O'Rourke
/s/ Sandra A. Van Trease Vice Chairman of the Board, Executive Vice
___________________________________________ President and Director (principal
Sandra A. Van Trease financial officer)
/s/ Angela F. Braly Secretary and Director
___________________________________________
Angela F. Braly
</TABLE>
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit
------ -------
<C> <S> <C>
(2) Agreement and Plan of Reorganization, dated as of March 14,
2000, by and among Blue Cross and Blue Shield of Missouri, a
Missouri nonprofit health services corporation, RightCHOICE
Managed Care, Inc., a Missouri corporation, The Missouri
Foundation For Health, a Missouri nonprofit public benefit
corporation, and RightCHOICE Managed Care, Inc., a Delaware
corporation (included as Appendix A to Proxy
Statement/Prospectus);
(3)(a) Certificate of Incorporation of RightCHOICE Managed Care,
Inc., a Delaware corporation (included as Appendix F to
Proxy Statement/Prospectus);
(3)(b) Bylaws of RightCHOICE Managed Care, Inc., a Delaware
corporation (included as Appendix G to Proxy
Statement/Prospectus);
(5) Opinion of Lewis, Rice & Fingersh, L.C. as to the legality
of the securities being issued;*
(8) Opinion of PricewaterhouseCoopers LLP as to tax matters;*
(9) Form of Voting Trust and Divestiture Agreement, to be
entered into by and among RightCHOICE Managed Care, Inc., a
Delaware corporation, The Missouri Foundation For Health, a
Missouri nonprofit public benefit corporation, and the
trustee to be named therein (included as Appendix C to Proxy
Statement/Prospectus);
(10)(a) Amended and Restated Settlement Agreement, dated January 6,
2000, by and among Jeremiah W. "Jay" Nixon, Attorney General
of the State of Missouri, the Missouri Department of
Insurance and Keith A. Wenzel, its Director, Blue Cross and
Blue Shield of Missouri, a Missouri nonprofit health
services corporation, and RightCHOICE Managed Care, Inc., a
Missouri corporation (included as Appendix B to Proxy
Statement/Prospectus);
(10)(b) Form of Registration Rights Agreement, to be entered into by
and between RightCHOICE Managed Care, Inc., a Delaware
corporation, and The Missouri Foundation For Health, a
Missouri nonprofit public benefit corporation (included as
Appendix D to Proxy Statement/Prospectus);
(10)(c) Form of Indemnification Agreement, to be entered into by and
between RightCHOICE Managed Care, Inc., a Delaware
corporation, and The Missouri Foundation For Health, a
Missouri nonprofit public benefit corporation (included as
Appendix E to Proxy Statement/Prospectus);
(10)(d) Directors' Stock Option Plan of RightCHOICE Managed Care,
Inc., a Missouri corporation (incorporated by reference to
Exhibit 10.18 to Registration Statement on Form S-1 of
RightCHOICE Managed Care, Inc., a Missouri corporation (File
No. 33-77798));
(10)(e) Equity Incentive Plan of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to Exhibit
10.19 to Registration Statement on Form S-1 of RightCHOICE
Managed Care, Inc., a Missouri corporation (File No. 33-
77798));
(10)(f) Amendment to Equity Incentive Plan of RightCHOICE Managed
Care, Inc., a Missouri corporation (incorporated by
reference to Exhibit 10.19.1 to Form 10-K for the period
ending December 31, 1994 of RightCHOICE Managed Care, Inc.,
a Missouri corporation);
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit
------ -------
<C> <S> <C>
(10)(g) Form of Indemnification Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and its
Directors and Officers (incorporated by reference to Exhibit
10.22 to Registration Statement on Form S-1 of RightCHOICE
Managed Care, Inc., a Missouri corporation (File No.
33-77798));
(10)(h) Supplemental Executive Retirement Plan of RightCHOICE
Managed Care, Inc., a Missouri corporation, as restated
(incorporated by reference to Exhibit 10.22.1 to Form 10-K
for the period ending December 31, 1999 of RightCHOICE
Managed Care, Inc., a Missouri corporation);
(10)(i) Nonqualified Executive Deferred Compensation Plan of
RightCHOICE Managed Care, Inc., a Missouri corporation
(incorporated by reference to Exhibit 10.24 to Registration
Statement on Form S-1 of RightCHOICE Managed Care, Inc., a
Missouri corporation (File No. 33-77798));
(10)(j) Amendment No. 1 to Nonqualified Executive Deferred
Compensation Plan of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to Exhibit
10.23.1 to Form 10-K for the period ending December 31, 1999
of RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(k) Basic Program Document for the Nonqualified Executive
Deferred Compensation Program of RightCHOICE Managed Care,
Inc., a Missouri corporation (incorporated by reference to
Exhibit 10.5 to Form 10-Q for the period ending June 30,
1999 of RightCHOICE Managed Care, Inc., a Missouri
corporation);
(10)(l) Adoption Agreement for the Nonqualified Executive Deferred
Compensation Program of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to Exhibit
10.6 to Form 10-Q for the period ending June 30, 1999 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(m) Amended Nonemployee Director Deferred Compensation Plan of
RightCHOICE Managed Care, Inc., a Missouri corporation
(incorporated by reference to Exhibit 10.26 to Form 10-K for
the period ending December 31, 1994 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
(10)(n) Amendment No. 1 to Amended Nonemployee Director Deferred
Compensation Plan of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to Exhibit
10.24.1 to Form 10-K for the period ending December 31, 1999
of RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(o) Adoption Agreement for Nonemployee Director Deferred
Compensation Plan of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to Exhibit
10.7 to Form 10-Q for the period ending June 30, 1999 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(p) Executive Employment Agreement of John A. O'Rourke dated
February 27, 1997 (incorporated by reference to Exhibit
10.51 to Form 10-Q for the period ending September 30, 1997
of RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(q) First Amendment to Executive Employment Agreement of John A.
O'Rourke dated December 28, 1999 (incorporated by reference
to Exhibit 10.45.1 to Form 10-K for the period ending
December 31, 1999 of RightCHOICE Managed Care, Inc., a
Missouri corporation);
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit
------ -------
<C> <S> <C>
(10)(r) Executive Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Sandra A. Van Trease
(incorporated by reference to Exhibit 10.47 to Form 10-K for
the period ending December 31, 1997 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
(10)(s) Executive Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Herbert B.
Schneiderman (incorporated by reference to Exhibit 10.48 to
Form 10-K for the period ending December 31, 1997 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(t) Officer Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Sandra A. Van Trease
(incorporated by reference to Exhibit 10.50 to Form 10-K for
the period ending December 31, 1997 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
(10)(u) Officer Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Herbert B.
Schneiderman (incorporated by reference to Exhibit 10.51 to
Form 10-K for the period ending December 31, 1997 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(v) Form of Executive Severance Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and certain
senior vice presidents of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to Exhibit
10.52 to Form 10-K for the period ending December 31, 1997
of RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(w) Form of Amendment No. 1 to Executive Severance Agreement
between RightCHOICE Managed Care, Inc., a Missouri
corporation, and certain senior vice presidents of
RightCHOICE Managed Care, Inc., a Missouri corporation
(incorporated by reference to Exhibit 10.52.2 to Form 10-K
for the period ending December 31, 1999 of RightCHOICE
Managed Care, Inc., a Missouri corporation);
(10)(x) Form of Officer Severance Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and certain
senior vice presidents of RightCHOICE Managed Care, Inc., a
Missouri corporation (incorporated by reference to Exhibit
10.53 to Form 10-K for the period ending December 31, 1997
of RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(y) Form of Officer Severance Agreement between RightCHOICE
Managed Care, Inc., a Missouri corporation, and certain vice
presidents of RightCHOICE Managed Care, Inc., a Missouri
corporation (incorporated by reference to Exhibit 10.54 to
Form 10-K for the period ending December 31, 1997 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(z) 2000 Alliance Blue Cross Blue Shield Incentive Plan between
RightCHOICE Managed Care, Inc., a Missouri corporation, and
Herbert B. Schneiderman (incorporated by reference to
Exhibit 10.5 to Form 10-Q for the period ending March 31,
2000 of RightCHOICE Managed Care, Inc., a Missouri
corporation);
(10)(a)(a) 2000 Alliance Blue Cross Blue Shield Incentive Plan between
RightCHOICE Managed Care, Inc., a Missouri corporation, and
Michael Fulk (incorporated by reference to Exhibit 10.4 to
Form 10-Q for the period ending March 31, 2000 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Exhibit
------ -------
<C> <S> <C>
(10)(b)(b) 2000 Alliance Blue Cross Blue Shield/Blue Cross Blue Shield
of Missouri Incentive Plan between RightCHOICE Managed Care,
Inc., a Missouri corporation, and John A. O'Rourke
(incorporated by reference to Exhibit 10.1 to Form 10-Q for
the period ending March 31, 2000 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
(10)(c)(c) 2000 Alliance Blue Cross Blue Shield Incentive Plan between
RightCHOICE Managed Care, Inc., a Missouri corporation, and
Sandra A. Van Trease (incorporated by reference to Exhibit
10.2 to Form 10-Q for the period ending March 31, 2000 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(d)(d) 2000 Alliance Blue Cross Blue Shield Incentive Plan between
RightCHOICE Managed Care, Inc., a Missouri corporation, and
Angela F. Braly (incorporated by reference to Exhibit 10.3
to Form 10-Q for the period ending March 31, 2000 of
RightCHOICE Managed Care, Inc., a Missouri corporation);
(10)(e)(e) Executive Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Michael Fulk
(incorporated by reference to Exhibit 10.69 to Form 10-K for
the period ending December 31, 1998 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
(10)(f)(f) Officer Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Michael Fulk
(incorporated by reference to Exhibit 10.69 to Form 10-K for
the period ending December 31, 1998 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
(10)(g)(g) Executive Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Angela F. Braly
(incorporated by reference to Exhibit 10.71 to Form 10-K for
the period ending December 31, 1999 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
(10)(h)(h) Officer Severance Agreement between RightCHOICE Managed
Care, Inc., a Missouri corporation, and Angela F. Braly
(incorporated by reference to Exhibit 10.72 to Form 10-K for
the period ending December 31, 1999 of RightCHOICE Managed
Care, Inc., a Missouri corporation);
(23)(a) Consent of Lewis, Rice & Fingersh, L.C. regarding legality
opinion (included in Opinion);
(23)(b) Consent of PricewaterhouseCoopers LLP regarding tax matters
opinion (included in Opinion);
(23)(c) Consent of PricewaterhouseCoopers regarding RightCHOICE
Managed Care, Inc., a Missouri corporation, Blue Cross and
Blue Shield of Missouri, and RightCHOICE Managed Care, Inc.,
a Delaware corporation;
(23)(d) Consent of Persons About to Become Directors;*
(23)(e) Consent of Greensfelder, Hemker & Gale, P.C. regarding legal
opinion to Blue Cross and Blue Shield of Missouri;*
(23)(f) Consent of PricewaterhouseCoopers LLP regarding discussion
of tax opinion;*
(24) Powers of Attorney;*
(27) Financial Data Schedule;*
(99)(a) Consent of Warburg Dillon Read LLC.*
</TABLE>
*Previously filed.
