<PAGE>
As filed with the Securities and Exchange Commission on April 14, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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. Cross, Esq.
Executive Vice President Lewis, Rice & Fingersh, Wilmer, Cutler &
and General Counsel L.C. Pickering
RightCHOICE Managed Care, 500 N. Broadway 2445 M Street, N.W.
Inc. St. Louis, Missouri 63102 Washington, D.C. 20037
1831 Chestnut Street (314) 444-7600 (202) 663-6000
St. Louis, Missouri 63103
(314) 923-4444
----------------
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]
----------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Amount maximum maximum Amount of
Title of each class to be offering price aggregate registration
of securities to be registered registered per unit offering price fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per
share............................... 20,233,380(1) $13.0625(2) $264,298,527 $69,775
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Represents the maximum number of shares of common stock of RightCHOICE
Managed Care, Inc., a Delaware corporation (the "Registrant"), that could
be issued in the merger described herein based upon the number of shares of
class A common stock (3,710,880 shares) and class B common stock
(14,962,500 shares) of RightCHOICE Managed Care, Inc., a Missouri
corporation ("RightCHOICE"), outstanding as of March 23, 2000, plus the
number of shares of RightCHOICE subject to options granted as of March 23,
2000 under stock option plans of RightCHOICE (1,282,418 shares), and the
number of shares of RightCHOICE remaining available for issuance under such
stock option plans (277,582 shares). The Registrant expects to file a post-
effective amendment to this Registration Statement following the merger to
specifically register on Form S-8 the issuance of the Registrant's common
stock under the stock option plans of RightCHOICE that will be assumed by
the Registrant in connection with the merger.
(2) The registration fee was computed pursuant to Rule 457(f)(1) and Rule
457(c) under the Securities Act of 1933, as amended, based upon the average
of the high ($13.125) and low ($13.00) price of a share of common stock of
RightCHOICE on April 7, 2000.
----------------
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.]
, 2000
Dear Shareholders:
I am pleased to invite you to attend a special meeting of shareholders of
RightCHOICE Managed Care, Inc. to be held at our headquarters at 1831 Chestnut
Street, St. Louis, Missouri, at .m., local time, on , 2000.
The purpose of this special meeting is for you 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 at the special
meeting.
With the approval of our shareholders, RightCHOICE will reorganize. In the
reorganization:
. RightCHOICE will merge with Blue Cross and Blue Shield of Missouri. Blue
Cross and Blue Shield of Missouri is currently the owner of approximately
80% of the stock and 97% of the voting power of RightCHOICE. Blue Cross
and Blue Shield of Missouri offers underwritten and self-funded insurance
products under the name Blue Cross and Blue Shield to approximately
155,000 members, principally in the metropolitan St. Louis, Missouri
area. The combined company will be a Delaware corporation also named
RightCHOICE Managed Care, Inc., which we refer to in this document as New
RightCHOICE.
. You and the other holders of RightCHOICE class A common stock will
receive one share of New RightCHOICE common stock in exchange for each
share of RightCHOICE class A common stock you own. Collectively, you and
the other holders of New RightCHOICE common stock who receive that stock
will have ownership in New RightCHOICE which is equal to approximately
20% of the equity and voting power of New RightCHOICE. This is the same
equity ownership interest you and the other holders of class A common
stock currently have in RightCHOICE, but it is greater voting power. We
expect that you will not recognize any taxable income, gain or loss for
federal income tax purposes as a result of the reorganization.
. Litigation will be settled 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 this litigation is not settled or
otherwise resolved on satisfactory terms.
. A new public benefit foundation will be created to serve the health care
needs of underinsured and uninsured Missourians in the Blue Cross and
Blue Shield of Missouri service area. It will own approximately 80% of
the stock of New RightCHOICE. The foundation has agreed that at least 95%
of its shares will be voted as directed by New RightCHOICE's board of
directors on all matters except those related to any future change of
control of New RightCHOICE. The foundation also has agreed to sell its
New RightCHOICE stock in an orderly manner.
After the reorganization, you will be a shareholder of New RightCHOICE. New
RightCHOICE's business and operations will generally consist of the combined
business and operations of RightCHOICE and Blue Cross and Blue Shield of
Missouri. Separate from the reorganization, but as part of the settlement of
the litigation, Blue Cross and Blue Shield of Missouri will pay approximately
$13 million to the foundation. The shares of New RightCHOICE will trade on the
New York Stock Exchange under the symbol "RIT," which is the current symbol of
RightCHOICE. The reorganization is expected to enhance shareholder value by
combining the business and operations of RightCHOICE and Blue Cross and Blue
Shield of Missouri. Your board of directors has received a written opinion
dated January 31, 2000 from its financial advisor, Warburg Dillon Read LLC, to
the effect that, as of that date and subject to the matters 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 holders of RightCHOICE class A common stock. The full text of the opinion
is included as Appendix H to this document and should be read 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.
New RightCHOICE will be a direct licensee of the Blue Cross and Blue Shield
Association with the right to use the Blue Cross and Blue Shield names and
service marks. As a result, the New RightCHOICE common stock you receive in the
reorganization will be subject to various limitations imposed by the Blue Cross
and Blue Shield Association, including limits on the total number of shares
that may be held by any single holder.
Even if you are unable to attend personally, it is very important that your
shares be represented and voted at the special meeting. If you do not return
your proxy card or if you do not instruct your bank or broker how to vote any
shares held for you in "street name," the effect will be a vote against the
reorganization. Please complete, sign, date and return the enclosed proxy card
promptly in the accompanying postage paid envelope.
This document provides you with detailed information about the
reorganization. I encourage you to read it carefully. For risks related to the
reorganization and New RightCHOICE, see "Risk Factors" beginning on page 18 of
this document.
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 , 2000 and was first
mailed to shareholders on or about , 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
.m., local time, at the headquarters of RightCHOICE at 1831 Chestnut Street,
St. Louis, Missouri.
The special meeting will be held:
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 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 RightCHOICE 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.
. Each share of RightCHOICE 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
RightCHOICE 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.
A copy of the reorganization agreement is attached as Appendix A to this
document. Approval and adoption of the plan of merger and the reorganization
agreement requires (1) the affirmative vote of the holders of two-thirds of the
issued and outstanding shares of RightCHOICE class A common stock and
RightCHOICE 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 holders of a majority
of the issued and outstanding shares of RightCHOICE 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 business other than the proposal described in this
notice will be considered at the special meeting or any adjournment or
postponement of the special meeting. Shareholders of record as of the close of
business on , 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
, 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 it is voted 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
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE REORGANIZATION............................ 1
SUMMARY................................................................... 4
RISK FACTORS.............................................................. 18
Risks Resulting From the Reorganization................................. 18
Risks Related to Litigation............................................. 27
Risks Related to RightCHOICE, Blue Cross and Blue Shield of Missouri and
New RightCHOICE........................................................ 29
SPECIAL MEETING........................................................... 37
Purpose of Special Meeting.............................................. 37
Matters to be Considered................................................ 37
Record Date............................................................. 37
Voting and Revocability of Proxies...................................... 37
Quorum.................................................................. 38
Solicitation of Proxies................................................. 38
Vote Required........................................................... 38
PROPOSED REORGANIZATION................................................... 39
Overview of Reorganization.............................................. 39
Pre-Reorganization Steps................................................ 40
Reorganization Steps.................................................... 41
Post-Reorganization Ownership Structure................................. 43
Effective Time of Reorganization........................................ 44
Exchange of Certificates................................................ 44
Background of Reorganization............................................ 44
Recommendation of RightCHOICE Board of Directors........................ 56
Reasons for Reorganization.............................................. 56
Opinion of Warburg Dillon Read.......................................... 57
Interests of Certain Persons in Reorganization.......................... 60
Material Federal Income Tax Consequences................................ 62
Regulatory and Other Approvals.......................................... 68
New York Stock Exchange Listing......................................... 68
Resale of New RightCHOICE Common Stock.................................. 68
Dissenters' Rights...................................................... 69
Accounting Treatment.................................................... 70
TERMS OF REORGANIZATION AGREEMENT......................................... 71
Purpose................................................................. 71
Agreements Before Reorganization is Completed........................... 71
Agreements After Reorganization is Completed............................. 73
Conditions to Reorganization............................................. 74
Termination.............................................................. 78
TERMS OF SETTLEMENT AGREEMENT.............................................. 79
General.................................................................. 79
Primary Purpose.......................................................... 79
Additional Purposes...................................................... 79
Termination of Litigation................................................ 79
Termination of Settlement Agreement...................................... 81
No Admission of Liability................................................ 82
Binding Effect........................................................... 82
Approval of Stock Purchases.............................................. 82
Representations.......................................................... 82
Related Settlements...................................................... 82
TERMS OF VOTING TRUST AND DIVESTITURE AGREEMENT............................ 84
Purpose.................................................................. 84
Deposit of Shares........................................................ 84
Withdrawal of Shares..................................................... 84
Voting of Shares Held in Voting Trust.................................... 84
Standstill............................................................... 85
Divestiture Requirements................................................. 86
Extension of Divestiture Deadlines....................................... 86
Failure to Meet Divestiture Deadlines.................................... 87
Dividends................................................................ 87
Trustee Compensation and Qualifications.................................. 87
Termination of Voting Trust and Divestiture Agreement.................... 87
Litigation............................................................... 88
Acquisition Proposals.................................................... 88
TERMS OF REGISTRATION RIGHTS AGREEMENT..................................... 89
Purpose.................................................................. 89
Demand Registration Rights............................................... 89
Piggy-Back Registration Rights........................................... 91
Continuing Option to Purchase Foundation Shares.......................... 91
Holdback................................................................. 91
Registration Expenses.................................................... 92
Rule 144................................................................. 92
Private Sales............................................................ 92
TERMS OF INDEMNIFICATION AGREEMENT......................................... 93
Income Tax Indemnity..................................................... 93
Non-Income Tax Indemnity................................................. 93
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Directors' and Officers' Liability Insurance............................ 94
Net Worth............................................................... 95
Termination of Indemnification Agreement................................ 95
PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS............... 95
INFORMATION ABOUT RIGHTCHOICE............................................. 103
Business................................................................ 103
Properties.............................................................. 115
Legal Proceedings....................................................... 115
Management's Discussion and Analysis of Financial Condition and Results
of Operation........................................................... 115
INFORMATION ABOUT BLUE CROSS AND BLUE SHIELD OF MISSOURI.................. 129
Business................................................................ 129
Properties.............................................................. 130
Legal Proceedings....................................................... 131
Management's Discussions and Analysis of Financial Condition and Results
of Operations.......................................................... 131
INFORMATION ABOUT NEW RIGHTCHOICE......................................... 137
General................................................................. 137
Ownership of New RightCHOICE Common Stock............................... 137
Directors of New RightCHOICE............................................ 140
Committees of Board of Directors........................................ 140
Compensation of Board of Directors...................................... 140
Executive Officers...................................................... 141
Executive Compensation and Other Information............................ 143
Certain Relationships and Related Transactions.......................... 149
INFORMATION ABOUT THE MISSOURI FOUNDATION FOR HEALTH...................... 150
NEW RIGHTCHOICE CERTIFICATE OF INCORPORATION AND BYLAWS................... 151
Introduction............................................................ 151
Authorized Stock........................................................ 151
Classified Board........................................................ 151
Qualification of Directors.............................................. 152
Removal of Directors.................................................... 152
Special Meetings of Shareholders........................................ 153
Indemnification......................................................... 153
Limitation on Liability for Breach of Fiduciary Duty.................... 153
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Limitations on Ownership................................................. 154
Cumulative Voting........................................................ 156
Preemptive Rights........................................................ 156
Amendments to Certificate of Incorporation............................... 156
Amendments to Bylaws..................................................... 156
Qualified Candidates..................................................... 156
Meetings of Shareholders................................................. 157
COMPARISON OF RIGHTS OF SHAREHOLDERS OF RIGHTCHOICE AND NEW RIGHTCHOICE.... 158
Introduction............................................................. 158
Authorized Stock......................................................... 158
Board of Directors....................................................... 158
Amendment of Charter..................................................... 160
Amendment of Bylaws...................................................... 161
Rights Upon Liquidation.................................................. 161
Voting Rights............................................................ 161
Preemptive Rights........................................................ 161
Power to Call Special Shareholder Meetings............................... 161
Quorum................................................................... 162
Shareholder Approval of Certain Business Combinations.................... 162
Indemnification.......................................................... 163
Limitation of Liability.................................................. 163
Dividends and Repurchases of Shares...................................... 164
Shareholder Voting on Mergers or Consolidations.......................... 164
Shareholder Voting on Sale of Substantially All Assets................... 165
Interested Director Transactions......................................... 165
Dissenters' and Appraisal Rights......................................... 166
Dissolution.............................................................. 166
LEGAL MATTERS.............................................................. 166
EXPERTS.................................................................... 167
WHERE YOU CAN FIND MORE INFORMATION........................................ 167
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
RightCHOICE.............................................................. F-2
Blue Cross and Blue Shield of Missouri................................... F-41
New RightCHOICE.......................................................... F-71
</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: Why does RightCHOICE want to reorganize?
A: The principal reason RightCHOICE is proposing to reorganize is to resolve
litigation with the Missouri Attorney General and the Missouri Department of
Insurance. An adverse decision in the litigation would have material adverse
consequences for RightCHOICE. 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,
. 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.
Q: How does the reorganization affect me as a RightCHOICE class A stockholder?
A: In the reorganization, RightCHOICE will be combined with Blue Cross and Blue
Shield of Missouri, which currently owns approximately 80% of RightCHOICE.
You will receive one share of common stock of the new combined company for
each share of RightCHOICE class A common stock you own. As a result, you and
the other RightCHOICE class A common shareholders will own approximately 20%
of the equity and voting power of New RightCHOICE. This is greater overall
voting power in the new combined company than in RightCHOICE but the same
percentage of equity. The Missouri Foundation For Health will own the
remaining approximately 80% of the equity and voting power of New
RightCHOICE.
Q: What litigation is being settled by the reorganization?
A: The principal litigation being settled by the reorganization involves the
operation of RightCHOICE as a for-profit subsidiary of Blue Cross and Blue
Shield of Missouri, which is a non-profit health services corporation, since
RightCHOICE was organized in 1994. The Missouri Attorney General and the
Missouri Department of Insurance alleged that the operation of RightCHOICE
violates the non-profit purposes of Blue Cross and Blue Shield of Missouri.
Q: What happens to RightCHOICE in the litigation if the reorganization is not
completed?
A: If the reorganization is not completed before December 31, 2000, the
deadline is not extended and the litigation is not otherwise settled, the
Missouri Attorney General and the Missouri Department of Insurance may be
able to sue Blue Cross and Blue Shield of Missouri to enforce judgments
previously entered by the trial court, which are no longer subject to
appeal. This could result in any of the following:
. Court ordered dissolution of Blue Cross and Blue Shield of Missouri,
. Termination of the valuable licenses granted by the Blue Cross and Blue
Shield Association which provide for the use of the Blue Cross and Blue
Shield names and service marks,
. Imposition of a significant monetary penalty by the Blue Cross and Blue
Shield Association,
. Default under RightCHOICE's major credit facility, and
. Other material adverse consequences to RightCHOICE.
If Blue Cross and Blue Shield of Missouri is dissolved and its assets
liquidated, one or more third parties would acquire the 14,962,500 shares
of RightCHOICE class B common stock owned by Blue Cross and Blue Shield of
Missouri, which represents approximately 80%
1
<PAGE>
of the equity of RightCHOICE and approximately 97% of the voting power. As
a result of that acquisition, there would be a change of control of
RightCHOICE which could result in significant changes in RightCHOICE.
Q: Has the State of Missouri approved the reorganization?
A: Yes, the Missouri Attorney General and the Missouri Department of Insurance
have approved the reorganization as a means of settling the litigation.
While Blue Cross and Blue Shield of Missouri and RightCHOICE must still
obtain other regulatory approvals of the reorganization from the Missouri
Department of Insurance, we do not anticipate any problems obtaining the
approvals.
Q: What will The Missouri Foundation For Health receive as a result of the
reorganization?
A: In the reorganization, The Missouri Foundation For Health will receive one
share of New RightCHOICE common stock for each share of RightCHOICE class B
common stock that is currently owned by Blue Cross and Blue Shield of
Missouri. This will represent approximately 80% of the total equity and
voting power of New RightCHOICE. The voting rights of the Foundation will
be subject to limits described in this document. Blue Cross and Blue Shield
of Missouri also will pay the Foundation approximately $13 million as part
of the settlement.
Q: Will I or New RightCHOICE be subject to federal income tax as a result of
the reorganization?
A: The reorganization has been structured with the intent that neither you, as
a RightCHOICE class A shareholder, nor New RightCHOICE, as successor to
both Blue Cross and Blue Shield of Missouri and RightCHOICE, will recognize
any gain or loss for federal income tax purposes. RightCHOICE is not
required to complete the reorganization unless we receive a private letter
ruling from the Internal Revenue Service or, in lieu of a letter ruling, a
tax opinion from PricewaterhouseCoopers LLP, in either case to the effect,
among other things, that the relevant steps of the reorganization will be
tax free to RightCHOICE and Blue Cross and Blue Shield of Missouri and to
you, as a holder of RightCHOICE class A common stock. A private letter
ruling will be requested from the Internal Revenue Service with respect to
two specific elements of the reorganization. In addition, Blue Cross and
Blue Shield of Missouri, RightCHOICE and The Missouri Foundation For Health
will receive a tax opinion from PricewaterhouseCoopers LLP with respect to
the federal income tax aspects of the relevant steps of the reorganization.
The federal income tax consequences to the Foundation are discussed
elsewhere in this document. 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.
Q: When do you expect the reorganization to be completed?
A: We are working on completing the reorganization as quickly as possible. In
addition to obtaining shareholder approval, we must also obtain numerous
regulatory and other approvals. We hope to complete the reorganization
before the end of the year 2000.
Q: Are there risks I should consider?
A: Yes. In considering the reorganization, you should consider a number of
risks, which are described beginning on page 18 of this document.
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
2
<PAGE>
AGAINST the reorganization. The holders of at least a majority of the
outstanding shares of RightCHOICE class A common stock must vote in favor
of the reorganization for its approval. This vote 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.
Q: May I attend the special meeting in person?
A: You may attend the special meeting and vote your shares in person rather
than signing and mailing your proxy card.
Q: Can I revoke my proxy after I mail it?
A: You may take back your proxy at any time before the vote by following the
directions on page 37 of this document. Then you can either sign and
deliver a new proxy 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 the reorganization is completed, we will send you instructions on
how to exchange your shares for shares of New RightCHOICE.
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 are unable to respond by e-mail.
3
<PAGE>
SUMMARY
This brief summary only highlights selected information from this document
and may not contain all of the information that is important to you. You should
carefully read the entire document, including the appendices, and the other
documents to which this document refers.
Parties to Reorganization
RightCHOICE Managed Care, Inc.
a Missouri corporation
("RightCHOICE")
(see page 103)
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 85 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 129)
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 155,000
members. Although it offers its services and products in the same 85 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 RightCHOICE class B common stock, equal to approximately 80% of the
equity and 97% of the voting power of RightCHOICE.
The Missouri Foundation For Health
(see page 150)
_________________________________
_________________________________
_________________________________
The Missouri Foundation For Health is a newly-created non-profit public
benefit corporation established by the State of Missouri 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. The
Foundation is expected to fund its health care purposes with the approximately
$13 million in cash payments it receives from the settlement and by selling in
an orderly fashion the New RightCHOICE common stock it receives in the
reorganization.
RightCHOICE Managed Care, Inc.
a Delaware corporation
("New RightCHOICE")
(see page 137)
1831 Chestnut Street
St. Louis, Missouri 63103
(314) 923-4444
New RightCHOICE was recently organized as a Delaware corporation pursuant to
the settlement agreement.
If the reorganization is approved and completed, 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.
4
<PAGE>
. The combined assets and liabilities of RightCHOICE and Blue Cross and
Blue Shield of Missouri, except for:
-- approximately $13 million to be paid to The Missouri Foundation For
Health as part of the settlement, and
-- the shares of RightCHOICE class B common stock owned by Blue Cross
and Blue Shield of Missouri, which will be cancelled and the value of
which will be transferred to The Missouri Foundation For Health in
the form of shares of New RightCHOICE common stock.
Reorganization Steps
(see page 41)
The reorganization consists of 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 the insurance contracts of Blue Cross and Blue Shield of
Missouri 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.
. RightCHOICE will merge with New RightCHOICE.
Exchange of Stock
(see page 43)
As a result of the merger with New RightCHOICE:
. Each share of RightCHOICE class A common stock that you own will be
converted into one share of New RightCHOICE common stock.
. Each share of RightCHOICE class B common stock that Blue Cross and Blue
Shield of Missouri owns will be cancelled and The Missouri Foundation For
Health will receive one share of New RightCHOICE common stock for each
cancelled share of RightCHOICE class B common stock.
Listing of New RightCHOICE common stock
(see page 68)
Like the RightCHOICE class A shares, 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."
Ownership of New RightCHOICE Following Reorganization
(see page 43)
Following completion of the reorganization:
. The current holders of RightCHOICE class A common stock will own the same
number of shares of New RightCHOICE common stock that they own of
RightCHOICE immediately before the reorganization, equal in the aggregate
to approximately 20% of the equity of New RightCHOICE.
. The Missouri Foundation For Health will own the same number of shares of
New RightCHOICE that Blue Cross and Blue Shield of Missouri owns of
RightCHOICE class B common stock immediately before the reorganization,
equal to approximately 80% of the equity of New RightCHOICE.
. Unlike the RightCHOICE class B common stock, which has 10 votes per
share, each share of New RightCHOICE common stock has one vote per share.
Therefore, the current holders of RightCHOICE class A common stock will
hold approximately 20% of the voting power of New RightCHOICE, and The
Missouri Foundation For Health will hold approximately 80% of the voting
power
5
<PAGE>
of New RightCHOICE. The voting rights of the Foundation will be subject to
limits described in this document.
Special Meeting
(see page 37)
RightCHOICE will hold the special meeting on , 2000 at its
headquarters at 1831 Chestnut Street, St. Louis, Missouri 63103, at .m.,
local time, to vote on the reorganization.
Only shareholders of record on , 2000 may vote at the special
meeting.
Vote Required
(see page 38)
Approval of the reorganization requires the affirmative vote of the holders
of:
. Two-thirds of the outstanding shares of RightCHOICE class A common stock
and RightCHOICE class B common stock voting together as a single class.
This requirement will be met because Blue Cross and Blue Shield of
Missouri has agreed to vote in favor of the reorganization at the special
meeting, and
. A majority of the outstanding shares of RightCHOICE class A common stock
voting as a class separate and apart from the RightCHOICE class B common
stock. This vote will exclude any shares of RightCHOICE 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.
Recommendation to Shareholders
(see page 56)
The RightCHOICE board of directors believes that the reorganization is in
your best interests and recommends that you vote FOR the reorganization at the
special meeting.
Opinion of Warburg Dillon Read LLC
(see page 57)
The RightCHOICE 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 holders of RightCHOICE class A
common stock of the one-for-one exchange ratio provided for in the merger of
RightCHOICE into New RightCHOICE. The full text of Warburg Dillon Read's
written opinion dated January 31, 2000 is included as Appendix H to this
document. 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's opinion is directed to the RightCHOICE board and its business
opportunities committee and does not constitute a recommendation to any
shareholder with respect to any matters relating to the reorganization.
Dissenters' Rights
(see page 69)
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 RightCHOICE class A common stock in
cash rather than in New RightCHOICE stock if the merger is completed.
Agreements Governing New RightCHOICE after Reorganization is Completed
If the reorganization is completed, New RightCHOICE and The Missouri
Foundation For Health will be parties to the following three agreements:
6
<PAGE>
Voting Trust and Divestiture Agreement
(see page 84)
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.
The shares will remain subject to the voting trust until they are sold
by the Foundation or the trust terminates.
. The trustee of the voting trust will vote these shares as directed by
the New RightCHOICE board of directors. However, in the case of proposed
business combination transactions involving New RightCHOICE in which the
then existing shareholders of New RightCHOICE would own less than 50.1%
of the shares of the resulting company, the Foundation will direct the
trustee how to vote its shares.
. 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 3 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 5 years after the reorganization, subject to a
possible two-year extension.
. The voting trust will terminate when the Foundation owns less than 5% of
the issued and outstanding shares of New RightCHOICE.
. The trustee under the voting trust will be an institutional trustee
mutually acceptable to New RightCHOICE and the Foundation.
Registration Rights Agreement
(see page 89)
In general, the registration rights agreement requires RightCHOICE to
register The Missouri Foundation For Health's shares of New RightCHOICE stock
with the Securities and Exchange Commission over a period of time and grants
New RightCHOICE the right to buy the Foundation's New RightCHOICE shares in
some cases.
Under the registration rights agreement:
. New RightCHOICE will register with the Securities and Exchange Commission
the sale to the public of the Foundation's shares of New RightCHOICE
common stock:
-- when requested by the Foundation, or
-- when New RightCHOICE registers the sale of shares of New RightCHOICE
common stock for a public offering and the Foundation requests that
its shares be included in the registration.
. New RightCHOICE's obligation to register the sale of the Foundation's
shares is subject to limitations in the registration rights agreement
that are intended 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 for a 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 by the
Foundation and a qualified investor whenever the Foundation desires to
sell the shares in a private transaction to the qualified investor.
7
<PAGE>
. The Foundation has agreed, if required by New RightCHOICE, to sell some
of its shares in an underwritten public offering within 6 months after
the reorganization. The number of shares to be sold and the other terms
of the offering would be as mutually agreed by the Foundation and New
RightCHOICE.
Indemnification Agreement
(see page 93)
Under the indemnification agreement:
. The Foundation will indemnify New RightCHOICE and its affiliates from any
income tax liabilities that they may incur that may arise 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 154)
New RightCHOICE's certificate of incorporation contains ownership
limitations required by the Blue Cross and Blue Shield Association for all of
its for-profit licensees. These ownership limitations are designed to protect
New RightCHOICE's independence 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.
New RightCHOICE's certificate of incorporation exempts The Missouri
Foundation For Health from the ownership limitations because it 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.
Subject to an exception for the acquisition of an insignificant amount of
excess shares that are disposed of in a short period of time, New RightCHOICE's
certificate of incorporation provides that any shares acquired in excess of the
applicable ownership limitations will be deemed immediately transferred to an
escrow agent. In that event, the escrow agent will sell the excess shares and
deliver the proceeds of the sale to the person or entity that acquired the
excess shares. The amount of the proceeds delivered by the escrow agent will be
reduced by an amount equal to all of the costs and expenses incurred in
connection with the escrow arrangement and sale. The sale of excess shares by
the escrow agent likely will require registration with the Securities and
Exchange Commission under the Securities Act. Registration is a time consuming
and expensive process. The sale of excess shares, therefore, could take a
considerable amount of time and money, and the owner of the excess shares will
be required to pay all expenses of the sale.
Management of New RightCHOICE
(see page 140 and page 142)
If the reorganization is approved and completed, the directors and executive
officers of New RightCHOICE initially will include the persons who are
directors and executive officers of RightCHOICE immediately prior to the
reorganization. After the reorganization, it is expected that additional
persons will be added to the New RightCHOICE board of directors.
8
<PAGE>
Interests of Directors and Officers in Reorganization
(see page 60)
In considering the RightCHOICE board of directors' recommendation that you
vote in favor of the 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 the reorganization is not approved or is not completed and the court
orders the dissolution of Blue Cross and Blue Shield of Missouri, a new
majority shareholder of RightCHOICE that would acquire control from Blue Cross
and Blue Shield of Missouri could eventually replace the current directors and
executive officers of RightCHOICE.
If the reorganization is approved, the board of directors of New RightCHOICE
will initially be the same persons who are the directors of RightCHOICE
immediately prior to the reorganization. Because of the voting limitations
applicable to The Missouri Foundation For Health's shares, 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 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 severance agreements provide that if (1) an executive officer is terminated
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. Mr. O'Rourke's right to receive severance benefits
under his employment agreement is not affected by the reorganization.
Stock Options
As a result of the reorganization, all outstanding options to purchase
shares of RightCHOICE common stock under RightCHOICE's stock option plans will
be assumed by New RightCHOICE and will become options to purchase New
RightCHOICE common stock on the same terms and conditions.
Indemnification and Liability Insurance
New RightCHOICE will assume all provisions for indemnification 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 with respect to Blue
Cross and Blue Shield of Missouri.
Conditions to Reorganization
(see page 74)
The reorganization will be completed only if various conditions are
satisfied or validly waived. The important conditions are the following:
. Shareholder approval,
. Regulatory approval,
. Receipt by The Missouri Foundation For Health of a determination from the
Internal Revenue Service that it is exempt from federal income tax,
9
<PAGE>
. Evidence from the Missouri Attorney General and the Missouri Department
of Insurance that they are satisfied with the 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,
. Receipt of a private letter ruling from the Internal Revenue Service or a
tax opinion from PricewaterhouseCoopers LLP regarding the tax-free nature
of the reorganization to the RightCHOICE class A shareholders, New
RightCHOICE, as successor by merger to RightCHOICE and Blue Cross and
Blue Shield of Missouri, and The Missouri Foundation For Health,
. Receipt by New RightCHOICE and its affiliates of new license agreements
with the Blue Cross and Blue Shield Association,
. Reaffirmation of a legal opinion previously received by the Board of
Directors of Blue Cross and Blue Shield of Missouri to the effect that
the reorganization is lawful and that the authorization and approval of
the reorganization by the board of directors of Blue Cross and Blue
Shield of Missouri is consistent with their fiduciary duties, and
. Receipt by The Missouri Foundation For Health of 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 evidence from the Missouri Attorney General and the Missouri
Department of Insurance as to the satisfaction or waiver of this
condition.
Regulatory Approvals
(see page 68)
In order to be completed, the reorganization requires various regulatory and
other approvals and filings, including approvals from and filings with federal
authorities and state authorities in the states in which RightCHOICE and Blue
Cross and Blue Shield of Missouri currently conduct business.
Blue Cross and Blue Shield Association Approvals
(see page 68)
The reorganization also requires the final approval of the Blue Cross and
Blue Shield Association and the issuance of new license agreements to New
RightCHOICE and its controlled affiliates providing for the use of the Blue
Cross and Blue Shield names and service marks.
10
<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
has no financial history.
. The selected financial data for RightCHOICE as of December 31, 1999 and
1998 and for each of the three years in the period ended December 31,
1999 have been derived from the historical consolidated financial
statements of RightCHOICE which have been audited by
PricewaterhouseCoopers LLP, independent accountants of RightCHOICE, and
are included herein. The selected financial data as of December 31, 1997,
1996 and 1995 and for each of the two years in the period ended December
31, 1996 are derived from the historical consolidated financial
statements of RightCHOICE which have been audited by
PricewaterhouseCoopers LLP, independent accountants of RightCHOICE, and
which are not included in this document. You should read the selected
financial data for RightCHOICE in conjunction with the accompanying
historical financial statements, and notes thereto, and the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," each of which are included in this document.
. 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
in the period ended December 31, 1999 have been derived from the
historical carve-out financial statements of Blue Cross and Blue Shield
of Missouri which have been audited by PricewaterhouseCoopers LLP,
independent accountants of Blue Cross and Blue Shield of Missouri, and
are included herein. The selected financial data as of December 31, 1997,
1996 and 1995 and for each of the two years in the period ended December
31, 1996 are derived from the historical carve-out financial statements
of Blue Cross and Blue Shield of Missouri which have not been audited and
which are not included herein. You should read the selected carve-out
financial data for Blue Cross and Blue Shield of Missouri in conjunction
with the accompanying historical carve-out financial statements, and
notes thereto, and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," each of which are included in this
document. The selected carve-out financial data for Blue Cross and Blue
Shield of Missouri is presented exclusive of its investment in
RightCHOICE class B common stock. Also, no per share data is presented
for Blue Cross and Blue Shield of Missouri because it is a non-profit
health services corporation with no stock outstanding.
. The pro forma unaudited combined condensed financial statements provide
financial information giving effect to the reorganization. The pro forma
unaudited combined condensed financial statements are provided for
informational purposes only and are not necessarily indicative of actual
results had the reorganization been consummated at the beginning of the
periods presented or of future results. The pro forma unaudited combined
condensed financial data are derived from, and should be read in
conjunction with, the pro forma unaudited combined condensed financial
statements set forth elsewhere in this document.
11
<PAGE>
RIGHTCHOICE HISTORICAL
<TABLE>
<CAPTION>
As of and for the years ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data and operating statistics)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
- ----------------------
Revenues:
Premium................ $ 732,151 $ 694,487 $ 654,267 $ 595,049 $ 538,422
Fees and other
income................ 84,761 73,025 65,144 58,326 53,458
------------ ------------ ------------ ------------ ------------
Total revenues....... 816,912 767,512 719,411 653,375 591,880
------------ ------------ ------------ ------------ ------------
Expenses:
Health care services... 601,532 579,827 555,126 491,662 409,495
Commissions............ 32,462 31,394 29,302 26,808 19,405
General and
administrative........ 163,251 159,638 163,172 143,950 140,473
Charge for contract
loss reserves......... 29,510
Non-recurring charges
(a)................... 900 3,301 4,534 3,474
------------ ------------ ------------ ------------ ------------
Total operating
expenses............ 797,245 771,759 780,411 666,954 572,847
------------ ------------ ------------ ------------ ------------
Operating income
(loss)................. 19,667 (4,247) (61,000) (13,579) 19,033
------------ ------------ ------------ ------------ ------------
Investment Income:
Interest and
dividends............. 13,367 14,737 15,916 14,241 14,832
Realized (losses)
gains, net............ (516) 3,932 17,268 3,291 3,512
------------ ------------ ------------ ------------ ------------
Total investment
income, net......... 12,851 18,669 33,184 17,532 18,344
------------ ------------ ------------ ------------ ------------
Other:
Interest expense....... (4,344) (4,539) (4,681) (5,434) (2,930)
Other income
(expense), net........ 219 (379) (1,058) 114 (397)
------------ ------------ ------------ ------------ ------------
Total other, net..... (4,125) (4,918) (5,739) (5,320) (3,327)
------------ ------------ ------------ ------------ ------------
Income (loss) before
provision (benefit)
for income taxes....... 28,393 9,504 (33,555) (1,367) 34,050
Provision (benefit) for
income taxes........... 11,177 3,844 (9,521) 660 10,480
------------ ------------ ------------ ------------ ------------
Net income (loss)....... $ 17,216 $ 5,660 $ (24,034) $ (2,027) $ 23,570
============ ============ ============ ============ ============
Basic and diluted
earnings (loss)
per share.............. $ 0.92 $ 0.30 $ (1.29) $ (0.11) $ 1.26
============ ============ ============ ============ ============
Operating Statistics:
(b)
Medical loss ratio..... 82.2% 83.5% 84.8% 82.6% 76.1%
General &
administrative
expense ratio......... 20.0% 20.8% 22.7% 22.0% 23.7%
Balance Sheet Data:
- -------------------
Cash and investments.... $ 246,326 $ 247,690 $ 250,844 $ 295,634 $ 284,515
Total assets............ 523,213 508,678 506,363 532,144 516,388
Medical claims payable.. 124,428 109,986 112,339 111,833 83,793
Long-term debt.......... 34,063 43,063 47,000 62,000 62,000
Shareholders' equity.... 157,543 145,874 140,865 172,954 173,221
Available cash and
investments (c)........ 9,085 12,494 8,279 48,472 56,753
Book value per share.... 8.44 7.81 7.54 9.26 9.27
Tangible book value per
share.................. 4.61 3.82 3.36 4.76 4.93
</TABLE>
- --------
(a) Non-recurring charges represent the following: in 1998, $0.9 million
related to planned reduction of approximately 7.5% of the work force; in
1997 and 1996 RightCHOICE charged $3.3 million and $4.5 million,
respectively, for costs associated with the moving of its service
operations; and in 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 a class action lawsuit.
(b) Operating statistics are calculated as health care services and general and
administrative expense divided by premium and total revenue, respectively.
(c) 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 years ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
(unaudited) (unaudited)
-------- -------- ---------- ----------- -----------
(in thousands, except per share data and operating
statistics)
<S> <C> <C> <C> <C> <C>
Income Statement Data
(a):
Revenues:
Premium................ $ 85,393 $ 80,672 $ 81,322 $ 67,325 $ 77,194
Fees and other income.. 25,354 19,749 16,780 14,077 16,008
-------- -------- ---------- ---------- ----------
Total revenues....... 110,747 100,421 98,102 81,402 93,202
-------- -------- ---------- ---------- ----------
Expenses:
Health care services... 73,070 71,007 74,777 58,659 70,173
Commissions............ 43 42 42 79 37
General and
administrative........ 25,475 26,804 27,317 30,733 27,238
Non-recurring charges
(b)................... 5,065 3,500
-------- -------- ---------- ---------- ----------
Total operating
expenses............ 103,653 97,853 102,136 89,471 100,948
-------- -------- ---------- ---------- ----------
Operating income (loss). 7,094 2,568 (4,034) (8,069) (7,746)
-------- -------- ---------- ---------- ----------
Investment income:
Interest and
dividends............. 1,895 592 786 1,213 1,954
Realized (losses)
gains, net............ (5,200) (55) 2,338 145
-------- -------- ---------- ---------- ----------
Total investment
income, net......... 1,895 (4,608) 731 3,551 2,099
Other income (expense),
net.................... 40 111 (44) (1,015) 98
-------- -------- ---------- ---------- ----------
Income (loss) before
provision (benefit) for
income taxes........... 9,029 (1,929) (3,347) (5,533) (5,549)
Provision (benefit) for
income taxes........... 4,037 (663) (1,172) (1,902) (3,499)
-------- -------- ---------- ---------- ----------
Net income (loss)....... $ 4,992 $ (1,266) $ (2,175) $ (3,631) $ (2,050)
======== ======== ========== ========== ==========
Basic and diluted
earnings (loss)
per share.............. -- -- -- -- --
Operating Statistics:
(c)
Medical loss ratio..... 85.6% 88.0% 92.0% 87.1% 90.9%
General &
administrative
expense ratio......... 23.0% 26.7% 27.8% 37.8% 29.2%
Balance Sheet Data (a): (unaudited) (unaudited) (unaudited)
Cash and investments.... $ 45,693 $ 16,065 $ 20,684 $ 22,055 $ 41,362
Total assets............ 164,113 139,916 136,223 134,552 157,419
Medical claims payable.. 16,609 12,238 15,010 11,984 13,917
Net assets representing
reserve for protection
of members............. 87,666 82,674 83,940 85,811 89,847
Book value per share.... -- -- -- -- --
Tangible book value per
share.................. -- -- -- -- --
</TABLE>
- --------
(a) This financial data is presented excluding Blue Cross and Blue Shield of
Missouri's investment in RightCHOICE class B common stock. No per share
data is presented for Blue Cross and Blue Shield of Missouri because it is
a non-profit health services corporation with no stock outstanding.
(b) Non-recurring charges represent the following: in 1999, charges of $5.1
million for litigation and settlement related costs, including the
organization of The Missouri Foundation For Health; in 1995, charges of
$3.5 million related to the settlement of a class action lawsuit.
(c) Operating statistics are calculated as health care services and general and
administrative expense divided by premium and total revenue, respectively.
13
<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 30,540 186,407
----------- -------- -----------
Total operating
expenses........... 797,245 103,653 893,514
----------- -------- -----------
Operating income........ 19,667 7,094 29,105
----------- -------- -----------
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....... 28,393 9,029 38,989
Provision for income
taxes.................. 11,177 4,037 15,347
----------- -------- -----------
Net income.............. $ 17,216 $ 4,992 $ -- $ 23,642
=========== ======== ===== ===========
Weighted average common
shares
outstanding............ 18,673,000 N/A 18,636,300
----------- -------- -----------
Basic and diluted
earnings per share..... $ 0.92 N/A $ 1.27
=========== ======== ===========
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 was not incorporated as of December 31, 1999, it
has been included herein to give effect to the reorganization. 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 in exchange for $1.
(2) Adjustments necessary to arrive at the pro forma unaudited combined
condensed financial data are described in the Notes to Historical
Consolidated and Pro Forma Unaudited Combined Condensed Financial
Statements beginning on page 98.
14
<PAGE>
PER SHARE DATA
The following table sets forth the book value per share as of December 31,
1999, and earnings per share and cash dividends declared per share for 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:
December 31, 1999....................... $8.44 $13.79
Earnings per share:
For the year ended December 31, 1999.... $0.92 $ 1.27
Cash dividends declared per share:
For the year ended December 31, 1999.... $ 0 $ 0
Common shares outstanding................. 18,673,153 18,636,413
</TABLE>
- --------
(1) Historical book value per share information for RightCHOICE as of December
31, 1999 was computed by dividing the historical shareholders' equity by
18,673,153, the number of shares outstanding at the end of the period.
(2) Pro forma New RightCHOICE book value per share information as of December
31, 1999 was computed by dividing the pro forma combined shareholders'
equity of $257 million by 18,636,413, the number of assumed shares
outstanding after the reorganization.
15
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
RightCHOICE
The following table sets forth for the calendar quarters indicated the high
and low sales prices of RightCHOICE 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 (through April 7, 2000)........... 13 3/8 13
</TABLE>
On January 6, 2000, the day before the first public announcement of the
final settlement with the Missouri Attorney General and the Missouri Department
of Insurance, the last reported sale price per share of RightCHOICE class A
common stock was $13 3/8. On April 7, 2000, the last reported sale price per
share of RightCHOICE class A common stock was $13.
On April 6, 2000, there were 227 holders of record of RightCHOICE class A
common stock, and Blue Cross and Blue Shield of Missouri was the one holder of
record of RightCHOICE class B common stock.
Although the payment of any dividend by RightCHOICE is at the discretion of
its board of directors, 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-14 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
It is expected that the New RightCHOICE 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. It is expected
that as part of the reorganization New RightCHOICE will assume the obligations
of RightCHOICE under its credit agreement and, as a result, will be
16
<PAGE>
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-14 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. The payment of any dividend
by New RightCHOICE will be at the discretion of its board of directors and will
depend on New RightCHOICE's earnings, financial position, regulatory and Blue
Cross and Blue Shield Association capital requirements and other factors that
its board of directors deems relevant.
Nothing contained in this document should be construed to suggest that the
trading price of RightCHOICE 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. No assurance can be given that shares of New
RightCHOICE common stock will trade at a price reflecting the earnings per
share or other attributes of RightCHOICE class A common stock.
17
<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
Required sales of New RightCHOICE stock by the Foundation and the expectation
of these sales could cause our stock price to fall.
Significant sales of New RightCHOICE stock by The Missouri Foundation For
Health which will be made as required by the voting trust and divestiture
agreement, and the expectation of these sales, could cause our stock price to
fall. Approximately 3.71 million shares of RightCHOICE class A common stock and
14.96 million shares of RightCHOICE class B common stock currently are
outstanding. The RightCHOICE class A common stock is traded on the New York
Stock Exchange, and the RightCHOICE class B common stock is owned by Blue Cross
and Blue Shield of Missouri and is not publicly traded. The trading volume for
the RightCHOICE class A common stock has been very limited. The average daily
trading volume during 1999 was 7,356 shares. In 1999, a total of 1,853,600
shares of RightCHOICE class A common stock were traded.
After the reorganization, approximately 18.67 million shares of New
RightCHOICE common stock will be outstanding--with 3.71 million shares held by
the current holders of RightCHOICE class A common stock and 14.96 million
shares held by the Foundation. The Foundation will be required to reduce its
ownership of our common stock:
. To less than 50% of our outstanding shares within 3 years after the
reorganization, subject to a possible one-year extension, and
. To less than 20% of our outstanding shares within 5 years after the
reorganization, subject to a possible two-year extension.
Based upon the current number of shares outstanding, the Foundation must
sell about 5.63 million of its shares within the first 3, or possibly 4, years
after the reorganization, and it must sell a total of about 11.23 million of
its shares within the first 5, or possibly 7, years after the reorganization.
Although it is not expected that the Foundation will sell shares every day or
in equal amounts, for purposes of illustration only, the average daily volume
equivalent of selling 5.63 million shares in 3 years is about 7,506 shares, or
1,876,700 shares per year, and the average daily volume equivalent of selling
11.23 million shares in 5 years is about 8,984 shares, or 2,246,000 shares per
year. If the Foundation fails to meet these requirements, New RightCHOICE will
arrange for the sale of the Foundation's shares as described under "Terms of
the Voting Trust and Divestiture Agreement" beginning on page 84.
The Foundation also has agreed, if we request, to sell some of its shares in
an underwritten public offering within 6 months after the reorganization. The
number of shares to be sold and the other terms of the offering would be
mutually agreed upon by us and the Foundation.
The New RightCHOICE stock price could fall as the Foundation sells a
substantial number of its shares to meet the divestiture guidelines described
above. The market's perception that those sales will ultimately occur also
could cause our stock price to fall.
18
<PAGE>
We may have difficulty raising additional equity because of the rights of the
Foundation.
Our ability to raise funds through equity offerings after the reorganization
upon terms that we desire or at times when we may require funds could be
limited or made more difficult because of provisions in the registration rights
agreement with The Missouri Foundation For Health. Under this agreement:
. For so long as the Foundation owns 50% or more of our shares, which could
be as long as 4 years after the reorganization, it has the right to sell
its shares in any public offering that we may propose so that it would
receive up to 50% of the proceeds from the public offering,
. We may not register any of our shares of common stock for a public
offering for a period of 30 days after the Foundation registers shares
that it owns for a public offering, and
. We may not register any of our shares of common stock for a public
offering for a period of 180 days after the reorganization without the
Foundation's prior consent, which it may not unreasonably withhold.
Our failure to raise additional equity capital could (1) restrict our future
growth, both internally and through acquisitions, (2) inhibit our ability to
invest in technology and other products and services that we may need, and (3)
adversely affect our ability to compete in our markets.
We can issue New RightCHOICE 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 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 may keep us from being sold to a third
party unless our board of directors approves the sale.
Provisions in our charter documents may keep us from being sold to a third
party on terms that the board of directors believes are not in the best
interests of New RightCHOICE and our shareholders. As a result, you may not be
able to obtain a premium from the sale of your shares in a transaction that the
board of directors does not approve. These provisions 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,
. We have adopted a classified board of directors,
. 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 shares of New RightCHOICE in excess of the
ownership limits,
. Our shareholders are unable to call special meetings of shareholders, to
act by written consent, to remove any director or the entire board of
directors without cause, or to fill any vacancy on the board of
directors,
. Our shareholders must meet advance notice requirements for shareholder
proposals and board nominations, and
. Our board of directors may issue preferred stock without any vote or
further action by the shareholders.
These provisions, together with other provisions under Delaware law, could
make it more difficult for a third party to acquire us in transactions that
have not been negotiated with and approved by our board of directors, but in
which our shareholders may receive a premium for their shares over the then
current market price. We believe that it is in the best interests of New
RightCHOICE and our shareholders to encourage potential acquirors to negotiate
directly with our board of directors and that these provisions will encourage
these negotiations and discourage non-negotiated or "hostile" takeover
attempts. We believe these provisions also should not discourage companies from
proposing a merger or other transaction at prices reflective of the true value
of New RightCHOICE and which are in the best interests of all of our
shareholders. See "New RightCHOICE Certificate of Incorporation and Bylaws"
beginning on page 151.
19
<PAGE>
Ownership limitations in our charter documents may limit or even eliminate
increases in our stock price based on "takeover" speculation.
Under our charter documents, no institutional investor may own 10% or more
of our voting securities and no other investors may own 5% or more of our
voting securities. These ownership limitations may limit or even eliminate
potential increases in our stock price based on "takeover" speculation.
A company that desires to acquire another company occasionally attempts to
acquire a significant block of the other company's stock prior to making an
acquisition proposal, hostile or friendly, in order to gain negotiating power
with the target's board of directors or to threaten a hostile takeover by
means of a tender offer. When a potential acquiror begins buying significant
blocks of a potential target's stock, the target's stock price might increase
because of the increased demand for the stock by the acquiror or by other
investors speculating on a potential takeover in which a premium may be paid.
Because the ownership limitations in our charter documents may deter a party
from acquiring a significant "foothold," 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 we could be subject to after the
reorganization may discourage potential acquirors from making a proposal to
buy New RightCHOICE.
Claims by subscribers and litigation that we could be subject to after the
reorganization may discourage potential acquirors from making a proposal to
buy New RightCHOICE. We may be subject to claims and litigation after the
reorganization is completed, as described in the risk factor "The
reorganization will not settle all litigation relating to the corporate status
of Blue Cross and Blue Shield of Missouri" on page 28 and the risk factor "New
RightCHOICE will succeed to potential liability from claims of subscribers of
Blue Cross and Blue Shield of Missouri and RightCHOICE" on page 29. A judgment
against New RightCHOICE in this litigation involving Blue Cross and Blue
Shield of Missouri's corporate status or in subscriber claims could have a
material adverse effect on New RightCHOICE and possibly 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
New RightCHOICE or cause them to reduce the amount they otherwise would
offer to pay for New RightCHOICE,
. Depress our stock price after the reorganization if investors believe
that our company is 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.
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 Missouri Foundation For Health owns a substantial number of our
shares. The Foundation will own approximately 80% of our outstanding shares
immediately after the reorganization. At least 95% of its shares, equal to at
least 76% of all of our outstanding shares as of closing date for the
reorganization, must be placed in a voting trust and voted and disposed 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 that are brought before
our shareholders for a vote, including amendments
20
<PAGE>
to our certificate of incorporation and bylaws and the election and removal of
our directors. As a result, you and the other holders of RightCHOICE class A
common stock who receive New RightCHOICE stock in the reorganization will not
be able to influence the outcome of matters presented to the New RightCHOICE
shareholders for a vote after the reorganization as long as the Foundation owns
a substantial number of our shares.
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.
We will not be able to sell or merge without the approval of The Missouri
Foundation For Health for so long as the Foundation owns 50% or more of our
outstanding shares. The Foundation 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 3, and possibly 4, years after the reorganization.
Although the board of directors of New RightCHOICE will direct the vote on
all other matters, the Foundation will be able to vote its shares that are held
in the voting trust, and any other shares it owns that are not held in the
voting trust, any way it wants on proposed merger or sale transactions
involving New RightCHOICE if the New RightCHOICE shareholders would not own a
majority of the shares of the resulting company.
The acquisition of New RightCHOICE by means of a merger or consolidation
will require the approval of our board of directors and the holders of a
majority 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 New RightCHOICE
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 the then existing New RightCHOICE shareholders
owning less than a majority of the outstanding shares of the resulting company.
The Missouri Foundation For Health may have interests concerning New
RightCHOICE 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. It
should be expected to vote its shares on proposed merger and sale transactions
based upon what is in the best interests of the Foundation. 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 New RightCHOICE by a third party. The Missouri
Attorney General may have interests that differ from your interests in any
acquisition proposal involving New RightCHOICE.
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 will be able to ensure their re-election and designate their
successors as long as The Missouri Foundation For Health owns a substantial
number of our shares. Our directors are elected by plurality vote and our
shareholders do not have cumulative voting rights. The Foundation will own
approximately 80% of our outstanding shares immediately after the
reorganization. At least 95% of its shares, equal to at least 76% of all of our
outstanding shares as of closing date of the reorganization, must be placed in
a voting trust and voted and disposed of under the terms of the voting trust
and divestiture agreement described in this document.
21
<PAGE>
In any election of directors, the trustee of the voting trust must vote the
Foundation's shares in favor of each nominee approved by a majority of our
independent directors and a majority of all of our directors. As a result, the
directors of New RightCHOICE 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.
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. Any shares of the Foundation
held in the voting trust will be voted against the removal of a director unless
the removal is initiated by or with the consent of a majority of our
independent directors and a majority of all of our directors.
You and the other holders of RightCHOICE class A common stock who receive
New RightCHOICE stock in the reorganization will not be able to influence the
outcome of matters presented to the New RightCHOICE shareholders for a vote
after the reorganization as long as the Foundation owns a substantial number of
our shares.
The trading price of New RightCHOICE stock may vary from the trading price of
RightCHOICE stock.
We cannot predict how the market will value New RightCHOICE. The market
value of New RightCHOICE stock may vary from the market value of RightCHOICE
stock and the stock price could be lower. The reorganization combines the
businesses of Blue Cross and Blue Shield of Missouri and RightCHOICE into New
RightCHOICE. Blue Cross and Blue Shield of Missouri is a non-profit health
services corporation that is not publicly owned.
There is no guarantee that shares of New RightCHOICE common stock will trade
in the same price range or at the same multiples as shares of RightCHOICE class
A common stock have traded in the past.
The indemnification obligation of the Foundation could fail to fully indemnify
New RightCHOICE against the risks of the reorganization.
The indemnification obligation of The Missouri Foundation For Health could
fail to fully indemnify New RightCHOICE against the risks of the
reorganization. Various potential liabilities of New RightCHOICE arising from
the reorganization are covered by the indemnification agreement. The
indemnification agreement is described below under "Terms of Indemnification
Agreement" beginning on page 93. 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 assets of the Foundation at the time it is called upon to honor an
indemnification obligation might not be sufficiently liquid to permit it
to honor that obligation in a timely fashion and without material adverse
effect on the market for New RightCHOICE's common stock, and
. The Foundation might contend that its indemnification obligation is not
valid under law, and the attempt to enforce the indemnification
obligation by judicial action might be unsuccessful.
Although a private letter ruling will be requested from the Internal Revenue
Service with respect to two specific elements of the reorganization, the
rulings requested may not be issued, and the Internal Revenue Service may be
more likely to challenge the conclusions of a tax opinion than a private
letter ruling.
One of the conditions of closing the reorganization is that Blue Cross and
Blue Shield of Missouri, or the appropriate party, receives a private letter
ruling from the Internal Revenue Service generally to the effect that each of
the steps in the reorganization will not result in gain or loss to the parties
involved. In the event that a private letter ruling is not received with
respect to any or all of the matters for which the private letter ruling is
22
<PAGE>
requested, the parties are required to deem this condition satisfied if a tax
opinion generally to the same effect is received from PricewaterhouseCoopers
LLP. A private letter ruling will be requested from the Internal Revenue
Service with respect to two elements of the transaction: (1) the transfer and
assumption transaction, which is described on page 41 of this document, and (2)
the charter conversion transaction, which is described on page 42 of this
document. We are uncertain whether the Internal Revenue Service will issue a
private letter ruling, or if one is issued whether it will address all of the
matters requested. A tax opinion will be obtained from PricewaterhouseCoopers
LLP with respect to all of the requisite matters.
It is possible that even if issued, all or part of the private letter ruling
could be revoked or modified by the Internal Revenue Service. With respect to
those matters, if any, upon which the Internal Revenue Service does not rule,
the likelihood is increased that the conclusions set forth in the tax opinion
of PricewaterhouseCoopers LLP may be challenged upon subsequent audit by the
Internal Revenue Service.
The Missouri Foundation For Health may be denied tax exempt status by the
Internal Revenue Service which could cause the parties to delay or abandon the
reorganization.
One of the conditions to closing the reorganization is that the Missouri
Foundation For Health receive a determination 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 may not grant the tax exemption to the
Foundation and, as a result, the condition to closing will not be satisfied. If
the condition is not satisfied, the reorganization may not close.
RightCHOICE class A shareholders could suffer adverse tax consequences in the
reorganization.
As a RightCHOICE class A shareholder, you could recognize taxable gain or
income as a result of the reorganization.
Blue Cross and Blue Shield of Missouri and other appropriate parties, if
any, to the reorganization will request a private letter ruling from the
Internal Revenue Service to the effect, among other things, that you, as a
class A shareholder of RightCHOICE, will not recognize any income, gain or loss
for federal income tax purposes as a result of the transfer and assumption
transaction. A tax opinion will be issued by PricewaterhouseCoopers LLP to each
of Blue Cross Blue Shield of Missouri, RightCHOICE and The Missouri Foundation
For Health generally to the effect, among other things, that you, as a class A
shareholder of RightCHOICE, will not recognize any income, gain or loss for
federal income tax purposes as a result of the transfer and assumption
transaction and the other steps of the reorganization in which RightCHOICE
participates, except that class A shareholders of RightCHOICE who perfect their
dissenters' rights in the merger of RightCHOICE into New RightCHOICE will
recognize gain or loss on the receipt of cash in exchange for their stock. See
the discussion under "Proposed Reorganization--Material Federal Income Tax
Consequences" beginning on page 62. The tax opinion to be issued by
PricewaterhouseCoopers LLP will be based upon various assumptions and
representations of the parties, including the crucial assumption described in
the following paragraph. A private letter ruling may not be issued for a number
of reasons, or, if issued, may be revoked or modified, and tax opinions
represent only the best judgment of the firm giving the opinion on matters
addressed in the opinion and have no binding effect or official status of any
kind. In the event that the Internal Revenue Service either revokes or modifies
its private letter ruling, if any, or challenges the conclusions set forth in
the tax opinion and the Internal Revenue Service's challenges are upheld, you
could be required to report taxable income.
The Internal Revenue Service could take the position that you, as a class A
shareholder of RightCHOICE, should recognize taxable income in the transfer and
assumption transaction if the fair market value of the assets transferred to
Healthy Alliance Life Insurance Company by Blue Cross and Blue Shield of
Missouri exceeds the liabilities under the transferred insurance contracts
assumed by Healthy Alliance Life Insurance Company. PricewaterhouseCoopers LLP
has assumed based on discussions with Blue Cross and Blue Shield of Missouri,
and Blue Cross and Blue Shield of Missouri will report for federal income tax
purposes, that the value of the
23
<PAGE>
assets transferred to Healthy Alliance Life Insurance Company pursuant to the
transfer and assumption transaction will equal the liabilities assumed.
However, no independent appraisal or valuation of these assets and liabilities
has been sought in connection with the reorganization. If the Internal Revenue
Service successfully challenged the foregoing assumption, you, as a RightCHOICE
class A shareholder, could recognize taxable income in an amount equal to the
percentage of stock held by you as a RightCHOICE class A shareholder multiplied
by the amount by which the value of the assets transferred exceeds the
liabilities assumed. We cannot assure you that the Internal Revenue Service
will not take the position that the value of the assets transferred exceeds the
liabilities assumed. If the Internal Revenue Service takes such a position, it
may be upheld. We cannot determine with any certainty the amount of taxable
income that might have to be recognized by you.
In addition, if the merger of RightCHOICE into New RightCHOICE is not
treated as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, you would recognize gain or loss in an amount equal to
the difference between the value of New RightCHOICE stock received in the
transaction and your tax basis in the stock surrendered in the transaction.
Moreover, even if the merger is treated as a reorganization, if the Internal
Revenue Service determines that the value of the New RightCHOICE stock received
by you in exchange for your stock of RightCHOICE is higher than the value of
the 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 stock to be received by the RightCHOICE class A shareholders will
approximately equal the fair market value of the RightCHOICE class A common
stock surrendered in the merger, the Internal Revenue Service may take a
contrary position and, if it does, its position may be upheld.
Unlike the obligation of The Missouri Foundation For Health to indemnify New
RightCHOICE if the Internal Revenue Service or any other taxing authority
determines that the reorganization is a taxable transaction for federal, state
or local income tax purposes, the Foundation does not have any obligation to
indemnify you or any other holder of RightCHOICE class A common stock for any
tax liabilities you may incur as a result of the reorganization. Thus, you
would have to pay any tax resulting from the reorganization.
New RightCHOICE, as successor to Blue Cross and Blue Shield of Missouri and
RightCHOICE, could suffer adverse tax consequences in the reorganization.
New RightCHOICE, as successor to Blue Cross and Blue Shield of Missouri and
RightCHOICE, could recognize taxable gain as a result of the reorganization.
Blue Cross and Blue Shield of Missouri and other appropriate parties, if
any, to the reorganization will request a private letter ruling from the
Internal Revenue Service to the effect, among other things, that Blue Cross and
Blue Shield of Missouri and RightCHOICE will not recognize gain or loss as a
result of the transfer and assumption transaction or the charter conversion
transaction. A tax opinion will be issued by PricewaterhouseCoopers LLP to Blue
Cross Blue Shield of Missouri and RightCHOICE to the effect that each of the
steps of the reorganization in which Blue Cross and Blue Shield of Missouri and
RightCHOICE participates is a transaction in which gain or loss will not be
recognized by either of them for federal income tax purposes, except that Blue
Cross and Blue Shield of Missouri could recognize gain to the extent its basis
in any asset is less than its fair market value on the date of transfer (see
the next paragraph and page 63 of this document under the heading Transfer and
Assumption Transaction for a discussion of the possible tax effects of the
transfer and assumption transaction). However, a private letter ruling may not
be issued for a number of reasons, or, if issued, may be revoked or modified,
and tax opinions represent only the best judgment of the firm giving the
opinion on matters addressed in the opinion and have no binding effect or
official status of any kind. See the discussion under "Proposed Reorganization
- -- Material Federal Income Tax Consequences" beginning on page 62. In the event
that the Internal Revenue Service either revokes or modifies its private letter
ruling, if any, or challenges the conclusions set forth in the tax opinion and
the Internal Revenue Service's challenges are upheld, either Blue Cross and
Blue Shield of Missouri or RightCHOICE or both of them could be required to
report taxable income.
24
<PAGE>
The Internal Revenue Service could take the position that Blue Cross and
Blue Shield of Missouri should recognize gain in the transfer and assumption
transaction to the extent the fair market value of any asset transferred by it
to Healthy Alliance Life Insurance Company exceeds the adjusted basis of that
asset. The Internal Revenue Service could also take the position that the value
of the assets transferred exceeds the liabilities assumed and that Blue Cross
and Blue Shield of Missouri should recognize gain in an amount equal to the
taxable income, if any, recognized by the RightCHOICE class A shareholders (as
described in the risk factor "RightCHOICE class A shareholders could suffer
adverse tax consequences in the reorganization" on page 23 of this document)
minus Blue Cross and Blue Shield of Missouri's basis in the hypothetical assets
that may be deemed to have been transferred by Blue Cross and Blue Shield of
Missouri to the RightCHOICE class A shareholders. Based on discussions with
Blue Cross and Blue Shield of Missouri, PricewaterhouseCoopers LLP has assumed
that the value of the assets transferred to Healthy Alliance Life Insurance
Company pursuant to the transfer and assumption transaction will equal the
liabilities assumed. Although Blue Cross and Blue Shield of Missouri
contemplates that the only assets transferred to Healthy Alliance Life
Insurance Company pursuant to the transfer and assumption transaction will be
insurance contracts and cash and receivables and it will report for federal
income tax purposes that the value of those assets will equal the liabilities
assumed under the transferred insurance contracts and all of those assets will
have a tax basis equal to fair market value, if the Internal Revenue Service
successfully challenged that position, gain could be recognized by Blue Cross
and Blue Shield of Missouri. We cannot assure you that the Internal Revenue
Service will not take the position that the value of the assets transferred
exceeds the liabilities assumed or the tax basis of those assets. We cannot
determine with any certainty the amount of any gain that might have to be
recognized by New RightCHOICE, as successor by merger with Blue Cross and Blue
Shield of Missouri.
If the Internal Revenue Service takes the position that the charter
conversion transaction is not a tax-free reorganization within the meaning of
Section 368(a)(1)(E) of the Internal Revenue Code, New RightCHOICE, as
successor by merger with 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 the Blue Cross and Blue Shield of Missouri assets
at the time of the charter conversion transaction and the tax basis of those
assets at the time of the charter conversion transaction. An example of a
situation in which the Internal Revenue Service could take the position that
the charter conversion transaction does not constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code would be if a 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. See, in this regard, the discussion in the risk factor
"The reorganization will not settle all litigation relating to the corporate
status of Blue Cross and Blue Shield of Missouri" on page 28. This could result
in a material federal income tax liability that could have a material adverse
effect on New RightCHOICE following the merger.
If the merger of RightCHOICE into New RightCHOICE is not treated as a tax-
free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code, and it is not treated as a tax-free liquidation of RightCHOICE
within the meaning of Section 332(a) of the Internal Revenue Code, 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 in 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. Taxable gain or
loss could also be recognized by New RightCHOICE 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 could result in a material federal income
tax liability that could have a material adverse effect on New RightCHOICE
following the merger.
The Missouri Foundation For Health will agree to indemnify New RightCHOICE,
as the successor by merger with Blue Cross and Blue Shield of Missouri, all of
its subsidiaries and affiliates and all directors, officers, agents and
employees of New RightCHOICE and any of its subsidiaries and affiliates against
tax liabilities that may be incurred as a result of the reorganization if the
Internal Revenue Service or other taxing
25
<PAGE>
authority determines that any part of the reorganization is a taxable
transaction for federal, state or local income tax purposes. The
indemnification will include penalties, interest, fines, additions to tax,
costs and expenses and professional fees incurred in connection with the
defense of the liabilities. The Foundation has agreed to maintain a minimum net
worth for the 6 years following the filing by Blue Cross and Blue Shield of
Missouri of its federal income tax return for the year in which the
reorganization is consummated. The net worth that it must maintain will not be
less than an amount equal to the potential tax liability on the difference
between the tax basis of the RightCHOICE 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 reorganization is closed. For illustrative purposes only, based
upon the market price of the RightCHOICE class A common stock at the close of
business on , 2000, that amount would be approximately $ million.
The actual minimum net worth amount will not be determined until the closing of
the reorganization, and it could differ materially from the amount determined
as of , 2000.
In addition to the income tax indemnity, the Foundation has an obligation to
indemnify New RightCHOICE for certain non-tax matters. For a discussion of the
other indemnification obligations, see "Terms of Indemnification Agreement"
beginning on page 93. The 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 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. Also, it is possible that the taxes may be due from New
RightCHOICE on a date after the Foundation is no longer required to maintain a
minimum 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 our 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 any of the foregoing occurs, we
may have to bear the cost of any tax liabilities and that could have a material
adverse effect on our financial condition. Also, as discussed in the risk
factor "We may have difficulty raising additional equity because of the rights
of the Foundation" on page 19, we may not be able to raise additional funds by
selling our stock to satisfy any tax liabilities that may result from the
reorganization.
The Foundation could suffer adverse tax consequences in the reorganization.
The Missouri Foundation For Health could recognize taxable gain as a result
of the reorganization.
Blue Cross and Blue Shield of Missouri and other appropriate parties, if
any, to the reorganization will request a private letter ruling to the effect,
among other things, that the Foundation will not recognize gain or loss in the
transfer and assumption transaction or the charter conversion transaction. A
tax opinion will be issued by PricewaterhouseCoopers LLP to the Foundation and
others to the effect, among other things, that for federal income tax purposes
the Foundation should not recognize gain or loss from the charter conversion
transaction and that it will not recognize gain or loss from the other elements
of the reorganization. However, a private letter ruling may not be issued for a
number of reasons, or, if issued, may be revoked or modified, and tax opinions
represent only the best judgment of the firm giving the opinion on matters
addressed in the opinion and have no binding effect or official status of any
kind. See the discussion under "Proposed Reorganization--Material Federal
Income Tax Consequences" beginning on page 62. In the event that the Internal
Revenue Service either revokes or modifies its private letter ruling, if any,
or challenges the conclusions set forth in the tax opinion and the Internal
Revenue Service's challenges are upheld, it is possible that the Foundation
could be required to report taxable income even though it is anticipated it
will be an entity exempt from federal income tax.
PricewaterhouseCoopers LLP's tax opinion will state that the charter
conversion transaction "should," rather than "will," be treated as a
recapitalization under Section 368(a)(1)(E) of the Internal Revenue Code and
that The Missouri Foundation For Health "should," rather than "will," not
recognize gain or loss in that
26
<PAGE>
transaction. PricewaterhouseCoopers LLP's opinion is so qualified because of
the lack of direct legislative, judicial or administrative authority, thus
raising the level of uncertainty. The Internal Revenue Service could take the
position that the charter conversion transaction does not constitute a tax-free
reorganization. If the Internal Revenue Service did take the position that the
charter conversion transaction is not tax-free and it ultimately prevailed in
that position, the Foundation could be subject to tax on an amount equal to the
value of the Blue Cross and Blue Shield of Missouri stock received by the
Foundation in the charter conversion transaction. This would result in a
material federal income tax liability and could have a material adverse effect
on the Foundation's ability to carry out its purposes or to meet its
obligations under the indemnification agreement. To satisfy its tax
liabilities, the Foundation probably would have to sell a substantial amount of
its New RightCHOICE stock, which could have a material adverse effect on the
market price for the stock. For a discussion of the indemnification agreement
see "Terms of the Indemnification Agreement" beginning on page 93.
Risks Related to Litigation
RightCHOICE is subject to litigation risks if the reorganization is not
completed because judgments previously entered against Blue Cross and Blue
Shield of Missouri are no longer subject to appeal and may be enforced.
If the reorganization is not completed by December 31, 2000, and the
deadline is not extended and the litigation is not otherwise settled, judgments
previously entered against Blue Cross and Blue Shield of Missouri may be
enforced by the Missouri Attorney General and the Missouri Department of
Insurance. These judgments are now final, without right of further appeal. If
successful, these enforcement actions could lead to the dissolution of Blue
Cross and Blue Shield of Missouri which could 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. These judgments declared that Blue Cross and Blue Shield of
Missouri, a non-profit corporation, has violated the Missouri Health Services
Corporation Law and the Missouri Non-Profit Corporation Law by operating
RightCHOICE as a for-profit subsidiary.
As part of the amended and restated settlement agreement signed January 6,
2000, the Missouri Attorney General and the Missouri Department of Insurance
dismissed the remaining claims pending in this litigation and agreed to take no
further action to enforce the claims that were raised in this litigation so
long as the settlement agreement remains in effect and the parties are
proceeding, using their best efforts, to close the reorganization.
If the reorganization is not closed by December 31, 2000, or if RightCHOICE
or Blue Cross and Blue Shield of Missouri breaches the settlement agreement by
not using its best efforts to close the reorganization, Blue Cross and Blue
Shield of Missouri and RightCHOICE will be subject to the risks of further
litigation to enforce those judgments. The Missouri Attorney General and the
Missouri 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 the certificate of authority of Blue Cross and Blue
Shield of Missouri to engage in the health insurance business. The Missouri
Attorney General and the Missouri Department of Insurance could also seek
monetary relief arising from the 1994 reorganization and the subsequent
operations of Blue Cross and Blue Shield of Missouri and RightCHOICE.
If these actions were taken, there could be material adverse effects on
RightCHOICE. The Missouri Attorney General and the Missouri Department of
Insurance would be free to assert claims directly against RightCHOICE arising
from the 1994 reorganization and the subsequent operations of RightCHOICE. In
addition, the Blue Cross and Blue Shield Association might take the position
that the assertion of these claims has caused the automatic termination of the
licenses of Blue Cross and Blue Shield of Missouri, RightCHOICE,
27
<PAGE>
and the affiliates of RightCHOICE to use the Blue Cross and Blue Shield names
and service marks. See the risk factor "Our Blue Cross and Blue Shield license
agreements could terminate upon the occurrence of events specified in the
license agreements and termination would have a material adverse effect on our
business" on page 30 for a discussion of the adverse effects resulting from any
termination of those license agreements.
See "Proposed Reorganization--Background of Reorganization" beginning on
page 44 for a description of the litigation in which the judgments of December
30, 1996 were entered.
The reorganization will not settle all litigation relating to the corporate
status of Blue Cross and Blue Shield of Missouri.
The reorganization will not settle all litigation relating to the corporate
status of Blue Cross and Blue Shield of Missouri. There remains pending in the
circuit court of Cole County, Missouri a certified subscriber class action in
which the subscriber class seeks a declaratory judgment that Blue Cross and
Blue Shield of Missouri is a mutual benefit corporation and that Blue Cross and
Blue Shield of Missouri may not transfer its assets to a public benefit
foundation.
In this litigation, a class of present and past subscribers of Blue Cross
and Blue Shield of Missouri, RightCHOICE, and their affiliates has been
certified for purposes of declaratory relief. The representative of the class,
Anthony Sarkis, on behalf of himself and the class, seeks a declaration that
Blue Cross and Blue Shield of Missouri is a mutual benefit non-profit
corporation--that is, that Blue Cross and Blue Shield of Missouri holds its
assets for the benefit of a limited class of persons who were subscribers of
Blue Cross and Blue Shield of Missouri and RightCHOICE rather than for the
benefit of the public as a whole. Mr. Sarkis also seeks a declaration that it
is unlawful for Blue Cross and Blue Shield of Missouri to transfer its assets
to a "charitable trust." For a description of this litigation, see footnote 10
to the financial statements of Blue Cross and Blue Shield of Missouri included
on page F-52 of this document.
While Blue Cross and Blue Shield of Missouri contests these claims, the
circuit court of Cole County could award Mr. Sarkis and the subscriber class
the relief they seek. Blue Cross and Blue Shield of Missouri believes that it
may engage in the reorganization regardless of whether it is a public benefit
corporation or a mutual benefit corporation. The circuit court of Cole County
might conclude otherwise and hold that it is unlawful for Blue Cross and Blue
Shield of Missouri to engage in the reorganization. If a judgment is entered
before completion of the reorganization, the reorganization might not be
completed. If a judgment is entered after the reorganization is completed, New
RightCHOICE could be obligated to pay substantial money damages. It is also
possible, although we believe 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 RightCHOICE. A judgment that Blue Cross and Blue
Shield of Missouri is a mutual benefit corporation could also have an adverse
tax effect as described in the risk factor "New RightCHOICE, as successor to
Blue Cross and Blue Shield of Missouri and RightCHOICE, could suffer adverse
tax consequences in the reorganization" on page 24.
A judgment in favor of Mr. Sarkis and the subscriber class might lead the
Blue Cross and Blue Shield Association to take action to terminate New
RightCHOICE's licenses for use of the Blue Cross and Blue Shield names and
service marks. See the risk factor "Our Blue Cross and Blue Shield license
agreements could terminate upon the occurrence of events specified in the
license agreements and termination would have a material adverse effect on our
business" on page 30 for a discussion of the adverse effects resulting from any
termination of those license agreements.
The Missouri Foundation For Health will indemnify New RightCHOICE 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. That
indemnification obligation is subject to the risks related to the
indemnification agreement described in the risk factor "The indemnification
obligation of the Foundation could fail to fully indemnify New RightCHOICE
against the risks of the reorganization" on page 22.
28
<PAGE>
New RightCHOICE will succeed to potential liability from claims of subscribers
of Blue Cross and Blue Shield of Missouri and RightCHOICE.
New RightCHOICE will succeed to potential liability of Blue Cross and Blue
Shield of Missouri resulting from the litigation described in the previous risk
factor relating to the corporate status of Blue Cross and Blue Shield of
Missouri that remains pending in the circuit court of Cole County, Missouri.
New RightCHOICE will also succeed to potential liability for claims that may be
filed by subscribers asserting that they are entitled to the assets of Blue
Cross and Blue Shield of Missouri.
One or more subscribers of Blue Cross and Blue Shield of Missouri or
RightCHOICE or its affiliates might bring a claim asserting that the
reorganization is unlawful as to them and that they are entitled to the assets
of Blue Cross and Blue Shield of Missouri. The claims could include asking a
court to prevent the closing of the reorganization or seeking to undo the
reorganization after it occurs, or money damages. The damages sought could be
for the full amount of the assets of Blue Cross and Blue Shield of Missouri
prior to the reorganization, including the value of its RightCHOICE class B
common stock.
These claims could be asserted against New RightCHOICE as the successor to
Blue Cross and Blue Shield of Missouri and the successor to RightCHOICE. New
RightCHOICE might also have indemnification obligations to the officers and
directors of RightCHOICE and Blue Cross and Blue Shield of Missouri with
respect to any of these claims.
While Blue Cross and Blue Shield of Missouri and RightCHOICE would contest
these claims, a judgment could be entered in favor of the subscribers. If a
judgment is entered before completion of the reorganization, the reorganization
might not be completed. If a judgment is entered after the reorganization is
completed, New RightCHOICE could be obligated to pay substantial money damages.
It is also possible, although we believe 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 RightCHOICE.
A judgment in favor of the subscribers could also result in the loss of the
licenses of New RightCHOICE to use the Blue Cross and Blue Shield names and
service marks. See the risk factor "Our Blue Cross and Blue Shield license
agreements could terminate upon the occurrence of events specified in the
license agreements and termination would have a material adverse effect on our
business" on page 30 for a discussion of the adverse effects resulting from any
termination of those license agreements.
The Missouri Foundation For Health will indemnify New RightCHOICE against
these potential claims, but that indemnification obligation is subject to the
risks related to the indemnification agreement described in the risk factor
"The indemnification obligation of the Foundation could fail to fully indemnify
New RightCHOICE against the risks of the reorganization" on page 22.
An action may be brought seeking an injunction against consummation of the
reorganization.
An action may be brought seeking an injunction against consummation of the
reorganization. It is a condition to the reorganization that no temporary
restraining order or injunction against completing the reorganization have been
issued, and that no action be pending seeking a restraining order or
injunction. If an action is brought, or if a restraining order or injunction is
entered, 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 "RightCHOICE is subject to litigation risks
if the reorganization is not completed because judgments previously entered
against Blue Cross and Blue Shield of Missouri are no longer subject to appeal
and may be enforced" on page 27.
Risks Related to RightCHOICE, Blue Cross and Blue Shield of Missouri and New
RightCHOICE
The following is a discussion of the risks which RightCHOICE and Blue Cross
and Blue Shield of Missouri believe currently affect their respective
businesses, financial condition or results of operations, and will affect New
RightCHOICE, as the successor to RightCHOICE and Blue Cross and Blue Shield of
Missouri, after the reorganization.
29
<PAGE>
Our Blue Cross and Blue Shield license agreements could terminate upon the
occurrence of events specified in the license agreements and termination
would have a material adverse effect on our business.
Our Blue Cross and Blue Shield license agreements could terminate upon the
occurrence of events specified in the license agreements. Termination of our
licenses would have a material adverse effect on our business. Under
controlled affiliate license agreements with the Blue Cross and Blue Shield
Association, RightCHOICE has the right to use the Blue Cross and Blue Shield
names and service marks in the managed health care business in the 85 of the
115 counties in Missouri that comprise the service area of Blue Cross and Blue
Shield of Missouri as the primary licensee. In connection with the
reorganization, the Blue Cross and Blue Shield Association is expected to
authorize New RightCHOICE to use the Blue Cross and Blue Shield names and
service marks in the same service area following completion of the
reorganization.
Our license agreements could be terminated if financial and service
performance requirements of the Blue Cross and Blue Shield Association are not
satisfied or if other events described in the license agreements occur
including, but not limited to:
. Violation of the ownership limitations contained in our certificate of
incorporation and described in this document,
. Termination of the voting trust and divestiture agreement before The
Missouri Foundation For Health's ownership of New RightCHOICE falls to
less than 5%,
. Violation of the Foundation's divestiture deadlines, or
. Association determination that a majority of our directors are not
independent.
Our certificate of incorporation includes ownership limitations required by
the Association. Although we believe that these limitations are enforceable
under Delaware law for a corporation like New RightCHOICE, we are not aware of
any case in which a court has specifically addressed this issue. If these
ownership limitations are violated by a shareholder of New RightCHOICE and a
court finds that the provisions of our certificate of incorporation are not
enforceable, we could lose our Blue Cross and Blue Shield licenses.
We believe that the exclusive right to use the Blue Cross and Blue Shield
names and service marks provide us with a marketing advantage in our licensed
operating area. Loss of licenses would adversely affect our ability to compete
in our markets. We would be subject to a significant monetary penalty to the
Blue Cross and Blue Shield Association if we lose the licenses, and the loss
also would be a default under our major credit agreement.
New RightCHOICE's profitability may be adversely affected by rising health
care costs and changes in the delivery of health care services.
New RightCHOICE's profitability may be adversely affected by rising health
care costs and changes in the delivery of health care services. As a result,
New RightCHOICE's future results will largely depend on its ability and the
ability of its subsidiaries to accurately predict and manage future health
care costs. Much of the premium revenue received by New RightCHOICE's
subsidiaries is based upon rates set before services are delivered, and the
related costs are usually incurred on a prospective annual basis. Although New
RightCHOICE and its subsidiaries will attempt to base the premiums charged on
an estimate of future health care costs over the fixed premium period,
competition, regulations and other circumstances may limit their ability to
fully base premiums on these estimated costs.
New RightCHOICE and its subsidiaries will use a large portion of their
revenue to pay the costs of health care services and supplies delivered to
their members. As a result, New RightCHOICE's financial condition or results
of operations could be adversely affected because of rising costs and other
changes in the delivery of health care services. These changes could include:
. Higher-than-expected utilization of services,
30
<PAGE>
. Increase in the number of high-cost cases,
. Changes in the population or demographic characteristics of members
served,
. Inflation,
. Periodic renegotiation of hospital, physician and other provider
contracts,
. Continued consolidation of physician, hospital and other provider groups,
. Aging of the population,
. Advances in medical technology and pharmaceuticals,
. Government-imposed limitations on Medicare reimbursement, and
. Other regulatory changes.
New RightCHOICE's profitability may be adversely affected by its subsidiaries'
inability to increase premium rates; competitive factors limit the ability to
increase rates.
New RightCHOICE will operate in a highly competitive environment which may
affect the ability of its subsidiaries to increase premium rates. New
RightCHOICE and its managed care subsidiaries will face competition from other
managed care companies, hospitals, health care facilities and other health care
providers, which have substantially greater financial and other resources than
New RightCHOICE.
New RightCHOICE and its subsidiaries will compete with a number of
established companies that offer a variety of benefit plans. Because New
RightCHOICE's business operations, excluding its HealthLink and HealthLink HMO
subsidiaries, are primarily confined to markets within or contiguous to the
State of Missouri, New RightCHOICE will be unable to subsidize losses in these
markets with profits from other markets. New RightCHOICE believes that larger,
national competitors are able to subsidize losses in the Missouri market with
profits from other markets in which they operate and may pursue that strategy
in New RightCHOICE's markets in an effort to increase their market share.
New RightCHOICE believes there are no significant impediments facing
potential competitors who wish to enter the markets New RightCHOICE will serve.
As a result, the addition of new competitors can occur relatively easily which
affords consumers significant flexibility in moving to new managed care
providers. New RightCHOICE's managed care operations may encounter competition
from companies with broader geographical markets or narrower geographical
markets, which allows for greater cost control and lower prices or greater
market share. New RightCHOICE's or its subsidiaries' financial condition or
results of operations may be adversely affected by significant premium
decreases by any major competitor or by any other limitation on the ability of
New RightCHOICE's subsidiaries to increase or maintain premium levels.
New RightCHOICE will conduct business in a heavily regulated industry; changes
in regulations or violations of regulations could materially adversely affect
New RightCHOICE.
New RightCHOICE's business will be heavily regulated on federal, state and
local levels. The laws and rules governing New RightCHOICE's business and the
interpretations of those laws and rules are subject to frequent change. Broad
latitude is given to the agencies administering those regulations. Legislation
or other regulatory reform that increases the regulatory requirements imposed
on New RightCHOICE and its subsidiaries may have a material adverse effect on
New RightCHOICE's business or results of operations in the future.
Changes in state and federal laws or regulations could adversely impact New
RightCHOICE's revenues and profitability. Legislative or regulatory changes
that could materially affect New RightCHOICE and its subsidiaries include:
. Adoption of federal or state legislation that holds insurance companies,
health maintenance organizations or managed care companies liable for
medical malpractice,
. Limitations on premium levels,
31
<PAGE>
. Increases in minimum capital, reserves, and other financial viability
requirements,
. Prohibition or limitation of provider financial incentives and provider
risk-sharing arrangements,
. New benefit mandates, and
. Limitations on the ability to manage care and utilization due to "any
willing provider" and direct access laws that limit or eliminate product
features that encourage members to seek services from contracted
providers or through referral by a primary care provider.
New RightCHOICE and its subsidiaries will need to obtain and maintain
regulatory approvals to market many of their products. Delays in obtaining or
failure to obtain or maintain these approvals could adversely affect New
RightCHOICE.
A portion of the revenues of New RightCHOICE and its subsidiaries will
relate to Medicare Supplement and Medicare Risk programs. Changes in these
programs, particularly changes affecting enrollment or changes in premium
payment or reimbursement levels, could materially affect the business and
profitability of New RightCHOICE.
New RightCHOICE and its subsidiaries will also be subject to various
governmental reviews, audits and investigations. Any adverse investigation,
audit results or sanctions could result in:
. Damage to the reputation of New RightCHOICE and its subsidiaries in
various markets,
. Increased difficulty in selling their products and services,
. Loss of a New RightCHOICE subsidiary's license to act as an insurer or
health maintenance organization or to otherwise provide a service,
. Loss of the right to participate in various federal programs, including
the Medicare Supplement and Medicare Risk programs, or
. Imposition of fines, penalties and other sanctions.
New RightCHOICE's profitability will be affected by its ability to enter into
provider agreements or other appropriate agreements.
New RightCHOICE's profitability will be dependent upon its ability, and the
ability of its subsidiaries, to contract on favorable terms with hospitals,
physicians and other health care providers. The failure to secure cost-
effective health care provider contracts may result in a loss of membership or
higher medical costs. In addition, New RightCHOICE's and its subsidiaries'
inability to contract with providers, or the inability of providers to provide
adequate care, could materially affect New RightCHOICE.
A reduction in the number of subscribers to New RightCHOICE's health care
programs could have an adverse effect on the business and profitability of New
RightCHOICE.
A reduction in the number of subscribers to New RightCHOICE's health care
programs could adversely affect New RightCHOICE's financial position, results
of operations and cash flows. Factors that could contribute to the loss of
membership include:
. Failure to obtain new customers or retain existing customers,
. Premium increases and benefit changes,
. New RightCHOICE's exit from markets,
. Reductions in work force by existing customers, or
. Negative publicity and news coverage.
32
<PAGE>
New RightCHOICE will be dependent upon key members of management.
New RightCHOICE's success will be dependent, to a significant extent, on
key management members, including those set forth on page 142 of this
document. Competition for highly skilled people with extensive experience in
the health care industry is intense. New RightCHOICE believes that its key
management members will have significant experience and competence in the
managed care industry that would be difficult to replace. All of New
RightCHOICE's key management members may voluntarily terminate their
employment with New RightCHOICE at any time. The loss of current key
management may result in a material adverse effect on New RightCHOICE's
results of operations, financial condition or business.
New RightCHOICE will need to retain qualified employees of RightCHOICE and
Blue Cross and Blue Shield of Missouri.
New RightCHOICE will need to retain qualified employees of RightCHOICE and
Blue Cross and Blue Shield of Missouri to meet its future needs. In addition,
New RightCHOICE will face intense competition for qualified employees,
particularly during the present economic environment of low unemployment. The
unemployment rate in Missouri is among the lowest in the nation at about 3.1%.
New RightCHOICE may not be able to attract and retain employees. Competition
among potential employers may result in increased salaries or an inability to
retain existing employees or attract additional employees.
The health care industry is subject to negative publicity, which can
adversely affect New RightCHOICE's profitability.
The health care industry is subject to negative publicity. Negative
publicity may result in increased regulation and legislative review of
industry practices which may further increase New RightCHOICE's costs of doing
business and adversely affect its profitability by:
. Adversely affecting New RightCHOICE's ability to market its products or
services,
. Requiring New RightCHOICE to change its products and services, or
. Increasing the regulatory burdens under which New RightCHOICE and its
subsidiaries will operate.
In addition, as long as New RightCHOICE uses the Blue Cross and Blue Shield
names and service marks in marketing its managed care products, any negative
publicity concerning the Blue Cross and Blue Shield Association or other Blue
Cross and Blue Shield Association licensees may adversely affect the business
of New RightCHOICE and the sales of its managed care products.
The health care industry, including New RightCHOICE, could be subject to
stock price and trading volume volatility.
From time to time, stock prices and the number of shares traded of
companies in the health care industry experience periods of significant
volatility. Both company specific issues and developments generally in the
health care industry may cause this volatility. New RightCHOICE's stock price
may experience significant price and volume fluctuations in response to these
and other factors.
The trading volume for RightCHOICE stock has historically been very low.
Significant changes in volume could result in significant price fluctuations.
For the one year period ended December 31, 1999, the trading price of
RightCHOICE class A common stock has ranged from a low of $9.50 per share to a
high of $13.00 per share, and the average daily trading volume was 7,356
shares.
33
<PAGE>
New RightCHOICE's business and operations may be adversely affected if its
current information systems and the integrity of its proprietary information
are not maintained.
New RightCHOICE's business will depend on its ability to maintain its
information systems and to ensure the continued integrity of its proprietary
information. New RightCHOICE is committed to maintaining and enhancing
existing information systems and developing new systems in order to keep pace
with continuing changes in information processing technology, industry
standards, and customer preferences. Failure to maintain effective and
efficient information systems could cause the loss of existing customers,
difficulty in attracting new customers, customer and provider disputes,
regulatory problems, increases in administrative expenses or other adverse
consequences.
If the information maintained by New RightCHOICE were found or perceived to
be inaccurate, or if the information were generally perceived to be
unreliable, commercial acceptance of New RightCHOICE's products would be
adversely and materially affected. Furthermore, the use by all of New
RightCHOICE's businesses of patient data is regulated at federal, state, and
local levels. These laws and rules change frequently. These changes could
adversely affect New RightCHOICE's business, financial condition and results
of operations.
New RightCHOICE will be subject to litigation in the ordinary course of its
business, including litigation based on new or evolving legal theories.
Due to the nature of their business, New RightCHOICE and its subsidiaries
will be subject to a variety of legal actions relating to their business
operations including claims relating to:
. Denial of health care benefits,
. Claims of vicarious liability for providers' actions or medical
malpractice claims,
. Provider disputes over compensation and termination of provider
contracts,
. Disputes related to self-funded business, including actions alleging
breach of fiduciary duties, claim administration errors and the failure
to disclose network rate discounts and other fee and rebate arrangements,
. Disputes over copayment calculations, and
. Claims relating to customer audits and contract performance.
In addition, plaintiffs continue to bring new types of purported legal
claims against managed care companies. The impact that these evolving theories
of recovery may have on the managed care industry in general, or New
RightCHOICE and its subsidiaries in particular, cannot be determined with any
degree of certainty.
New RightCHOICE and its subsidiaries may, in the ordinary course of their
business, be parties to a variety of legal actions such as:
. Employment and employment discrimination-related suits,
. Employee benefits claims,
. Breach of contract actions,
. Tort claims,
. Intellectual property claims,
. Anti-competitive claims, and
. Shareholder suits, including those related to securities matters.
Recent court decisions and legislative activity increase the exposure of
New RightCHOICE and its subsidiaries to these claims. In some cases,
substantial non-economic or punitive damages may be sought. The loss of even
one of these claims, if it were to result in a significant punitive damage
award, could adversely affect New RightCHOICE's and its subsidiaries'
financial condition or results of operations. This risk of potential liability
may make reasonable settlements of claims more difficult to obtain.
34
<PAGE>
New RightCHOICE and its subsidiaries anticipate that they 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. In
addition, insurance coverage for all or some forms of liability may become
unavailable or prohibitively expensive in the future.
New RightCHOICE's credit agreement will contain limitations on the business
and operations of New RightCHOICE; failure to comply with these limitations
could adversely impact New RightCHOICE.
New RightCHOICE's credit agreement will contain limitations on New
RightCHOICE and its subsidiaries. New RightCHOICE may not be able to achieve
and maintain compliance with the requirements of its credit agreement. If that
occurs, New RightCHOICE's operations, financial condition or business may be
adversely impacted. The limitations in the credit agreement include:
. Limitations on additional indebtedness and liens,
. Limitations on payment of cash dividends or purchases of stock,
. Limitations on acquisitions, dispositions and mergers,
. Limitations on indebtedness of New RightCHOICE's subsidiaries,
. Maintaining net worth and financial ratios, and
. Maintaining the licenses to use the Blue Cross and Blue Shield of
Missouri names and service marks.
Future losses related to the Missouri Consolidated Health Care Plan could
adversely affect New RightCHOICE.
In 1997, BlueCHOICE, a subsidiary of RightCHOICE, recorded a $29.5 million
pre-tax charge related to a health maintenance organization contract with the
Missouri Consolidated Health Care Plan. The Missouri Consolidated Health Care
Plan is a Missouri public agency that purchases health care coverage for
employees of the State of Missouri and selected public entities. It is
currently the largest customer group served by BlueCHOICE. Continued losses
related to the Missouri Consolidated Health Care Plan could adversely affect
New RightCHOICE. BlueCHOICE is contractually bound to serve the Missouri
Consolidated Health Care Plan members through the year 2000 at rates
originally contracted for in 1995. Under the current contract, even though a
limited rate increase was made in August 1999 for the 2000 contract year,
annual rate increases are not adequate to allow BlueCHOICE to recover its
costs in serving those members. New RightCHOICE will assume the obligations of
RightCHOICE under this contract, which expires on December 31, 2000.
The pre-tax charge of $29.5 million was based upon actuarial estimates,
including projected limited rate increases, and projected enrollment and
medical cost trends accounted for through the year 2000. Management of
RightCHOICE reviews the adequacy of this reserve on an ongoing basis. If the
actual number of BlueCHOICE's members participating through the Missouri
Consolidated Health Care Plan or medical cost trends differ materially from
those assumed in RightCHOICE's actuarial estimates, the amount of the reserve
recorded to date could be insufficient to cover all future losses that may be
associated with the Missouri Consolidated Health Care Plan contract. As a
result, these losses could have an adverse effect on New RightCHOICE and the
market for its stock.
Blue Cross and Blue Shield of Missouri currently has voting control on all
shareholder actions involving RightCHOICE prior to the completion of the
reorganization.
Blue Cross and Blue Shield of Missouri has voting control on all
shareholder actions involving RightCHOICE prior to the completion of the
reorganization, including the sale or merger of RightCHOICE, a sale of
substantially all of its assets and the election of all of RightCHOICE's
directors. Blue Cross and Blue Shield of Missouri may have interests with
respect to its ownership of RightCHOICE that diverge from those of
RightCHOICE's public shareholders. RightCHOICE cannot provide any assurances
that it will not be adversely impacted by the control that Blue Cross and Blue
Shield of Missouri has with respect to matters affecting RightCHOICE.
35
<PAGE>
There are other risks and uncertainties which may have an adverse effect on
the business and profitability of New RightCHOICE.
Additional risks and uncertainties that may affect the future results of
operations, financial condition or business of New RightCHOICE include, but
are not limited to:
. Demand for, and market acceptance of, New RightCHOICE's products and
services,
. Effect of economic and industry conditions on prices for New
RightCHOICE's and its subsidiaries' products and services and their cost
structure,
. Ability to develop and deliver new products and services and adapt
existing products and services to meet customer needs and expectations,
. Ability to keep pace with technological change in order to provide better
service and remain competitive,
. Ability to attract and retain capital for growth and operations on
competitive terms, and
. Changes in accounting policies and practices.
Forward-looking statements may prove inaccurate.
The statements included in this document regarding future financial
performance and results and the other statements herein that are not
historical facts are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include those
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "could," "plans," "projects," "may," "should" or similar
expressions. These forward-looking statements involve risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among others, those
risks discussed above. These forward-looking statements may prove inaccurate
and investors should not view them as guarantees of future performance.
36
<PAGE>
SPECIAL MEETING
This document and the accompanying proxy card are being furnished to you in
connection with the solicitation of proxies by the board of directors of
RightCHOICE to be used at the special meeting of RightCHOICE shareholders to be
held at .m., local time, on , 2000 at the RightCHOICE
headquarters at 1831 Chestnut Street, St. Louis, Missouri 63103, and at any
postponements and adjournments of the special meeting. This document and the
accompanying proxy card are first being sent to you on or about ,
2000.
Purpose of Special Meeting
The purpose of the special meeting is to vote on the reorganization.
Matters to be Considered
The matters to be considered and voted upon at the special meeting are the
plan of merger of RightCHOICE with and 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
are properly brought before the special meeting, including a proposal to
adjourn the special meeting to permit the RightCHOICE board of directors to
solicit additional proxies in the event that there are not enough votes to
approve the merger of RightCHOICE into New RightCHOICE and the reorganization
agreement. A proxy which is voted against the plan of 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 RightCHOICE board of directors does not
know of any other business that will be presented for consideration at the
special meeting, other than the matters described in this document.
Record Date
Only RightCHOICE shareholders of record as of , 2000 will be
entitled to notice of and to vote at the special meeting. On , 2000,
shares of RightCHOICE class A common stock and 14,962,500 shares of
RightCHOICE class B common stock were outstanding and entitled to vote at the
special meeting.
Voting and Revocability of Proxies
Shareholders who execute proxies retain the right to revoke them at any time
before their exercise. Unless revoked, the shares represented by proxies will
be voted at the special meeting and all postponements and adjournments thereof.
Proxies may be revoked by:
. Sending written notice to the Corporate Secretary, RightCHOICE Managed
Care, Inc., 1831 Chestnut Street, St. Louis, Missouri 63103, or
. 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.
Proxies solicited by the RightCHOICE board of directors will be voted 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 RightCHOICE common stock represented by the proxy on matters incident
to the conduct of the special meeting. If any other business is presented at
the special meeting, the proxy holders will vote the proxies in their
discretion.
37
<PAGE>
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.
The RightCHOICE board of directors recommends that you vote in favor of 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 RightCHOICE
class A common stock and RightCHOICE class B common stock taken together as one
class, and taken separately as two different classes. For purposes of
determining a quorum, shares of RightCHOICE common stock present at the special
meeting but not voting, and present by proxy at the special meeting but which
have abstained from voting, will be counted as present in determining if a
quorum is present.
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 mailing of 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 RightCHOICE 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
holders of:
. Two-thirds of the outstanding shares of RightCHOICE class A common stock
and RightCHOICE class B common stock voting together as a single class,
and
. A majority of the outstanding shares of RightCHOICE class A common stock
voting as a class separate and apart from the RightCHOICE class B common
stock, but excluding any shares of RightCHOICE 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 RightCHOICE class B common stock in
favor of the reorganization at the special meeting. As a result and based upon
information as of , 2000, the reorganization will be approved if the
holders of shares of RightCHOICE class A common stock vote in favor
of the reorganization at the special meeting.
38
<PAGE>
PROPOSED REORGANIZATION
The following is a summary of the material terms of the reorganization. We
urge you to read the reorganization agreement, a copy of which is attached to
this document as Appendix A and is summarized beginning on page 71.
Overview of Reorganization
The reorganization is part of a settlement agreement entered into among
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. The Foundation is expected to fund its
charitable activities with the cash it receives from Blue Cross and Blue Shield
of Missouri and with the proceeds it receives through an orderly sale of the
stock it receives in the reorganization. The reorganization will not happen
unless it is approved by the RightCHOICE shareholders at the special meeting.
The reorganization will be accomplished in several separate steps which are
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 holders of RightCHOICE class A common stock will
receive one share of New RightCHOICE common stock for each share of
RightCHOICE class A common stock you own, representing in the aggregate
approximately 20% of the equity and the voting power of New RightCHOICE,
which is the same ownership interest, but an increased voting interest,
that the holders of class A common stock currently have in RightCHOICE,
and
. The Missouri Foundation For Health will receive a number of shares of New
RightCHOICE common stock representing approximately 80% of the equity 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.
. The combined assets and liabilities of RightCHOICE and Blue Cross and
Blue Shield of Missouri, except for:
-- approximately $13 million to be paid to The Missouri Foundation For
Health as part of the settlement, and
-- the shares of RightCHOICE class B common stock owned by Blue Cross
and Blue Shield of Missouri, which will be cancelled and the value
of which will be transferred 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 95 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.
39
<PAGE>
Pre-Reorganization Steps
The following steps have been, or will be, taken prior to the
reorganization.
Creation of Foundation
The Missouri Foundation For Health was created under the settlement
agreement as a Missouri non-profit public benefit corporation. It is expected
to use the assets it receives in the reorganization to benefit uninsured and
underinsured Missourians in the Blue Cross and Blue Shield of Missouri service
area. It will apply to the Internal Revenue Service for a determination that it
is exempt from federal income tax as a social welfare organization pursuant to
Section 501(c)(4) of the Internal Revenue Code. The reorganization is
conditioned upon the receipt of this determination from the Internal Revenue
Service.
[REORGANIZATION CHART Creation of Foundation Shown]
Creation of New RightCHOICE
RightCHOICE Managed Care, Inc., a Delaware corporation, which is referred to
as New RightCHOICE in this document, was formed under the settlement agreement
for the sole purpose of facilitating the reorganization. When it was formed,
New RightCHOICE issued one share of its common stock to The Missouri Foundation
For Health.
[REORGANIZATION CHART Creation of New RightCHOICE Shown]
$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. The Foundation will use the payment to carry out its
stated purposes described in the settlement agreement and summarized in this
document.
[REORGANIZATION CHART $12.78 Million Cash Payment Shown]
40
<PAGE>
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, all of the insurance contracts of Blue Cross and Blue Shield of
Missouri will be transferred to and assumed by Healthy Alliance Life Insurance
Company, a wholly-owned subsidiary of RightCHOICE. Healthy Alliance Life
Insurance Company will also receive from Blue Cross and Blue Shield of Missouri
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 prior to the charter conversion transaction,
which is the next step, because when Blue Cross and Blue Shield of Missouri
converts to a Missouri-for-profit corporation, it will no longer have the
authority under its current charter to engage in the health insurance business
under Missouri law. Although this specific step does not require the approval
of the shareholders of RightCHOICE, it will not be completed unless the
shareholders of RightCHOICE approve the reorganization at the special meeting.
[REORGANIZATION CHART Transfer and Assumption Transaction Shown]
41
<PAGE>
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 Cross and Blue Shield of Missouri. Although this specific step does not
require the approval of the shareholders of RightCHOICE, it will not be
completed unless the shareholders of RightCHOICE approve the reorganization at
the special meeting.
[REORGANIZATION CHART Charter Conversion Transaction Shown]
Reincorporation Merger Transaction
Third, Blue Cross and Blue Shield of Missouri will reincorporate as a
Delaware corporation by merging with New RightCHOICE, which will be 100% owned
by The Missouri Foundation For Health at that time. In this reincorporation
merger transaction, the one share of New RightCHOICE 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
be completed unless the shareholders of RightCHOICE approve the reorganization
at the special meeting. Following this step, the Foundation will own 100% of
New RightCHOICE.
[REORGANIZATION CHART Reincorporation Merger Transaction Shown]
42
<PAGE>
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 holders of RightCHOICE class A common stock will
receive one share of New RightCHOICE common stock for each share of
RightCHOICE class A common stock you own,
. Each outstanding share of RightCHOICE 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 RightCHOICE class B common stock cancelled in this merger.
This step requires the approval of the shareholders of RightCHOICE and New
RightCHOICE. See page 38 of this document for a summary of the vote required by
the shareholders of RightCHOICE to approve this step. The Missouri Foundation
For Health, as the sole shareholder of New RightCHOICE immediately prior to
this merger, has agreed in the reorganization agreement to vote in favor of
this merger.
[REORGANIZATION CHART RightCHOICE/New RightCHOICE Merger Transaction Shown]
New RightCHOICE Payment
Immediately after the reorganization is completed, 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 the
Missouri corporate law resulting from the conversion of Blue Cross and Blue
Shield of Missouri from a non-profit, non-stock health services corporation to
a for-profit, stock corporation as described above.
Post-Reorganization Ownership Structure
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. Unlike the RightCHOICE
class B common stock, which has 10 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
43
<PAGE>
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.
[REORGANIZATION CHART POST - REORGANIZATION OWNERSHIP STRUCTURE SHOWN]
Effective Time of Reorganization
The reorganization is expected to occur promptly after the last of the
preconditions to the reorganization is waived or satisfied. It is currently
anticipated that the reorganization will be completed before the end of 2000,
although no assurances can be given in this regard. Any party to the
reorganization agreement may terminate the reorganization agreement if the
reorganization is not completed by December 31, 2000.
Exchange of Certificates
After the reorganization is completed, your rights as a shareholder of
RightCHOICE will cease, and you will be a shareholder of New RightCHOICE. As
soon as reasonably practicable after the reorganization is completed, a bank or
trust company to be designated by RightCHOICE as the exchange agent will mail
to you a letter of transmittal and instructions on how to exchange your
RightCHOICE 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
The reorganization is being proposed as a result of the settlement
agreement. The background of the settlement agreement is as follows.
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 non-profit health services corporation organized under the laws
of Missouri. 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' decision to do so
was made on the advice of professional advisors to allow Blue Cross and Blue
Shield of Missouri to have access to public equity markets through RightCHOICE
and to raise necessary capital for its operations and possible acquisitions.
44
<PAGE>
To create RightCHOICE, Blue Cross and Blue Shield of Missouri transferred
its managed care business to RightCHOICE in exchange for all of the RightCHOICE
class B common stock, which then represented 100% of the outstanding shares.
Immediately thereafter, RightCHOICE conducted an initial public offering of its
class A common stock. The class A common stock sold in the initial public
offering, and currently outstanding, represents approximately 20% of the
outstanding capital stock 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 RightCHOICE class B common stock which
represents the remaining 80% of the outstanding capital stock of RightCHOICE
and, by virtue of the 10 votes per share given to the class B shares,
approximately 97% of the voting power.
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
85 counties of Missouri, including the County of and the City of St. Louis,
Missouri, 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 RightCHOICE class A
common stock, finding those actions to be in accordance with the insurance laws
and regulations of Missouri. 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 was primarily engaged 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 was required to 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 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.
45
<PAGE>
The Missouri Department of Insurance and the Missouri Attorney General both
filed answers and counterclaims. The Department of Insurance claimed that there
had been 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 equitable
relief in a number of forms, 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 the 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 Blue Cross and
Blue Shield of Missouri was entitled to any relief. In his counterclaim, the
Attorney General alleged that Blue Cross and Blue Shield of Missouri was
continuing 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 that Blue Cross and Blue Shield of
Missouri be required 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 that Blue Cross and Blue
Shield of Missouri 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.
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 1994 reorganization was authorized under
all Missouri laws applicable to non-profit health services corporations.
All the parties filed additional motions for summary judgment, which were
decided by the Cole County circuit court 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, that the
1994 reorganization and public offering of RightCHOICE class A common stock
were authorized by all laws applicable to non-profit health services
corporations.
46
<PAGE>
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 continued
licensure of RightCHOICE and Blue Cross and Blue Shield of Missouri by the Blue
Cross and Blue Shield Association. 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 dissolution or rehabilitation was a possible remedy. 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. Under these temporary licenses, Blue Cross
and Blue Shield of Missouri and RightCHOICE were given 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 for the Western District 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 trial 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, he
was also appointed as President of RightCHOICE and as President and Chief
Executive Officer of Blue Cross and Blue Shield of Missouri. Both boards of
directors assigned certain objectives to him. Among those objectives was
resolution of the litigation with the Missouri state officials.
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, attempting 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. It would retain voting control of
RightCHOICE. A new tax-exempt foundation would be created 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 foundation would be
funded 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 Blue Cross and
Blue Shield of Missouri be declared 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 assets equal to the full fair market
value of Blue Cross and Blue Shield of Missouri, less only an appropriate
discount for litigation risk, were transferred 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 was not sufficient to meet
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.
47
<PAGE>
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 100% of the outstanding shares
of RightCHOICE stock would be owned by Blue Cross and Blue Shield of Missouri,
and the merger of Blue Cross and Blue Shield of Missouri into the other plan. A
specific purchase price for the publicly held RightCHOICE shares was not
proposed. 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. Its decision was based, 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 RightCHOICE 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.
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, it had to either (1) revert to a fully non-profit
corporation by purchasing the RightCHOICE class A common stock and merging
RightCHOICE 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 litigation should be settled and 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
48
<PAGE>
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 board of RightCHOICE and the committee on October 26, 1998.
Ronald G. Evens, M.D. was added as a committee member on December 7, 1998, and
Earle H. Harbison, Jr. was added as a committee member on March 1, 1999. Dr.
Evens resigned from the board of RightCHOICE and the committee on October 22,
1999. Gloria W. White was added as a committee member on June 28, 1999. Among
the duties of this committee was representing the interests of RightCHOICE 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 special counsel to the committee.
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 name of
the committee was later changed 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, Daniel J. McVey was added as a member of this
committee. Among other things, this committee represented the interests of Blue
Cross and Blue Shield of Missouri in connection with the 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 special counsel to
the committee.
The only person who serves on the board of directors of both Blue Cross and
Blue Shield of Missouri and RightCHOICE is 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 full 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
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 foundation
option was favored 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. There
were 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.
49
<PAGE>
The basic terms negotiated by legal counsel were embodied in a document
entitled "Proposed Resolution Terms." On April 20, 1998, the Proposed
Resolution Terms were formally proposed by the Missouri Attorney General and
the Missouri Department of Insurance as the terms of a settlement that would
resolve the outstanding litigation. On April 21, 1998, the Proposed Resolution
Terms were considered and approved by the board of directors of Blue Cross and
Blue Shield of Missouri and the board of directors of RightCHOICE.
The contents of the Proposed Resolution Terms were announced publicly on
April 22, 1998. The parties announced that a public benefit foundation would be
created 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 stock in RightCHOICE. 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 holders 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 the Proposed Resolution
Terms was subject to 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 trial court
concluded, among other things, that Blue Cross and Blue Shield of Missouri was
operating in violation of Missouri non-profit law. It 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 was subject to 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 other
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 holders of RightCHOICE's
class A common stock.
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 Blue Cross and
Blue Shield of Missouri on September 14, 1998, and by the board of directors of
RightCHOICE on September 10, 1998. At those meetings, the business
opportunities committee of the RightCHOICE board and the full RightCHOICE board
received an opinion from RightCHOICE's financial advisor at the time as to the
fairness, from a financial point of view, to the holders of RightCHOICE class A
common stock 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.
50
<PAGE>
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. These settlements were
conditioned 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 RightCHOICE shares 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 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 concerns about the restrictions on the
shares of RightCHOICE common stock to be held by the foundation.
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 the licenses of Blue
Cross and Blue Shield of Missouri and of RightCHOICE 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. Mr.
Russell was appointed special master, for the purpose of gathering information
for the court concerning the settlement agreement. Counsel were appointed to
assist him. At the November 4, 1999 hearing, the circuit court judge 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 - - that is, 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 that the value to be received
by the foundation under the settlement agreement was inadequate 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 owned by the public and $15.25 in cash for each share of
RightCHOICE 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's proposal was never formally
communicated to the board of directors of either Blue Cross and Blue Shield of
Missouri or RightCHOICE.
51
<PAGE>
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 was not subject to a
financing contingency, it was subject to the resolution of the pending
litigation. After a thorough evaluation of the proposal, 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 the settlement was implemented, 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. Disposition of the assets of Blue Cross and Blue Shield of
Missouri was said to be "within the exclusive power of the Court." The special
master 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 what
the parties were really doing was not settling their case, but nominating the
foundation for the court's consideration as a beneficiary, 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
would be created if the settlement were implemented 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 process
of attempted settlement be stopped. 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 did engage 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 that would be
created if the settlement agreement were implemented. Changes were made in the
qualifications and manner of selecting the foundation's initial directors.
Changes were made 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 settlement agreement were implemented. 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,
was empowered 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
would be established. A clarification that the foundation would not be
prohibited from interacting with the Missouri legislature on matters within the
foundation's purposes or expertise was made as well. The amendments were
approved by the business opportunities committees and by the full boards of
directors of RightCHOICE and Blue Cross and Blue Shield of Missouri.
RightCHOICE's financial advisor at the time was present at 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.
52
<PAGE>
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 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 were not free to
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 members were to be selected 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, all members of the foundation board would have
been appointed by the Governor of Missouri 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 RightCHOICE account had
joined Warburg Dillon Read. In connection with its engagement, Warburg Dillon
Read was requested to render an opinion to the business opportunities committee
and full board of RightCHOICE 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.
This order was followed by further proceedings in the circuit court. The
special master conducted another hearing on October 4, and issued a second
report on October 8, 1999. The second report recommended that the settlement
agreement be disapproved. The special master's recommendation was based
primarily on value issues. Specifically, the special master found that the
value to be received by the foundation under the amended settlement agreement
was insufficient because the amended settlement agreement did not give the
foundation the right to force a sale of RightCHOICE.
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.
53
<PAGE>
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 trial court rejecting the settlement agreement.
The issues related to the amended settlement agreement were argued 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 trial 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 settlement agreement were abandoned and the
litigation pursued,
. 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 success were achieved 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 the operations of Blue Cross and Blue
Shield of Missouri were in violation of its non-profit purposes and
Missouri law so that those judgments would become final, and
. 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. This would be accomplished by dismissal
of the
54
<PAGE>
claims that remained pending in the principal litigation in the Cole County
circuit court, amendment of the settlement agreement to eliminate the court
approval conditions, dismissal of the appeals pending in the Supreme Court of
Missouri, and implementation of the corporate reorganization contemplated by
the settlement agreement.
Before the parties dismissed the litigation, they agreed to further
amendments to the settlement agreement. Those amendments were 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 corporate
reorganization contemplated by the settlement agreement 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 shares of New
RightCHOICE 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 consummate 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 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, there remain a number of other
conditions precedent to closing the reorganization. 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 reorganization is not consummated by December 31, 2000, or if a
party fails to use its best efforts to close the reorganization before that
date, the settlement agreement could be terminated and the Missouri Attorney
General and the Missouri Department of Insurance could pursue the claims that
have been dismissed.
On January 6, 2000, the parties agreed to delete the court approval
conditions precedent to consummation of the settlements of the Merchandising
Practices Act claim of the Missouri Attorney General, that had been filed in
February 1998 and dismissed without prejudice in September 1998, the
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. All conditions precedent to closing those settlements have
been fulfilled and they have been consummated.
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 holders of RightCHOICE class A common stock. Warburg Dillon Read
confirmed its oral opinion by delivery of 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.
55
<PAGE>
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.
Recommendation of RightCHOICE Board of Directors
The business opportunities committee of RightCHOICE, consisting entirely of
independent, non-employee directors, unanimously approved the reorganization
and recommended approval of the reorganization to the full RightCHOICE board of
directors. The RightCHOICE 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. The RightCHOICE board of directors believes
that the reorganization is in your best interests and the best interests of
RightCHOICE.
The RightCHOICE 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 litigation with the Missouri Attorney General and the Missouri
Department of Insurance. An adverse decision in the litigation would have
material adverse consequences for RightCHOICE. 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,
. 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 RightCHOICE business opportunities committee and the RightCHOICE 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 public holders of RightCHOICE class A common stock,
. The intention of New RightCHOICE to obtain direct licenses to use the
Blue Cross and Blue Shield names and service marks in 85 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 holders of RightCHOICE class A common stock of the
one-for-one exchange ratio provided for in the merger of RightCHOICE into
New RightCHOICE.
56
<PAGE>
Opinion of Warburg Dillon Read
General
On January 31, 2000, at a meeting of the RightCHOICE board and business
opportunities committee to review matters relating to the reorganization,
Warburg Dillon Read rendered to the RightCHOICE board and business
opportunities committee an oral opinion, which opinion was 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 in the
merger of RightCHOICE into New RightCHOICE was fair, from a financial point of
view, to the holders of RightCHOICE class A common stock.
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
attached as 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 holders of RightCHOICE class A common
stock of the class A 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 holder of RightCHOICE
class A common stock as to how to vote with respect to any matter relating to
the proposed reorganization. Holders of RightCHOICE class A common stock are
encouraged 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 to be transferred from Blue Cross and
Blue Shield of Missouri to New RightCHOICE's subsidiary, Healthy Alliance
Life Insurance Company,
. 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 were provided to Warburg Dillon Read by RightCHOICE and Blue Cross
and Blue Shield of Missouri and 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 RightCHOICE 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, with RightCHOICE's consent, Warburg Dillon
Read did not assume any responsibility for independent verification of any of
the information that Warburg Dillon Read was provided or reviewed for the
purpose of its opinion and, with RightCHOICE's consent, Warburg Dillon Read
relied on that information being complete and accurate in all material
respects.
57
<PAGE>
At RightCHOICE's direction, Warburg Dillon Read did not make an independent
evaluation or appraisal of the transferred assets or any of the assets or
liabilities, contingent or otherwise, of RightCHOICE, and was not furnished
with any evaluation or appraisal. Warburg Dillon Read was advised, and at
RightCHOICE's direction 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 provided to or
discussed with Warburg Dillon Read by the managements of RightCHOICE and Blue
Cross and Blue Shield of Missouri, and that Healthy Alliance Life Insurance
Company and New RightCHOICE will be fully indemnified against other contingent
liabilities as specified in agreements to be entered into in connection with
the transactions contemplated by the reorganization.
With respect to the financial forecasts and estimates that it reviewed,
Warburg Dillon Read assumed, at RightCHOICE's direction, that they were
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the managements of RightCHOICE and Blue Cross and
Blue Shield of Missouri as to the future financial performance of RightCHOICE
and the transferred assets and that they will be realized in the amounts and at
the times contemplated by the managements of Blue Cross and Blue Shield of
Missouri and RightCHOICE.
Warburg Dillon Read also assumed, with RightCHOICE's consent, that the asset
transfer will qualify as a tax-free transfer and that the conversion, the
reincorporation and the merger 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, at RightCHOICE's direction, Warburg
Dillon Read was not asked to, and 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 stock when issued in the merger or the price at which the
New RightCHOICE 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 the reorganization
would be validly consummated in accordance with its terms. In connection with
its engagement, Warburg Dillon Read was not asked to, and it did not,
participate in the negotiation or structuring of the reorganization, and
Warburg Dillon Read was not asked to, and it did not, solicit third party
indications of interest with respect to the acquisition of all or a part of
RightCHOICE. No other instructions or limitations were imposed by RightCHOICE's
board of directors or business opportunities committee upon Warburg Dillon Read
with respect to the investigations made or the procedures followed by Warburg
Dillon Read in rendering its opinion.
In connection with rendering its opinion to RightCHOICE's 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. None
58
<PAGE>
of the analyses performed by Warburg Dillon Read was assigned a greater
significance by Warburg Dillon Read than any other. Warburg Dillon Read arrived
at its ultimate opinion based on the results of all the analyses undertaken by
it and 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 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 are beyond the control of
RightCHOICE and Blue Cross and Blue Shield of Missouri. Estimates of the
financial value of companies do not purport to be appraisals or necessarily
reflect the prices at which companies actually may be sold.
The exchange ratio in the merger was determined through negotiation between
RightCHOICE, Blue Cross and Blue Shield of Missouri and other parties to the
settlement agreement, and the decision to enter into the reorganization was
solely that of RightCHOICE's board of directors and business opportunities
committee. Warburg Dillon Read's opinion and financial analyses were only one
of many factors considered by RightCHOICE's board of directors and business
opportunities committee in their evaluation of the reorganization and should
not be viewed as determinative of the views of RightCHOICE's 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 RightCHOICE's 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 with respect
to 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
the management of Blue Cross and Blue Shield of Missouri.
The range of estimated terminal values for Blue Cross and Blue Shield of
Missouri, excluding its real estate holdings, was calculated 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. The range of estimated terminal values for Blue
Cross and Blue Shield of Missouri's primary real estate asset was calculated by
applying capitalization rates of 9.0% to 11.0% to the projected fiscal year
2003 real estate cash flows generated by that asset. 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 were
calculated 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
59
<PAGE>
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.
Other Factors
In rendering its opinion, Warburg Dillon Read also reviewed and considered
other factors, including:
. The relationship between movements in RightCHOICE 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 holders of RightCHOICE class A common
stock upon consummation of the merger.
RightCHOICE has agreed to pay Warburg Dillon Read for its services in
connection with its opinion an aggregate fee of $600,000. 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 services 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
If the reorganization is approved and completed, each share of RightCHOICE
class A common stock held by or for the benefit of directors and executive
officers of RightCHOICE will be converted into one share of New RightCHOICE
common stock just as your shares of RightCHOICE class A common stock will be
converted 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 RightCHOICE shareholders.
Continued Positions of Management
If the reorganization is approved and completed, the directors and executive
officers of New RightCHOICE initially will include the persons who are
directors and executive officers of RightCHOICE immediately prior to the
reorganization. If the reorganization is not approved or is not completed on or
before
60
<PAGE>
December 31, 2000, and the parties do not reach agreement to extend the
deadline or settle the litigation on other terms, the Attorney General and the
Department of Insurance could sue Blue Cross and Blue Shield of Missouri to
enforce judgments previously entered by the circuit court. In enforcing the
judgments, the 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 RightCHOICE 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 the reorganization is not approved or is not completed.
In addition, as described above in the risk factor "Our directors will be
able to ensure their re-elections and designate their successors as long as the
Foundation owns a substantial number of our shares" on page 21, in each
election of directors, the trustee of the voting trust must vote The Missouri
Foundation For Health's shares 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 New RightCHOICE's shares.
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. The agreements provide that an executive officer
will receive severance benefits from RightCHOICE or its successor (1) if the
executive officer is terminated 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 24 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 75 miles from his or her previous principal place of business,
. A reduction in the benefits the executive officer was eligible to
receive, or
. The termination of the severance agreement by RightCHOICE or its
successor.
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 30
months, or (2) two times the executive officer's annual compensation. If these
amounts become payable, the amount of these severance payments will be reduced
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, amounts payable under the executive severance
agreement are reduced by any benefits paid to the officer or the officer's
representatives under the life insurance program or long-term disability plan
maintained by RightCHOICE.
Benefits under the executive severance agreements are payable in 24 monthly
installments or 36 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, the remaining severance benefit
may be paid
61
<PAGE>
in a lump-sum and benefits for outplacement services and insurance premiums
will cease. 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. Mr. O'Rourke's right to receive
severance benefits under his employment agreement is not affected by the
reorganization. Mr. O'Rourke's employment agreement is discussed beginning on
page 146 of this document.
Stock Options
Upon completion of the reorganization, each outstanding option to purchase
shares of RightCHOICE class A common stock granted pursuant to a RightCHOICE
stock option plan, whether or not exercisable or vested, will become an option
to purchase shares of New RightCHOICE common stock upon the same terms and
conditions as the option to purchase shares of RightCHOICE class A common
stock.
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 it 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 shareholder of RightCHOICE class
A common stock, to New RightCHOICE, as successor to both Blue Cross and Blue
Shield of Missouri and RightCHOICE, and to The Missouri Foundation For Health.
It is intended only as a summary. It 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 are generally assumed to be known by
investors. 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. No information is provided in this document with respect to the
tax consequences, if any, of the reorganization under applicable state, local,
foreign, and other tax laws.
62
<PAGE>
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. We cannot assure
you that there will not be future legislative, administrative, or judicial
changes or interpretations or that those changes or interpretations will not
affect the accuracy of the statements or conclusions set forth herein. Any such
change could apply retroactively and could affect the accuracy of this
discussion.
The transfer and assumption transaction, the charter conversion transaction,
the reincorporation merger transaction and the merger of RightCHOICE and New
RightCHOICE, each as described under "Proposed Reorganization--Reorganization
Steps" beginning on page 41, each have been structured with the intent that
they be tax-free and that no gain or loss will be recognized by any party. A
private letter ruling will be requested from the Internal Revenue Service,
generally, to that effect with respect to the transfer and assumption
transaction and the charter conversion transaction. In addition,
PricewaterhouseCoopers LLP, special tax advisor to RightCHOICE, Blue Cross and
Blue Shield of Missouri and New RightCHOICE, will issue a tax opinion generally
to that effect with respect to all of the relevant steps of the reorganization.
PricewaterhouseCoopers LLP's opinion will state that in its opinion, based upon
various facts, representations and assumptions set forth or referenced in its
opinion, generally, gain or loss will not be recognized by you as a shareholder
of the RightCHOICE class A common stock or by New RightCHOICE, the successor to
both Blue Cross and Blue Shield of Missouri and RightCHOICE, as a result of the
reorganization. Accordingly, the tax basis in your shares of New RightCHOICE
will be the same as the tax basis of the shares in RightCHOICE and the holding
period of the shares of New RightCHOICE you receive will include the holding
period of your shares of RightCHOICE. These conclusions are discussed more
fully below.
A taxpayer ordinarily may rely on a private letter ruling issued by the
Internal Revenue Service, unless it is revoked or modified. Generally, a
private letter ruling will not be revoked or modified unless the Internal
Revenue Service determines it to be in error or not in accord with the current
views of the Internal Revenue Service. Except in rare or unusual circumstances,
a private letter ruling will not be revoked or modified 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. Positions contrary to those taken by
PricewaterhouseCoopers LLP may be taken by the Internal Revenue Service or a
court considering the issue.
Transfer and Assumption Transaction
A private letter ruling will be requested from the Internal Revenue Service
that the transfer and assumption transaction constitutes a tax free transaction
and income, gain or loss will not be recognized by Blue Cross and Blue Shield
of Missouri, RightCHOICE, Healthy Alliance Life Insurance Company, New
RightCHOICE, The Missouri Foundation For Health or you for federal income tax
purposes as a result of the transfer and assumption transaction.
PricewaterhouseCoopers LLP's opinion will state that it is of the opinion
that gain or loss will not be recognized by Blue Cross and Blue Shield of
Missouri, RightCHOICE, Healthy Alliance Life Insurance Company, New
RightCHOICE, The Missouri Foundation For Health or you 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 its 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. It is expected that the only assets
transferred to Healthy Alliance Life Insurance Company pursuant to the transfer
and assumption transaction will be insurance contracts and cash and
receivables.
63
<PAGE>
PricewaterhouseCoopers LLP's opinion as to the tax consequences of the
transfer and assumption transaction with respect to both you, as a shareholder
of RightCHOICE class A common stock, and Blue Cross and Blue Shield of
Missouri, will be based upon the crucial assumption that the value of the
assets, contracts and agreements transferred by Blue Cross and Blue Shield of
Missouri 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 to be transferred 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, these
contracts cannot be transferred 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
transfer would be subject to 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
party to the reorganization has received or otherwise requested an independent
appraisal or valuation of these assets and liabilities in connection with the
reorganization.
The Internal Revenue Service may not issue the requested private letter
ruling with respect to the transfer and assumption transaction. If a private
letter ruling is not issued by the Internal Revenue Service to the effect that
no income, gain or loss will be recognized by Blue Cross and Blue Shield of
Missouri and you, as a RightCHOICE class A shareholder, 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 took the position
that the value of the assets transferred exceeds the liabilities assumed and
was successful, it may assert that (1) you, as a RightCHOICE class A
shareholder, should recognize taxable income in an amount equal to the
percentage of stock held by you as a RightCHOICE class A shareholder 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
RightCHOICE class A shareholders (as described above) minus Blue Cross Blue
Shield of Missouri's basis in hypothetical assets that may be deemed to have
been transferred by Blue Cross Blue Shield of Missouri to the RightCHOICE class
A shareholders. In the event the Internal Revenue Service successfully asserts
that the value of the assets transferred exceeds the liabilities assumed, it
could be argued that no income should be recognized by you, as a RightCHOICE
class A shareholder, or Blue Cross and Blue Shield of Missouri because the
transaction is one in which income recognition is inappropriate. For example,
it could be asserted that the transaction should not be taxable because the
RightCHOICE class A common stock is publicly traded, the transaction arose in
the ordinary course of business, the RightCHOICE class A shareholders did not
participate in the negotiation of the reorganization, and the RightCHOICE class
A shareholders did not receive mutual consideration of any kind. We cannot
determine with any certainty the amount of gain that might have to be
recognized by you as a RightCHOICE class A shareholder or by Blue Cross Blue
Shield of Missouri if the Internal Revenue Service took this position and was
successful.
Charter Conversion Transaction
A private letter ruling will be requested from the Internal Revenue Service
that the charter conversion transaction constitutes a reorganization under
Section 368(a) of the Internal Revenue Code 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 will state that it is of the opinion
that the charter conversion transaction should constitute a tax-free
reorganization, called a recapitalization, within the meaning of Section
368(a)(1)(E) of the Internal Revenue Code 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. Blue
Cross and Blue Shield of Missouri's basis in its assets and its holding period
for its assets will
64
<PAGE>
not be affected by the charter conversion transaction. PricewaterhouseCoopers
LLP's opinion will state that the charter conversion transaction "should,"
rather than "will," be treated as a recapitalization under Section 368(a)(1)(E)
of the Internal Revenue Code and that the Foundation "should," rather than
"will," not recognize gain or loss in the transaction. The opinion will be so
qualified 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 with respect to the charter
conversion 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 did take the position that the
charter conversion transaction is not tax-free and it ultimately prevailed in
that position, the Foundation could be subject to tax on an amount equal to the
value of the Blue Cross and Blue Shield of Missouri stock received by the
Foundation in the charter conversion transaction. It is also 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 the Blue Cross and Blue Shield of Missouri 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 will state that it is of the opinion
that the reincorporation merger transaction will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code. It is
structured to constitute a mere change in place of organization of Blue Cross
and Blue Shield of Missouri. No gain or loss will be recognized by Blue Cross
and Blue Shield of Missouri, New RightCHOICE or The Missouri Foundation For
Health 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 during
which that asset was held by Blue Cross and Blue Shield immediately before the
reincorporation merger transaction.
RightCHOICE/New RightCHOICE Merger Transaction
PricewaterhouseCoopers LLP's opinion will state that it is of the opinion
that the merger of RightCHOICE into New RightCHOICE will be treated under
Section 332(a) and Section 337(a) of the Internal Revenue Code as a tax-free
distribution by RightCHOICE in complete liquidation of RightCHOICE, a more than
80% owned subsidiary of New RightCHOICE, and as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. No gain or loss will be
recognized by any of the shareholders of RightCHOICE or New RightCHOICE who
receive shares of New RightCHOICE in exchange for their shares of RightCHOICE
or New RightCHOICE, as the case may be, in their capacity as shareholders, in
connection with the merger of RightCHOICE into New RightCHOICE. The tax basis
of shares of New RightCHOICE received by the shareholders of RightCHOICE will
be the same as the tax basis of shares of RightCHOICE exchanged therefor. The
holding period of the shares of New RightCHOICE received by the shareholders of
RightCHOICE will include the holding period of the shares of RightCHOICE
exchanged therefor, provided the shares were held as capital assets as of the
consummation of the merger of RightCHOICE into New RightCHOICE.
If the merger of RightCHOICE into New RightCHOICE is not treated as a tax-
free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code, you would recognize gain or loss in an amount equal to the
difference between the value of New RightCHOICE stock received in the
transaction and your tax basis in the 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 stock
received by you in exchange for your stock of RightCHOICE is higher than the
value of the 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
65
<PAGE>
RightCHOICE stock received by the RightCHOICE class A stockholders will
approximately equal the fair market value of the RightCHOICE class A common
stock surrendered in the merger, we cannot assure you that the Internal Revenue
Service will not take a contrary position and that, if it does, its position
will not be upheld. For a further discussion of possible adverse tax
consequences that could result to you in the RightCHOICE/New RightCHOICE merger
transaction, see the risk factor "RightCHOICE class A shareholders could suffer
adverse tax consequences in the reorganization" on page 23.
No gain or loss will be recognized by RightCHOICE on the distribution of its
assets to New RightCHOICE and the assumption of its liabilities by New
RightCHOICE, and no gain or loss will be recognized by New RightCHOICE on
receipt of the assets of RightCHOICE and the assumption of liabilities by New
RightCHOICE pursuant to the merger of RightCHOICE into New RightCHOICE. New
RightCHOICE's basis in each asset received from RightCHOICE will be the same as
the basis of that asset in the hands of RightCHOICE, and the holding period of
each RightCHOICE asset acquired by New RightCHOICE will include the period
during which that asset was held by RightCHOICE immediately before the merger
of RightCHOICE into New RightCHOICE.
If the merger of RightCHOICE into New RightCHOICE is not treated as a tax-
free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code, and it is not treated as a tax-free liquidation of RightCHOICE
within the meaning of Section 332(a) of the Internal Revenue Code, 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. Taxable gain or loss could
also be recognized by New RightCHOICE 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. For a further discussion of possible adverse tax consequences that
could result to New RightCHOICE in the RightCHOICE/New RightCHOICE merger
transaction, see the risk factor "New RightCHOICE, as successor to Blue Cross
and Blue Shield of Missouri and RightCHOICE, could suffer adverse tax
consequences in the reorganization" on page 24.
If you exercise your dissenters' rights in the merger of RightCHOICE into
New RightCHOICE and receive cash in exchange for your shares of RightCHOICE
class A common stock you will be treated as having received the payment in
redemption of your shares. See "Proposed Reorganization--Dissenters' Rights"
beginning on page 69. In general, if your shares are held as capital assets
when the merger of RightCHOICE into New RightCHOICE is closed and no other
RightCHOICE stock is constructively owned by you, 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 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 own tax advisor as to the
possibility that any payment to that person will be treated as dividend income.
As stated above, Section 337(a) of the Internal Revenue Code generally
provides that no gain or loss is recognized by a liquidating corporation which
distributes its assets to its parent corporation in a liquidation that would
otherwise qualify as tax free. Section 337(b)(2) of the Internal Revenue Code
provides that Section 337(a) of the Internal Revenue Code does not apply when
the distributee is an organization which is exempt from income tax. Section
337(d) of the Internal Revenue Code gives the Internal Revenue Service the
authority to draft regulations to carry out the purposes of Section 337(b)(2)
of the Internal Revenue Code. These
66
<PAGE>
regulations have been recently issued. Generally, in the context of the
reorganization, they 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. However, the opinion of PricewaterhouseCoopers LLP will state that
it is of the opinion that none of the foregoing transactions will cause gain to
be recognized by Blue Cross and Blue Shield of Missouri, RightCHOICE, New
RightCHOICE, the shareholders of any of the foregoing entities or the
Foundation as a result of the application of Section 337(b)(2) or Section
337(d) of the Internal Revenue Code.
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 holders of RightCHOICE class A common stock
may incur in connection with the reorganization. The indemnification agreement
provides that the Foundation will maintain a minimum net worth for the 6 years
following the filing by Blue Cross and Blue Shield of Missouri of its federal
income tax return for the year in which the reorganization is consummated. The
net worth that it must maintain will not be less than an amount equal to the
potential tax liability on the difference between the tax basis of the
RightCHOICE 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 reorganization
is closed.
In addition to the income tax indemnity, the Foundation has an obligation to
indemnify New RightCHOICE for certain non-tax matters. For a discussion of this
indemnification, see "Terms of Indemnification Agreement" beginning on page 93.
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. Also, it is 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 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. See the risk factor
"RightCHOICE class A shareholders could suffer adverse tax consequences in the
reorganization" on page 23 and the risk factor "New RightCHOICE, as a successor
to Blue Cross and Blue Shield of Missouri and RightCHOICE, could suffer adverse
tax consequences in the reorganization" on page 24 and "Terms of
Indemnification Agreement" on page 93.
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.
67
<PAGE>
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
operations and businesses of Blue Cross and Blue Shield of Missouri,
RightCHOICE, and their affiliates are subject to regulation by various state
and federal authorities. In connection with this regulation, numerous filings
and approvals from the federal authorities and the regulatory authorities in
the states in which the companies conduct business will be required. To date,
the companies have obtained some of the approvals required from the Missouri
Department of Insurance. However, additional filings and approvals still must
be made and obtained. In order to complete each phase of the reorganization,
all of the regulatory filings and approvals must be made and obtained.
The closing of the reorganization is contingent upon the Blue Cross and Blue
Shield Association granting 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 the 85 counties in Missouri in which Blue Cross and
Blue Shield of Missouri and RightCHOICE are presently licensed. 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
various conditions are satisfied and the reorganization is closed before the
currently scheduled meeting of the Association board on November 18, 2000,
unless this date is extended by the Association. The conditions imposed by the
Association have been substantially satisfied, and RightCHOICE and Blue Cross
and Blue Shield of Missouri have been given assurances by the Association that
the new licenses will be granted 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 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. This approval has been
obtained.
New York Stock Exchange Listing
An application will be filed with the New York Stock Exchange to list the
shares of New RightCHOICE common stock for trading on the New York Stock
Exchange if the reorganization is approved and completed. It is expected that
New RightCHOICE common stock will be traded on the New York Stock Exchange
under the symbol "RIT" beginning on the day the reorganization is completed.
Resale of New RightCHOICE Common Stock
The issuance of the shares of New RightCHOICE common stock in the
reorganization will be registered under the Securities Act of 1933 and the
shares will be freely transferable under the Securities Act, except for shares
issued to any shareholder who may be deemed 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 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,
68
<PAGE>
. 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
. the shares must be sold by a broker 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.
Although there are substantial restrictions on its right to vote its New
RightCHOICE stock, The Missouri Foundation For Health may be deemed an
affiliate of New RightCHOICE. If it is an affiliate, the Foundation will be
subject to securities laws restrictions on the resale of its New RightCHOICE
common stock. New RightCHOICE has agreed to file registration statements with
the Securities and Exchange Commission to allow for the sale of shares by the
Foundation. The registration rights agreement also includes various contractual
restrictions on the ability of the Foundation to sell its shares of New
RightCHOICE common stock. See "Terms of Registration Rights Agreement"
beginning on page 89.
Dissenters' Rights
RightCHOICE class A common stock
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. 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 attached as
Appendix I to this document. If you have a beneficial interest in shares of
RightCHOICE 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 RightCHOICE
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 20 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 RightCHOICE 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 20-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 shares of RightCHOICE
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 30 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 RightCHOICE class A common stock, New RightCHOICE will pay you for
your shares within 90 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
RightCHOICE class A common stock or in New RightCHOICE.
69
<PAGE>
If you and New RightCHOICE do not agree on the value of your shares of
RightCHOICE class A common stock within the 30-day period, then you may, within
60 days after the expiration of the 30-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. The
judgment will be paid to you simultaneously with the surrender of the
certificate(s) representing your shares of RightCHOICE 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 RightCHOICE common stock, or in New
RightCHOICE. Unless you file the required petition within the 60-day time
period, you will be conclusively presumed to have approved and ratified the
merger of RightCHOICE with New RightCHOICE, and the shares of RightCHOICE class
A common stock that you own will be treated as though such shares had been
exchanged in the merger.
For an explanation of the tax consequences if you exercise your dissenter's
rights, see "Material Federal Income Tax Consequences--RightCHOICE/New
RightCHOICE Merger Transaction" on page 65.
RightCHOICE class B common stock
Under Missouri law, dissenters' rights are available only if the shareholder
does not vote in favor of a merger transaction. Blue Cross and Blue Shield of
Missouri has agreed to vote in favor of the merger of RightCHOICE with New
RightCHOICE. Therefore, Blue Cross and Blue Shield of Missouri will not have
dissenters' rights in connection with the merger.
New RightCHOICE common stock
Under Delaware law, dissenters' rights are available only if the shareholder
does not vote in favor of a merger transaction. The Missouri Foundation For
Health, as the sole shareholder of New RightCHOICE, has agreed to vote in favor
of the merger of RightCHOICE with New RightCHOICE. Therefore, the Foundation
will not have dissenters' rights in connection with the merger.
Accounting Treatment
The reorganization will be accounted for in a manner similar to a pooling of
interests transaction except for (1) the exchange of the minority shareholders'
ownership of class A common stock of RightCHOICE for common stock of New
RightCHOICE, and (2) the exchange of options to receive common stock of
RightCHOICE for options to receive common stock of New RightCHOICE. This
exchange of shares and options will be accounted for as a purchase. Under the
pooling of interest method of accounting, the companies are treated for
accounting purposes as if they had always been one company, with the exception
described above for the minority RightCHOICE shareholders and option holders.
Under the purchase method of accounting for the minority shareholders'
ownership of class A common stock, the difference between the fair market value
of the shares of class A common stock as of January 6, 2000, the date the
parties to the settlement reached agreement, and the book value of the shares
of class A common stock at that date, will be recorded as additional goodwill
and additional paid-in-capital. Fair market value was determined to be the
closing price of the shares on the New York Stock Exchange on January 6, 2000.
For the stock options to receive class A common stock, the amount calculated
using the Black-Scholes option pricing model will be recorded as additional
goodwill and additional paid-in-capital. This accounting is reflected within
the accompanying pro forma unaudited combined condensed balance sheet on page
96 and pro forma adjustment footnote number 7 on page 100.
70
<PAGE>
TERMS OF REORGANIZATION AGREEMENT
The following is a summary of the reorganization agreement which is attached
as 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 if the reorganization is completed, the reorganization
agreement also sets forth:
. Agreements that the parties have reached concerning what actions each of
them must take before the reorganization can be completed,
. What events must occur before the reorganization can be completed, 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. The special meeting must be held 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
reorganization from being completed.
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 name and service marks,
and any other material contract which requires the consent of another person
for its transfer or assumption pursuant to the reorganization. These consents
and approvals are necessary 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 investigation of Blue Cross and Blue Shield of Missouri and
RightCHOICE until 15 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.
71
<PAGE>
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 RightCHOICE class B common stock that it owns in favor of the
merger of RightCHOICE with New RightCHOICE at the special meeting. This vote is
required for the reorganization to be completed.
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 reorganization from being completed.
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 (1)
the Blue Cross and Blue Shield name and service marks, and (2) any other
material contract which requires the consent of another person for its transfer
or assumption pursuant to the reorganization.
New RightCHOICE
Refrain From Specified Acts. New RightCHOICE has agreed not to take any
action unless it is expressly permitted by the reorganization agreement.
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 reorganization from being completed.
Make Filings. New RightCHOICE has agreed to file all documents required by
the Securities and Exchange Commission and state securities laws as a result of
the reorganization. Because securities are being offered in the reorganization,
various filings, including this document, have or will be made 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.
Execute Other Agreements. New RightCHOICE has agreed to execute the voting
trust and divestiture agreement, the registration rights agreement and the
indemnification agreement. Each of these agreements is discussed 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.
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 reorganization from being completed.
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. This vote is required under Missouri law and Delaware law for the
merger of Blue Cross and Blue Shield of Missouri into New RightCHOICE to be
effective.
72
<PAGE>
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. This vote, together with the approval of the RightCHOICE
shareholders, is required by Missouri law and Delaware law 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 the RightCHOICE tax opinion is not delivered
to the Foundation. It is expected 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. Each of these agreements is
discussed 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 the reorganization is
completed.
Foundation Status Quo
In order to ensure that The Missouri Foundation For Health will not change
the manner in which it is governed while it is the majority 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
The Missouri Foundation For Health, if requested to do so by New
RightCHOICE, will take all actions necessary to complete a public offering of
its shares of New RightCHOICE common stock on a date within 6 months following
the completion of the reorganization. The terms of this sale, including the
amount of stock to be sold, would be mutually agreeable to the Foundation and
New RightCHOICE if and when New RightCHOICE asks the Foundation to make this
sale.
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
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 RightCHOICE common stock. Each outstanding
option to purchase shares of RightCHOICE class A common stock whether or not
exercisable or vested will be converted into an option to acquire the same
number of shares of New RightCHOICE common stock as the holder of such option
would have been entitled to receive under the option at the same price per
share payable under such option, and New RightCHOICE will assume all
obligations of RightCHOICE under its stock option plans.
73
<PAGE>
In addition, Blue Cross and Blue Shield of Missouri had previously issued to
its directors options to purchase shares of RightCHOICE class A common stock.
Each option was subsequently exchanged for cash based on the value of
RightCHOICE class A common stock the day before the settlement agreement was
executed, and, therefore, none of these options will be assumed by New
RightCHOICE.
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. Once the
reorganization is complete, 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 cause to be maintained in effect for a period of 6
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 6-year period.
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 must be
satisfied 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, before the reorganization can be
completed, and (2) a list of conditions that must be resolved to the
satisfaction of a particular party or waived by that party.
74
<PAGE>
All Parties
No party to the reorganization agreement is required to complete the
reorganization unless the following conditions are either satisfied or waived
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, and this condition has been satisfied,
. There is no effective or pending temporary restraining order, preliminary
or permanent injunction or other prohibition preventing the
reorganization from being completed, so that the reorganization may be
lawfully completed,
. All necessary regulatory approvals have been received, so that the
reorganization may be lawfully completed,
. All necessary shareholder approvals have been received, so that the
reorganization may be lawfully completed,
. The registration statement of which this document forms a part continues
to be effective so that the reorganization may be lawfully completed,
. 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 shares of New RightCHOICE common stock issuable in the reorganization
are approved for listing by the New York Stock Exchange, so that shares
of New RightCHOICE common stock may be traded on the New York Stock
Exchange immediately after the reorganization is completed,
. 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 obligations and agreements of the other parties contained in the
reorganization agreement are performed,
. Each party receives of all documents required to be received by it 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 reorganization agreement has been properly authorized,
executed and delivered by such parties so that the parties are assured
that they can complete the reorganization lawfully.
RightCHOICE
In addition to the conditions listed above that must be satisfied,
RightCHOICE is not required 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,
75
<PAGE>
. It receives a copy of the private letter ruling from the Internal Revenue
Service to Blue Cross and Blue Shield of Missouri, or another appropriate
party, regarding the tax free nature of the reorganization and such
ruling remains in effect and, if the favorable private letter ruling is
not received 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. A private letter ruling will be requested 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 reorganization is completed, 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's opinion attached as Appendix H to this document has
not been withdrawn or adversely modified as of the date this document is
mailed to shareholders of RightCHOICE, so that the RightCHOICE business
opportunities committee and board of directors may have assurance that
events occurring between the delivery of Warburg Dillon Read's opinion
and the mailing of this document will not have materially altered the
conclusion reached in that opinion,
. 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 has received
the requisite approval of the lenders under its credit agreement,
. 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, and 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 to be issued 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.
Blue Cross and Blue Shield of Missouri
In addition to the closing conditions applicable to all parties, Blue Cross
and Blue Shield of Missouri is not required 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,
76
<PAGE>
. It, or the appropriate party, 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 the private
letter ruling is not received 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. A private letter ruling will be
requested from the Internal Revenue Service with respect to two specific
elements of the reorganization - - the transfer and assumption
transaction and the charter conversion transaction,
. The pending 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 RightCHOICE was
organized in 1994 is disposed of by all parties 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., St. Louis,
Missouri, 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 their fiduciary duties,
-- 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, and 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 to be issued to the Foundation in the
reorganization will be free and clear of all claims based upon the
reorganization 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 Missouri Foundation For Health
In addition to the closing conditions applicable to all parties, The
Missouri Foundation For Health is not required 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, or another appropriate
party, regarding the tax free nature of the reorganization and such
ruling remains in effect and, if a favorable private letter ruling is not
received 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. A private letter ruling will be requested from
the Internal Revenue Service with respect to two specific elements of the
reorganization - - the transfer and assumption transaction and the
charter conversion transaction,
77
<PAGE>
. It receives an opinion from its counsel to the effect that the shares of
New RightCHOICE common stock to be issued 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.
Termination
Although the parties have executed the reorganization agreement, the
reorganization agreement may still be terminated before the reorganization is
completed. Specifically, any party to the reorganization agreement may
terminate the reorganization agreement at any time before the reorganization is
completed, 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 the reorganization is
permanently enjoined or restrained, 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 the RightCHOICE board of directors or the RightCHOICE business
opportunities committee.
78
<PAGE>
TERMS OF SETTLEMENT AGREEMENT
The reorganization is being proposed pursuant to the settlement agreement
which is attached as 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 RightCHOICE was organized in 1994. 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 "The reorganization will
not settle all litigation relating to the corporate status of Blue Cross and
Blue Shield of Missouri" on page 28 and the risk factor "New RightCHOICE will
succeed to potential liability from claims of subscribers of Blue Cross and
Blue Shield of Missouri and RightCHOICE" on page 29 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
the reorganization is completed.
Additional Purposes
The settlement agreement also has the following additional purposes:
. To provide that Blue Cross and Blue Shield of Missouri's assets will be
used 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 litigation involving Blue Cross
and Blue Shield of Missouri's operation of RightCHOICE as a for-profit
subsidiary since RightCHOICE was organized in 1994 to be settled by:
. Dismissal of the litigation,
. Completion of the reorganization,
. A $12.78 million payment by Blue Cross and Blue Shield of Missouri to The
Missouri Foundation For Health, and
. The granting of mutual releases to be effective upon the closing of the
reorganization.
79
<PAGE>
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 described above. 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 Missouri Attorney General and
the Missouri Department of Insurance caused the incorporation of The Missouri
Foundation For Health and New RightCHOICE. On March 14, 2000, RightCHOICE, Blue
Cross and Blue Shield of Missouri, the Foundation and New RightCHOICE signed
the reorganization agreement. Your approval of the reorganization as well as
satisfaction of the conditions to the reorganization described in the preceding
discussions of the reorganization agreement are necessary for the
reorganization to be completed.
$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. The
payment is expected to be used by the Foundation to carry out its stated
purposes.
Mutual Releases
The following releases will become effective if the reorganization is
completed. 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 since RightCHOICE was organized in 1994. In addition to dismissing
this litigation, the parties to the settlement agreement will grant the
following mutual releases upon completion of the reorganization.
The Missouri Attorney General and Missouri Department of Insurance Release
Effective as of the date the reorganization is completed, 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 were
asserted or might have been 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 RightCHOICE was organized in 1994,
. 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 proposed resolution terms for the settlement, that do not
arise out of or are not related to the settled litigation,
. 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,
80
<PAGE>
. 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
Effective as of the date the reorganization is completed, 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 RightCHOICE was organized in
1994,
. Any and all claims, causes of action, liabilities and judgments that were
asserted or might have been 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
. 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 reorganization is not completed on or before December 31, 2000, or if
another party fails to use its best efforts to consummate the reorganization.
81
<PAGE>
No Admission of Liability
By executing the settlement agreement, none of the parties have admitted any
fault or liability with respect to any matter that is 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 there is no threat of additional litigation with the State of
Missouri, the Missouri Attorney General and the Missouri Department of
Insurance represented in the settlement agreement that there were no claims
pending or threatened against RightCHOICE or Blue Cross and Blue Shield of
Missouri on the date the proposed resolution terms of the settlement were
announced 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 there were no 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 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
82
<PAGE>
. An appeal by Healthy Alliance Life Insurance Company, a subsidiary of
RightCHOICE, from the disallowance of a claim for refund of premium
taxes.
These settlements were conditioned 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. These three settlements have
been completed.
83
<PAGE>
TERMS OF VOTING TRUST AND DIVESTITURE AGREEMENT
The following is a summary of the voting trust and divestiture agreement
which is attached as 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 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 in a voting trust and sells its
shares within prescribed time periods. Compliance with the terms of the voting
trust and divestiture agreement will satisfy these conditions. The conditions
are designed 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 Foundation's
voting rights will be significantly limited, and the shares will be voted in
the manner described below. In addition, the shares may only be disposed of 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 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:
. The shares are registered in the name of the purchaser before being
withdrawn from the voting trust, so that the Foundation may not keep
ownership of those shares,
. The sale is not to an affiliate of the Foundation, so that the Foundation
may not keep indirect ownership of those shares,
. The sale is not 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 met,
. 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 met, and
. The sale is permitted under the voting trust and divestiture agreement,
the registration rights agreement and New RightCHOICE's certificate of
incorporation and bylaws.
Voting of Shares Held in Voting Trust
In general, in order to maintain New RightCHOICE's independence from The
Missouri Foundation For Health, the shares of New RightCHOICE owned by the
Foundation that are held in the voting trust will be voted 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
84
<PAGE>
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 the removal
action is initiated by or with the consent of (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 any change to New RightCHOICE's certificate of incorporation or
bylaws unless the action is initiated by or with the consent of (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,
. 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 the action is initiated by or with the consent of (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, neither the Foundation nor
the trustee of the voting trust may do the following:
. 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 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 the shares are received 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,
85
<PAGE>
. 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 that its for-profit
licensees have limitations on the ownership of their stock in order to maintain
independence from the control of any single 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 as to the Foundation
provided a number of conditions are satisfied, including obtaining the
agreement of the Foundation to sell most of 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 3 years following completion of the
reorganization. This 3-year period is automatically extended for each day, up
to a maximum of 365 days, that New RightCHOICE is not required to register the
Foundation shares pursuant to a demand registration because it 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 5-year
period is automatically extended for each day, up to a maximum of 730 days,
that New RightCHOICE is not required to register Foundation shares pursuant to
a demand registration because it had previously recently effected a
registration of New RightCHOICE common stock.
Extension of Divestiture Deadlines
Extension Sought by The Missouri Foundation For Health
In the event that The Missouri Foundation For Health is unable to meet the
divestiture deadlines, it may be able to obtain an extension. However, an
extension is ultimately subject to approval of the Blue Cross and Blue Shield
Association. Specifically, the divestiture deadlines must be extended by New
RightCHOICE 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, an extension must be approved by the Blue Cross and Blue Shield
Association in order to be effective. Specifically, New RightCHOICE may extend
the divestiture deadlines if:
86
<PAGE>
. 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
It is possible that The Missouri Foundation For Health will be unable to
meet the divestiture deadlines. If the Foundation fails to meet a divestiture
deadline, New RightCHOICE will arrange for the sale of the shares that were
required to be sold 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. It is likely that the sale of these
shares would 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 and the expenses of the sale will
be paid by the Foundation. Until sold, these shares of New RightCHOICE common
stock will be voted by the trustee of the voting trust 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 all
shares of New RightCHOICE common stock not held in the voting trust are voted
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 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 will be agreed upon by the parties 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
divestiture deadlines will have been satisfied.
87
<PAGE>
Litigation
In order to further ensure that New RightCHOICE will remain independent
after the reorganization from The Missouri Foundation For Health, the
Foundation will not be permitted to participate in litigation against New
RightCHOICE that challenges the various documents that include 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:
. Any provisions of the voting trust and divestiture agreement or New
RightCHOICE's certificate of incorporation or bylaws are not enforceable
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 is not, however, prohibited from
participating in any litigation that alleges the board of directors of New
RightCHOICE should solicit proposals from third parties for the acquisition of
New RightCHOICE or should 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 a merger, tender
offer or other business combination, involving New RightCHOICE. However, the
Foundation may:
. Have discussions with the counter-party to business combination
transactions after the transactions have been submitted 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 on which the
Foundation would be entitled to direct the trustee how to vote.
88
<PAGE>
TERMS OF REGISTRATION RIGHTS AGREEMENT
The following is a summary of the registration rights agreement which is
attached as 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 sale of the Foundation's shares of New RightCHOICE
common stock 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 all or part 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, before
being required to take any action, New RightCHOICE has the option to purchase
any or all of the shares for which the Foundation requests registration. 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 for the shares New RightCHOICE elects to
purchase would be a price per share equal to the average closing sale price per
share of New RightCHOICE common stock on the New York Stock Exchange during the
10 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 under the demand registration, 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 desired to be sold by the Foundation 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 demand was received,
. It previously effected a registration of shares of New RightCHOICE common
stock to be sold by New RightCHOICE during the preceding 120 days, other
than shares registered pursuant to acquisitions or dividend reinvestment
or similar employee plans,
89
<PAGE>
. The amount of New RightCHOICE common stock the Foundation seeks to
register has a market value of less than $30 million, unless the shares
of New RightCHOICE are all of the remaining shares of New RightCHOICE
common stock owned by the Foundation,
. 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 New RightCHOICE will
not be required 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 demanded registration has not been declared effective,
. After becoming effective, the demanded registration is materially
interfered with by any order or requirement of a regulatory authority or
court for reasons not attributable to the Foundation and does not become
effective later,
. The closing conditions specified in the underwriting agreement, if any,
are not satisfied or waived 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 managing underwriter concludes
that marketing or other factors require a reduction of the number of shares of
New RightCHOICE common stock that can be sold 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 be sold 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 may
be sold at a price range acceptable to the Foundation.
90
<PAGE>
In the event that (1) New RightCHOICE does not desire to register any shares
of New RightCHOICE common stock to be sold in the demand registration offering,
or (2) the reduction in the number of shares to be registered by New
RightCHOICE still does not result in a total number of shares that may be sold
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 rights 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 to be registered, 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 to be registered so that it is entitled to
receive up to 50% of the proceeds from the offering.
If the lead managing underwriter for an offering for which such piggy-back
registration rights are requested by the Foundation determines that marketing
or other factors require a limitation on the number of shares of New
RightCHOICE common stock to be offered and sold 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 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 holds 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 45 days before
reselling them in a public or private transaction.
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 90-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.
91
<PAGE>
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 30-day period commencing on the effective date of a registration statement
filed on behalf of the Foundation under a demand registration.
Once the reorganization is complete, The Missouri Foundation For Health may
desire to quickly sell its shares of New RightCHOICE. 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 6 months
after the reorganization is completed on terms and conditions mutually
agreeable to the Foundation and New RightCHOICE.
Registration Expenses
The registration process can be expensive as 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.
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 its non-affiliates.
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
. 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 can be sold in any three month
period is limited and the stock can only be sold in specified unsolicited
broker transactions or transactions with a market maker.
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.
92
<PAGE>
TERMS OF INDEMNIFICATION AGREEMENT
The following is a summary of the indemnification agreement which is
attached as 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 was dismissed
and 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.
However, the Foundation is not obligated to provide the indemnification if:
. A potential indemnitee's conduct is finally determined by an appropriate
court to have been knowingly fraudulent or deliberately dishonest or
willful misconduct,
93
<PAGE>
. The claim is asserted by New RightCHOICE, 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 given 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 is finally determined by an appropriate
court 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.
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 6
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.
94
<PAGE>
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 would
otherwise have been covered by the insurance policies.
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 6 years following the filing by
Blue Cross and Blue Shield of Missouri of its federal income tax return for the
year in which the reorganization is completed, 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 RightCHOICE class B common stock owned
by Blue Cross and Blue Shield of Missouri on the date the reorganization closes
and the market price of RightCHOICE stock on that same date. See, in this
regard, the discussion in the risk factor "The indemnification obligation of
the Foundation could fail to fully indemnify New RightCHOICE against the risks
of the reorganization" on page 22.
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.
PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
Following is a pro forma unaudited combined condensed balance sheet for New
RightCHOICE giving effect to the reorganization as of December 31, 1999, and 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. Reference is made
to the notes to the pro forma unaudited combined condensed financial statements
for a discussion of the transaction. The carve-out financial statements for
Blue Cross and Blue Shield of Missouri are presented exclusive of its
investment in the RightCHOICE class B common stock. Also, no per share data is
presented for Blue Cross and Blue Shield of Missouri because it is a non-profit
health services corporation with no stock outstanding.
Certain data and notes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. 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 reorganization actually been completed 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 and the accompanying pro forma unaudited combined condensed
financial statements and notes thereto should be read in conjunction with the
RightCHOICE financial statements, Blue Cross and Blue Shield of Missouri carve-
out financial statements, and the New RightCHOICE financial statements, each of
which is included in this document.
95
<PAGE>
NEW RIGHTCHOICE
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
December 31, 1999
(In thousands)
<TABLE>
<CAPTION>
BCBS
Missouri New Pro forma
RightCHOICE Historical RightCHOICE Pro forma Note Combined
Historical Carve-Out Historical(/1/) Adjustments(/2/) Ref Condensed
----------- ---------- --------------- ---------------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents............ $ 44,400 $ 19,076 $ 1 $(12,955) 2 $ 50,522
Investments available
for sale, at market
value.................. 201,926 26,617 (490) 12 228,053
Receivables from
members................ 78,947 16,513 95,460
Receivables from related
parties................ 28,764 27,098 (55,862) 9
Property and equipment,
net.................... 55,470 61,936 117,406
Goodwill and intangible
assets, net............ 71,400 25,296 7 96,696
Other assets............ 42,306 12,873 55,179
-------- -------- --- -------- --- --------
Total assets........... $523,213 $164,113 $ 1 $(44,011) $643,316
======== ======== === ======== === ========
Liabilities:
Medical claims payable.. $124,428 $ 16,609 $141,037
Unearned premiums....... 62,824 544 63,368
Accounts payable and
accrued expenses....... 59,476 14,626 74,102
Long-term debt.......... 34,063 34,063
Payables to related
parties................ 27,009 28,853 (55,862) 8
Income taxes payable.... 12,965 8,888 21,853
Other liabilities....... 44,905 6,927 51,832
-------- -------- -------- --------
Total liabilities...... 365,670 76,447 (55,862) 386,255
Equity:
Preferred stock.........
Common stock............ 187 187
Additional paid-in
capital................ 132,634 1 99,802 11 232,437
Retained earnings....... 29,529 (175) 3 29,354
Net assets representing
reserve for protection
of members............. 87,666 (87,666) 11
Treasury stock.......... (380) (110) 10 (490)
Accumulated other
comprehensive loss..... (4,427) (4,427)
-------- -------- --- -------- --- --------
Total equity........... 157,543 87,666 1 11,851 257,061
-------- -------- --- -------- --------
Total liabilities and
equity................ $523,213 $164,113 $ 1 $(44,011) $643,316
======== ======== === ======== ========
</TABLE>
- --------
(1) Although New RightCHOICE was not incorporated as of December 31, 1999, it
has been included herein to give effect to the reorganization. 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 in exchange for $1.
(2) Adjustments necessary to arrive at the pro forma unaudited combined
condensed financial data are described in the Notes to Historical
Consolidated and Pro Forma Unaudited Combined Condensed Financial
Statements beginning on page 98.
See Accompanying Notes
96
<PAGE>
NEW RIGHTCHOICE
PRO FORMA UNAUDITED COMBINED CONDENSED INCOME STATEMENT
For the Twelve Months 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 30,540 (7,384) 6 186,407
----------- -------- -------- -----------
Total operating
expenses............ 797,245 103,653 (7,384) 893,514
----------- -------- -------- -----------
Operating income........ 19,667 7,094 2,344 29,105
----------- -------- -------- -----------
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 before provision
for income taxes....... 28,393 9,029 1,567 13 38,989
Provision for income
taxes.................. 11,177 4,037 133 13 15,347
----------- -------- -------- -----------
Net income.............. $ 17,216 $ 4,992 $ -- $ 1,434 $ 23,642
=========== ======== ===== ======== ===========
Weighted average common
shares outstanding..... 18,673,000 -- 1 (36,701) 14 18,636,300
----------- -------- ----- -------- -----------
Basic and diluted
earnings per share..... $ 0.92 -- $ 0.08 $ 1.27
=========== ======== ===== ======== === ===========
</TABLE>
- --------
(1) Adjustments necessary to arrive at the pro forma unaudited combined
condensed financial data are described in the Notes to Historical
Consolidated and Pro Forma Unaudited Combined Condensed Financial
Statements beginning on page 98.
See Accompanying Notes
97
<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. This merger will be accounted for in a manner similar to a pooling
of interests, except for the exchange of class A common shares held by the
minority shareholders of RightCHOICE and outstanding options of RightCHOICE for
the same number of common shares and options in New RightCHOICE. This exchange
will be accounted for 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 proposed merger had occurred as of
December 31, 1999. 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 statement of income gives 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 year ended December 31, 1999 in a
manner similar to a pooling assuming the transaction occurred on January 1,
1999. New RightCHOICE is a newly formed entity which was incorporated on March
14, 2000 and thus did not have operations in 1999. No effect has been given in
the pro forma unaudited combined condensed statement of income for operating
and synergistic benefits that may result from the merger.
Blue Cross and Blue Shield of Missouri currently owns 100% of the class B
common stock of RightCHOICE. For purposes of the pro forma combined condensed
balance sheet, this investment has been eliminated because the balance sheet
data for RightCHOICE is shown separately. The income resulting from the
investment in RightCHOICE has similarly been eliminated as the statement of
income for RightCHOICE is also presented. Thus, the Blue Cross and Blue Shield
of Missouri financial data for both the combined condensed balance sheet and
statement of income is referred to as "Historical Carve-Out" data as the
investment in RightCHOICE and income from that investment has been "carved out"
of the historical Blue Cross and Blue Shield of Missouri financial statements.
Under the terms of the settlement agreement with the State of Missouri, the
insurance contracts and certain assets and liabilities of Blue Cross and Blue
Shield of Missouri will be transferred to Healthy Alliance Life Insurance
Company, a wholly-owned subsidiary of RightCHOICE. The class B common stock
owned by Blue Cross and Blue Shield of Missouri will be cancelled and The
Missouri Foundation For Health will receive one share of New RightCHOICE common
stock for each cancelled share of RightCHOICE 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 approximately $13.0 million paid to the Foundation (see
Note 2), approximately $25.3 million of goodwill related to the minority
RightCHOICE shareholders and outstanding options (see Note 7), and the
RightCHOICE class B common stock 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 historical financial statements and notes thereto
of RightCHOICE, the Blue Cross and Blue Shield of Missouri carve-out and New
RightCHOICE included elsewhere in this document.
98
<PAGE>
Notes to Historical Consolidated and Pro Forma Unaudited
Combined Condensed Financial Statements--(Continued)
(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. The payments are $12.78 million from Blue Cross and Blue
Shield of Missouri and $175,000 from New RightCHOICE. Pro forma adjustments to
cash and cash equivalents, resulting from the above consist of the following:
<TABLE>
<CAPTION>
(in 000's)
----------
<S> <C>
Payment to The Missouri Foundation For Health from Blue Cross
and Blue Shield of Missouri................................... $(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>
(in 000's)
----------
<S> <C>
Interest income reduction from $12.8 million and $175,000
payments to The Missouri Foundation For Health, calculated at
6% (Note 2).................................................. $(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 $420,000
in 1999. Pro forma adjustments to fees and other income consist of the
following:
<TABLE>
<CAPTION>
(in 000's)
----------
<S> <C>
Elimination of intercompany rent between RightCHOICE and Blue
Cross and Blue Shield of Missouri........................... $(5,040)
=======
</TABLE>
99
<PAGE>
Notes to Historical Consolidated and Pro Forma Unaudited
Combined Condensed Financial Statements--(Continued)
(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 $72.8 million. Pro forma adjustments to
general and administrative expense consist of the following:
<TABLE>
<CAPTION>
(in 000's)
----------
<S> <C>
Elimination of intercompany rent between RightCHOICE and Blue
Cross and Blue Shield of Missouri (Note 5)................... $(5,040)
One year of goodwill amortization related to minority
shareholders and stock options amortized over 20 years (Note
7)........................................................... 1,265
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............ 1,456
Elimination of cost of litigation, consultation and support
related to the settlement agreement (Note 2)................. (5,065)
-------
$(7,384)
=======
</TABLE>
(7) Goodwill and Intangible Assets, net
Pro forma adjustments for goodwill result from application of the purchase
method of accounting for the minority interest in RightCHOICE and outstanding
stock options. Goodwill related to minority interest is calculated as the
difference between fair value of the RightCHOICE stock on January 6, 2000, the
settlement date, and its book value. The $4.94 represents the difference
between the quoted market value of the class A RightCHOICE shares on the New
York Stock Exchange and the book value of the shares as of December 31, 1999.
RightCHOICE uses book value as there are no other tangible assets that require
adjustment to fair market value. Goodwill for outstanding stock options was
calculated using the Black-Scholes option pricing model. The resulting goodwill
is amortized over 20 years. Pro forma adjustments to goodwill and intangible
assets, net, consist of the following:
<TABLE>
<CAPTION>
(in 000's)
----------
<S> <C>
Goodwill 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......................... $25,296
=======
</TABLE>
(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....................... $(55,862)
========
</TABLE>
100
<PAGE>
Notes to Historical Consolidated and Pro Forma Unaudited
Combined Condensed Financial Statements--(Continued)
(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................... $(55,862)
========
</TABLE>
(10) Treasury Stock
RightCHOICE's treasury stock will be cancelled and the class A common stock
of RightCHOICE 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 shareholder's equity
of RightCHOICE. 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........... 87,666
Goodwill 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)
--------
$ 99,802
========
Transfer existing net assets representing reserve for
protection of members to additional paid in capital........... $(87,666)
========
</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>
101
<PAGE>
Notes to Historical Consolidated and Pro Forma Unaudited
Combined Condensed Financial Statements--(Continued)
(13) Income Tax Provision
The tax impact of the pro forma adjustments was calculated by adjusting the
total income statement adjustments and eliminating the permanent differences
related to goodwill amortization 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
Pro Forma Tax Permanent Difference Tax
Adjustments Effect Difference Adjustment Impact
----------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
One year of goodwill
amortization related to
minority shareholders
amortized over twenty years
(Note 6).................... $(1,265) $ (506) $ 1,265 $ 506 $
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)
Elimination of cost of
litigation, consultation and
support related to the
settlement agreement (Note
6).......................... 5,065 2,026 (2,500) (1,000) 1,026
Interest income reduction
from payments of $12.8
million and $175 (Note 4)... (777) (311) (311)
------- ------ ------- ------- ------
Pro forma adjustment totals.. $ 1,567 $ 627 $(1,235) $ (494) $ 133
======= ====== ======= ======= ======
</TABLE>
(14) Weighted Average Shares Outstanding
The one share of New RightCHOICE stock will be converted into 14,962,500
shares of New RightCHOICE stock as part of the merger of RightCHOICE into New
RightCHOICE. Also, the 36,700 shares of RightCHOICE 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).
102
<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-33 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 RightCHOICE's 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 10 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 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
103
<PAGE>
service area, which consists of 85 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-21 of this document contains information describing
litigation uncertainties with respect to RightCHOICE's continued use of these
names and service marks.
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.
- --------------------------------------------------------------------------------
"Blue" Branded Product Portfolio
---------------------------------------------------------------------
HMO products Open access PPO products
---------------------------------------------------------------------
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
---------------------------------------------------------------------
- --------------------------------------------------------------------------------
104
<PAGE>
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.
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 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 85 of the 115 counties in the state with 8,200
physicians and 99 hospitals. 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
105
<PAGE>
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 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. 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 17 hospitals.
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 48 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 61 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 67 hospitals.
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.
106
<PAGE>
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 8 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.
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 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.
107
<PAGE>
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,
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.
108
<PAGE>
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 2 to 25 employees), emerging markets (which RightCHOICE
defines as groups with 26 to 99 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.
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 30 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
109
<PAGE>
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.
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. Cumulatively,
since 1995, RightCHOICE has 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.
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" on page 125 has more information
related to RightCHOICE's Year 2000 program.
110
<PAGE>
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 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-21 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,
111
<PAGE>
. 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 meet more stringent risk-based capital
requirements than that required under the National Association of Insurance
Commissioners and Missouri guidelines.
Because 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
112
<PAGE>
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 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.
113
<PAGE>
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 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 50 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 also has
numerous operational requirements that are part of the administrative
simplification section of the law.
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. 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. Many of these requirements are similar to the
requirements of House Bill 335 that 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
114
<PAGE>
business of RightCHOICE and its subsidiaries. For example, the United States
House of Representatives 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. This 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, 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 payors, 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>
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-21 of this
document.
Management's Discussion and Analysis of Financial Condition and Results of
Operation
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 on page 12 of this document and the
financial statements and the accompanying notes, and the other financial data
about RightCHOICE included in this document.
115
<PAGE>
This discussion contains forward-looking statements that involve risks and
uncertainties. Actual results could differ significantly from those anticipated
in these forward-looking statements as a result of various factors, including
those discussed in "Risks Related to RightCHOICE, Blue Cross and Blue Shield of
Missouri and New RightCHOICE" beginning on page 29 of this document.
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 years ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
For the year ended
December 31,
--------------------------
Product Group 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
PPO:
Alliance PPO................................ $209,487 $191,855 $197,329
AllianceCHOICE POS.......................... 167,392 151,034 124,890
HMO (includes other POS)...................... 211,910 206,292 183,485
Medicare supplement........................... 92,314 94,951 97,157
Managed indemnity............................. 3,659 7,627 12,531
Other specialty services...................... 47,389 42,728 38,875
-------- -------- --------
Total premium revenue....................... 732,151 694,487 654,267
ASO/Self-funded and other income.............. 84,761 73,025 65,144
-------- -------- --------
Total revenues.............................. $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 year
ended December
31,
-------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Operating revenues:
Premium revenue................................... 89.6% 90.5% 90.9%
Fees and other income............................. 10.4% 9.5% 9.1%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Operating ratios:
Medical loss ratio................................ 82.2% 83.5% 84.8%
----- ----- -----
Commission expense ratio.......................... 4.0% 4.1% 4.1%
----- ----- -----
General and administrative expense ratio.......... 20.0% 20.8% 22.7%
----- ----- -----
Adjusted general and administrative expense ratio
(excludes depreciation and amortization)......... 17.9% 18.3% 19.5%
----- ----- -----
</TABLE>
116
<PAGE>
Membership
The following table sets forth the number of members by product category:
<TABLE>
<CAPTION>
December 31, %
------------------- Increase/
Product Group 1999 1998 (Decrease)
------------- --------- --------- ----------
<S> <C> <C> <C>
Underwritten:
PPO:
Alliance PPO........................... 149,769 141,225 6.0
AllianceCHOICE POS..................... 130,192 127,907 1.8
HMO:
Commercial (includes other POS)........ 128,215 129,417 (0.9)
Blue Horizons Medicare HMO............. 4,914 5,432 (9.5)
Medicare supplement...................... 53,460 57,966 (7.8)
Managed indemnity........................ 1,752 2,777 (36.9)
--------- ---------
468,302 464,724 0.8
--------- ---------
Self-funded:
PPO...................................... 44,355 43,688 1.5
HMO...................................... 7,152 8,843 (19.1)
ASO (includes HealthLink):
Workers' compensation.................. 516,107 449,986 14.7
Other ASO*............................. 1,250,436 1,155,658 8.2
--------- ---------
Total membership........................... 2,286,352 2,122,899 7.7
========= =========
</TABLE>
- --------
*does not include 391,021 and 455,006 additional third-party administrator
members 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 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, such increase in premium revenue may not be indicative of future
periods. RightCHOICE and its subsidiaries will continue to strive to establish
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 the products of its subsidiaries consistent with health care
cost trends.
Recently, competitors of RightCHOICE have announced their intention to exit
the Missouri market, which is RightCHOICE's primary sales area. A reduction in
the number of competitors for the Missouri market share may have a positive
impact on RightCHOICE's ability to attract and maintain membership; however,
RightCHOICE cannot provide any assurances that it will attract or retain
membership as a result of the changing competitive landscape.
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
117
<PAGE>
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%, pursuant to a contract amendment. 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 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.
118
<PAGE>
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 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.
119
<PAGE>
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.
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.
120
<PAGE>
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 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
18-county central Missouri region. The decision to discontinue was made due to
what RightCHOICE believes were unacceptable contract terms proposed by the
State of Missouri. 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.
121
<PAGE>
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.
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.
122
<PAGE>
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.
Liquidity and capital resources
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 was $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, 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.
123
<PAGE>
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. RightCHOICE's net 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. In the third quarter of 1997, RightCHOICE took a pre-tax charge of
$29.5 million, which 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
is 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. While management of
RightCHOICE believes the current provision for losses is adequate, particularly
in light of the rate increases provided on August 6, 1999, 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.
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.
124
<PAGE>
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.
Other than continued investment in information technology and debt
repayment, 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 pursuant to the credit agreement's requirements, as described above.
In addition, 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. Management
continually evaluates opportunities to 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.
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 of February 1, 2000, RightCHOICE had not experienced any significant
problems relating to the Year 2000 transition. While there are some
applications that have not had their first production use in 2000, management
does not anticipate that any such problems would have a material adverse effect
on RightCHOICE. RightCHOICE will continue to monitor these and other systems
for continued processing. As of February 1, 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 $12.9 million with $5.4 million expensed in 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.
125
<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 payors, 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. This law 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 the Bipartisan Consensus Managed
Care Improvement Act or 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-6 of this document.
Contingencies
See description under the same caption in Note 13 to RightCHOICE's financial
statements included on page F-21 of this document.
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-11 of this document for further
breakdown of the available-for-sale securities) are exposed to market
126
<PAGE>
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>
127
<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 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>
-300 20.15 7.29 12.87 4.05 $207,223
-250 17.92 7.27 10.66 3.99 203,380
-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
250 -2.26 7.46 -9.73 4.00 168,561
300 -4.02 7.49 -11.51 3.98 165,535
</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-14 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 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.
128
<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 RightCHOICE 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-64 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.
129
<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 Blue Card(R)
for members living or traveling within its service area who are employed by
companies headquartered in other plans' service areas. PPO Blue Card(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 Blue Card(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 Blue Card 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 Blue Card 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 Blue Card(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>
130
<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-52 of this document.
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 on page 13 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 RightCHOICE 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 as a result of various factors, including
those discussed under "Risks related to RightCHOICE, Blue Cross and Blue Shield
of Missouri and New RightCHOICE," beginning on page 29 of this document. Blue
Cross and Blue Shield of Missouri believes that it is generally subject to the
same risks and uncertainties as RightCHOICE.
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 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
Blue Card(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 Blue Card(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.
131
<PAGE>
Premium and Other Revenue
The following table sets forth premium and other revenue (in thousands) by
product group for the years ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
For the year ended
December 31,
-------------------------
Product Group 1999 1998 1997
------------- -------- -------- -------
<S> <C> <C> <C>
Underwritten:
Federal Employee Program...................... $ 82,153 $ 77,187 $77,473
Other......................................... 3,240 3,485 3,849
-------- -------- -------
Total Premium Revenue....................... 85,393 80,672 81,322
Self Funded and other fees...................... 17,856 13,132 11,232
Other........................................... 7,498 6,617 5,548
-------- -------- -------
Total revenues.............................. $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 year ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Operating revenues:
Premium revenue....................... 77.1% 80.3% 82.9%
Self Funded and other fees............ 16.1% 13.1% 11.4%
Other................................. 6.8% 6.6% 5.7%
---------- ---------- ----------
100.0% 100.0% 100.0%
========== ========== ==========
Operating ratios:
Medical loss ratio.................... 85.6% 88.0% 92.0%
---------- ---------- ----------
General and administrative expense
ratio................................ 23.0% 26.7% 27.8%
---------- ---------- ----------
Adjusted general and administrative
expense ratio (excludes depreciation
and amortization).................... 20.5% 23.9% 25.3%
---------- ---------- ----------
</TABLE>
Membership
The following table sets forth the number of members by product category:
<TABLE>
<CAPTION>
For the year ended
December 31,
-----------------------
Product Group 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
Underwritten:
Federal Employee Program....................... 44,952 44,930 48,664
Other.......................................... 3,301 4,515 6,589
------- ------- -------
Total underwritten members................... 48,253 49,445 55,253
Self Funded and other members.................. 106,705 77,437 82,266
------- ------- -------
Total members................................ 154,958 126,882 137,519
======= ======= =======
</TABLE>
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
132
<PAGE>
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 Blue Card(R) members in 1999 over 1998, an
increase of 125%. Management anticipates continued growth in PPO Blue Card(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 Blue Card(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 Blue Card(R) to increase. National
and Special Accounts membership and related revenue did not change
significantly in 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 parking fees from employees and special
events. 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.
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 $3.7 million in 1999 to
$27.7 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 $5.1
133
<PAGE>
million in 1999, inclusive of $1.3 million in reorganization costs related to
1998 charges, which were capitalized in 1998 and subsequently expensed in 1999
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 income
Operating income increased to $7.1 million in 1999 from $2.6 million in 1998
for the reasons described above.
Net investment income
Net investment income includes interest income from invested cash and short
term investments. 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 45% and (34)% 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.
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-52 of this
document.
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.
134
<PAGE>
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 Blue Card 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 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)% and (35)% 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.
135
<PAGE>
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-52 of this
document.
Liquidity and capital resources
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 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.
136
<PAGE>
INFORMATION ABOUT NEW RIGHTCHOICE
General
New RightCHOICE was incorporated on March 14, 2000 as a Delaware corporation
pursuant to the settlement agreement solely to facilitate the reorganization.
If the reorganization is approved and completed, 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 to be paid to The Missouri Foundation For
Health as part of the settlement, and
-- the shares of RightCHOICE class B common stock owned by Blue Cross and
Blue Shield of Missouri, which will be cancelled and the value of
which will be transferred 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 95 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 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. Unlike the RightCHOICE
class B common stock, which has 10 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 shares are
sold 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 RightCHOICE 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 reorganization had been consummated on January 1, 2000.
137
<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 60 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 of which
beneficial ownership may be acquired pursuant to stock options that are
exercisable or that will become exercisable within 60 days.
[Note: The following table includes only the executive officers of
RightCHOICE who also are expected to become executive officers of New
RightCHOICE upon consummation of the reorganization. The persons who will serve
as directors of New RightCHOICE immediately after the reorganization will be
added to the table by means of a pre-effective amendment to this Registration
Statement.]
<TABLE>
<CAPTION>
Pre-Reorganization Post-Reorganization
---------------------- ------------------------
Amount and Nature
of Beneficial Amount and Nature of
Ownership of Beneficial Ownership
RightCHOICE class A of New 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 *
Sandra A. Van
Trease(/2/)............ 61,703 * 61,703 *
Angela F. Braly(/3/).... 25,902 * 25,902 *
Michael Fulk(/4/)....... 20,359 * 20,359 *
Herbert B.
Schneiderman(/5/)...... 55,224 * 55,224 *
Directors and executive
officers
as a group (
persons)...............
</TABLE>
- --------
*Less than 1%.
(1) Includes 36,117 shares that may be acquired pursuant to vested stock
options at December 31, 1999 and 28,215 shares that may be acquired pursuant to
stock options that vested on January 1, 2000.
(2) Includes 39,884 shares that may be acquired pursuant to vested stock
options at December 31, 1999, 18,154 shares that may be acquired pursuant to
stock options that vested on January 1, 2000 and 865 shares beneficially owned
through RightCHOICE's 401(k) plan.
(3) Includes 16,000 shares that may be acquired pursuant to vested stock
options at December 31, 1999 and 9,902 shares that may be acquired pursuant to
stock options that vested on January 1, 2000.
(4) Includes 11,577 shares that may be acquired pursuant to vested stock
options at December 31, 1999 and 8,782 shares that may be acquired pursuant to
stock options that vested on January 1, 2000.
(5) Includes 42,830 shares that may be acquired pursuant to vested stock
options at December 31, 1999 and 10,894 shares that may be acquired pursuant to
stock options that vested on January 1, 2000. All shares are held by a trust
for the benefit of Mr. Schneiderman.
Ownership by Certain Beneficial Owners
The following table sets forth (1) historical information as of December 31,
1999 regarding the beneficial ownership of RightCHOICE class A common stock and
RightCHOICE class B common stock by each entity known by RightCHOICE's 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 reorganization had been consummated on January 1, 2000.
138
<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 60 days. Unless
otherwise indicated, the persons or 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 RightCHOICE class A common stock outstanding and 14,962,500 shares of
RightCHOICE 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 80.13%
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/).............. 1,444,900 38.9% 0 0% 1,444,900 7.74%
790 North Milwaukee St.
Milwaukee, Wisconsin
53202
Health Care Services
Corporation(/3/)........ 695,800 18.8% 0 0% 695,800 3.73%
300 Randolph Street
Chicago, Illinois 60601
Dimensional Fund
Advisors, Inc.(/4/)..... 211,700 5.71% 0 0% 211,700 1.13%
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, the shares are beneficially owned by Blue Cross and Blue
Shield of Missouri. 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 shares of class
B common stock would be outstanding.
(2) According to information contained in a report on Schedule 13G/A, dated
January 27, 2000, the shares are beneficially owned by one or more individual
and institutional investors, including Heartland Value Fund (which owned more
than 5% of the outstanding shares), for which Heartland Advisors, Inc. serves
as investment advisor. Heartland Advisors, Inc. has sole voting power with
respect to 676,800 shares and sole dispositive power with respect to 1,444,900
shares.
(3) According to information contained in a report on Schedule 13D, dated
October 22, 1999, the shares are beneficially owned by Health Care Service
Corporation, which operates the Blue Cross and Blue Shield Plans in Illinois
and Texas.
139
<PAGE>
(4) According to information contained in a report on Schedule 13G, dated
February 4, 2000, the shares are owned by four registered investment companies
and certain other investment vehicles for which Dimensional Fund Advisors, Inc.
serves as an investment advisor. 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 RightCHOICE
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
6 directors. The directors of New RightCHOICE will be the directors of
RightCHOICE immediately prior to the reorganization. After the reorganization,
the board of directors of New RightCHOICE expects that additional persons will
be added to the New RightCHOICE board of directors. The size of the board may
be increased and the newly-created vacancies filled with persons selected by
the New RightCHOICE board of directors 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 elected
for a 1 year term ending in 2001, Class II directors will be elected for a 2
year term ending in 2002 and Class III directors will be elected for a 3 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>
<S> <C> <C>
Current Position with RightCHOICE or
Name Blue Cross and Blue Shield of Missouri Age
---- -------------------------------------- ---
</TABLE>
[Note: This table and related information about each person who will serve
as a director of New RightCHOICE immediately after the reorganization will be
included in a pre-effective amendment to this Registration Statement.]
There is no arrangement or understanding between any director and any other
person pursuant to which the director was selected as a director. None of the
corporations or other organizations that employ or employed the directors of
RightCHOICE are parents, subsidiaries or affiliates of RightCHOICE.
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
It is expected that the board of directors of New RightCHOICE initially will
receive the same compensation for their services as the board of 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
140
<PAGE>
meeting attended, except the committee chair who received $900 for each
committee meeting attended. Each non-employee director was also entitled to
receive additional fees for attending lengthy meetings. No additional fees were
paid 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.
In 2000, RightCHOICE's non-employee director compensation was increased so
that each non-employee director is paid: (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 is paid $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. Only non-employee directors, currently 5 individuals,
are eligible to participate in the directors' stock option plan. New
RightCHOICE will adopt this plan upon completion of the reorganization. It is
also expected that New RightCHOICE will consider amendments to this plan and/or
may adopt new stock and stock option plans after the reorganization is
completed.
Under the plan, each year RightCHOICE grants each non-employee director an
option to purchase 1,000 shares of class A common stock. Each person who is
elected for the first time as a non-employee director is granted 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. The aggregate number of shares of
class A common stock that may be issued under options granted under the
directors' stock option plan is limited to 60,000 shares, subject to adjustment
in the event of various changes in RightCHOICE's capital structure. The
directors' stock option plan is administered by a committee designated by the
board of directors and composed of directors who are not otherwise eligible to
be participants in the 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
10 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 which would have been received had the
options been exercised 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 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.
141
<PAGE>
Executive Officers
It is expected 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 38 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 44 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. 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 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 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 Senior Vice President, Client Services, in
August 1997. Mr. Campbell joined RightCHOICE as Chief Internal Auditor in
September 1994 and was named Corporate Compliance Officer in 1996. Prior to
joining RightCHOICE, Mr. Campbell was a Senior Manager with Price Waterhouse
LLP.
142
<PAGE>
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.
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 21 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 in June 1999. He came to RightCHOICE from CIGNA Health Care of
Texas where he was Vice President and Corporate Medical Director. Prior to
joining CIGNA, 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 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 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
It is expected 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 summarizes for the years ended December 31, 1999, 1998 and 1997 all of
the compensation RightCHOICE paid to the five most highly compensated executive
officers of RightCHOICE, 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
143
<PAGE>
to 5% of a participant's compensation. The matching contribution, which is
included under the column entitled "All Other Compensation," vests over a
period of years and is 100% vested after 5 years of service. The deferred
compensation plan permits additional elective deferrals and additional matching
contributions and restores benefits that cannot be contributed to and provided
by RightCHOICE 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, 1997 208,750 0 0 0 12,926 0 13,397
Chief 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 but was fully reimbursed by Blue Cross and Blue Shield of
Missouri. Otherwise, for all other named executives the bonus consists of
compensation paid under the Alliance Blue Cross Blue Shield Incentive Plan.
Amounts are payable under the plan upon the achievement of a pre-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 Right CHOICE 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
144
<PAGE>
$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. Approximately 50% of the remaining amount of salary
reported in the table for Mr. O'Rourke in 1998 and 1997 was paid by RightCHOICE
to Mr. O'Rourke 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 was authorized and directed by the
HealthLink Board of Directors 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 Mr. O'Rourke was still employed by
RightCHOICE. This two-year bonus arrangement was created to assure the
purchaser of HealthLink (which was acquired by RightCHOICE 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.
Option Grants
It is expected 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 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 would have been
received had the options been exercised prior to the change in control. The
reorganization will not constitute a change in control under this option plan.
The dollar value of the stock options has been determined 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 10 years from the grant
date, (4) the option exercise price is $11.50 per share, (5) the dividend yield
is 0%, (6) the "risk free" interest rate is 6.45%, the yield on a United States
government zero coupon bond having a 10-year maturity from the grant date, (7)
the price volatilities for the shares of class A common stock underlying the
options is 40.52%, and (8) the options have an expected term of 10 years.
Options/SAR Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------
Percent of Total
Number of Securities Options/SARs
underlying Granted To Exercise or
options/SARs Granted Employees in Fiscal Base Price Expiration Grant Date
Name (#) Year ($/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.
145
<PAGE>
Option/SAR Exercises and Holdings
It is expected 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 RightCHOICE's class A common stock reported on the New York Stock
Exchange on December 31, 1999 was $11.50 per share. In the following table,
value is calculated by determining the difference between $11.50 and the option
exercise price multiplied by the number of shares of class A common stock
underlying the options.
Aggregated Option/SAR Exercises In Last Fiscal Year
And December 31, 1999 Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs Options/SARs
Shares Value At December 31, 1999 (#) at December 31, 1999 ($)
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 he is terminated by RightCHOICE 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 3 times
his annual base salary payable in 36 substantially equal monthly installments
plus an amount equal to 36 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. Any severance benefits would be
reduced 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 once the
reorganization is completed.
146
<PAGE>
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 severance agreements
provide for severance benefits in the event of termination 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 the executive officer is terminated within two years after the
reorganization is completed 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 61 of this document.
As the successor to RightCHOICE, New RightCHOICE will have all of
RightCHOICE's rights and responsibilities under the agreements once the
reorganization is completed.
Officers' Severance Agreements
RightCHOICE has entered into standard 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
officers who are involuntarily terminated 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 12 monthly
installments, 2 year's base pay, payable in 24 monthly installments, or 3
years' base pay, payable in 36 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, the remaining
severance benefit may be paid in a lump sum.
In addition, amounts equal to health, dental and life insurance premiums
will be provided by RightCHOICE for up to 12 months. Outplacement services are
also provided. Severance benefits would be reduced 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,
amounts payable under the officer's severance agreement are reduced 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 once the
reorganization is completed.
Pension Plans
Eligible employees of RightCHOICE participate in a qualified defined benefit
pension plan. Employees become vested in the plan after accruing 5 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 30. Credited service for this purpose includes service with other
organizations licensed by the Blue Cross and Blue Shield Association, and
pension benefits are offset by pension benefits payable by these other
organizations. Normal retirement benefits are payable upon reaching age 65.
147
<PAGE>
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 subsidies
are increased for participants who retire on or after attaining age 62 with 20
years or more of credited service. Employees with 20 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 25 or more
years of service may draw a benefit reduced by 4% per year for each year that
benefits are drawn 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 10-year certain life annuity or other optional forms.
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 20, 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
Years of Credited Service
Final 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, the years of service recognized under the pension
plan and the supplemental executive retirement plan for each of the named
executives were as follows: Mr. O'Rourke, 4.5 years and 15 years (including Mr.
O'Rourke's prior service at HealthLink), respectively, Ms. Van Trease, 5.5
years and 5.5 years, respectively, Ms. Braly, 1 year and 1 year, respectively,
Mr. Fulk, 2 years and 2 years, respectively; and Mr. Schneiderman, 4.5 years
and 4.5 years, respectively. 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 same compensation, plus amounts deferred under the non-
qualified deferred compensation plan, is recognized under the supplemental
executive retirement plan, but without the maximum limits. Retirement benefits
are calculated based upon the average of a participant's 5 highest consecutive
years of compensation of the most recent 10 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
148
<PAGE>
Revenue Code) for each of the named executives as of December 31, 1999 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) for each of the named executives as of December 31, 1999
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.
As the successor to RightCHOICE, New RightCHOICE will have all of
RightCHOICE's responsibilities under the pension plan and supplemental
executive retirement plan once the reorganization is completed.
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 [to be added by means of a pre-
effective amendment to this Registration Statement]. 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.
These agreements are described in this document under "Terms of Voting Trust
and Divestiture Agreement," "Terms of Registration Rights Agreement," and
"Terms of Indemnification Agreement," respectively. The Foundation initially
will own approximately 80% of the outstanding shares of New RightCHOICE common
stock.
149
<PAGE>
INFORMATION ABOUT THE MISSOURI FOUNDATION FOR HEALTH
The Missouri Foundation For Health is a Missouri non-profit public benefit
corporation. It will apply to the Internal Revenue Service for a determination
that it is exempt from federal income tax as a social welfare organization
pursuant to Section 501(c)(4) of the Internal Revenue Code. The reorganization
is conditioned upon receipt of this determination from the Internal Revenue
Service.
The Missouri Foundation For Health was established to serve the needs of
underinsured and uninsured Missourians in Blue Cross and Blue Shield of
Missouri's service area. It will receive, hold and ultimately sell the shares
of New RightCHOICE common stock that it will receive upon completion of the
reorganization, and use the proceeds for its nonprofit purposes.
The Missouri Foundation For Health will have no stockholders or members. Its
business and affairs will be governed by its board of directors. Currently, the
board of directors consists of three members who were appointed by the Director
of the Missouri Department of Insurance and the Missouri Attorney General.
Immediately following the reorganization, the board of directors will consist
of 15 members. Ten of these members will be appointed by the Governor of the
State of Missouri and the remaining 5 members will be appointed by the Missouri
Attorney General. These appointments will be made from a slate of 35 nominees
that will be provided by a nominating committee. The nominating committee will
consist of 13 persons appointed by the Governor and Attorney General of the
State of Missouri 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 15 members of the
board will be divided into three classes of five members each. Members of the
first class of directors will serve a term of 1 year, members of the second
class of directors will serve a term of 2 years and members of the third class
of directors will serve a term of 3 years. Thereafter, directors will each
serve a term of 3 years on the board. After the initial post-closing board is
appointed, all vacancies will be filled by the board from among persons
nominated by a community advisory committee appointed by the Governor and
Attorney General of the State of Missouri 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 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 qualified to serve as an officer, director or
employee of The Missouri Foundation For Health.
150
<PAGE>
NEW RIGHTCHOICE CERTIFICATE OF INCORPORATION AND BYLAWS
The following is a summary of New RightCHOICE's certificate of incorporation
and bylaws which are attached to this document as appendices F and G,
respectively. 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
If the reorganization is approved and completed, 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 to be voted on by shareholders, you will be entitled to one
vote for each share of stock you own. In addition, you will be entitled to
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 shareholder, you will
be entitled to 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 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 holders 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 holders of common stock.
There are no current plans to issue any preferred stock.
Classified Board
The board of directors will be divided into three classes. Each class will
serve for a 3 year period and will consist, as nearly as possible, of one-third
of the total number of directors. At each annual meeting of shareholders, the
successors to the class of directors whose term expires at that annual meeting
will be elected for a 3 year term.
The interim board of directors consists of three directors, John A.
O'Rourke, Sandra A. Van Trease and Angela F. Braly, who were appointed as
directors solely to facilitate the reorganization. Immediately after the
reorganization is completed, the board of directors will consist of
directors. The directors of New RightCHOICE will be the same persons who served
as directors of RightCHOICE immediately prior to the
151
<PAGE>
reorganization. Thereafter, the board of directors will consist of no less than
3 and no more than 21 directors. It is expected that additional persons will be
invited to join the board of directors after the reorganization is completed.
The size of the New RightCHOICE board of directors may be increased, and the
newly-created vacancies may be filled, 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 is not
approved by the directors, and
. Takes no action that would make the person or entity a major participant.
The Missouri Foundation For Health will always be deemed to be a major
participant.
Removal of Directors
A director may be removed only if either:
. Convicted of a felony or
. 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.
152
<PAGE>
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 any improper personal benefit is derived.
No breach of a director's fiduciary duty will occur 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 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.
153
<PAGE>
Limitations on Ownership
General
New RightCHOICE's certificate of incorporation contains the following
ownership limitations required by the Blue Cross and Blue Shield Association of
all for-profit licensees. These ownership limitations are designed 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 would be beneficially owned by any affiliate or associate under any
agreement, arrangement or understanding.
The beneficial ownership provisions include several exceptions which are
included in the definition of beneficial ownership in New RightCHOICE's
certificate of incorporation which is attached as 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, within 15 days of becoming aware of the ownership of excess shares,
the excess shares are disposed of or transferred.
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 who has been nominated by a
majority of the independent directors and a majority of all directors,
. Against any candidate for the board of directors for whom no competing
candidate has been nominated or selected by a majority of the independent
directors and a majority of all directors,
. 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,
154
<PAGE>
-- 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 all other New RightCHOICE securities are voted 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 the excess shares are sold as
described below.
Any dividends or distributions received by an owner of excess shares must be
repaid to New RightCHOICE or the share escrow agent. 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 are purchased 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 proceeds from the sale of excess shares and the receipt of excess share
dividends will be distributed in the following manner:
. First, to the share escrow agent for any costs and expenses incurred in
administering the excess shares and that have not previously been
reimbursed by New RightCHOICE,
. 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.
Exceptions to Ownership Limits
The ownership limits will not apply to:
. Any shares issued by New RightCHOICE to The Missouri Foundation For
Health upon the incorporation of New RightCHOICE,
. The shares of common stock that The Missouri Foundation For Health
receives in the reorganization, or
. The shares of 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 common stock originally issued to the
Foundation in the reorganization.
155
<PAGE>
Any shares of common stock that The Missouri Foundation For Health transfers
to another person or entity will be subject to the ownership limits.
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.
Amendments to Bylaws
A majority of the board of directors has the power to amend or replace the
bylaws. Only the holders of 75% or more of the common stock may change or alter
any provision of the bylaws.
Qualified Candidates
The bylaws provide that directors will be elected by a plurality vote and
only "qualified candidates" may be elected 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
who has been nominated by a majority of the independent directors and a
majority of
156
<PAGE>
all directors, or who has been timely nominated by shareholders, but who does
not qualify as an "independent director" under the certificate of
incorporation. Page 152 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 all positions available for non-
independent candidates at the election have been filled.
Meetings of Shareholders
With respect to shareholder meetings, the bylaws provide:
. Meetings of shareholders will be held at the principal offices of New
RightCHOICE unless otherwise decided by the board of directors,
. The annual meeting of shareholders will be held on the second Tuesday in
May of each year, unless otherwise provided by the board of directors or
the bylaws, and
. Special meetings of the shareholders may only be called by (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.
157
<PAGE>
COMPARISON OF RIGHTS OF SHAREHOLDERS
OF RIGHTCHOICE AND NEW RIGHTCHOICE
Introduction
Once the reorganization is completed, you will become a shareholder of New
RightCHOICE. As a result, your rights as a shareholder will be governed by
Delaware law and New RightCHOICE's certificate of incorporation and bylaws and
will no longer be governed by Missouri law and RightCHOICE's articles of
incorporation and bylaws.
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 and Missouri law and
RightCHOICE's articles of incorporation and bylaws. Copies of New RightCHOICE's
certificate of incorporation and bylaws are attached to this document as
Appendices F and G, respectively. Copies of RightCHOICE's articles of
incorporation and bylaws are available for inspection at RightCHOICE's main
office or will be sent 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 7 directors,
with the actual number of directors to be fixed by RightCHOICE's bylaws (which
calls for 7 to 12 directors). Each director serves for a 3-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 3 classes of directors will expire in
different years, so that the appointment or re-election of a new class of
directors will be voted upon at each annual meeting of shareholders.
New RightCHOICE. Delaware law provides that a Delaware corporation must have
one or more directors. New RightCHOICE's certificate of incorporation provides
for no fewer than 3 and no more than 21 directors. The directors will be
divided into 3 classes as nearly as equal in number as possible. Each director
will serve for a 3-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 3 classes
of directors will expire in different years, so that the appointment or re-
election of a new class of directors will be voted upon at each annual meeting
of shareholders.
Vacancies
RightCHOICE. Missouri law provides that vacancies on the board of directors
may be filled by a majority of the directors then in office, although less than
a quorum, or by the sole remaining director. Missouri law also provides that if
a corporation elects directors by class, a director elected to fill a vacancy
or a newly created directorship need not be presented for election by the
shareholders of the corporation until that class of directors is presented for
election.
158
<PAGE>
New RightCHOICE. Delaware law provides that vacancies may be filled by a
majority of the directors then in office, although less than a quorum, unless
the corporation's certificate of incorporation or bylaws provide otherwise.
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
Missouri law and Delaware law both provide that 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 152 of this document.
Removal
RightCHOICE. Under Missouri law, a director may be removed for cause by a
majority of the entire board 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, any director or the entire board of
directors may be removed, with or without cause, by a majority of the
outstanding shares entitled to vote at an election of directors. However, if
shareholders are entitled to vote cumulatively in the election of directors, a
director may not be removed, 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 a single director or
the entire board of directors may be removed at any time for:
. Commission of a felony, or
. 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, any director or the entire board of
directors may be removed, with or without cause, by a majority of the
outstanding shares entitled to vote at an election of directors. However,
unless a corporation's certificate of incorporation provides otherwise, a
director of a corporation with a classified board of directors may be removed
only for cause. In addition, if the corporation has cumulative voting, if less
than the entire board is to be removed, a director may not be removed without
cause if the votes cast against his or her removal would be sufficient to elect
the director under cumulative voting.
159
<PAGE>
New RightCHOICE's certificate of incorporation provides that any director,
or the entire board of directors, may be removed 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:
. A resolution setting forth the proposed amendment must be adopted by its
board and directors and submitted 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 156 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.
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 that is 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.
160
<PAGE>
Amendments to provisions of the certificate of incorporation other than
those set forth on page 156 of this document require only the vote of the
holders of a majority of the outstanding shares of New RightCHOICE entitled to
vote.
Amendment of Bylaws
RightCHOICE. Under Missouri law, the power to amend or repeal the bylaws of
a corporation is vested in the shareholders unless that power is vested in the
board of directors by the corporation's 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 that power is
vested in the board of directors by the corporation's 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 preferred stock is issued, 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 10 votes per share.
New RightCHOICE. All shareholders have one vote per share on all matters
submitted to a vote of the shareholders.
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 new shares are issued.
Power to Call Special Shareholder Meetings
RightCHOICE. Missouri law provides that special shareholder meetings may be
called by the board of directors or by anyone authorized by the corporation's
articles of incorporation or bylaws. RightCHOICE's bylaws provide that special
shareholder meetings may be called only by the chairman of the board of
directors, the president or by a majority of the board of directors. Notice of
a special shareholder meeting must be delivered to each shareholder not less
then 10 days or more than 70 days before the date of the special meeting.
161
<PAGE>
New RightCHOICE. Delaware law provides that a special shareholder meeting
may be called by the board of directors or by anyone authorized in the
corporation's certificate of incorporation or bylaws. New RightCHOICE's bylaws
provide that special shareholder meetings may be called only by 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. Notice of a
special shareholder meeting must be delivered to each shareholder not less than
10 days or more than 60 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. Any action
required or permitted to be taken by the shareholders at a meeting may be taken
without a meeting if written consents are signed by all of the shareholders
entitled to vote at the meeting.
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.
No action required or permitted to be taken at a meeting of shareholders may be
taken 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' rights if the
control shares are granted voting rights. 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 3 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 3 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.
162
<PAGE>
However, the 3-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
business combination is approved by the board of directors and by two-
thirds of the voting stock not owned by the interested stockholder.
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. An exception to these ownership limitations has
been made 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 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, officer, and
employee or agent in Missouri only, 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 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. These indemnification agreements will be assumed
by New RightCHOICE 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.
163
<PAGE>
New RightCHOICE. As permitted under Delaware law, New RightCHOICE's
certificate of incorporation states 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.
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
. No shares of common stock of the surviving corporation are to be issued
or delivered 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 is not approved in advance by a majority
of the independent directors and a majority of the whole board of directors.
New RightCHOICE's certificate of incorporation provides for limitations on
the amount of New RightCHOICE securities which may be beneficially owned by any
one person or entity. 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,
164
<PAGE>
. 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, has
acquired any securities of New RightCHOICE after the execution of the
agreement, other than in accordance with the terms of the agreement.
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 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 the amendment is approved by a
majority of independent directors and a majority of all directors 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 vote 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 a majority of the outstanding stock of the corporation 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
165
<PAGE>
. 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 it is
approved by the board of directors, a committee of directors, or the
shareholders.
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 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 are 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
The validity of New RightCHOICE common stock to be issued in the
reorganization will be passed upon by Lewis, Rice & Fingersh, L.C., St. Louis,
Missouri. PricewaterhouseCoopers LLP will render opinions with respect to
material federal income tax consequences as described in their opinion.
166
<PAGE>
EXPERTS
The financial statements of RightCHOICE and carve-out Blue Cross and Blue
Shield of Missouri 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 all of which are included in this document
have been so included in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of such firm as experts in
auditing and accounting.
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. RightCHOICE's 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. No one has been authorized to provide any
information that is different from what is contained in this document. This
document is dated , 2000. Shareholders 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 to shareholders nor the
issuance of New RightCHOICE common stock in the reorganization will create any
implication to the contrary.
167
<PAGE>
INDEX TO FINANCIAL STATEMENTS
RIGHTCHOICE MANAGED CARE, INC. (RIGHTCHOICE)
<TABLE>
<S> <C>
Consolidated Balance Sheets, December 31, 1999, and 1998................ F-2
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997.......................................................... F-3
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997................................. F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................... F-5
Notes to Consolidated Financial Statements.............................. F-6
Report of Independent Accountants....................................... F-37
Financial Statement Schedule-Condensed Financial Information............ F-38
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
Consolidated Balance Sheets, December 31, 1999 and 1998................. F-41
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997.......................................................... F-42
Consolidated Statements of Changes in Net Assets Representing Reserve
for Protection of Members for the years ended December 31, 1999, 1998
and 1997............................................................... F-43
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................... F-44
Notes to Consolidated Financial Statements.............................. F-45
Report of Independent Accountants....................................... F-67
Financial Statement Schedule-Condensed Financial Information............ F-68
Report of Independent Accountants....................................... F-70
RIGHTCHOICE MANAGED CARE, INC. (NEW RIGHTCHOICE)
Balance Sheet, March 14, 2000........................................... F-71
Note to Balance Sheet................................................... F-72
Report of Independent Accountants....................................... F-73
</TABLE>
F-1
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
December 31,
ASSETS 1999 1998
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 44,400 $ 39,409
Investments available for sale, at market value............... 201,926 208,281
Receivables from members...................................... 78,947 68,024
Receivables from related parties.............................. 28,764 18,294
Deferred income taxes......................................... 8,629 4,798
Other assets.................................................. 17,981 19,818
-------- --------
Total current assets...................................... 380,647 358,624
Property and equipment, net..................................... 55,470 58,234
Deferred income taxes........................................... 9,791 11,583
Investments in affiliates....................................... 5,905 5,729
Goodwill and intangible assets, net............................. 71,400 74,508
-------- --------
Total assets.............................................. $523,213 $508,678
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Medical claims payable........................................ $124,428 $109,986
Unearned premiums............................................. 62,824 56,407
Accounts payable and accrued expenses......................... 59,476 64,754
Current portion of long-term debt............................. 8,000 10,000
Payables to related parties................................... 27,009 26,194
Reserve for loss contract..................................... 7,259 9,052
Obligations for employee benefits............................. 1,577 2,954
Income taxes payable.......................................... 12,965 10,485
Obligations under capital leases.............................. 4,071 4,254
-------- --------
Total current liabilities................................. 307,609 294,086
Reserve for loss contract....................................... 7,259
Long-term debt.................................................. 26,063 33,063
Obligations for employee benefits............................... 26,819 24,338
Obligations under capital leases................................ 5,179 4,058
-------- --------
Total liabilities......................................... 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, 3,710,653 and 3,710,426 shares outstanding,
respectively............................................... 37 37
Class B, convertible, $0.01 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................ $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 year ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Premium............................... $ 732,151 $ 694,487 $ 654,267
Fees and other income................. 84,761 73,025 65,144
----------- ----------- -----------
Total revenues...................... 816,912 767,512 719,411
----------- ----------- -----------
Operating expenses:
Health care services.................. 601,532 579,827 555,126
Commissions........................... 32,462 31,394 29,302
General and administrative (excludes
depreciation and amortization and
excludes net intercompany charges of
$11,728, $11,231 and $8,356,
respectively, allocated to Blue Cross
and Blue Shield of Missouri)......... 146,036 140,304 140,064
Depreciation and amortization......... 17,215 19,334 23,108
Charge for loss reserves.............. 29,510
Other non-recurring charges........... 900 3,301
----------- ----------- -----------
Total operating expenses............ 797,245 771,759 780,411
----------- ----------- -----------
Operating income (loss)................. 19,667 (4,247) (61,000)
----------- ----------- -----------
Investment income:
Interest and dividends................ 13,367 14,737 15,916
Realized (losses) gains, net.......... (516) 3,932 17,268
----------- ----------- -----------
Total investment income, net........ 12,851 18,669 33,184
----------- ----------- -----------
Other:
Interest expense...................... (4,344) (4,539) (4,681)
Other income (expense), net........... 219 (379) (1,058)
----------- ----------- -----------
Total other, net.................... (4,125) (4,918) (5,739)
----------- ----------- -----------
Income (loss) before provision (benefit)
for income taxes....................... 28,393 9,504 (33,555)
Provision (benefit) for income taxes.... 11,177 3,844 (9,521)
----------- ----------- -----------
Net income (loss)....................... $ 17,216 $ 5,660 $ (24,034)
=========== =========== ===========
Weighted average common shares
outstanding............................ 18,673,000 18,672,100 18,672,600
----------- ----------- -----------
Basic and diluted earnings (loss) per
share.................................. $ 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:
Net income............ 17,216 17,216
Change in unrealized
appreciation on
available-for-sale
securities, net of
income tax benefit of
$3,198............... (5,624) (5,624)
Minimum pension
liability adjustment,
net of income tax
provision of $40..... 75 75
--------
Comprehensive income.... 11,667
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
=== ==== ======== ======= ===== ======= ========
</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 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:
Provision (benefit) for deferred income taxes. 1,118 1,697 (6,507)
Depreciation and amortization................. 17,215 19,334 23,108
Loss (gain) on sale of property and equipment. 514 53 (44)
Undistributed (earnings) losses of affiliates. (176) 48 916
Loss (gain) on sale of investments............ 516 (3,932) (17,268)
Accretion of discounts and amortization of
premiums, net................................ 400 612 6
(Increase) decrease in certain assets, net of
effects from investment in affiliates:
Receivables from members...................... (10,923) (8,005) (5,182)
Receivables from related parties.............. (10,470) (2,164) 943
Other assets.................................. 2,232 (4,556) (2,859)
Increase (decrease) in certain liabilities, net
of effects from investment in affiliates:
Medical claims payable........................ 14,442 (2,353) 506
Unearned premiums............................. 6,417 (1,249) 4,957
Accounts payable and accrued expenses......... (5,163) 8,293 (13,065)
Payables to related parties................... 815 5,981 3,064
Reserve for loss contract..................... (9,052) (9,052) 25,363
Obligations for employee benefits............. 1,104 2,217 (33)
Income taxes payable.......................... 2,480 (1,566) (755)
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... 28,685 11,018 (10,884)
-------- -------- --------
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities............................ 10,489 20,359 3,975
Proceeds from investments sold:
Fixed maturities............................ 157,505 273,591 311,599
Equity securities........................... 521 40,734
Other....................................... 101 4,482 32,469
Investments purchased:
Fixed maturities............................ (161,665) (282,400) (340,366)
Equity securities........................... (10,034) (548) (230)
Other....................................... (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..... 24 2,051 561
Property and equipment purchased.............. (6,598) (12,496) (18,544)
-------- -------- --------
Net cash (used in) provided by investing
activities..................................... (10,146) 7,687 28,183
-------- -------- --------
Cash flows from financing activities:
Sale (purchase) of class A treasury stock..... 2 16 (78)
Payments of long-term debt.................... (9,000) (3,937) (15,000)
Payments of capital lease obligations......... (4,550) (5,247) (5,767)
-------- -------- --------
Net cash used in financing activities........... (13,548) (9,168) (20,845)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 4,991 9,537 (3,546)
Cash and cash equivalents at beginning of year.. 39,409 29,872 33,418
-------- -------- --------
Cash and cash equivalents at end of year........ $ 44,400 $ 39,409 $ 29,872
======== ======== ========
Supplemental disclosure of cash information:
Interest paid................................. $ 4,344 $ 4,687 $ 5,036
Income taxes paid (refund received), net...... 7,579 712 (2,262)
Supplemental schedule of noncash investing and
financing activities:
Equipment acquired through capital leases..... $ 7,631 $ 4,325 $ 9,730
Disposal of equipment under capital leases.... 2,143 675 2,810
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<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.
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 other
companies in which less than a majority interest is held are accounted for
under the equity or cost method.
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.
F-6
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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. Accumulated
amortization on goodwill and intangible assets as of December 31, 1999, and
1998 was $14,370 and $11,467, 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.
F-7
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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.
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 43,438 and 17,924 dilutive potential common
shares for 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 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.
F-8
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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.
Revenue recognition and unearned premiums
For most members, premiums are billed in advance of coverage periods and are
recorded as 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 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.
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 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.
F-9
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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 years ended
December 31, 1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Unrealized holding (losses) gains arising
during period, net of taxes................... $(5,961) $1,671 $ 3,163
Less: reclassification adjustment for losses
(gains) included in net income (loss), net
of taxes................................... 337 (1,968) (11,140)
------- ------ -------
Net unrealized losses on securities............ $(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 $(4,132) and $1,492 at
December 31, 1999 and 1998, respectively. The minimum pension liability
increase was $295 and $370 at December 31, 1999 and 1998, respectively.
F-10
<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-11
<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-12
<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.
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>
F-13
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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 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>
F-14
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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>
Year ended December
31,
-----------------------
1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Current:
Federal........................................ $ 9,684 $2,652 $(3,771)
State.......................................... 375 (505) 757
------- ------ -------
10,059 2,147 (3,014)
Deferred:
Federal........................................ 1,118 1,697 (6,507)
------- ------ -------
$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>
Year ended
December 31,
-----------------
1999 1998 1997
---- ---- -----
<S> <C> <C> <C>
Tax provision (benefit) based on federal statutory
rate............................................... 35.0% 35.0% (35.0)%
State income taxes, net of federal provision
(benefit).......................................... 1.3 (5.3) 2.3
Goodwill amortization............................... 2.4 6.8 2.2
Other............................................... 0.7 3.9 2.1
---- ---- -----
Effective tax provision (benefit) rate.............. 39.4% 40.4% (28.4)%
==== ==== =====
</TABLE>
F-15
<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 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:
IOS expense............................................ 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 as of
December 31, 1999 and, accordingly, no valuation allowance has been provided
against such assets as of 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-16
<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
======= =======
<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.
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>
F-17
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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.
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>
F-18
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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.
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.
F-19
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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. 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.
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>
F-20
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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.
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."
F-21
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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).
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 of Cole County, Missouri, 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 Cole County 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.
F-22
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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 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"
F-23
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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.
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.
F-24
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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.
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,
F-25
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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.
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.
F-26
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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
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, 1999, and at subsequent meetings on June 17, September
17, 1999, and November 19, 1999 the BCBSA Board of Directors extended the
licenses until the next scheduled meeting, the next of which is scheduled for
March 9, 2000. 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
F-27
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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 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."
F-28
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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.
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 Circuit Court of the City of
St. Louis 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.
F-29
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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 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 such a judgment is entered, it might be followed by a claim seeking
an injunction against the closing of the reorganization, or money damages, or
both. It could also cause conditions to the closing of the reorganization not
to be fulfilled.
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.
F-30
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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 being implemented. RightCHOICE anticipates
that the settlement will be consummated.
Status of Blue Cross and Blue Shield licenses
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 service marks until the next scheduled
meeting of the BCBSA Board of Directors. The extensions on a "board to board"
basis followed the reinstatement by the BCBSA Board of Directors, effective as
of October 29, 1998, of the licenses to use the Blue Cross and Blue Shield
service marks, granted to RightCHOICE, Blue Cross and Blue Shield of Missouri,
and two wholly owned subsidiaries of RightCHOICE, HALIC and BlueCHOICE (the
licensed affiliates). The approval clarified the rights of RightCHOICE and its
licensed affiliates to continue uninterrupted the use of the service marks
following actions taken by the BCBSA which resulted from the October 29 Order.
On March 9, 2000, the Board of Directors of the BCBSA unanimously voted to
fully reinstate the licenses so that extensions on a "board to board" basis
would no longer be required.
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 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.
F-31
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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, and pursuant to extensions, March 9, 2000). 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 9, 2000, the BCBSA Board voted to reinstate the full
license without board to board extensions as a result of the dismissal of the
principal litigation as contemplated by the Amended and Restated Settlement
Agreement described above under "Agreement for Settlement of Certain Litigation
Matters and Reorganization of RightCHOICE."
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.
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 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
F-32
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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, including the claims of its members
arising from health plan benefit coverage issues for certain services under
evolving theories of liability. The financial and operational impact that such
evolving theories of recovery will have on the managed care industry generally,
or RightCHOICE in particular, is presently unknown.
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.
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
F-33
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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 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>
The following table sets forth revenue (in thousands) by product group for
the years ended December 31, 1999, 1998, and 1997. The ASO/self-funded and
other income category below includes $444, $191 and $48 of other income related
to RightCHOICE's underwritten segment for the years ended December 31, 1999,
1998 and 1997, respectively.
<TABLE>
<CAPTION>
For the year ended
December 31,
--------------------------
Product Group 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
PPO:
Alliance PPO................................ $209,487 $191,855 $197,329
AllianceCHOICE POS.......................... 167,392 151,034 124,890
HMO (includes other POS)...................... 211,910 206,292 183,485
Medicare supplement........................... 92,314 94,951 97,157
Managed indemnity............................. 3,659 7,627 12,531
Other specialty services...................... 47,389 42,728 38,875
-------- -------- --------
Total premium revenue..................... 732,151 694,487 654,267
ASO/Self-funded and other income.............. 84,761 73,025 65,144
-------- -------- --------
Total revenues............................ $816,912 $767,512 $719,411
======== ======== ========
</TABLE>
F-34
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share data)
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>
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.
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
F-35
<PAGE>
RIGHTCHOICE MANAGED CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(dollars in thousands, except share data)
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.
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-36
<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-37
<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-38
<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-39
<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-40
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................. $ 19,076 $ 12,543
Investments available for sale, at market value............ 26,617 3,522
Receivables from members................................... 16,513 20,363
Receivables from related parties........................... 27,098 26,194
Deferred income taxes...................................... 1,244 2,224
Other assets............................................... 11,049 9,941
-------- --------
Total current assets..................................... 101,597 74,787
Property and equipment, net.................................. 61,936 64,562
Other assets................................................. 580 567
-------- --------
Total assets............................................. $164,113 $139,916
======== ========
Liabilities
Current liabilities:
Medical claims payable..................................... $ 16,609 $ 12,238
Unearned premiums.......................................... 544 639
Accounts payable and accrued expenses...................... 14,626 15,035
Payables to related parties................................ 28,853 18,363
Income taxes payable....................................... 8,888 3,244
-------- --------
Total current liabilities................................ 69,520 49,519
Obligations for employee benefits............................ 630 628
Deferred income taxes........................................ 6,297 7,095
-------- --------
Total liabilities........................................ 76,447 57,242
-------- --------
Net assets representing reserve for protection of members.... 87,666 82,674
-------- --------
Total liabilities and net assets representing reserve for
protection of members................................... $164,113 $139,916
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-41
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
For the year ended
December 31,
---------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Premium......................................... $ 85,393 $ 80,672 $ 81,322
Fees and other income........................... 25,354 19,749 16,780
-------- -------- --------
Total revenues................................ 110,747 100,421 98,102
-------- -------- --------
Operating expenses:
Health care services............................ 73,070 71,007 74,777
Commissions..................................... 43 42 42
General and administrative (excludes
depreciation and amortization and includes net
intercompany charges of $16,586, $15,245, and
$11,007, respectively, allocated by RightCHOICE
Managed Care, Inc.)............................ 22,662 24,008 24,792
Depreciation and amortization................... 2,813 2,796 2,525
Non-recurring charges........................... 5,065
-------- -------- --------
Total operating expenses...................... 103,653 97,853 102,136
-------- -------- --------
Operating income (loss)........................... 7,094 2,568 (4,034)
-------- -------- --------
Investment income:
Interest and dividends.......................... 1,895 592 786
Realized losses, net............................ (5,200) (55)
-------- -------- --------
Net investment income......................... 1,895 (4,608) 731
-------- -------- --------
Other:
Interest expense................................ (2) (42)
Other income (expense), net..................... 40 113 (2)
-------- -------- --------
Total other, net.............................. 40 111 (44)
-------- -------- --------
Income (loss) before provision (benefit) for
income taxes..................................... 9,029 (1,929) (3,347)
Provision (benefit) for income taxes.............. 4,037 (663) (1,172)
-------- -------- --------
Net income (loss)................................. $ 4,992 $ (1,266) $ (2,175)
======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-42
<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 year ended December 31,
1999............................................................... 4,992
-------
Net Assets Representing Reserve for Protection of Members at December
31, 1999............................................................. $87,666
=======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-43
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the year ended
December 31,
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 4,992 $ (1,266) $(2,175)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 2,813 2,796 2,525
Provision (credit) for deferred income taxes..... 182 (248) (836)
Loss on sale of investments...................... 5,200 55
Accretion of discounts and amortization of
premiums, net................................... (372) 7
Decrease (increase) in certain assets:
Receivables from members......................... 3,850 (2,580) (3,265)
Receivables from related parties................. (904) (5,981) (3,064)
Other assets..................................... (854) (321) (2,146)
Other long-term investments...................... (790)
Increase (decrease) in certain liabilities:
Medical claims payable........................... 4,371 (2,772) 3,026
Unearned premiums................................ (95) 22 308
Accounts payable and accrued expenses............ (409) 3,769 403
Payables to related parties...................... 10,490 2,230 (940)
Obligations for employee benefits................ 2 10 132
Income taxes payable............................. 5,644 1,669 1,340
------- -------- -------
Net cash provided by (used in) operating
activities........................................ 29,710 2,528 (5,420)
------- -------- -------
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities............................... 10,184
Proceeds from investments sold:
Fixed maturities............................... 23,774 8,514
Equity securities.............................. 712 200
Other.......................................... 5,384
Investments purchased:
Fixed maturities............................... (57,660) (275)
Property and equipment purchased................. (187) (1,672) (136)
------- -------- -------
Net cash (used in) provided by investing
activities........................................ (23,177) 3,437 8,578
------- -------- -------
Net increase in cash and cash equivalents.......... 6,533 5,965 3,158
Cash and cash equivalents at beginning of year..... 12,543 6,578 3,420
------- -------- -------
Cash and cash equivalents at end of year........... $19,076 $ 12,543 $ 6,578
======= ======== =======
Supplemental Disclosure of Cash Information:
Interest paid.................................... $ 42 $ 42
Income tax (payments) refunds (received from)
paid to RIT..................................... $(7,730) (842) 2,897
Income tax payments (refunds).................... 5,941 (1,242) (4,745)
------- -------- -------
Net income taxes received........................ $(1,789) $ (2,084) $(1,848)
======= ======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-44
<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.
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 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.
F-45
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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.
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.
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.
F-46
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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 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 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 underwritten members, premiums that are billed in advance of coverage
periods are recorded as revenue over the period to which health care coverage
relates. Amounts billed but unearned are recorded as unearned premiums. The
company's third-party administrator (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.
Non-recurring charges
During 1999, the company expensed $5.1 million related to the settlement and
reorganization of the company with RIT as described in Note 10,
"Contingencies."
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 in 1999 relating to costs incurred in 1998. In total, 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-47
<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>
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>
F-48
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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.
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.
F-49
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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.
8. Income taxes
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997
------ ----- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $3,855 $(415) $ (336)
Deferred:
Federal.......................................... 182 (248) (836)
------ ----- -------
$4,037 $(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>
Year ended December 31,
----------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Tax provision (benefit) based on federal
statutory rate.......................... 35.0% (35.0)% (35.0)%
Settlement expenses and other............ 9.7% 0.6%
------- -------- --------
Effective tax provision (benefit) rate... 44.7% (34.4)% (35.0)%
======= ======== ========
</TABLE>
F-50
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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>
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 December 31, 1999 and 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.
F-51
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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 End 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.
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.
F-52
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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 of Cole County, Missouri, 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.
On October 29, 1999, the Cole County 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."
F-53
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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 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.
F-54
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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
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.
F-55
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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 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.
F-56
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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 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, 1999, and at subsequent meetings on June 17, September
17, 1999, and November 19, 1999 the BCBSA Board of Directors extended the
licenses until the next scheduled meeting. On March 9, 2000, the Board of
Directors of the BCBSA 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.
F-57
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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.
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.
F-58
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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
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 and the appeals were dismissed 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 Circuit Court of the City of
St. Louis 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.
F-59
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
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.
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 such a judgment is entered, it might be followed by a claim seeking
an injunction against the closing of the reorganization, or money damages, or
both. It could also cause conditions to the closing of the reorganization not
to be fulfilled.
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.
F-60
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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 being implemented. BCBSMo anticipates that
the settlement will be consummated, without material adverse financial effect.
Status of Blue Cross and Blue Shield licenses
On March 11, June 17, September 17, and November 19, 1999, the Board of
Directors of the BCBSA unanimously voted to extend RIT's licenses to use the
Blue Cross and Blue Shield service marks until the next scheduled meeting of
the BCBSA Board of Directors. The extensions on a "board to board" basis
followed the reinstatement by the BCBSA Board of Directors, effective as of
October 29, 1998, of the licenses to use the Blue Cross and Blue Shield service
marks, granted to RIT, BCBSMo, and two wholly owned subsidiaries of RIT, HALIC
and BlueCHOICE (the licensed affiliates). The approval clarified the rights of
RIT and its licensed affiliates to continue uninterrupted the use of the
service marks following actions taken by the BCBSA which resulted from the
October 29 Order. On March 9, 2000, the Board of Directors of the BCBSA
unanimously voted to fully reinstate the licenses so that extensions on a
"board to board" basis would no longer be required.
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 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,
F-61
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
March 11, 1999, and pursuant to extensions, March 9, 2000). 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 9, 2000, the BCBSA Board voted to reinstate the full
license without board to board extensions as a result of the dismissal of the
principal litigation as contemplated by the Amended and Restated Settlement
Agreement described above under "Agreement for Settlement of Certain Litigation
Matters and Reorganization of RIT."
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.
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 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.
F-62
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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, including the claims of its members arising from
health plan benefit coverage issues for certain services under evolving
theories of liability. The financial and operational impact that such evolving
theories of recovery will have on the managed care industry generally, or
BCBSMo in particular, is presently unknown.
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.
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.
F-63
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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 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) (1,785)
------- ------- -------
Net expense allocated to BCBSMo.............. $16,586 $15,245 $11,007
======= ======= =======
</TABLE>
The company provides office space and parking facilities to RIT pursuant to
lease agreements between BCBSMo's real estate subsidiaries and 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 allocated on a
consistent and reasonable basis utilizing membership, groups, claims, and other
key drivers. Corporate identifiable assets for the underwritten and self-funded
F-64
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
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 year ended
December 31, 1999
Revenues........................ $85,393 $17,856 $ 7,498 $110,747
Operating (loss) income......... (1,513) 5,902 2,705 7,094
Non-recurring charges........... 3,905 817 343 5,065
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
<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>
The following table sets forth revenue (in thousands) by product group for
the years ended December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
For the year ended
December 31,
-------------------------
Product Group 1999 1998 1997
------------- -------- -------- -------
<S> <C> <C> <C>
Underwritten:
Federal Employee Program..................... $ 82,153 $ 77,187 $77,473
Other........................................ 3,240 3,485 3,849
-------- -------- -------
Total Premium Revenue...................... 85,393 80,672 81,322
ASO/Self Funded and other fees................. 17,856 13,132 11,232
Other.......................................... 7,498 6,617 5,548
-------- -------- -------
Total revenues............................. $110,747 $100,421 $98,102
======== ======== =======
</TABLE>
F-65
<PAGE>
BLUE CROSS AND BLUE SHIELD OF MISSOURI HISTORICAL CARVE-OUT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(dollars in thousands)
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................... 23,720 28,189 25,202 26,542
Operating income..................... 1,667 409 4,491 527
Investment income, net............... 310 386 535 664
Other (expense) income, net.......... (67) 147 (34) (6)
Income before taxes.................. 1,910 942 4,992 1,185
Provision for income taxes........... 672 330 1,753 1,282
Net income (loss).................... $ 1,238 $ 612 $ 3,239 $ (97)
======= ======= ======= =======
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, net............... 187 149 181 (5,125)
Other (expense) income, net.......... (89) (40) 163 77
Income 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-66
<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-67
<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
Location property spaces Encumbrances Land improvements costs
-------- ------------ --------------- ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1831 Chestnut St. Office 425,057 sq. ft. None $ 1,601 $33,599 $27,381
St. Louis, MO building (1)
1910 Pine St. Office 73,211 sq. ft. None 50 905 2,677
St. Louis, MO building (2)
Chestnut & 20th Parking lots 488 spaces None 3,010 0 1,401
St. Louis, MO (3)
1701 Chestnut St. Parking 860 spaces None 1,364 1,161 6,233
St. Louis, MO garage (4)
Cupples Real estate N/A None 7,300 0 3,284
Properties investment
St. Louis, MO (5)
------- ------- -------
$13,325 $35,665 $40,976
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Gross amount at which
carried at 12/31/99 Date of construction Life on which
-------------------------- ------------------------- depreciation in
Buildings Accumulated Original Latest date latest income
Carrying and building Total depreciation date of of Date statements is
Location costs Land improvements (6) (6) construction renovation acquired computed
-------- -------- ------ ------------ ----- ------------ ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1831 Chestnut St. None $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. None 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 None 3,010 1,401 4,411 954 early 1990's 02/92 10 years for
St. Louis, MO parking lot
improvements
1701 Chestnut St. None 1,364 7,394 8,758 1,400 1930's early 1990's 03/93 30 years
St. Louis, MO
Cupples None 0 0 0 0 1885-1915 02/92 N/A
Properties
St. Louis, MO
------ ------------ ------- ----------
$6,025 $73,357 $79,382 $17,454
====== ============ ======= ==========
</TABLE>
F-68
<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-69
<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-37 and F-67, 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-38-F-40 and pages F-68-F-69 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-70
<PAGE>
RIGHTCHOICE MANAGED CARE, INC. (a Delaware corporation)
BALANCE SHEET
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
March 14, 2000
--------------
<S> <C>
Assets:
Cash............................................................ $ 1
---
Total assets................................................ $ 1
===
Liabilities..................................................... $ 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
---
Total shareholders' equity.................................. 1
---
Total liabilities and shareholders' equity.................. $ 1
===
</TABLE>
See accompanying note to balance sheet.
F-71
<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 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-72
<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-73
<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-3
(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-4
(c) Conversion of Shares................................ A-4
(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-5
Section 1.05. RIT/New RIT Merger Transaction........................... A-5
(a) Structure of Merger................................. A-5
(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-6
(g) Regulatory Approvals................................ A-6
(h) Certificate of Incorporation and Bylaws............. A-6
(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-7
(3) Exchange Procedure for Foundation............... A-7
(4) Distributions With Respect to Unexchanged
Shares.............................................. A-8
(5) Transfers of Ownership.......................... A-8
(6) No Liability.................................... A-8
(7) Lost, Stolen or Destroyed Certificates.......... A-8
(k) Stock Transfer Books................................ A-8
(l) Tax Consequences.................................... A-8
(m) Consummation of Transaction......................... A-8
Section 1.06. Stock Options............................................ A-9
Section 1.07. Closing; Closing Date.................................... A-9
</TABLE>
A-i
<PAGE>
<TABLE>
<C> <C> <S> <C>
ARTICLE II REPRESENTATIONS AND WARRANTIES................................. A-9
Section 2.01. Disclosure Schedule; Standard............................ A-9
(a) Disclosure Schedule................................. A-9
(b) Standard............................................ A-10
Section 2.02. Representations and Warranties of RIT.................... A-10
(a) Corporate Existence and Power....................... A-10
(b) Authorization; No Defaults.......................... A-10
(c) Capitalization...................................... A-11
(d) Financial Information............................... A-11
(e) Reports............................................. A-11
(f) Absence of Changes.................................. A-12
(g) Undisclosed Liabilities............................. A-12
Section 2.03. Representations and Warranties of BCBSMo................. A-12
(a) Authorization; No Defaults.......................... A-12
(b) Capitalization...................................... A-12
(c) Financial Information............................... A-13
(d) Reports............................................. A-13
(e) Absence of Changes.................................. A-13
(f) Undisclosed Liabilities............................. A-13
Section 2.04. Representations and Warranties of New RIT................ A-13
(a) Corporate Existence and Power....................... A-13
(b) Authorization; No Defaults.......................... A-13
(c) Capitalization...................................... A-14
Section 2.05. Representations and Warranties of the Foundation......... A-14
(a) Corporate Existence and Power....................... A-14
(b) Authorization; No Defaults.......................... A-14
ARTICLE III COVENANTS..................................................... A-15
Section 3.01. Pre-Closing Covenants of RIT............................. A-15
(a) Submission to Shareholders.......................... A-15
(b) Consummation of Reorganization...................... A-15
(c) Consents and Approvals.............................. A-15
Section 3.02. Pre-Closing Covenants of BCBSMo.......................... A-15
(a) Agreement to Vote in Favor.......................... A-15
(b) Consummation of Reorganization...................... A-15
(c) Consents and Approvals.............................. A-16
Section 3.03. Pre-Closing Covenants of New RIT......................... A-16
(a) Other Actions....................................... A-16
(b) Consummation of Reorganization...................... A-16
(c) Plans of Merger..................................... A-16
Section 3.04. Pre-Closing Covenants of Foundation...................... A-16
(a) No Sale or Transfer................................. A-16
(b) Agreements to Vote in Favor......................... A-16
(1) Reincorporation Merger Transaction.............. A-16
(2) RIT/New RIT Merger Transaction.................. A-16
(c) Consummation of Reorganization...................... A-16
(d) Tax Opinion......................................... A-17
Section 3.05. Proxy Statement/Prospectus; Registration Statement....... A-17
Section 3.06. Public Announcements..................................... A-17
Section 3.07. Registration Rights Agreement............................ A-17
Section 3.08. Indemnification Agreement................................ A-17
Section 3.09. Voting Trust and Divestiture Agreement................... A-17
</TABLE>
A-ii
<PAGE>
<TABLE>
<C> <C> <S> <C>
Section 3.10. Public Offering.......................................... A-17
Section 3.11. Indemnification and Insurance............................ A-18
Section 3.12. Accountants' Letters..................................... A-18
Section 3.13. Foundation Governance.................................... A-18
Section 3.14. Due Diligence............................................ A-18
Section 3.15. Payment to Foundation.................................... A-18
ARTICLE IV CONDITIONS PRECEDENT TO REORGANIZATION......................... A-19
Section 4.01. Conditions to Reorganization............................. A-19
(a) Injunction.......................................... A-19
(b) Regulatory and Shareholder Approval................. A-19
(c) Effective Registration Statement.................... A-19
(d) Tax Determination................................... A-19
(e) NYSE Listing........................................ A-19
(f) Resolution of Sarkis Litigation..................... A-19
Section 4.02. Conditions to Obligations of BCBSMo...................... A-19
(a) Representations and Warranties...................... A-19
(b) Compliance with Agreements.......................... A-19
(c) Delivery of Documents............................... A-20
(d) Other Consents...................................... A-20
(e) Comfort Letter...................................... A-20
(f) Favorable Ruling.................................... A-20
(g) Tax Opinions........................................ A-20
(h) BCBSMo Board Legal Opinion.......................... A-21
(i) Resolution of Pending Litigation.................... A-21
(j) Legal Opinions...................................... A-21
(k) Confirmation From Attorney General and DOI.......... A-21
Section 4.03. Conditions to Obligations of RIT......................... A-21
(a) Representations and Warranties...................... A-21
(b) Compliance with Agreements.......................... A-22
(c) Delivery of Documents............................... A-22
(d) Other Consents...................................... A-22
(e) Comfort Letter...................................... A-22
(f) Favorable Ruling.................................... A-22
(g) Tax Opinions........................................ A-22
(h) Association Approval................................ A-22
(i) Opinion of Financial Advisor to RIT................. A-23
(j) Confirmation From Attorney General and DOI.......... A-23
(k) Bank Approval....................................... A-23
(l) Legal Opinions...................................... A-23
Section 4.04. Conditions to Obligations of New RIT..................... A-23
(a) Representations and Warranties...................... A-23
(b) Compliance with Agreements.......................... A-23
(c) Delivery of Documents............................... A-23
(d) Comfort Letter...................................... A-23
(e) Legal Opinions...................................... A-23
Section 4.05. Conditions to Obligations of Foundation.................. A-24
(a) Representations and Warranties...................... A-24
(b) Compliance with Agreements.......................... A-24
(c) Delivery of Documents............................... A-24
(d) Other Consents...................................... A-24
(e) Comfort Letter...................................... A-24
(f) Favorable Ruling.................................... A-24
(g) Tax Opinions........................................ A-24
(h) Legal Opinions...................................... A-25
</TABLE>
A-iii
<PAGE>
<TABLE>
<C> <C> <S> <C>
ARTICLE V TERMINATION............. A-25
ARTICLE VI GENERAL PROVISIONS..... A-25
Fees and
Section 6.01. Expenses......... A-25
Nonsurvival of
Representations,
Warranties and
Section 6.02. Agreements....... A-25
Section 6.03. Notices.......... A-26
Section 6.04. Amendment........ A-26
Section 6.05. Waiver........... A-26
Entire
Section 6.06. Agreement........ A-26
Parties in
Section 6.07. Interest......... A-26
Section 6.08. Governing Law.... A-27
Section 6.09. Counterparts..... A-27
Section 6.10. Recitals......... A-27
Fair
Section 6.11. Construction..... A-27
Headings and
Section 6.12. Captions......... A-27
Section 6.13. Assignment....... A-27
</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).
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.
A-1
<PAGE>
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.
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.
A-2
<PAGE>
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 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
A-3
<PAGE>
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.
(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.
A-4
<PAGE>
(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) 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.
A-5
<PAGE>
(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
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.
A-6
<PAGE>
(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.
(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
A-7
<PAGE>
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, 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
A-8
<PAGE>
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 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
A-9
<PAGE>
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 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
A-10
<PAGE>
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 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, 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
A-11
<PAGE>
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, 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).
A-12
<PAGE>
(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 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
A-13
<PAGE>
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 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).
A-14
<PAGE>
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.
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.
A-15
<PAGE>
(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 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.
A-16
<PAGE>
(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 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.
A-17
<PAGE>
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.
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.
A-18
<PAGE>
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;
(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;
A-19
<PAGE>
(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 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
A-20
<PAGE>
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 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);
A-21
<PAGE>
(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;
(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
A-22
<PAGE>
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;
(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.
A-23
<PAGE>
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);
(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
A-24
<PAGE>
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
(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
A-25
<PAGE>
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 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 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).
A-26
<PAGE>
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]
A-27
<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-28
<PAGE>
Appendix B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 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.
B-1
<PAGE>
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;
(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
B-2
<PAGE>
(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;
(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
B-3
<PAGE>
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.
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.
B-4
<PAGE>
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 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.
B-5
<PAGE>
(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 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
B-6
<PAGE>
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
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]
B-7
<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 andChief 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>
B-8
<PAGE>
Appendix C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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:
C-1
<PAGE>
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
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.
C-2
<PAGE>
(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.
(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.
C-3
<PAGE>
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.
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.
C-4
<PAGE>
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 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.
C-5
<PAGE>
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.
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.
C-6
<PAGE>
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 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
C-7
<PAGE>
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 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.
C-8
<PAGE>
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.
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
C-9
<PAGE>
(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 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.
C-10
<PAGE>
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 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]
---------------------------------
---------------------------------
---------------------------------
---------------------------------
C-11
<PAGE>
if to the Trustee: [to be determined by Trustee prior to signing]
---------------------------------
---------------------------------
---------------------------------
---------------------------------
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]
C-12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
RIGHTCHOICE MANAGED CARE, INC., a
Delaware corporation
By:
----------------------------------
Name:
-----------------------------
Title:
------------------------------
THE MISSOURI FOUNDATION FOR HEALTH,
a Missouri corporation
By:
----------------------------------
Name:
-----------------------------
Title:
------------------------------
[TRUSTEE]
By:
----------------------------------
Name:
-----------------------------
Title:
------------------------------
C-13
<PAGE>
EXHIBIT A
Trustee Fee Schedule
C-14
<PAGE>
Appendix D
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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.
(l) "Continuing Option Notice" has the meaning specified in Section
4(a) hereof.
D-1
<PAGE>
(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 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.
D-2
<PAGE>
(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.
(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
D-3
<PAGE>
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.
(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),
D-4
<PAGE>
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 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
D-5
<PAGE>
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 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.
D-6
<PAGE>
(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 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
D-7
<PAGE>
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 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;
D-8
<PAGE>
(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
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;
D-9
<PAGE>
(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 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
D-10
<PAGE>
the Company's subsidiaries to ask questions and to obtain information
reasonably requested by such Inspector and all financial and other records
and other 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 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
D-11
<PAGE>
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 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
D-12
<PAGE>
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 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,
D-13
<PAGE>
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 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,
D-14
<PAGE>
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
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]
_________________________
_________________________
_________________________
D-15
<PAGE>
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.
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]
D-16
<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
By:____________________________________
Name:
Title:
The Missouri Foundation For Health, a
Missouri nonprofit corporation
By:____________________________________
Name:
Title:
D-17
<PAGE>
Appendix E
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
E-1
<PAGE>
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.
(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.
E-2
<PAGE>
(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 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.
E-3
<PAGE>
(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.
(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
E-4
<PAGE>
(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 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
E-5
<PAGE>
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 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.
E-6
<PAGE>
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.
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.
By: _________________________________
Name:
Title:
The Missouri Foundation for Health
By: _________________________________
Name:
Title:
E-7
<PAGE>
Appendix F
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CERTIFICATE OF INCORPORATION
OF
RIGHTCHOICE MANAGED CARE, INC.
a Delaware corporation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 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
F-1
<PAGE>
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 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
F-2
<PAGE>
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.
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
F-3
<PAGE>
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 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.
F-4
<PAGE>
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;
(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);
F-5
<PAGE>
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;
(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:
F-6
<PAGE>
(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:
(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-7
<PAGE>
(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 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.
F-8
<PAGE>
(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.
(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.
F-9
<PAGE>
(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.
(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
F-10
<PAGE>
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.
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.
F-11
<PAGE>
(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.
(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
F-12
<PAGE>
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 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
F-13
<PAGE>
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 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.
F-14
<PAGE>
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.
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 and 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
F-15
<PAGE>
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 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
F-16
<PAGE>
Appendix G
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BYLAWS
OF
RIGHTCHOICE MANAGED CARE, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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-5
ARTICLE IV--OFFICERS....................................................... G-13
ARTICLE V--INDEMNIFICATION................................................. G-16
ARTICLE VI--STOCK.......................................................... G-17
ARTICLE VII--CORPORATE FINANCE............................................. G-19
ARTICLE VIII--GENERAL PROVISIONS........................................... G-19
</TABLE>
G-i
<PAGE>
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 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
G-1
<PAGE>
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.
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
G-2
<PAGE>
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 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
G-3
<PAGE>
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.
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
G-4
<PAGE>
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 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
G-5
<PAGE>
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'
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
G-6
<PAGE>
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 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
G-7
<PAGE>
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 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
G-8
<PAGE>
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.
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.
G-9
<PAGE>
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 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
G-10
<PAGE>
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 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.
G-11
<PAGE>
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 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.
G-12
<PAGE>
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 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
G-13
<PAGE>
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.
(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.
G-14
<PAGE>
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 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.
G-15
<PAGE>
(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.
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.
G-16
<PAGE>
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 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
G-17
<PAGE>
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 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.
G-18
<PAGE>
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 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
G-19
<PAGE>
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.
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.
G-20
<PAGE>
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 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.
H-1
<PAGE>
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 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.
H-2
<PAGE>
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Class A change 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.
I-1
<PAGE>
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.
II-1
<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 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) Form of 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);
(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**;
(24) Powers of Attorney (included on signature page);
(27) Financial Data Schedule;
(99)(a) Consent of Warburg Dillon Read LLC.
</TABLE>
(b) No financial statement schedules are required to be filed herewith
pursuant to Item 21(b) or (c) of this Form.
- --------
*Signed version to be filed by pre-effective amendment.
**To be filed by pre-effective amendment.
II-2
<PAGE>
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;
(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.
II-3
<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.
II-4
<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 April 10, 2000.
RIGHTCHOICE MANAGED CARE, INC.,
a Delaware corporation
/s/ John A. O'Rourke
By: _________________________________
John A. O'Rourke,
Chairman of the Board and
President
Each individual whose signature appears below hereby designates and appoints
John A. O'Rourke, Sandra A. Van Trease and Angela F. Braly, and each of them,
any one of whom may act without the joinder of the other, as such person's true
and lawful attorney-in-fact and agents (the "Attorneys-in-Fact") with full
power of substitution and re-substitution, for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, which amendments may make changes in this Registration Statement as
either Attorney-in-Fact deems appropriate, and registration statements relating
to the same offering filed pursuant to Rule 462(b) under the Securities Act of
1933 and requests to accelerate the effectiveness of such registration
statements, and to file each such amendment with all exhibits thereto, and all
documents in connection therewith, the Securities and Exchange Commission,
granting unto such Attorneys-in-Fact and each of them, full power and authority
to do and perform each and every act and things requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as such
person might or could do in person, hereby ratifying and confirming all that
such Attorneys-in-Fact or either of them, or their substitution or substitutes,
may lawfully do or cause to be done by virtue hereof.
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 April 10, 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>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit
------ -------
<C> <S>
(2) Agreement and Plan of Reorganization, dated 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) Form of 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);
(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**;
(24) Powers of Attorney (included on signature page);
(27) Financial Data Schedule;
(99)(a) Consent of Warburg Dillon Read LLC.
</TABLE>
- --------
*Signed version to be filed by pre-effective amendment.
**To be filed by pre-effective amendment.
<PAGE>
EXHIBIT 5
LEWIS, RICE & FINGERSH, L.C.
ATTORNEYS AT LAW
500 N. BROADWAY, SUITE 2000
ST. LOUIS, MISSOURI 63102-2147
TEL (314) 444-7600 WWW.LRF.COM FAX (314) 241-6056
April 10, 2000
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, Missouri 63103
Re: Registration Statement on Form S-4
Ladies & Gentlemen:
You have requested our opinion regarding the issuance of up to 20,233,380
shares of the common stock, par value $0.01 per share (the "Common Stock"), of
RightCHOICE Managed Care, Inc., a Delaware corporation (the "Company") in
connection with a certain Registration Statement on Form S-4 (the "Registration
Statement") filed by the Company with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder. The Common Stock is to be issued by the
Company pursuant to the terms of the Agreement and Plan of Reorganization (the
"Reorganization Agreement"), dated as of March 14, 2000, among the Company,
Blue Cross and Blue Shield of Missouri, a Missouri nonprofit health services
corporation, RightCHOICE Managed Care, Inc., a Missouri corporation, and The
Missouri Foundation For Health, a Missouri nonprofit public benefit
corporation.
In rendering this opinion, we have examined such corporate records and other
documents, and reviewed such matters of law as we have deemed necessary or
appropriate to render this opinion.
Based upon the foregoing, we are of the opinion that the Common Stock has
been duly authorized and, when the Registration Statement has been declared
effective by order of the Securities and Exchange Commission and the Common
Stock has been issued and paid for upon the terms and conditions set forth in
the Registration Statement and the Reorganization Agreement, the Common Stock
will be validly issued, fully paid and non-assessable.
We consent to being named in the Registration Statement and in the related
proxy statement--prospectus as the attorneys who passed upon the legality of
the Common Stock, and to the filing of a copy of this opinion as an Exhibit to
the Registration Statement.
Very truly yours,
LEWIS, RICE & FINGERSH, L.C.
/s/ Lewis, Rice & Fingersh, L.C.
ST. LOUIS, MISSOURI . KANSAS CITY, MISSOURI . ST. LOUIS COUNTY .
WASHINGTON, MISSOURI . BELLEVILLE, ILLINOIS . LEAWOOD, KANSAS
<PAGE>
EXHIBIT 8
PRICEWATERHOUSECOOPERS [LOGO]
[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP]
Form of Opinion
The issuance of this opinion is contingent upon the delivery of the
representation letters attached as Exhibits A and B and the delivery of the
Missouri Attorney General's letter referred to in assumption viii on Page 6 of
this opinion.
Mr. John A. O'Rourke
President & CEO
Blue Cross Blue Shield of Missouri
1831 Chestnut Street
St. Louis, MO 63103
Mr. John A. O'Rourke
Chairman, President & CEO
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, MO 63103
The Missouri Foundation For Health
c/o Mr. Paul C. Wilson, Chairperson
221 West High Street
Jefferson City, MO 65101
__________, 2000
Subject: BCBSMo Settlement Agreement and Plan of Reorganization
Ladies and Gentlemen:
You have requested the opinion of PricewaterhouseCoopers, LLP ("PwC") regarding
certain material United States federal income tax consequences of a series of
transactions that will be consummated pursuant to the Amended and Restated
Settlement Agreement dated January 6, 2000 (the "Settlement Agreement"), by and
among, the Attorney General of the State of
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
Missouri, The Missouri Department of Insurance, Blue Cross and Blue Shield of
Missouri, a Missouri nonprofit public benefit corporation ("BCBSMo") and
RightCHOICE Managed Care, Inc., a Missouri corporation ("RIT"), and the
Agreement and Plan of Reorganization (the "Plan") dated as of March 14, 2000,
signed in connection with the Settlement Agreement by and among BCBSMo, RIT, The
Missouri Foundation For Health, a Missouri nonprofit public benefit corporation
(the "Foundation"), and RightCHOICE Managed Care, Inc., a Delaware corporation
("New RIT").
Section I of this letter (the "Tax Opinion Letter") contains the facts and
assumptions upon which the opinions are based. Section II of this Tax Opinion
Letter contains PwC's opinions. Section III of the Tax Opinion Letter contains
limitations on the opinions. All capitalized terms, unless otherwise specified,
have the meanings assigned to them in the Settlement Agreement and Plan.
I. FACTS & ASSUMPTIONS
BCBSMo is a Missouri nonprofit non-stock public benefit health services
corporation. RIT is a Missouri general business corporation. In 1994, BCBSMo
transferred assets and liabilities to RIT in exchange for stock in RIT, and a
minority interest in RIT was sold by RIT in a public stock offering.
RIT has two classes of stock outstanding: Class A voting common stock and Class
B super-voting common stock. BCBSMo owns all of the outstanding Class B stock,
representing approximately 80.1% of the value and 97.6% of the vote of RIT
stock. The outstanding Class A stock represents approximately 19.9% of the
value and 2.4% of the vote of all outstanding RIT stock and is held
predominantly by shareholders other than BCBSMo (the "RIT Public Shareholders").
RIT owns all the outstanding stock of Healthy Alliance Life Insurance Co., a
Missouri corporation ("HALIC").
BCBSMo filed a lawsuit against the Missouri Attorney General and the Director of
the Missouri Department of Insurance to obtain a judicial declaration that the
1994 reorganization was lawful and asking for an injunction preventing the
Missouri Department of Insurance from refusing to renew BCBSMo's certificate of
authority to engage in the health insurance business or taking any other action
against it to force it into paying a "toll charge" or
(2)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
"charitable asset assessment" or any other fee as a result of the 1994
reorganization./1/ The Attorney General and the Director contested BCBSMo's
assertion and filed answers and counterclaims.
The parties agreed to settle the lawsuit. The terms of the settlement are set
forth in the Settlement Agreement. Pursuant to the Settlement Agreement, the
following transactions have been or will be consummated:
1. Transfer and Assumption Transaction: BCBSMo shall transfer certain
---------------------------------------
assets, liabilities, contracts, and agreements to HALIC with an aggregate
value equal to the sum of (i) 100% of the estimated policy liabilities, and
(ii) an amount, if any, necessary for HALIC to meet reserve requirements.
2. Charter Conversion Transaction: BCBSMo shall amend its Articles of
----------------------------------
Incorporation to convert from a Missouri nonprofit non-stock public benefit
corporation to a Missouri for-profit stock corporation ("New BCBSMo"). In the
Charter Conversion Transaction, New BCBSMo will issue one share of stock to
the Foundation, which then shall be the sole shareholder of New BCBSMo. On
January 6, 2000, the Missouri Attorney General and Missouri Department of
Insurance caused the Foundation to be created as a new Missouri not-for-profit
public benefit corporation. On March 14, 2000, the Foundation incorporated
New RIT in Delaware, and New RIT issued one share of stock to the Foundation
(the "Prime New RIT Share"), which is, and at all times prior to the
Reorganization (defined below) will remain, the sole shareholder of New RIT.
The Foundation will apply to the Internal Revenue Service ("IRS") for a
determination that it is exempt from federal income tax as a social welfare
organization under Section 501(c)(4)./2/
3. Reincorporation Merger Transaction: New BCBSMo shall be reincorporated
--------------------------------------
under the corporate laws of the State of Delaware by means of a merger of New
BCBSMo with and into New RIT in accordance with Missouri and Delaware
corporate law, with New RIT
______________________
/1/ Blue Cross and Blue Shield of Missouri vs. Jay Angoff, in his official
capacity as the Director of the Missouri Department of Insurance, and the
Missouri Department of Insurance, and Jeremiah W. (Jay) Nixon, in his official
capacity as the Attorney General of the State of Missouri, in the Circuit Court
of Cole County, Missouri, Case No. CV196-619CC, Division 1.
/2/ All Section references are to the Internal Revenue Code of 1986, as amended
(the "Code").
(3)
<PAGE>
surviving (still as a wholly-owned subsidiary of the Foundation). In the
Reincorporation Merger Transaction, the Prime New RIT Share owned by the
Foundation shall remain issued and outstanding, and the share of New BCBSMo
stock owned by the Foundation will be canceled. New BCBSMo's directors and
officers will resign, and New RIT's directors and officers will continue. The
Foundation waives any right it may have to dissent to this merger.
4. RIT/New RIT Merger Transaction: RIT shall merge upstream into New RIT in
----------------------------------
accordance with Missouri and Delaware corporate law, with New RIT surviving.
Each outstanding share of RIT Class A stock, other than shares for which
dissenter's rights have been perfected, will be converted into one share of
New RIT stock. All outstanding RIT Class B stock, and any RIT stock held as
treasury shares, will be cancelled. The Prime New RIT Share held by the
Foundation will be converted into the right to receive a number of shares of
New RIT stock equal to the number of RIT Class B shares outstanding prior to
the merger. As a result, New RIT will not issue to any party either fractional
shares of New RIT stock, or cash in lieu of fractional shares of New RIT
stock. Outstanding options for RIT Class A stock will be converted into
options for an equal number of shares of New RIT stock. Under the Plan, the
Foundation will have the right to receive the New RIT stock issued in the
RIT/New RIT Merger Transaction. The Foundation has authorized and directed New
RIT to issue all but 4.99% of the shares of New RIT stock issuable in exchange
for the one outstanding share of New RIT stock held by the Foundation directly
to the trustee of a voting trust (the "Voting Trust") as designated by the
Voting Trust and Divestiture Agreement (in the form attached as Exhibit L to
the Plan) to be signed at Closing.
5. Disposition of the Foundation's Interest in New RIT: Pursuant to the
-------------------------------------------------------
terms of the Plan, all but 4.99% of the shares of New RIT owned by the
Foundation will be transferred to the Voting Trust, and all of the shares of
New RIT held by the Foundation and the Voting Trust will be liquidated
pursuant to the Voting Trust and Divestiture Agreement with the proceeds
applied to the purposes stated in the Foundation's charter documents. After
the Reorganization (as defined below), New RIT 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. The Board of Directors of the Foundation independently will decide
whether to accept or reject any offer to acquire the
(4)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
stock of New RIT. No member of the Board of Directors of the Foundation will
be an officer, agent, employee, director, or independent contractor of New
RIT, or any governmental authority.
6. Payment for Public Purpose: On the Closing Date, but prior to and
------------------------------
separate from the implementation of the Reorganization (as defined below),
BCBSMo will pay to the Foundation the amount of $12,780,000 in partial
satisfaction of claims by various parties that BCBSMo has a public purpose
obligation, which amount is to be used by the Foundation to carry out its
stated purpose.
7. Payment in Satisfaction of Obligations. After consummation of the
------------------------------------------
Reorganization (as defined below), New RIT will pay to the Foundation
$175,000 in partial satisfaction of any obligation of BCBSMo under the
Charter Conversion Transaction.
The Transfer and Assumption Transaction, Charter Conversion Transaction,
Reincorporation Merger Transaction, and RIT/New RIT Merger Transaction are
collectively referred to as the "Reorganization."
In rendering the PwC opinions in Section II, below, PwC has assumed the
following material facts and conclusions:
(i) The Reorganization will be consummated in accordance with the Plan
(including satisfaction of all material covenants and conditions to the
obligations of the parties without amendment or waiver thereof in any
respect prior to the Closing, except the waiver of the following
conditions precedent to the Reorganization, as described in Article IV of
the Plan, shall not be considered material for purposes of this
assumption: 4.01(e) NYSE Listing; 4.02(e) Comfort Letter; 4.03(e) Comfort
Letter; 4.04(d) Comfort Letter; 4.05(e) Comfort Letter; 4.02(f) Favorable
Ruling; 4.03(f) Favorable Ruling; and 4.05(f) Favorable Ruling).
(ii) Each of BCBSMo, New BCBSMo, RIT, New RIT, the Foundation, and HALIC will
comply with all necessary reporting obligations with respect to the
Reorganization required under the Code, and the Treasury regulations
promulgated thereunder (the
(5)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
"Regulations").
(iii) The Plan and all other documents and instruments referred to therein are
valid and binding in accordance with their terms.
(iv) All statements and representations in the representation letters to PwC
from BCBSMo and RIT dated April __, 2000 and from the Foundation dated
April __, 2000, are true and correct.
(v) The value of the assets, contracts, and agreements transferred by BCBSMo
to HALIC in the Transfer and Assumption Transaction (net of liabilities
assumed by HALIC in that transaction) is zero.
(vi) At the time of the Charter Conversion Transaction, the Foundation will
have received from the IRS a determination letter that it is a tax exempt
entity under Section 501(c)(4).
(vii) BCBSMo is a nonprofit public benefit corporation, and for Missouri law
purposes, will be the same legal entity before and immediately after the
Charter Conversion Transaction.
(viii) At the time of the Charter Conversion Transaction, BCBSMo will have
received from the Missouri Attorney General a letter stating that BCBSMo
is a nonprofit public benefit corporation.
(ix) The Foundation will not sell New RIT stock "in connection with" the
Reincorporation Merger Transaction to any "related person" as those terms
are defined in Treas. Reg. Section 1.368-1(e)(2) and (3).
(x) The Voting Trust was formed for, and its activities will be limited to,
the exercise of the voting power of the New RIT stock transferred to it,
and the Voting Trust will not be taxable as an association.
(6)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
(xi) The RIT Public Shareholders did not participate in the negotiation of
either the Settlement Agreement or the Plan.
(xii) The Payment for Public Purpose is independent from, and does not
represent consideration in, the Reorganization.
II. OPINION
Based upon and subject to the foregoing material facts and assumptions, as well
as the limitations set forth below, our opinions, under presently applicable
United States federal income tax law, are as follows:
1. BCBSMo, RIT, HALIC, New RIT, the Foundation, the current RIT Public
Shareholders , and the recipients of New RIT common stock in the RIT/New RIT
Merger Transaction will not recognize gain or loss pursuant to the Transfer
and Assumption Transaction, except that BCBSMo could recognize gain to the
extent its basis in any asset transferred differs from its fair value on the
date of transfer. However, the gain would be deferred. Section 1.1502-13 of
the Regulations.
The foregoing opinion contains a qualification and is also based upon a crucial
assumption. The crucial assumption is (v) above.
If Assumption (v) is Correct
- ----------------------------
If assumption (v) is correct, no gain or loss will be recognized by the RIT
Public Shareholders pursuant to the Transfer and Assumption Transaction, and
BCBSMo will recognize gain pursuant to the Transfer and Assumption Transaction
only if (i) the basis of any asset transferred differs from its fair market
value on the date of transfer and (ii) the transfer does not qualify as (a) an
exchange under Section 351 or (b) a capital contribution which is treated as
tax-free to the contributing shareholder.
(7)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
With regard to Section 351, because BCBSMo receives no stock from RIT or HALIC
and because BCBSMo does not own all of the stock of RIT, the IRS could argue
that Section 351 does not apply. BCBSMo could argue that Section 351 applies
because (S) 1.1502-34 of the Regulations generally allows stock ownership of all
members of a consolidated group to be included when determining whether the
control requirement of Section 351 is met./3/ However, because there is no
authority applying (S) 1.1502-34 of the Regulations in the present context, we
are unable to issue an opinion with regard to whether Section 351 will apply.
Nevertheless, even if BCBSMo is deemed to recognize gain because its basis in
any asset transferred differs from its fair value on the date of transfer in the
Transfer and Assumption Transaction, under (S) 1.1502-13 of the Regulations,
recognition of such gain would be deferred until the occurrence of certain
events such as BCBSMo (or its successor, New RIT), HALIC or the transferred
assets leaving the consolidated return group.
If Section 351 does not apply, it may be argued that no taxable gain should be
recognized by BCBSMo because the Transfer and Assumption Transaction should be
treated as a contribution to capital which would be tax free to the contributing
shareholder and the transferee corporation./4/ The argument would be that the
contribution of assets and liabilities by BCBSMo to HALIC should be
characterized as a series of contributions to capital. The first contribution
would be a contribution from BCBSMo to RIT. The second capital contribution
would be from RIT to HALIC. This second deemed capital contribution would be
from a parent to its wholly owned subsidiary and no gain or loss would be
recognized by RIT or HALIC. Again, because BCBSMo does not own all of the stock
of RIT, and because there is no authority applying the capital contribution
analysis in this context, we are unable to issue an opinion with regard to
whether the transaction will be treated as a tax-free contribution to capital.
As stated above, if BCBSMo is deemed to recognize gain in the Transfer and
Assumption Transaction, it will be deferred.
If the Assumption (v) is Incorrect and the Value of the Transferred Assets
- --------------------------------------------------------------------------
Exceeds Liabilities Transferred
- -------------------------------
____________________
/3/ Rev. Rul. 89-46, 1989-1 C.B. 272 (which provides that, under certain
circumstances, a transfer of assets between members of a consolidated group can
qualify under Section 351 even though no shares of the transferee corporation
are issued in the exchange).
/4/ CIR v. Fink, 483 U.S. 89 (1987); Section 118.
(8)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
If the Assumption (v) is incorrect and the value of the transferred assets
exceeds liabilities transferred, then the IRS could argue that Section 351 does
not apply because BCBSMo does not own all of the stock of RIT, and therefore
BCBSMo should have received additional shares of RIT or shares of HALIC to
reflect the transfer.
If assumption (v) is incorrect and Section 351 does not apply, it may be argued
that no taxable gain or income should be recognized by BCBSMo or the RIT Public
Shareholders because the Transfer and Assumption Transaction should be treated
as a contribution to capital which would be tax free to the contributing
shareholder and the transferee corporation, for the same reasons set forth
above. As a result of the first contribution described above, the RIT Public
Shareholders could be treated by the IRS as receiving an increase in value of
their ownership interest in RIT. However, if the capital contribution was in
the ordinary course of business, not bargained for by the RIT Public
Shareholders, and not mutual consideration to the RIT Public Shareholders of any
kind, it could be concluded that no gain should be recognized by the RIT Public
Shareholders./5/
If the assumption is incorrect and the Transfer and Assumption Transaction is
not treated as a contribution to capital which is tax free to BCBSMo and the RIT
Public Shareholders, as discussed in the immediately preceding paragraph, then
even if Section 351 does apply to the Transfer and Assumption Transaction,
BCBSMo and the RIT Public Shareholders may recognize taxable gain or income.
When stock issued (or deemed issued) in a Section 351 transaction is received by
shareholders in disproportion to their interests, the entire transaction is
given a tax effect in accordance with its true nature./6/ In the instant
transaction, the IRS may attempt to recharacterize the transaction as a
contribution from BCBSMo to HALIC in return for stock of HALIC in a transaction
qualifying under Section 351, but in order to account for BCBSMo's less than
100% ownership interest in RIT, it could treat the stock that is deemed
transferred from HALIC to BCBSMo as being transferred to the RIT Public
Shareholders by BCBSMo in proportion to their 19.9% ownership interest in RIT.
Such a deemed transfer could be treated as a gift (which would not result in
income tax), or as compensation or an amount paid to satisfy an obligation,
either of which would result in taxable income or gain to
___________________
/5/ CIR v. Fink, 483 U.S. 89 (1987); Treas. Reg. 1.351-1(b)(1). See PLR 9836004
(Sept. 4, 1998). PLRs are not precedential authority but indicate how the IRS
has treated another transaction with similar facts.
/6/ Treas. Reg. 1.351-1(b)(1).
(9)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
the RIT Public Shareholders and BCBSMo./7/ However, because the RIT Class A
stock is publicly traded, and if (i) the RIT Public Shareholders did not
participate in the negotiation of either the Settlement Agreement or the Plan
and (ii) the RIT Public Shareholders did not receive mutual consideration of any
kind for any increased value in the RIT Class A shares, the parties could argue
that the Transfer and Assumption Transaction should not be taxable./8/ Again, we
are unable to opine as to whether this argument would prevail.
2. The Charter Conversion Transaction should be treated as a recapitalization
under Section 368(a)(1)(E).
3. The Foundation should not recognize gain or loss in the Charter Conversion
Transaction. Section 354.
4. Neither BCBSMo nor New BCBSMo will recognize gain or loss in the Charter
Conversion Transaction. Section 1032.
5. The Reincorporation Merger Transaction will qualify as a reorganization
under Section 368(a).
6. New BCBSMo, New RIT, and the Foundation will not recognize gain or loss in
the Reincorporation Merger Transaction. Sections 361, 1032 and 354.
7. The tax basis of the New BCBSMo assets received by New RIT in the
Reincorporation Merger Transaction will be the same as the tax basis of
those assets in the hands of New BCBSMo. Section 362(b).
8. The holding period of the New BCBSMo assets received by New RIT in the
Reincorporation Merger Transaction will include the holding period for
those assets in the hands of New BCBSMo. Section 1223(2).
9. The RIT/New RIT Merger Transaction will qualify as a reorganization under
Section 368(a) and also will be a liquidation under Sections 332 and 337.
__________________
/7/ BCBSMo would recognized taxable gain if the value of the RIT or HALIC stock
transferred (or deemed transferred) to the RIT Class A shareholders exceeds
BCBSMo's basis in that stock.
/8/ See Treas. Reg. Section 1.351-1(b)(1); Rev. Rul. 76-454, 1976-2 C.B. 102
(non-pro rata Section 351 exchange); Rev. Rul. 73-233, 1973-1 C.B. 179 (majority
shareholder contributed shares to the corporation to induce the minority
shareholders to participate in the merger); Rev. Rul. 79-10, 1979-1 C.B. 140
(non-pro rata liquidation).
(10)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
10. RIT will not recognize gain or loss on the transfer of all of its assets
and liabilities to New RIT in the RIT/New RIT Merger Transaction. Sections
337(a), 357(a), and 361(a).
11. No gain or loss will be recognized by New RIT on the receipt of property
distributed in complete liquidation of RIT in the RIT/New RIT Merger
Transaction. Sections 332(a) and 1032.
12. The shareholders of RIT Class A stock will not recognize gain or loss upon
the exchange of RIT Class A stock solely for New RIT stock in the RIT/New
RIT Merger Transaction. Section 354(a).
13. The aggregate tax basis of the New RIT stock received by the shareholders
of the RIT Class A stock in the RIT/New RIT Merger Transaction will equal
the aggregate basis of the respective RIT Class A stock exchanged therefor,
reduced by any amount allocable to any fractional share interest, if any,
for which cash is received. Section 358.
14. Provided that the RIT Class A stock is held by a holder as a capital asset
at the RIT/New RIT Merger Effective Time, the holding period of the New RIT
stock received by the holder of the RIT Class A stock in the RIT/New RIT
Merger Transaction will include the holding period of the RIT Class A
stock. Section 1223.
15. The Foundation will not recognize gain or loss in the RIT/New RIT Merger
Transaction.
16. The aggregate tax basis of the New RIT stock received by the Foundation in
the RIT/New RIT Merger Transaction will equal the aggregate basis of the
Prime New RIT Share exchanged therefor. Section 358.
17. Provided that the Prime New RIT Share is held by the Foundation as a
capital asset at the RIT/New RIT Merger Effective Time, the holding period
of the New RIT stock received by the Foundation in the RIT/New RIT Merger
Transaction will include the holding period of the Prime New RIT Share.
Section 1223.
18. No gain or loss will be recognized pursuant to Section 337(b)(2) or Section
337(d) by BCBSMo, New BCBSMo, RIT, New RIT, the shareholders of any of the
foregoing entities, or the Foundation in the Reorganization.
19. The tax basis of the RIT assets received by New RIT in the RIT/New RIT
Merger Transaction will be the same as the tax basis of those assets in the
hands of RIT. Section 362(b).
(11)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
20. The holding period of the RIT assets received by New RIT in the RIT/New RIT
Merger Transaction will include the holding period for those assets in the
hands of RIT. Section 1223(2).
III. LIMITATIONS
1. In rendering our opinions, we have considered applicable provisions of
the Code, the Regulations, pertinent judicial authorities, rulings of the IRS
and such other tax authorities in effect as of the date of this letter as we
considered relevant. It should be noted that such tax authorities are subject
to change at any time and, in some circumstances, with retroactive affect. A
material change in any of the authorities upon which our opinion is based could
adversely affect our opinions. PwC assumes no obligation to update or modify
the Tax Opinion Letter to reflect any developments that occur after the date of
the Tax Opinion Letter.
2. The opinions set forth in Section II are based on the accuracy and
completeness of the representation letters of BCBSMo and RIT dated April __,
2000 and the Foundation dated April, __, 2000, attached hereto as Exhibits A,
and B, as well as the information, documents, facts and assumptions that we have
included or referenced in the Tax Opinion Letter.
3. The opinions set forth in Section II are not binding on the IRS or the
courts, and there can be no assurance that the IRS or a court of competent
jurisdiction will not disagree with such opinions.
4. In connection with the opinions set forth in Section II, PwC read
copies or originals, certified or otherwise identified, of such documents and
records as it has deemed necessary or appropriate for purposes of the opinions
set forth in Section II, including the following:
a. The Settlement Agreement
b. Articles of Incorporation of The Missouri Foundation For Health, a
Missouri nonprofit public benefit corporation, as filed with the
Missouri Secretary of State on January 6, 2000.
(12)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
c. Bylaws of The Missouri Foundation For Health, a Missouri nonprofit
public benefit corporation, as adopted by the board of the Foundation
on March 13, 2000.
d. Form of Articles of Incorporation of New BCBSMo attached as Exhibit C
to the Plan.
e. Certificate of Incorporation of New RIT filed with the Secretary of
State of Delaware on March 14, 2000.
f. Bylaws of New RIT as adopted by the Board of New RIT on March 14,
2000.
g. The Plan.
h. Assumption Reinsurance Agreement between BCBSMo and HALIC dated March
14, 2000.
i. List of Policy Types attached as Exhibit A to the Assumption
Reinsurance Agreement.
j. Form of Novation Agreement attached as Exhibit B to the Assumption
Reinsurance Agreement.
k. Form of Plan Participation Agreement - BCBSMo attached as Exhibit C to
the Assumption Reinsurance Agreement.
l. Form of Plan Participation Agreement - HALIC attached as Exhibit D to
the Assumption Reinsurance Agreement.
m. Form of Policyholder Notice attached as Exhibit E to the Assumption
Reinsurance Agreement.
n. Form of Certificate of Assumption attached as Exhibit F to the
Assumption Reinsurance Agreement.
o. Form of Assignment and Assumption Agreement attached as Exhibit G to
the Assumption Reinsurance Agreement.
p. Form of Bylaws of New BCBSMo attached as Exhibit D to the Plan.
q. Intercompany Liabilities attached as Exhibit E to the Plan.
(13)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
r. Form of Foundation Reincorporation Merger Resolution for New RIT
attached as Exhibit H to the Plan.
s. Form of Foundation Reincorporation Merger Resolution for New BCBSMo
attached as Exhibit H to the Plan.
t. Form of Foundation RIT/New RIT Merger Resolution attached as Exhibit I
to the Plan.
u. Form of Registration Rights Agreement by and between New RIT and the
Foundation attached as Exhibit J to the Plan.
v. Form of Indemnification Agreement by and between New RIT and the
Foundation attached as Exhibit K to the Plan.
w. Form of Voting Trust and Divestiture Agreement by and among New RIT,
the Foundation, and a to be named trustee, attached as Exhibit L to
the Plan.
x. The Registration Statement on Form S-4 of New RIT (which includes the
proxy statement of RIT and prospectus of New RIT) filed with the
Securities and Exchange Commission on ________, 2000.
PwC has assumed (without independent verification) that all signatures on all
documents presented to it are genuine, that all documents submitted to it as
originals are accurate originals thereof, that all information submitted to it
was accurate and complete, and that all persons executing and delivering
originals or copies of documents examined by it were competent to execute and
deliver such documents.
5. PwC is expressing its opinions only as to the matters expressly set
forth in Section II. No opinion should be inferred as to any other matters.
Specifically, no opinion is offered about the tax treatment of the Payment for
Public Purpose pursuant to which BCBSMo will pay to the Foundation the amount of
$12,780,000 in partial satisfaction of claims by various parties, the $175,000
payment by New RIT in partial satisfaction of any obligation of BCBSMo resulting
from the Charter Conversion Transaction, or the $50,000 payment by BCBSMo to the
Foundation for the reimbursement of Foundation nominating committee expenses.
Also, no opinion is expressed as to the tax consequences of any of the
transactions under any United States state or local tax law, or any non-United
States tax law.
(14)
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
Blue Cross Blue Shield of Missouri
RightCHOICE Managed Care, Inc.
The Missouri Foundation For Health
__________, 2000
6. Any inaccuracy in, or breach of, any of the aforementioned statements,
representations, and assumptions, could adversely affect our opinion. No ruling
has been (or will be) sought from the IRS by BCBSMo, New BCBSMo, RIT, New RIT,
the Foundation, HALIC or any of their affiliates as to the United States federal
income tax consequences of any aspect of the Plan, except BCBSMo has sought a
ruling from the IRS regarding (i) whether the Transfer and Assumption
Transaction qualifies as a tax-free transaction, and (ii) whether the Charter
Conversion Transaction qualifies as a reorganization defined under Section
368(a).
PwC hereby consents to the filing of this Tax Opinion Letter as an exhibit to
the Registration Statement and to the reference to this Tax Opinion Letter in
the Prospectus/Proxy Statement that forms a part of the Registration Statement.
Very truly yours,
Enclosures
(15)
<PAGE>
EXHIBIT A
[BCBSMo/RIT Letterhead]
__________, 2000
PricewaterhouseCoopers LLP
800 Market Street
18/th/ Floor
St. Louis, MO 63101
Re: BCBSMo Settlement Agreement and Plan of Reorganization
You have been requested to render opinions regarding certain material United
States federal income tax consequences of a series of transactions (the
"Reorganization") that will be consummated pursuant to the Amended and Restated
Settlement Agreement dated January 6, 2000, (the "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, a Missouri nonprofit public
benefit corporation ("BCBSMo") and RightCHOICE Managed Care, Inc., a Missouri
corporation ("RIT"), and the Agreement and Plan of Reorganization (the "Plan")
dated as of March 14, 2000, signed in connection with the Settlement Agreement
by and among BCBSMo, RIT, The Missouri Foundation For Health, a Missouri
nonprofit public benefit corporation (the "Foundation"), and RightCHOICE Managed
Care, Inc., a Delaware corporation ("New RIT").
In connection with the Reorganization, and recognizing that you will rely upon
this certificate and a certificate issued by the Foundation in rendering your
opinions, each of the undersigned, officers of BCBSMo and RIT, respectively,
after due inquiry and investigation, hereby certify the following
representations as of the date hereof and as of the Closing. We understand that
you will reaffirm your opinions at the time of the Closing and that, in
connection with such reaffirmation, you will require that we reaffirm this
certification as of that time.
Unless otherwise noted, all capitalized terms have the meanings set forth in the
Settlement Agreement and Plan.
General representations:
- -----------------------
(1)
<PAGE>
1. The facts relating to the Reorganization as described in the Plan and the
draft of the tax opinion letter dated __________, 2000, are true and
correct in all material respects, and, insofar as such facts pertain to
BCBSMo, New BCBSMo, or RIT, the undersigned has no reason to believe that
such facts are not true and correct in all material respects.
2. The Reorganization is being undertaken for the following business reasons:
(a) to resolve the litigation with the Missouri Attorney General and the
Missouri Department of Insurance, and (b) to enhance shareholder value by
(i) combining the business operations of RIT and BCBSMo, (ii) 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; (iii) creating efficiencies by eliminating duplicative expenses;
(iv) improving the public image of the resulting company by establishing a
large public benefit foundation; and (v) improving relations with Missouri
regulatory officials by resolving the litigation.
3. Upon completion of the Closing, none of BCBSMo, New BCBSMo, or New RIT will
have entered into negotiations to sell or otherwise transfer the New RIT
stock issued to the Foundation.
4. The Transfer and Assumption Transaction, the Charter Conversion
Transaction, the Reincorporation Merger Transaction, and the RIT/New RIT
Merger Transaction are all being undertaken pursuant to the Settlement
Agreement.
Representations related to the Charter Conversion Transaction:
- -------------------------------------------------------------
1. New BCBSMo will pay its own expenses in connection with the Charter
Conversion Transaction and will not pay the expenses of any other person
incurred in connection with the Charter Conversion Transaction.
2. The fair market value of the New BCBSMo stock issued by New BCBSMo to the
Foundation in the Charter Conversion Transaction in exchange for the deemed
ownership interest of the Foundation in BCBSMo approximately equals the
fair market value of the deemed ownership interest of the Foundation in
BCBSMo surrendered in exchange therefor.
3. At the Charter Conversion Effective Time, New BCBSMo will not be under the
jurisdiction of a court in a Title 11 or similar case within the meaning of
Section 368(a)(3)(A) of the Code./1/
4. At the Charter Conversion Effective Time, neither New BCBSMo, HALIC, nor
RIT will have a plan to redeem or otherwise acquire any of the stock issued
in the proposed Charter Conversion Transaction.
_________________
/1/ All Section references are to the Internal Revenue Code of 1986, as amended.
(2)
<PAGE>
5. At the Charter Conversion Effective Time, New BCBSMo will not have
outstanding any stock options, warrants, convertible securities or any
other right that is convertible into any class of stock or securities of
New BCBSMo.
6. After the Charter Conversion Effective Time, New BCBSMo and its affiliated
subsidiaries will continue to conduct the business operations that BCBSMo
and its affiliated subsidiaries conducted immediately prior to the Charter
Conversion Effective Time.
7. The Charter Conversion Transaction will not result in the issuance of any
fractional share interests in New BCBSMo.
8. The Charter Conversion Transaction is not part of a plan to periodically
increase the proportionate interest of any person or deemed shareholder in
the assets or earnings and profits of BCBSMo.
9. The Foundation will not receive any property other than New BCBSMo common
stock in the Charter Conversion Transaction.
10. Immediately after the Charter Conversion Transaction and prior to the
Reincorporation Merger Transaction, New BCBSMo will continue to own
substantially all of the assets that were held by BCBSMo immediately prior
to the Charter Conversion Transaction.
11. None of BCBSMo, New BCBSMo, New RIT, or RIT will take any position (or
cause any affiliate to take any position) in or with respect to any U.S.
federal, state, local or non-U.S. tax return, that is inconsistent with the
treatment of the Charter Conversion Transaction as a reorganization within
the meaning of Section 368(a) of the Code, unless otherwise required by a
"determination" (as defined in Section 1313(a)(1) of the Code) or by
applicable state, local or non-U.S. tax law.
Representations related to the Reincorporation Merger Transaction:
- -----------------------------------------------------------------
1. New RIT is a new corporation with no activity, assets or liabilities other
than those activities, assets and liabilities necessary to effectuate the
Reorganization.
2. The adjusted basis and the fair market value of the assets to be
transferred by New BCBSMo to New RIT in the Reincorporation Merger
Transaction will, in each instance, be equal to or exceed the sum of the
liabilities to be assumed by New RIT in the Reincorporation Merger
Transaction plus any liabilities to which the transferred assets are
subject.
3. The liabilities of New BCBSMo to be assumed by New RIT in the
Reincorporation Merger Transaction were incurred in the ordinary course of
business.
(3)
<PAGE>
4. In the Reincorporation Merger Transaction, the fair market value of the New
RIT stock to be received, or deemed received, by the Foundation will be
approximately equal to the fair market value of the New BCBSMo stock
surrendered in exchange therefor.
5. New BCBSMo will not redeem any of its stock, nor will it pay a dividend
with respect to its stock, prior to the Reincorporation Merger Transaction.
6. Neither New RIT nor any affiliated subsidiary has any plan or intention to
redeem or otherwise reacquire any of the New RIT stock to be issued in the
Reincorporation Merger Transaction.
7. New RIT has no plan or intention to sell or otherwise dispose of any of the
assets of New BCBSMo to be acquired by it in the Reincorporation Merger
Transaction except for dispositions made in the ordinary course of
business.
8. Following the Reincorporation Merger Transaction, New RIT will continue in
a substantially unchanged manner the business conducted by New BCBSMo
immediately prior to the Reincorporation Merger Transaction.
9. Immediately following consummation of the Reincorporation Merger
Transaction, New RIT will possess the same assets and liabilities (except
for assets used to pay expenses incurred by New RIT in connection with the
Reincorporation Merger Transaction) as those possessed by New BCBSMo
immediately prior to the Reincorporation Merger Transaction. Assets used to
pay expenses will constitute less than one percent of the net assets of New
BCBSMo.
10. Immediately following consummation of the Reincorporation Merger
Transaction, the Foundation will own all of the outstanding New RIT stock
and will own such stock solely by reason of its ownership of New BCBSMo
stock and New RIT stock immediately prior to the transaction.
11. The New RIT shares to be issued to the Foundation in the Reincorporation
Merger Transaction are being issued to the Foundation solely in its
capacity as a shareholder of New BCBSMo and not in any other capacity.
12. Immediately following the Reincorporation Merger Transaction, New RIT will
have no outstanding warrants, options, convertible securities or any other
type of right pursuant to which any person could acquire stock in New RIT,
other than stock issued in connection with the RIT/New RIT Merger
Transaction.
13. In the Reincorporation Merger Transaction, New RIT has no plan to issue any
warrants, options, convertible stock, or other instrument to acquire new
RIT stock.
(4)
<PAGE>
14. New BCBSMo and New RIT each will pay their own expenses, if any, incurred
in connection with the Reincorporation Merger Transaction and will not pay
the expenses of any other person incurred in connection with the
Reincorporation Merger Transaction.
15. No two parties to the Reincorporation Merger Transaction are investment
companies as defined by Section 368(a)(2)(F)(iii) and (iv) of the Code.
16. At the time of the Reincorporation Merger Transaction, New BCBSMo will not
be under the jurisdiction of a court in a Title 11 or similar case within
the meaning of Section 368(a)(3)(A) of the Code.
17. None of BCBSMo, New BCBSMo, New RIT, or RIT will take any position (or
cause any affiliate to take any position) in or with respect to any U.S.
federal, state, local or non-U.S. tax return, that is inconsistent with the
treatment of the Reincorporation Merger Transaction as a reorganization
within the meaning of Section 368(a) of the Code, unless otherwise required
by a "determination" (as defined in Section 1313(a)(1) of the Code) or by
applicable state, local or non-U.S. tax law.
Representations related to the RIT/New RIT Merger Transaction:
- -------------------------------------------------------------
1. The outstanding RIT stock is held immediately prior to the RIT/New RIT
Merger Transaction only by New RIT (as the successor to BCBSMo) and public
shareholders.
2. The fair market value of the assets of RIT will exceed its liabilities both
at the dates of the adoption of the Plan by the shareholders of RIT and New
RIT and immediately prior to the time of the merger of RIT into New RIT.
3. Following the RIT/New RIT Merger Transaction, New RIT will continue the
historic business of RIT or use a significant portion of the historic
business assets of RIT in a business.
4. RIT and New RIT each will pay their own expenses, if any, incurred in
connection with the RIT/New RIT Merger Transaction and will not pay the
expenses of any other person incurred in connection with the RIT/New RIT
Merger Transaction.
5. When the RIT/New RIT Merger Transaction is approved by the shareholders of
RIT, BCBSMo, and ultimately New RIT as successor by merger with New BCBSMo,
will own, and will continue to own at all times until the merger of RIT
into New RIT is completed, stock in RIT that (i) possesses at least 80
percent of the total voting power of the stock of RIT and (ii) has a value
equal to at least 80 percent of the total value of the stock of RIT.
(5)
<PAGE>
6. As of the date of the adoption of the Plan by the shareholders of RIT, RIT
intends to merge into New RIT and cease its separate existence.
7. Except for assets received in the Transfer and Assumption Transaction, if
any, RIT has not acquired assets in any nontaxable transaction at any time
within the past three years, except for acquisitions that occur in
transactions that are not related to the plan of liquidation and that
occurred prior to any intention to adopt the plan of liquidation.
8. No assets of RIT have been, or will be pursuant to a plan that includes the
RIT/New RIT Merger Transaction, disposed of by either RIT or New RIT except
for dispositions in the ordinary course of business.
9. Except for assets received in the Transfer and Assumption Transaction, if
any, there is no plan or intention for the merger of RIT into New RIT
pursuant to the RIT/New RIT Merger Transaction to be preceded or followed
by the reincorporation in, or transfer or sale to, another corporation
("Recipient") of any of the businesses or assets of RIT, if persons
holding, directly or indirectly, more than 20 percent in value of RIT stock
also hold, directly or indirectly, more than 20 percent in value of the
stock in Recipient. For purposes of this representation, ownership is
determined by application of the constructive ownership rule of Section
318(a) as modified by Section 304(c)(3).
10. Prior to adoption by the shareholders of RIT of the Plan, no assets of RIT
will have been distributed in kind, transferred, or sold to New RIT, except
for transactions occurring in the normal course of business.
11. The fair market value of the assets of RIT exceed its liabilities both at
the date the Plan was adopted by the shareholders of RIT and immediately
prior to the time of the merger of RIT into New RIT.
12. Other than intercompany accounts that arose in the ordinary course of
business, there is no intercorporate debt existing between New RIT and RIT
and none has been canceled, forgiven, or discounted.
13. The stock to be issued to each holder of RIT stock in the RIT/New RIT
Merger Transaction is intended to represent fair consideration for the RIT
stock surrendered in exchange therefor, and it is anticipated that the fair
market value of the New RIT stock received by such holders will
approximately equal the fair market value of the RIT stock surrendered
therefor.
14. The exchange ratios in the RIT/New RIT Merger were agreed to as part of the
Settlement Agreement and were reached after arm's length negotiations
between the Attorney General of the State of Missouri, the Missouri
Department of Insurance, BCBSMo and RIT.
(6)
<PAGE>
15. The New RIT shares to be issued in connection with the RIT/New RIT Merger
are being issued to persons solely in their capacity as shareholders and
not in any other capacity (including as an employee), and are being issued
solely in exchange for their stock in RIT and not as consideration for any
other purpose (including compensation for services rendered or to be
rendered or in exchange for a favorable vote on any aspect of the
transactions, or for any other services, property, or right).
16. All other material transactions undertaken contemporaneously with, in
anticipation of, in conjunction with, or in any way related to, the RIT/New
RIT Merger Transaction have been fully disclosed to PricewaterhouseCoopers
L.L.P.
17. No shares of RIT stock were redeemed or reacquired by RIT prior to and in
anticipation of the adoption of the Plan.
18. Neither, New RIT nor any affiliate of New RIT has any plan or intention to
reacquire any of the New RIT shares issued in connection with the RIT/New
RIT Merger Transaction.
19. The RIT/New RIT Merger Transaction will be effected pursuant to the
corporation laws of the states of Missouri and Delaware.
20. Shareholders of RIT will have adopted the Plan which is intended to
constitute a plan of liquidation within the meaning of Section 332(b)(2) of
the Code.
21. RIT is not exempt from tax under Section 501 or any other provision of the
Code.
22. The shareholders of RIT as a group have never previously adopted, either
formally or informally, a plan of complete liquidation other than the Plan
adopted by the shareholders of RIT at the special meeting of the
shareholders to approve the RIT/New RIT Merger Transaction.
23. At the time RIT was formed, there was no plan or intention to effect the
liquidation of RIT.
24. None of BCBSMo, New BCBSMo, New RIT, or RIT will take any position (or
cause any affiliate to take any position) in or with respect to any U.S.
federal, state, local or non-U.S. tax return, that is inconsistent with the
treatment of the RIT/New RIT Merger Transaction as a liquidation under
Section 332 of the Code or a reorganization within the meaning of Section
368(a) of the Code, unless otherwise required by a "determination" (as
defined in Section 1313(a)(1) of the Code) or by applicable state, local or
non-U.S. tax law.
The above representations are accurate as of the date hereof.
Blue Cross Blue Shield of Missouri
(7)
<PAGE>
By:________________________________
Name:______________________________
Title:_____________________________
RightCHOICE Managed Care, Inc.
By:________________________________
Name:______________________________
Title:_____________________________
(8)
<PAGE>
EXHIBIT B
[Foundation Letterhead]
___________, 2000
PricewaterhouseCoopers LLP
800 Market Street
18/th/ Floor
St. Louis, MO 63101
Re: BCBSMo Settlement Agreement and Plan of Reorganization
You have been requested to render opinions regarding certain material United
States federal income tax consequences of a series of transactions (the
"Reorganization") that will be consummated pursuant to the Amended and Restated
Settlement Agreement dated January 6, 2000, (the "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, a Missouri nonprofit public
benefit corporation ("BCBSMo") and RightCHOICE Managed Care, Inc., a Missouri
corporation ("RIT"), and the Agreement and Plan of Reorganization (the "Plan")
dated as of March 14, 2000, signed in connection with the Settlement Agreement
by and among BCBSMo, RIT, The Missouri Foundation For Health, a Missouri
nonprofit public benefit corporation (the "Foundation"), and RightCHOICE Managed
Care, Inc., a Delaware corporation ("New RIT").
In connection with the Reorganization, and recognizing that you will rely upon
this certificate and a certificate issued by BCBSMo and RIT in rendering your
opinions, the undersigned officers of the Foundation, respectively, after due
inquiry and investigation, hereby certify the following representations as of
the date hereof and as of the Closing. We understand that you will reaffirm
your opinions at the time of the Closing and that, in connection with such
reaffirmation, you will require that we reaffirm this certification as of that
time.
Unless otherwise noted, all capitalized terms have the meanings set forth in the
Settlement Agreement and Plan.
General representations:
- -----------------------
(1)
<PAGE>
1. The facts relating to the Reorganization, which facts are described in the
Plan and the draft of the opinion letter dated April __, 2000, are true and
correct in all material respects, and, insofar as such facts pertain to the
Foundation, the undersigned has no reason to believe that such facts are
not true and correct in all material respects.
2. The Foundation will not be under a binding commitment to sell or otherwise
transfer the New RIT stock, except pursuant to the Voting Trust and
Divestiture Agreement.
3. The Reorganization is being undertaken for valid business reasons other
than the avoidance of federal tax.
4. Upon completion of the Closing, the Foundation will not have entered into
negotiations to sell or otherwise transfer the New RIT stock issued to the
Foundation.
5. The Transfer and Assumption Transaction, the Charter Conversion
Transaction, the Reincorporation Merger Transaction, and the RIT/New RIT
Merger Transaction are all being undertaken pursuant to the Settlement
Agreement.
Representations related to the Charter Conversion Transaction:
- -------------------------------------------------------------
1. The Foundation will pay its own expenses in connection with the Charter
Conversion Transaction and will not pay the expenses of any other person
incurred in connection with the Charter Conversion Transaction.
2. The fair market value of the New BCBSMo stock received by the Foundation in
the Charter Conversion Transaction in exchange for the deemed ownership
interest of the Foundation in BCBSMo approximately equals the fair market
value of the deemed ownership interest of the Foundation in BCBSMo
surrendered in exchange therefor.
3. At the Charter Conversion Effective Time, the Foundation will have received
from the Internal Revenue Service a determination that it is a tax exempt
entity under Section 501(c)(4)./1/
4. The Foundation is established to serve the needs of the underinsured and
uninsured Missourians in the BCBSMo service area and is a public benefit
corporation.
5. The Foundation will not receive any property other than New BCBSMo common
stock in the Charter Conversion Transaction.
6. The Foundation will not take any position (or cause any affiliate to take
any position) in or with respect to any U.S. federal, state, local or non-
U.S. tax return, that is inconsistent with
_________________
/1/ All Section references are to the Internal Revenue Code of 1986, as amended.
(2)
<PAGE>
the treatment of the Charter Conversion Transaction as a reorganization
within the meaning of Section 368(a) of the Code, unless otherwise required
by a "determination" (as defined in Section 1313(a)(1) of the Code) or by
applicable state, local or non-U.S. tax law.
Representations related to the Reincorporation Merger Transaction:
- -----------------------------------------------------------------
1. In the Reincorporation Merger Transaction, the fair market value of the New
RIT stock to be received, or deemed received, by the Foundation will be
approximately equal to the fair market value of the New BCBSMo stock
surrendered in exchange therefor.
2. Immediately following consummation of the Reincorporation Merger
Transaction, the Foundation will own all of the outstanding New RIT stock
and will own such stock solely by reason of its ownership of New BCBSMo
stock immediately prior to the transaction.
3. The Foundation will pay its own expenses, if any, incurred in connection
with the Reincorporation Merger Transaction and will not pay the expenses
of any other person incurred in connection with the Reincorporation Merger
Transaction.
4. The New RIT shares to be issued to the Foundation in the Reincorporation
Merger Transaction are being issued to the Foundation solely in its
capacity as a shareholder of New BCBSMo and New RIT and not in any other
capacity.
5. The Foundation will not take any position (or cause any affiliate to take
any position) in or with respect to any U.S. federal, state, local or non-
U.S. tax return, that is inconsistent with the treatment of the
Reincorporation Merger Transaction as a reorganization within the meaning
of Section 368(a) of the Code, unless otherwise required by a
"determination" (as defined in Section 1313(a)(1) of the Code) or by
applicable state, local or non-U.S. tax law.
Representations related to the RIT/New RIT Merger Transaction:
- -------------------------------------------------------------
1. In the RIT/New RIT Merger Transaction, the Foundation will receive stock in
New RIT that is approximately equal to the value of the New BCBSMo stock
received by the Foundation in the Charter Conversion Transaction.
2. The Foundation does not intend to transfer any property or other
consideration to the public shareholders of RIT in the RIT/New RIT Merger
Transaction.
3. The Foundation has no current plan or intention to sell the New RIT stock
to New RIT, or any corporation related to New RIT.
4. The Foundation will pay its own expenses, if any, in connection with the
RIT/New RIT Merger Transaction and will not pay the expenses of any other
person incurred in connection
(3)
<PAGE>
with the RIT/New RIT Merger Transaction.
5. The Foundation will not take any position (or cause any affiliate to take
any position) in or with respect to any U.S. federal, state, local or non-
U.S. tax return, that is inconsistent with the treatment of the RIT/New RIT
Merger Transaction as a liquidation under Section 332 of the Code or a
reorganization within the meaning of Section 368(a) of the Code, unless
otherwise required by a "determination" (as defined in Section 1313(a)(1)
of the Code) or by applicable state, local or non-U.S. tax law.
The above representations are accurate as of the date hereof.
The Missouri Foundation For Health
By:___________________________________
Name:_________________________________
Title:________________________________
(4)
<PAGE>
Exhibit 23(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
RightCHOICE Managed Care, Inc. of our reports dated February 9, 2000 related to
the financial statements and financial statement schedules, 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, and of our report
dated March 23, 2000 relating to the balance sheet of RightCHOICE Managed Care,
Inc., a Delaware Corporation, which appear in such Registration Statement. We
also consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
April 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the balance sheet as of March 14, 2000, of RightCHOICE Managed Care, Inc. (a
Delaware corporation) included in Form S-4 and is qualified in its entirety by
reference to such balance sheet.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-14-2000
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1
<TOTAL-LIABILITY-AND-EQUITY> 1
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99(a)
[LETTERHEAD OF WARBURG DILLON READ LLC]
The Board of Directors and the Independent Committee
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, MO 63103
Members of the Board of Directors and the Independent Committee:
Warburg Dillon Read LLC ("Warburg Dillon Read") hereby consents to the
inclusion of the opinion letter of Warburg Dillon Read dated January 31, 2000
as Appendix H to, and to the reference thereto under the captions "SUMMARY--
Opinion of Warburg Dillon Read LLC" and "PROPOSED REORGANIZATION--Opinion of
Warburg Dillon Read" in, the Proxy Statement/Prospectus of RightCHOICE Managed
Care, Inc. ("RightCHOICE") relating to the proposed transaction involving
RightCHOICE, Blue Cross and Blue Shield of Missouri and The Missouri Foundation
for Health. In giving such consent, we do not admit that we come within the
category of persons whose consent is required under, and we do not admit that
we are "experts" for purposes of the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
By:
/s/ Warburg Dillon Read LLC
WARBURG DILLON READ LLC
New York, New York
April 14, 2000
