UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-13248
RIGHTCHOICE MANAGED CARE, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1674052
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1831 Chestnut Street, St. Louis, Missouri 63103-2275
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 923-4444
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Title of each class Outstanding at June 30, 1996
Class A Common Stock, $0.01 par value 3,714,400 shares
Class B Common Stock, $0.01 par value 14,962,500 shares
RIGHTCHOICE MANAGED CARE, INC.
Second Quarter 1996 Form 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 2. Changes in Securities 26
ITEM 3. Defaults Upon Senior Securities 26
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 5. Other Information 27
ITEM 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
June 30, December 31,
ASSETS 1996 1995
(unaudited)
Current assets:
Cash and cash equivalents $ 21,032 $ 21,132
Investments available for sale 258,746 263,383
Receivables from members 51,370 55,695
Receivables from related parties 14,027 24,079
Deferred income taxes 4,106 2,475
Other assets 13,869 12,144
Total current assets 363,150 378,908
Property and equipment, net 45,955 40,305
Deferred income taxes 6,193 9,311
Investments in affiliates 9,247 6,752
Goodwill and intangible assets, net 86,013 81,112
Total assets $510,558 $ 516,388
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Medical claims payable $ 90,403 $ 83,793
Unearned premiums 50,296 51,432
Accounts payable and accrued expenses 59,334 64,445
Payables to related parties 15,755 22,174
Obligations for employee benefits 4,507 4,414
Income taxes payable 19,052 23,102
Obligations under capital leases 4,806 4,747
Total current liabilities 244,153 254,107
Long-term debt 62,000 62,000
Obligations under capital leases 3,692 6,137
Obligations for employee benefits 21,393 20,923
Total liabilities 331,238 343,167
Shareholders' Equity:
Common Stock:
Class A, $.01 par,125,000,000 shares authorized,
3,737,500 shares issued, 3,714,400 and 3,718,700
shares outstanding, respectively 37 37
Class B, $.01 par, 100,000,000 shares authorized
14,962,500 shares issued and outstanding 150 150
Additional paid in capital 132,640 132,640
Retained earnings 42,223 32,714
Treasury stock, 23,100 and 18,800 Class A shares,
respectively, at cost (326) (266)
Unrealized net appreciation of investments available
for sale 4,596 7,946
Total shareholders' equity 179,320 173,221
Total liabilities and shareholders' equity $ 510,558 516,388
See accompanying Notes to Consolidated Financial Statements.
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except shares and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Revenues:
Premium $147,810 $132,985 $291,357 $268,614
Fees and other income 13,570 11,133 27,991 22,000
Total revenues 161,380 144,118 319,348 290,614
Operating expenses:
Health care services 119,713 98,589 226,600 199,019
Commissions 6,513 5,118 12,819 9,376
General and administrative
(excludes net intercompany
charges allocated to Blue Cross
and Blue Shield of Missouri of
$3,009, $4,159, $6,523, and
$7,195, respectively 34,686 32,573 69,086 65,767
Non-recurring relocation charge 2,743 -- 2,743 --
Total operating expenses 163,655 136,280 311,248 274,162
Operating income (2,275) 7,838 8,100 16,452
Investment income:
Interest and dividends 3,648 3,559 7,099 7,175
Realized gains, 1,919 1,004 2,987 1,231
Total investment income,net 5,567 4,563 10,086 8,406
Other:
Interest expense (1,268) (292) (2,597) (623)
Other income (expense), net 145 -- 81 (354)
Total other, net (1,123) (292) (2,516) (977)
Income before provision for
income taxes 2,169 12,109 15,670 23,881
Provision for income taxes 885 4,665 6,161 8,868
Net income $ 1,284 $ 7,444 $ 9,509 $15,013
Weighted average common shares
outstanding 18,680,000 18,690,000 18,681,000 18,690,000
Earnings per share .07 .40 .51 .80
See accompanying Notes to Consolidated Financial Statements.
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the six months ended,
June 30,
1996 1995
Cash flows from operating activities:
Net income $ 9,509 $ 15,013
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income tax benefits 3,332 1,280
Loss on sale of property and equipment 36 1
Depreciation and amortization 7,043 4,718
Undistributed earnings of affiliates (115) (69)
Gain on sale of investments (2,987) (1,210)
Accretion of discounts and
amortization of premiums, net 247 (139)
Decrease (increase) in certain assets:
Receivables from members 6,119 1,401
Receivables from related parties 10,052 9,707
Other assets (9,020) (876)
Increase (decrease) in certain liabilities:
Medical claims payable 4,556 (8,395)
Unearned premiums (1,136) (849)
Accounts payable and accrued expenses (6,963) 5,143
Payables to related parties (6,419) (15,706)
Obligations for employee benefits 563 (529)
Income taxes payable (4,050) 3,320
Net cash provided by operating activities 10,767 12,810
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities 5,025 4,000
Proceeds from investments sold:
Fixed maturities 163,456 86,236
Equity securities 17,690 25,456
Investments purchased:
Fixed maturities (161,384 (107,034)
Equity securities (19,241) (12,179)
Other (941) (1,020)
Investment in Healthcare InterChange (3,055)
Payment for purchase of HealthLink HMO,
net of cash acquired (198)
Redemption of HealthLink affiliate 500
Proceeds from property and equipment sold 1
Property and equipment purchased (10,273) (2,685)
Net cash used in investing activities (8,421) (7,225)
Cash flows from financing activities:
Additional expenses related to
initial public stock offering (89)
Purchase of Class A Treasury stock (60)
Decrease in borrowings under reverse
repurchase agreements (4,302)
Payments on capital lease obligations (2,386) (2,126)
Net cash used in financing activities (2,446) (6,517)
Net decrease in cash and cash equivalents (100) (932)
Cash and cash equivalents at beginning of
period 21,132 31,085
Cash and cash equivalents at end of period $ 21,032 $ 30,153
Supplemental Disclosure of Cash Information:
Interest paid $ 2,655 $ 625
Income taxes paid 6,562 4,268
Supplemental Schedule of Noncash
Investing and Financing Activities:
Equipment acquired through capital
leases $ -- 1,090
See accompanying Notes to Consolidated Financial Statements.
RightCHOICE Managed Care, Inc.
Notes to Consolidated Financial Statements (unaudited)
1. Financial Statement Presentation
The interim consolidated financial statements included herein have
been prepared by RightCHOICE Managed Care, Inc. (the company) without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). Certain information and footnote disclosures,
normally included in the financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or omitted
pursuant to such SEC rules and regulations; however, the management of the
company believes that the disclosures herein are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the consolidated financial position of the company with
respect to the interim consolidated financial statements, and the
consolidated results of its operations and its cash flows for the interim
periods then ended, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the full
year.
2. Transactions with Blue Cross and Blue Shield of Kansas City (BCBSKC)
The company's subsidiary, HealthLink, Inc. (HealthLink), completed its
acquisition of HealthLink HMO, Inc. (HealthLink HMO) on May 31, 1996.
Prior to this, HealthLink had shared equal ownership of this HMO with a
subsidiary of BCBSKC. HealthLink HMO had approximately 11,100 members at
June 30, 1996 and had revenues of $3.4 million and $1.5 million in 1995 and
1994, respectively with net income (loss) of $0.3 million and $(0.7)
million for those same time periods. HealthLink HMO had revenues of $0.4
million for the one month period ending June 30, 1996 which are included in
fees and other income on the 1996 Consolidated Statements of Income.
On March 1, 1996, RightCHOICE announced that it had reached a network
access and financial reinsurance agreement with BCBSKC designed to make the
two companies more competitive in the Missouri market. As of March 1,
RightCHOICE, through its subsidiary Healthy Alliance Life Insurance Company
(HALIC), had approximately 30,000 members residing in the Kansas City
plan's license area that were unable to access the Kansas City plan's
preferred networks. Likewise, approximately 40,000 members of a BCBSKC
subsidiary residing in RightCHOICE's Alliance trade area previously could
not access the Alliance preferred provider networks in that area. As a
result of the new network access agreements, HALIC's 30,000 members may now
access BCBSKC's preferred provider networks and the 40,000 members of the
BCBSKC subsidiary may now access Alliance's preferred provider networks.
Through the financial reinsurance transaction, RightCHOICE now shares
underwriting risks and profits on a net increase of 10,000 members, while
reducing administrative costs. As a result of the agreements, members of
either plan who are enrolled through statewide employers or associations
will be able to use the provider network of the Blue Cross and Blue Shield
company where they live.
In exchange for these two transactions, the company paid approximately $5.9
million to subsidiaries of BCBSKC, the majority of which ($5.4 million) is
reflected in goodwill and intangible assets, net on the Consolidated
Balance Sheet and will be amortized over three years, the expected period
covered by the reinsurance agreements.
In addition, HealthLink's twenty percent interest in Missouri Valley Life
and Health Insurance Company, Inc. (MVLH) was redeemed through a cash
payment by MVLH of $0.5 million. Subsequent to this transaction, MVLH
became a wholly-owned subsidiary of BCBSKC. HealthLink recorded a gain on
this disposition of $0.4 million, which is reflected in realized gains, net
on the 1996 Consolidated Statements of Income.
3. Acquisition of HealthLink
The company completed its acquisition of HealthLink, a regional managed
healthcare organization, on August 10, 1995. The following table summarizes
the second quarter and first half 1995 unaudited pro forma consolidated
results of the company as though the HealthLink acquisition occurred at the
beginning of 1995 giving effect to the interest income foregone, the
interest expense incurred, the amortization of the excess of the purchase
price over the fair value of the assets acquired, and the amortization of
post-acquisition agreements. The unaudited 1995 pro forma information is
not necessarily indicative of the actual consolidated results of operations
that would have occurred had the acquisition occurred at the beginning of
1995 and is not intended to be indicative of results which may occur in the
future. Second quarter and first half 1996 actual results are included
for comparative purposes.
(unaudited) Three months ended Six months ended
(Amounts in thousands, June 30, June 30,
except per share amounts) 1996 1995* 1996 1995*
Total revenues $161,380 $150,649 $319,348 $303,238
Operating income $(2,275) $10,073 $8,100 $20,524
Net income $1,284 $7,571 $9,509 $15,125
Earnings per share $0.07 $0.41 $0.51 $0.81
* Second quarter and first half 1995 do not include non-recurring operating
charges of $2.0 million ($0.07 per share) for integration charges related
to HealthLink that were actually recorded in the third quarter of 1995.
4. Other Acquisitions
Cragin
The company announced its plans on June 7, 1996 to purchase Cragin American
Assurance Company (Cragin), a currently dormant Illinois company chartered
to underwrite health and life insurance. The acquisition of Cragin from
LaSalle Bank, F.S.B., which is subject to regulatory approval, will give
the company a license to further its offerings of managed care products in
Illinois. The transaction, expected to close in the third quarter of 1996,
will include a cash payment of approximately $3 million, in exchange for
the net assets of Cragin of approximately $3 million, representing
primarily marketable securities.
Healthcare InterChange, Inc.
On February 8, 1996, the company entered an agreement to purchase common
and preferred shares of Healthcare InterChange, Inc. (HIC) from Blue Cross
and Blue Shield of Missouri (BCBSMo). The purchase represents
approximately forty-four percent of the total outstanding common stock of
HIC and consisted of a cash payment of $3.1 million. HIC is in the
business of providing electronic health data network services to medical
care providers. HIC had revenues of $3.4 million and $2.6 million in
fiscal years 1995 and 1994 (September 30 fiscal year end), respectively
with net income of $0.2 million and $0.1 million for those same time
periods.
5. Contingencies
OPM audit
The company, through its subsidiary, BlueCHOICE, contracts with the Office
of Personnel Management (OPM) to provide or arrange health services under
the Federal Employees Health Benefits Program (FEHBP) for federal
employees. OPM is the largest commercial customer of BlueCHOICE. OPM
conducts periodic audits to, among other things, verify that the
premiums established under the OPM contract were established in compliance
with the community rating and other requirements under the FEHBP.
On August 8, 1995, the company received a draft audit report from the OPM
regarding the audit, conducted in 1994, of the FEHBP operations of
BlueCHOICE for the years 1989 through 1994. The audit dealt primarily with
a comparison of premium rates charged to the FEHBP to rates charged by
BlueCHOICE to other similarly sized groups. The OPM draft audit report
indicates that BlueCHOICE has a potential liability of $7.5 million to the
FEHBP. The company responded to the draft report in November of 1995
following an in-depth analysis of the issues. At this time, management is
unable to determine the final dollar amount which may be required to
resolve the audit findings; however, management believes that it has made
adequate provisions to cover the contingency, and the final amount will not
have a material impact on the financial position of the company.
Subscriber Class Action Petition
On March 15, 1996, a suit was filed in the Circuit Court of the City of St.
Louis, Missouri, 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 the company, and
(ii) all persons and/or entities who benefited from BCBSMo's tax-exempt
status. The complaint names the company, BCBSMo, HealthLink, and certain
officers of the company as defendants.
The plaintiffs' claims relate 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 complaint further alleges that certain
amendments to BCBSMo's Articles of Incorporation were improper. The
complaint also alleges the purchase of HealthLink was at an excessive price
and that HealthLink operates under contracts providing for illegal
discounts by health care providers. The plaintiffs seek restitution,
compensatory damages and punitive damages in unspecified amounts, as well
as injunctive and other equitable relief.
The case has been removed from the Circuit Court of the City of St. Louis
to the United States District Court for the Eastern District of Missouri.
The plaintiffs filed a motion to remand the case to state court, and that
motion currently is pending. BCBSMo filed an answer to the complaint on
May 31, 1996. BCBSMo believes the claims are without merit and intends to
vigorously defend the action.
Litigation with DOI and Attorney General
In order to access the equity capital markets to fund growth and enhanced
services, BCBSMo transferred certain assets to and engaged in certain
reinsurance transactions with the company in connection with an offering to
the public of twenty percent of the common stock of the company (such
events are referred to collectively as the Reorganization and Public
Offering). Although the Director of the Missouri Department of Insurance
(DOI), following several meetings with BCBSMo, the submission of background
documents and the filing of an application by BCBSMo, formally approved the
Reorganization and Public Offering on April 14, 1994, the Director and DOI
subsequently made public statements that the Reorganization and Public
Offering violated state laws and constituted a de facto conversion to a for-
profit corporation. The Director and the DOI claimed that BCBSMo was
therefore obligated to transfer all of its assets, including all of its
RightCHOICE stock, to the State of Missouri or a charity designated by the
State of Missouri and made various threats to, among other things, bring
legal action, seek a receivership or terminate BCBSMo's license to operate
as a health services corporation unless BCBSMo made that transfer.
BCBSMo engaged in extensive efforts to settle this dispute but has been
unsuccessful due to the unreasonable and unauthorized demands of the
Director, including an offer by the Director to settle for a $180 million
payment to the State of Missouri or to a charity designated by the State of
Missouri. BCBSMo ultimately concluded that it had no reasonable
alternative but to file a petition for declaratory judgment and other
relief on May 13, 1996 in the Circuit Court of Cole County, Missouri (the
Court) against the DOI and the Director in his official capacity. The
Missouri Attorney General was joined in this action as a necessary party
due to his sole authority to enforce the nonprofit corporation laws at
issue. In the petition, BCBSMo requests a declaration that under Missouri
law (i) the Director and the DOI have no authority to demand any such
payment; (ii) the Director and the DOI have no jurisdiction to commence an
administrative action to compel (or coerce) any such payment; (iii) the
Director and the DOI lack jurisdiction to amend, modify or reverse the
final administrative approval of the Reorganization and the Public
Offering; (iv) BCBSMo has no legal obligation to make any such payment to
the State of Missouri or to any other entity as a result of the
Reorganization or Public Offering; and (v) the Reorganization and Public
Offering complied with all laws applicable to nonprofit health services
corporations. BCBSMo further seeks injunctive relief to restrain and
enjoin the Director and the DOI from taking any action against BCBSMo based
upon the Reorganization and Public Offering including, (i) demanding that
BCBSMo make any such payment; (ii) instituting regulatory actions to compel
any such payment; (iii) revoking, suspending or refusing to renew the
operating license of BCBSMo or instituting any seizure or receivership
action relating to the Reorganization and Public Offering; or (iv)
otherwise pressuring and coercing BCBSMo to "voluntarily" make any such
payment. In view of the bias, hostility and prejudgment of the merits of
this dispute reflected by the public and private statements of the Director
and other members of the DOI, the petition also seeks a declaration that
the Director and the DOI should be disqualified from conducting any hearing
or making any determination which relates to the Reorganization and Public
Offering, including the legal consequences thereof or payments supposedly
due and owing as a result thereof. Finally the petition seeks recovery of
all expenses and costs (including attorneys' fees) incurred by BCBSMo in
the prosecution of these claims and such other and further relief as the
Court deems just and appropriate.
On May 22, 1996, BCBSMo obtained a temporary restraining order (TRO)
against the Director and the DOI -- which remains in effect until the Court
renders its decision on the merits -enjoining them from, among other
things, (i) terminating BCBSMo's Certificate of Authority to operate as a
health service corporation for reasons related to the Reorganization
and Public Offering; (ii) making any administrative determination relating
to the Reorganization and Public Offering; or (iii) instituting any
seizure, receivership, conservatorship or similar action or proceeding
against BCBSMo relating to the Reorganization and Public Offering.
The Director and the DOI filed an answer and counterclaims on June 13,
1996. The answer sets forth several affirmative defenses, including
alleged fraud and negligent misrepresentation with respect to the
application filed by BCBSMo seeking approval of the Reorganization and
Public Offering. The answer contends that the application failed to
adequately disclose that BCBSMo intended to reinsure its Medigap policies
with HALIC and thus effected such reinsurance without the necessary DOI
approval. The answer further contends that the DOI's approval was
improperly obtained because BCBSMo did not file amendments to its articles
of incorporation adopted on April 13, 1994 with the DOI within the 20 day
period specified by the health service corporation statute (even though
that period expired after the DOI's approval had been obtained) because
those amendments would have alerted the DOI of BCBSMo's alleged wrongful de
facto conversion into a for profit corporation (or from a public benefit
nonprofit corporation to a mutual benefit nonprofit corporation even though
the Missouri nonprofit laws in effect in 1994 did not recognize that
distinction). The counterclaims also allege various violations of certain
health service corporation statutes within Chapter 354 of the Missouri
Revised Statutes (RSMo) which the DOI contends disqualify BCBSMo from
being organized and operating under Chapter 354 of RSMo, as well as
violations of various other laws by allegedly not obtaining proper approval
of the Reorganization and Public Offering and by effecting the
aforementioned de facto conversion.
The Director and the DOI seek the following relief with respect to their
counterclaims: (i) permanent injunctions restraining, among other things,
(A) BCBSMo from transferring assets to or entering into reinsurance
transactions with its subsidiaries or affiliates without the prior express
approval of the DOI, or (B) permitting the company or any for profit
subsidiary to retain profits to the exclusion of BCBSMo's use of such
profits to further nonprofit public benefit purposes, (ii) ordering BCBSMo
to cease the allegedly unauthorized reinsurance of Medigap policies and to
compel HALIC to return to BCBSMo all profits earned by HALIC as a result of
the allegedly unauthorized reinsurance of BCBSMo's Medi-gap policies, (iii)
enjoining BCBSMo from transacting its business without the prior express
written consent of the Director; (iv) imposing a trust on BCBSMo's assets
for public benefit purposes, and (v) an accounting of all asset transfers
to the company, its subsidiaries or affiliates, or their respective
officers or directors, as well as all profits earned by HALIC as a result
of the allegedly unauthorized reinsurance of BCBSMo's Medi-gap policies,
including a judgment against BCBSMo and its subsidiaries for a sum to be
determined from the accounting.
The Attorney General filed an answer and counterclaim on June 20, 1996. The
counterclaim alleges that the Reorganization and Public Offering, and the
continued operations through the company and its subsidiaries, exceed
BCBSMo's statutory purposes under Chapters 354 and 355 or RSMo. The
Attorney General requests a declaration that BCBSMo has exceeded its lawful
authority and seeks such relief as the Court determines to be appropriate
under the circumstances.
BCBSMo filed a motion for summary judgment against the Director and the DOI
on July 1, 1996, asserting that it should prevail in this action as a
matter of law because (i) the Missouri statutes expressly authorized the
Reorganization, (ii) the Director's approval was not required (or
alternatively the Director expressly approved the Reorganization after full
disclosure and now has no jurisdiction to modify, amend or revoke the
approval), (iii) equitable principles preclude the Director from
reconsidering the approval even if he had jurisdiction to do so, (iv) the
Director has no legal authority or standing to challenge BCBSMo's nonprofit
status, to claim that BCBSMo is a public benefit corporation (as opposed to
a mutual benefit corporation) or to assert that BCBSMo's assets are held in
a charitable trust for the benefit of the public, (v) BCBSMo did not
violate the statutes alleged, (vi) BCBSMo is a mutual benefit corporation
and not a public benefit corporation, and (vii) BCBSMo's assets are not
held in charitable trust for the benefit of the public. BCBSMo's motion
for summary judgment remains pending.
A motion to intervene was filed on July 11, 1996 by certain self-described
special interest groups and individuals asserting that they have an interest
in the property and the transactions which are the subject matter of
BCBSMo's dispute with the DOI. After BCBSMo opposed this motion, the
Court denied the motion on the ground, among others, that the intervenors
lacked the requisite standing to assert the claims they were attempting to
assert.
BCBSMo filed a reply to the counterclaims of the Director and the DOI on
July 15, 1996, and filed a reply to the counterclaim of the Attorney
General on July 22, 1996, which in each case sets forth affirmative
defenses. On July 31, 1996 the Missouri Attorney General filed a motion
for partial summary judgment on his counterclaim. BCBSMo intends to file a
motion for summary judgment on its claims against the Attorney General and
on the Attorney General's counterclaims in the near future.
The company believes that the counterclaims of the Director, the DOI and
the Attorney General are without merit and that BCBSMo's legal position is
strong. If, however, BCBSMo is unsuccessful in obtaining the relief it is
requesting, or in defending against such counterclaims, there could be a
material adverse effect on the company and the market for the company's
stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors that May Affect Future Results of
Operations, Financial Condition or Business - Litigation with DOI and
Attorney General."
Other Contingencies
The company and BCBSMo recently received a market conduct report from the
DOI. The company has formally responded to the report. Certain of the
criticisms made by the examiners involve compliance issues which the
company is currently addressing. The company believes, and has so alleged
in the action described under "Litigation with DOI and Attorney General,"
that the market conduct study was not conducted for legitimate purposes of
regulatory oversight but rather as a pretext to either revoke or refuse to
renew BCBSMo's license to operate as a health services corporation and thus
to improperly pressure and coerce BCBSMo into making the payment in the
nature and amount described above under "Litigation with DOI and Attorney
General." Although the company believes that any forfeitures legitimately
required to be paid should not be material, the company cannot anticipate
the potential actions of the DOI or their reasonableness.
In addition to the matters described above, the company is a party to
litigation in the normal course of business, including professional
liability.
6. Transfer of Service Functions
Beginning January 1997, the company will move its St. Louis-based claims,
customer service, billing and provider services functions to its
Springfield, Missouri facility and a yet to be constructed facility to be
located in Cape Girardeau, Missouri. Approximately 200 jobs will be
relocated to Cape Girardeau with an additional 100 moving to Springfield.
The transfer program will be conducted in stages beginning January 1997 and
ending mid-1997. The move is expected to result in annual salary and
benefit cost savings of approximately $3 million to $3.5 million. The
company will incur charges to earnings estimated at $6 million to $8
million beginning in the second quarter and continuing through 1996 and
into 1997 for costs associated with the relocation. The second quarter
charge for this relocation of $2.7 million is reflected in the non-
recurring relocation charge caption on the 1996 Consolidated Statements of
Income.
7. RightCHOICE Plan to Purchase Stock Held by Parent Company
BCBSMo announced on June 20, 1996 that its board of directors had approved
a funding mechanism to support its strategic plan designed to expand
programs, health care services, and community activities. In an initial
transaction, BCBSMo plans to sell 1.5 million to 2 million shares to the
company by the end of the third quarter of 1996 at current market prices,
subject to regulatory review and final board of directors' approvals. On
August 12, 1996, BCBSMo received notification from the DOI denying BCBSMo's
Form D, "Prior Notification of a Transaction." The denial requests that
BCBSMo provide answers to the DOI's questions and provide additional
documentation related to this transaction. BCBSMo intends to resubmit the
Form D in compliance with the DOI request. Following approval by the DOI,
if granted, and completion of the transaction, the shares will be held by
the company for general corporate purposes. Also, subsequent to the
transaction, BCBSMo will continue to maintain a controlling interest in the
company.
8. Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1995 to conform with the 1996 presentation.
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT ON FORM
10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS, FINANCIAL CONDITION OR
BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL
CONDITION OR BUSINESS, OR THE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS," AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THE COMPANY'S SEC REPORTS (INCLUDING WITHOUT
LIMITATION, ITS REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1995).
The following table sets forth premium revenue by product group for the
three and six month periods ended June 30, 1996 and 1995 (unaudited):
Three Months Ended Six Months Ended
June 30, June 30,
Product Group 1996 1995 1996 1995
(in thousands) in thousands)
PPO $ 77,608 $ 72,847 $153,008 $147,746
HMO 33,638 22,657 66,011 45,287
Medicare supplement 24,755 26,665 49,752 53,626
Managed indemnity 4,413 6,188 8,505 13,214
Other specialty services 7,396 4,628 14,081 8,741
Total premium revenue 147,810 132,985 291,357 268,614
ASO/Self-funded and other income 13,570 11,133 27,991 22,000
Total revenues $161,380 $144,118 $319,348 $290,614
The following table sets forth selected operating ratios. The medical loss
ratio is shown as a percentage of healthcare services expense over premium
revenue. All other ratios are shown as a percentage of premium revenue and
fees and other income combined:
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Operating revenues:
Premium revenue 91.6% 92.3% 91.2% 92.4%
Fees and other income 8.4% 7.7% 8.8% 7.6%
100.0% 100.0% 100.0% 100.0%
Operating expenses:
Medical loss ratio 81.0% 74.1% 77.8% 74.1%
Commission expense 4.0% 3.6% 4.0% 3.2%
General and administrative expense 21.5% 22.6% 21.6% 22.6%
Membership
The following table sets forth membership data and the percent change in
membership:
June 30,
Product Group 1996 1995 %
Underwritten:
PPO:
Alliance PPO 210,332 236,076 (10.9)%
AllianceChoice POS 74,962 20,070 273.5
HMO:
Commercial (includes other POS) 92,510 62,921 47.0
BlueCHOICE Senior 5,058 1,725 193.2
BlueCHOICE Medicaid (MC+) 5,120 N/A
Medicare supplement 70,649 79,458 (11.1)
Managed indemnity 12,373 19,619 (36.9)
471,004 419,869 12.2
Self-funded:
PPO 111,680 114,768 (2.7)
HMO 16,157 10,173 58.8
ASO (1996 includes HealthLink)* 1,133,645 255,697 343.4
Total Membership 1,732,486 800,507 116.4%
* does not include 439,073 additional third party administrator members
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 Second Quarter 1996 to Second Quarter 1995
Revenues
Premium revenue increased 11.1% in the second quarter of 1996 in comparison
to the second quarter of 1995. As described below, components of premium
revenue were affected by product mix shifts as the company continued its
positioning of its managed care portfolio; and as a result, such changes
may not be indicative of future periods.
PPO revenues increased $4.8 million - - $5.5 million due to a 10.8%
increase in member months, partially offset by a $0.7 million decrease in
revenue resulting from a 3.8% net decrease in premium rates. Rates
decreased due to two main factors. First, the company's drug product,
AllianceRx, which was introduced in November 1994 is sold to members on a
separate product basis; prior to this, the drug benefit was typically
included as part of the basic PPO medical program. The resulting shift
in revenue from the PPO products to other specialty services is more
pronounced in the second quarter of 1996 than the prior year second quarter
due to the gradual penetration of AllianceRx throughout 1995. Second, the
company experienced a shift in membership to AllianceChoice, a lower cost,
non-gatekeeper point-of-service (POS) product. Alliance PPO membership
decreased by 25,700 members from June 30, 1995 to June 30, 1996 while
AllianceChoice membership increased by 54,900 over the same time period.
Thus, net PPO membership gains are attributable to the positive acceptance
in the marketplace of the company's AllianceChoice product. AllianceChoice
membership increased by an additional 11,100 members in the second quarter
of 1996. Management anticipates continued enrollment gains for this
product. The company also intends to introduce an AllianceChoice
Individual product and expand its PPO offering into Illinois in the second
half of 1996.
HMO premium revenue increased $11.0 million or 48.5% - - $13.6
million due to a 54.9% increase in member months partially offset by a $2.6
million decrease due to a 4.1% net reduction in premium rates. Net premium
rates have declined due to HMO competition in the company's HMO service
areas. Membership increases are due to the introduction and positive
momentum of new products--BlueCHOICE Individual (introduced in November
1994), BlueCHOICE Senior (introduced in April 1995), HealthNet Blue POS
(introduced in March 1995), and BlueCHOICE Medicaid (introduced in March
1996). These four products combined account for approximately 31,500
underwritten members at June 30, 1996. In addition, the company's
arrangement with Freeman Hospitals and Health System, beginning in July
1995, has enabled the BlueCHOICE HMO and POS products to be offered in the
six-county area surrounding Joplin, Missouri. As of June 30, 1996, there
were approximately 6,000 members enrolled in products sold through this
arrangement with Freeman. In addition to the expected future enrollment
growth in these products, the company anticipates offering a HealthNet Blue
Individual product in the second half of 1996 to complement the HealthNet
Blue product family in southeast Missouri.
Premium revenue from Medicare supplement decreased by $1.9 million in the
second quarter of 1996. Member months decreased by 11.4% partially
offset by a 4.8% increase in premium rates. Membership declines are
partially attributable to members shifting to BlueCHOICE Senior, a
Medicare-risk program, which provides medical benefits at least as
comprehensive as Medicare benefits for persons eligible to receive Medicare
at no additional cost to the member. The company markets its BlueCHOICE
Senior product as part of its strategy to direct existing customers to more
intensely managed health care products.
Managed indemnity premium revenue decreased by $1.8 million due to a 38.9%
decline in member months in keeping with the company's strategy to move
towards more highly managed care products.
Revenue from other specialty services increased $2.8 million due primarily
to a 62.5% increase in member months. These increases are primarily
attributable to the aforementioned selling of the company's drug product
separate from PPO major medical products.
Fees and other income from administrative services only/self-insured and
network services increased by $2.4 million. This increase is due to two
main factors. First, ASO revenues of $6.8 million were generated for the
second quarter of 1996 by HealthLink, which was acquired by the company in
August 1995. The HealthLink ASO revenues include $0.4 million earned by
HealthLink HMO, Inc. subsequent to its May 31, 1996 acquisition by
HealthLink. Second, offsetting HealthLink's ASO revenues is the loss of
revenues from the company's third-party administrator (TPA) subsidiaries
which were $2.4 million in the second quarter of 1995. These subsidiaries
were combined with another TPA company to form The EPOCH Group,
L.C. (Epoch) in December 1995. The company owns 50% of Epoch and utilizes
the equity method of accounting for this entity. The company's share of the
earnings of Epoch for the second quarter of 1996 was $0.3 million and is
included in the other income (expense), net, caption on the 1996
Consolidated Statement of Income. Excluding the effect of these two
organizational changes, fees and other income declined by $2.0 million
partially due to the loss of one employer group with approximately 15,800
members in the second quarter of 1995.
Operating Expenses
The overall medical loss ratio increased by 6.9% to 81.0% in the second
quarter 1996 in comparison to 74.1% in the second quarter 1995 primarily as
a result of 1) the company's lower margin BlueCHOICE Senior and Medicaid
products, 2) competitive HMO pricing to enhance selected enrollment growth,
3) higher drug and outpatient utilization, and 4) growth in regions outside
of the metropolitan St. Louis area that have less cost efficient networks.
The company's extensive PPO provider recontracting and ongoing medical
management efforts have enabled the company to achieve medical cost
savings. These efforts with the PPO products are evidenced by fewer
hospital days / 1000 members and a lower average length of stay. The
savings from these efforts have been offset by increased outpatient
encounters and costs coupled with increased local medical cost trends.
The company expects its continued medical management efforts to assist in
controlling future medical costs. These efforts include implementing
improved medical management mechanisms and network management actions,
effective July 1, 1996, which will focus primarily on ambulatory services,
including outpatient precertification for certain services under new PPO
and POS business, and lower provider reimbursement rates for selected
outpatient services. In addition, the company's BlueCHOICE HMO will launch
its Physician Group Partners Program that provides incentives to
physicians to improve quality, patient satisfaction, and cost savings.
Commission expense increased by $1.4 million or 27.3% in the second quarter
of 1996 primarily related to increased membership growth and more
aggressive commission schedules to enhance member growth and persistency.
General and administrative expenses increased by $2.1 million, or 6.5%.
HealthLink accounted for $4.8 million of general and administrative
expenses in the second quarter of 1996. These expenses were not incurred
in the second quarter of 1995 as HealthLink was acquired in August 1995.
Offsetting this increase to expense is the reduction of expenses related to
the company's aforementioned TPA subsidiaries that were combined to form
Epoch in December 1995. The results of operations of Epoch (50% owned by
the company) are not consolidated with the company's operations. Second
quarter 1995 general and administrative expenses include $2.4 million of
TPA subsidiary general and administrative expenses. Factoring out the
effects of these entities, comparable second quarter 1996 general and
administrative expenses decreased by $0.3 million. This decrease is
partially attributable to greater costs incurred for corporate investments
in 1995.
Operating Income
Operating income decreased $10.1 million in the second quarter 1996 in
comparison to the second quarter 1995. Excluding the second quarter 1996
non-recurring relocation charge as described under "Recent Developments -
Transfer of Service Functions," operating income decreased by $7.4 million.
This decrease is primarily attributable to softer pricing and higher
outpatient utilization trends.
Net Investment Income
The second quarter 1996 net investment income of $5.6 million represents a
$1.0 million increase over the second quarter 1995, inclusive of a $0.9
million increase in net realized gains. The net realized gains in the
second quarter of 1996 include a gain of $0.4 million related to
HealthLink's disposition of its 20 percent interest in Missouri Valley Life
and Health Insurance Company, Inc. An additional $1.7 million of net
realized gains in 1996 were incurred in the second quarter when the company
converted one of its equity portfolios from an active to a more passive
investment strategy. Approximately $1.0 million in net realized gains in
the second quarter of 1995 were the result of the company's sale of $14.0
million in equity securities pursuant to the restructuring of the company's
investment portfolio to be weighted more heavily in fixed income securities
to comply with regulatory limitations.
Provision for Income Taxes
The company's effective income tax rate was 40.8% and 38.5% for the second
quarter of 1996 and the second quarter of 1995, respectively. The
effective rate increased in the second quarter of 1996 primarily as a
result of the impact of non-deductible goodwill amortization.
Net Income
The company's net income for the second quarter of 1996 was $1.3 million
($.07 per share). Excluding the non-recurring relocation charge, net
income was $3.0 million ($.16 per share), representing a decrease of $4.4
million compared to net income of $7.4 million for the second quarter of
1995.
Comparison of Results for the Six Months Ended June 30, 1996 to the Six
Months Ended June 30, 1995
Revenues
Premium revenue increased $22.7 million or 8.5% in the first half of 1996
in comparison to the first half of 1995. As described below, components of
premium revenue were affected by product mix shifts as the company
continued its positioning of its managed care portfolio; and as a result,
such changes may not be indicative of future periods.
PPO revenues increased $5.3 million - - $9.9 million due to a 9.8%
increase in member months, partially offset by a $4.6 million decrease in
revenue resulting from a 5.7% net decrease in premium rates. Rates
decreased due to two main factors. First, the company's drug product,
AllianceRx, which was introduced in November 1994 is sold to members on a
separate product basis; prior to this, the drug benefit was typically
included as part of the basic PPO medical program. The resulting shift in
revenue from the PPO products to other specialty services is more
pronounced in the first half of 1996 than the prior year due to the gradual
penetration of AllianceRx throughout 1995. Second, the company experienced
a shift in membership to AllianceChoice, a lower cost, non-gatekeeper point-
of-service (POS) product. Alliance PPO membership decreased by 25,700
members from June 30, 1995 to June 30, 1996 while AllianceChoice membership
increased by 54,900 over the same time period. Thus, net PPO membership
gains are attributable to the positive acceptance in the marketplace of the
company's AllianceChoice product. AllianceChoice membership increased by
26,300 in the first half of 1996. Management anticipates continued
enrollment gains for this product. The company also intends to introduce
an AllianceChoice Individual product and expand its PPO offering into
Illinois in the second half of 1996.
HMO premium revenue increased $20.7 million or 45.8% - - $24.8 million due
to a 46.3% increase in member months partially offset by a $4.1 million
decrease due to a small net reduction in premium rates. Net premium rates
have declined due to HMO competition in the company's HMO service areas.
Membership increases are due to the introduction and positive momentum of
new products--BlueCHOICE Individual (introduced in November 1994),
BlueCHOICE Senior (introduced in April 1995), HealthNet Blue POS
(introduced in March 1995), and BlueCHOICE Medicaid (introduced in March
1996). These four products combined gained 16,500 members in the first
half of 1996 and 23,900 members since June 30, 1995. In addition, the
company's arrangement with Freeman Hospitals and Health System, beginning
in July 1995, has enabled the BlueCHOICE HMO and POS products to be offered
in the six-county area surrounding Joplin, Missouri. As of June 30,
1996,there were approximately 6,000 members enrolled in products sold
through this arrangement with Freeman. In addition to the expected future
enrollment growth in these products, the company anticipates offering a
HealthNet Blue Individual product in the second half of 1996 to complement
the HealthNet Blue product family in southeast Missouri.
Premium revenue from Medicare supplement decreased by $3.9 million in the
first half of 1996. Member months decreased by 11.3% partially offset by a
4.6% increase in premium rates. Membership declines are partially
attributable to members shifting to BlueCHOICE Senior, a Medicare-risk
program, which provides medical benefits at least as comprehensive as
Medicare benefits for persons eligible to receive Medicare at no additional
cost to the member. The company markets its BlueCHOICE Senior product as
part of its strategy to direct existing customers to more intensely managed
health care products.
Managed indemnity premium revenue decreased by $4.7 million due to a 40.4%
decline in member months in keeping with the company's strategy to move
towards more highly managed care products.
Revenue from other specialty services increased $5.3 million due primarily
to a 69.4% increase in member months. These increases are primarily
attributable to the aforementioned selling of the company's drug product
separate from PPO major medical products.
Fees and other income from administrative services only/self-insured and
network services increased by $6.0 million. This increase is due to two
main factors. First, ASO revenues of $13.4 million were generated for the
first half of 1996 by HealthLink, which was acquired by the company in
August 1995. The HealthLink ASO revenues include $0.4 million earned by
HealthLink HMO, Inc. subsequent to its May 31, 1996 acquisition by
HealthLink. Second, offsetting HealthLink's ASO revenues is the loss of
revenues from the company's third-party administrator (TPA) subsidiaries
which were $4.8 million in the first half of 1995. These subsidiaries were
combined with another TPA company to form The EPOCH Group, L.C. (Epoch) in
December 1995. The company owns 50% of Epoch and utilizes the equity
method of accounting for this entity. The company's share of the earnings
of Epoch for the first half of 1996 was $0.4 million and is included in the
other income (expense), net, caption on the 1996 Consolidated Statement of
Income. Excluding the effect of these two organizational changes, fees and
other income declined by $2.6 million partially due to the loss of one
employer group with approximately 15,800 members in the second quarter of
1995.
Operating Expenses
The overall medical loss ratio increased by 3.7% to 77.8% in the first half
1996 in comparison to 74.1% in the first half 1995 primarily as a result of
1) the company's lower margin BlueCHOICE Senior and Medicaid products, 2)
competitive HMO pricing to enhance selected enrollment growth, 3) higher
drug and outpatient utilization, and 4) growth in regions outside of the
metropolitan St. Louis area that have less cost efficient networks. The
company's extensive PPO provider recontracting and ongoing medical
management efforts have enabled the company to achieve medical cost
savings. These efforts with the PPO products are evidenced by fewer
hospital days / 1000 members, a lower average length of stay, and slightly
lower year-to-date medical costs on a per member basis. These savings have
been offset by increased outpatient encounters and costs coupled with
increased local medical cost trends. The company expects its continued
medical management efforts to assist in controlling future medical costs.
These efforts include implementing improved medical management mechanisms
and network management actions, effective July 1, 1996, which will focus
primarily on ambulatory services, including outpatient precertification for
certain services under new PPO and POS business, and lower provider
reimbursement rates for selected outpatient services. In addition, the
company's BlueCHOICE HMO will launch its Physician Group Partners Program
that provides incentives to physicians to improve quality, patient
satisfaction, and cost savings.
Commission expense increased by $3.4 million or 36.7% in the first half of
1996 primarily related to increased membership growth and more aggressive
commission schedules to enhance member growth and persistency. In
addition, commissions were lower in the first half of 1995 due to an
accounting adjustment of $0.6 million.
General and administrative expenses increased by $3.3 million, or 5.0%.
HealthLink accounted for $9.4 million of general and administrative
expenses in the first half of 1996. These expenses were not incurred in
the first half of 1995 as HealthLink was acquired in August 1995.
Offsetting this increase to expense is the reduction of expenses related to
the company's aforementioned TPA subsidiaries that were combined to form
Epoch in December 1995. The results of operations of Epoch (50% owned by
the company) are not consolidated with the company's operations. First
half 1995 general and administrative expenses include $4.9 million of TPA
subsidiary general and administrative expenses. Factoring out the effects
of these entities, comparable first half 1996 general and administrative
expenses decreased by $1.2 million. This decrease is partially attributable
to greater costs incurred for corporate investments in 1995 which included
costs pertaining to the establishment of feasibility for the company's
information and operations strategy (IOS) project.
Operating Income
Operating income decreased $8.4 million in the first half of 1996 in
comparison to the first half of 1995. Excluding the second quarter 1996
non-recurring relocation charge as described under "Recent Developments -
Transfer of Service Functions," operating income decreased by $5.6 million.
This decrease is primarily attributable to softer pricing and higher
outpatient utilization trends in 1996.
Net Investment Income
The first half 1996 net investment income of $10.1 million represents a
$1.7 million increase over the first half 1995, inclusive of a $1.8 million
increase in net realized gains. Realized gains in the first half of 1996
include a gain of $0.4 million related to HealthLink's disposition of its
20 percent interest in Missouri Valley Life and Health Insurance Company,
Inc., net realized gains of $1.7 million incurred when the company
converted one of its equity portfolios from an active to a more passive
investment strategy, and additional net realized gains that resulted from
investment transactions in the ordinary course of business. Approximately
$1.0 million in net realized gains in the first half of 1995 were the
result of the company's sale of $14.0 million in equity securities pursuant
to the restructuring of the company's investment portfolio to be weighted
more heavily in fixed income securities to comply with regulatory
limitations.
Provision for Income Taxes
The company's effective income tax rate was 39.3% and 37.1% for the first
half 1996 and the first half 1995, respectively. The effective rate
increased in the first half of 1996 as a result of the impact of non-
deductible goodwill amortization and the lack of comparable tax-exempt
investment income as that received in the first half of 1995.
Net Income
The company's net income for the first half of 1996 was $9.5 million ($.51
per share). Excluding the non-recurring relocation charge, net income was
$11.2 million ($.60 per share), representing a decrease of $3.8 million
compared to the net income of $15.0 million for the first half of 1995.
Liquidity and Capital Resources
The company's working capital as of June 30, 1996 was $119.0 million, a
decrease of $5.8 million from December 31, 1995. The decrease is partially
attributable to a $3.4 million unrealized net depreciation of investments
available for sale during the first half of 1996. Additional decreases
relate to the company's $3.1 million cash purchase of a forty-four percent
interest in Healthcare InterChange, Inc. in the first quarter of 1996, net
cash payments of $5.4 million to a subsidiary of Blue Cross and Blue
Shield of Kansas City (BCBSKC) relating to a reinsurance agreement
transaction, and $10.3 million of property and equipment purchases
primarily for IOS development costs. These working capital decreases are
partially offset by the $16.6 million of net income, excluding depreciation
of property and equipment and amortization of intangibles, earned in the
first half of 1996.
Cash generated from operations totaled $10.8 million for the six months
ended June 30, 1996. Net income was $9.5 million while depreciation of
property and equipment and amortization of intangibles was $7.0 million.
Receivables from members decreased by $6.1 million partially due to the
large volume of annual direct pay billings that took place in December
1995. In addition, the company's net related party receivable at June 30,
1996 decreased by $3.6 million primarily due to intercompany tax
settlements pursuant to a tax sharing agreement between the company and
Blue Cross and Blue Shield of Missouri (BCBSMo). These increases to
operating cash flows were partially offset by an increase in other assets
of $9.0 million and a decrease in accounts payable and accrued expenses of
$7.0 million. The increase in other assets is primarily due to the $5.4
million payment related to a reinsurance agreement transaction with BCBSKC.
The decrease in payables relates to settlements of legal liabilities and
decreases in various other accruals, partially offset by a second quarter
accrual of $2.7 million for relocation costs as described under "Recent
Developments - Transfer of Service Functions."
The company requested that its reducing revolving credit facility
agreement (the Credit Facility) be amended (1) to exclude from a covenant
calculation the one-time expenses up to $7 million related to the
relocation of the service center (as described in "Recent Developments -
Transfer of Service Functions") during fiscal 1996 and 1997 (2) to reduce
the level of a required covenant ratio during this same time period, and
(3) to permit the company to repurchase up to 2 million shares of its
common stock from BCBSMo. Also related to the Credit Facility, the company
completed, for a small cancellation fee, a termination of its interest rate
swap agreements covering a notional amount of $62 million. The quarterly
settlement rates for these agreements had been calculated as a spread
between a fixed annual rate of 6.22% and the three-month floating London
Interbank Offered Rate (LIBOR). At June 30, 1996, the $62 million of
borrowings under the Credit Facility are denominated, at the option of the
company, as offshore rate loans that bear interest from 0.5% to 0.925%
above LIBOR.
BCBSMo announced on June 20, 1996 that its board of directors had approved
a funding mechanism to support its strategic plan designed to expand
programs, health care services, and community activities. In an initial
transaction, BCBSMo plans to sell 1.5 million to 2 million shares to the
company by the end of the third quarter of 1996 at current market prices,
subject to regulatory review and final board of directors' approvals. On
August 12, 1996, BCBSMo received notification from the DOI denying BCBSMo's
Form D, "Prior Notification of a Transaction." The denial requests that
BCBSMo provide answers to the DOI's questions and provide additional
documentation related to this transaction. BCBSMo intends to resubmit the
Form D in compliance with the DOI request. Following approval by the DOI,
if granted, and completion of the transaction, the shares will be held by
the company for general corporate purposes. Also, subsequent to the
transaction, BCBSMo will continue to maintain a controlling interest in the
company.
Recent Developments
Information Strategies
The Board of Directors of the company approved the continued implementation
of a comprehensive information and operations strategy (IOS) which
substantially began in 1995. IOS will assist the company in implementing
its managed care strategy of delivering the lowest cost medical care
consistent with quality outcomes. The company believes that controlling
medical costs in the future will be highly dependent on readily accessing
both member and provider medical information at a detail level which
provides real-time analytical support. Management received a capital
expenditure authorization from the Board of Directors to expend funds up to
approximately $16 million during 1996 for the project subject to periodic
review by an ad-hoc committee of the Board. In the first half of 1996, the
company made capitalized expenditures of $8.9 million on this project.
While management believes that the IOS project will be initially dilutive
to earnings per share, it is believed that opportunities exist for
significant medical and administrative savings which will provide a payback
and contribute to earnings per share, possibly as early as 1997.
Transfer of Service Functions
Beginning January 1997, the company will move its St. Louis-based claims,
customer service, billing and provider services functions to its
Springfield, Missouri facility and a yet to be constructed facility to be
located in Cape Girardeau, Missouri. Approximately 200 jobs will be
relocated to Cape Girardeau with an additional 100 moving to Springfield.
The transfer program will be conducted in stages beginning January 1997 and
ending mid-1997. The move is expected to result in annual salary and
benefit cost savings of approximately $3 million to $3.5 million. The
company will incur charges to earnings estimated at $6 million to $8
million beginning in the second quarter and continuing through 1996 and
into 1997 for costs associated with the relocation. The second quarter
charge for this relocation of $2.7 million is reflected in the non-
recurring relocation charge caption on the 1996 Consolidated Statements of
Income.
Southern Illinois Expansion
The company announced its plans on June 7, 1996 to purchase Cragin American
Assurance Company (Cragin), a currently dormant Illinois company chartered
to underwrite health and life insurance. The acquisition of Cragin from
LaSalle Bank, F.S.B., which is subject to regulatory approval, will give
the company a license to further its offerings of managed care products in
Illinois. The transaction, expected to close in the third quarter of 1996,
will include a cash payment of approximately $3 million, in exchange for
the net assets of Cragin of approximately $3 million, representing
primarily marketable securities. The company already owns a southern
Illinois provider network through its HealthLink subsidiary and the company
plans to offer group and individual PPO coverage to the approximately one
million residents in this region by early 1997.
Contingencies
See the description under the same caption in Note 5 of the Notes to
Consolidated Financial Statements, which description is incorporated herein
by reference.
Factors that May Affect Future Results of Operations, Financial Condition
or Business
In order to take advantage of the safe harbor provisions for forward-
looking statements contained in Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, added to those Acts by the Private Securities Litigation Reform
Act of 1995, the company is identifying important risks and uncertainties
that could cause the company's actual results of operations, financial
condition or business to differ materially from its historical results of
operations, financial condition or business, or the results of operations,
financial condition or business contemplated by forward-looking statements
made herein or elsewhere orally or in writing. Factors that could cause
or contribute to such differences include, but are not limited to, those
factors described below.
Litigation with DOI and Attorney General
BCBSMo has filed an action against the Missouri Department of Insurance
(DOI), the Director of the DOI, and the Attorney General seeking a
declaratory judgment and other relief (the Declaratory Judgment Action)
with respect to the Reorganization and Public Offering, as described under
the same caption in Note 5 of the Notes to Consolidated Financial
Statements. Among the relief requested in that action is a declaration
that the Director and the DOI should be disqualified from conducting any
hearing or making any determination which relates to the Reorganization and
Public Offering (including the legal consequences thereof or payments due
and owing as a result thereof) due to the hostility, bias and prejudgment
of the merits of this dispute reflected in the public and private
statements of the Director and other members of the DOI. In the absence of
such relief, the Director and the DOI may pursue various types of
retaliatory administrative action against BCBSMo.
While the Board of Directors and management of the company believe, after
reviewing these matters with legal counsel, that BCBSMo's legal position in
the Declaratory Judgment Action is strong, the risks and uncertainties of
litigation are such that there can be no assurance that BCBSMo will
prevail, that BCBSMo will be able to obtain a stay of any adverse ruling by
lower courts pending appeal, that the DOI will not pursue retaliatory
action during or after these proceedings, or that any such action would not
have a material adverse impact on the company or the market for the
company's stock.
Government Regulations and Health Care Reform
The company operates its managed health care business principally through
wholly owned subsidiaries whose business is subject to extensive federal,
state and local laws and regulations. To date, these laws and regulations
have not had a significant negative impact on the growth of the company's
business. However, there can be no assurance that the company will be able
to obtain or maintain required governmental approvals or licenses or that
any regulatory reform will not have a material adverse effect on the
company's business in the future.
Competition and Consolidation
The health care industry is highly competitive. The company has numerous
types of competitors in its PPO, POS and HMO operations, many of which have
substantially greater financial and other resources than the company. The
company believes that price competition among PPO, POS and HMO benefits
plans in the company's markets, particularly the St. Louis metropolitan
area, has recently intensified. Because the company's existing business
operations are confined to markets within or contiguous to the state of
Missouri, the company currently is unable to subsidize losses in these
markets with profits from other markets. The company believes that certain
larger, national competitors are able to subsidize losses in the Missouri
market with profits from other markets in which they operate and may pursue
such a strategy in the company's markets in an effort to increase their
market share. Health care providers are consolidating into larger health
care delivery enterprises and their increased bargaining power may lead to
a reduction in the gross margins of the company's products and services.
The company also faces competition in its markets from a trend among some
health care providers to combine and form their own networks in order to
contract directly with employer groups and other prospective customers for
the delivery of health care services.
Escalating Health Care Costs
The company's profitability depends in large part on predicting and
effectively managing medical costs under its managed care plans. A variety
of external factors affecting the delivery and cost of health care,
including increased costs and utilization of high-technology diagnostic
testing and treatments, the rising costs of malpractice insurance, efforts
in the medical community to avoid malpractice claims, higher operating
costs of hospitals and physicians, the aging of the population and other
demographic characteristics, changes in federal and state health care
regulations and major epidemics may adversely affect the company's ability
to predict and control health care costs and claims.
Dependence on Sales to Individuals
Sales of the company's health care benefit products to individuals comprise
a substantial portion of the the company's business. The medical loss ratio
attributable to the company's individual business is significantly
lower than that of the company's insured group business. As a
result, individual business accounts for a proportionately greater
percent of the company's operating income. The company's overall margins
would be adversely impacted by a reduction in the relative percent of its
business represented by individual business or by an increase in the
medical loss ratio for individuals. The company believes that the success
of the individual business is more dependent than that of its group
business on the management of health care costs through product design,
pricing decisions and the application of appropriate underwriting
standards. There can be no assurance that the profitability of this
business will be sustained or that the company will not experience
unanticipated increases in claims.
Potential Nonrenewal of Subscriber and Provider Agreements
The company's profitability is dependent upon its ability to obtain and
maintain contracts with employee groups and individual consumers (the
Subscriber Agreements) which generally are renewable annually. The
company's profitability is also dependent, in large part, on its ability to
contract on favorable terms with hospitals, physicians and other health
care providers. There can be no assurance that the subscribers or
providers will renew their contracts or enter into new contracts with the
company or, in the case of provider contracts, will not seek terms that are
less profitable to the company in connection with any such renewal.
Control by BCBSMo
BCBSMo has voting control on all stockholder actions, including the sale or
merger of the company, a sale of substantially all of its assets and the
election of all of the company's directors. BCBSMo may have interests with
respect to its ownership of the company which diverge from those of the
company's public stockholders. There can be no assurance that the company
will not be adversely impacted by the control which BCBSMo has with respect
to matters affecting the company.
Potential Loss of Use of Trade Names, Trademarks, Service Marks and
Licenses and Associated Goodwill
Pursuant to a license agreement between BCBSMo and Blue Cross and Blue
Shield Association (BCBSA), the company and certain of its subsidiaries,
have the right to refer to themselves as subsidiaries of BCBSMo and to do
business in its service area under a derivative Blue Cross and/or Blue
Shield name. The company has licenses from BCBSA to use the Blue Cross and
Blue Shield names, trademarks and service marks with respect to the
company's network-based plans. These licenses require a fee to be paid to
BCBSA. These licenses will terminate if BCBSMo does not maintain its
license with BCBSA, BCBSMo controls less than 51% of the total voting power
of the company or if the company does not maintain certain quality control
standards. The company believes that the exclusive right to use the Blue
Cross and Blue Shield names, trademarks and service marks provides it with
a significant marketing advantage in its licensed service area, the loss of
which would have a material adverse effect on its business and results of
operations. However, to the extent that the company continues to use these
names, trademarks and service marks in marketing its network-based plans,
there can be no assurance that negative publicity concerning BCBSA and
other BCBSA licensees will not adversely impact the sales of the company's
network-based plans and the company's operations.
Dependence on Key Management
The company depends to a significant extent on key management members. The
loss of these management members could have a material adverse effect on
the company's results of operations, financial condition and business.
Variability of Quarterly Operating Results and Stock Price
The company's quarterly results of operations could be adversely affected
by the timing of new product and service introductions, competitive pricing
pressures, contract renegotiations with customers and providers,
fluctuations in the medical loss ratio (due to changes in utilization,
timing of submission of claims presented for payment in the period and the
unpredictability of unusually large claims), increases in commission
expenses and general and administrative expenses, changes in interest
rates, acquisitions, governmental and regulatory actions, overall market
conditions, and other factors. The company's stock price may experience
significant price and volume fluctuations in response to these and other
internal and external factors which cause variations in its quarterly
results of operations and the stock markets.
Credit Agreement Restrictions
The company's revolving credit agreement with its existing lenders contains
certain restrictions on the company, including requirements as to the
maintenance of net worth and certain financial ratios, restrictions on
payment of cash dividends or purchases of stock, restrictions on
acquisitions, dispositions and mergers and restrictions on additional
indebtedness and liens and certain other matters. There can be no
assurance that the company will be able to achieve and maintain compliance
with the prescribed financial ratio tests or other requirements of the
revolving credit agreement. The failure to obtain any waivers or
amendments that might be needed to remain in compliance with such
requirements would reduce the company's flexibility to respond to adverse
industry conditions and could have a material adverse effect on the
company's results of operations, financial condition or business.
Additional Factors
Additional risk and uncertainties that may affect future results of
operations, financial condition or business of the company include, but are
not limited to: demand for and market acceptance of the company's products
and services; the effect of economic and industry conditions on prices for
the company's products and services and its cost structure; the ability to
develop and deliver new products and services and adapt existing products
and services to meet customer needs and expectations; the ability to keep
pace with technological change including developing and implementing
technological advances timely and cost-effectively in order to lower its
cost structure, to provide better service and remain competitive; adverse
publicity, news coverage by the media, or negative reports by brokerage
firms, industry and financial analysts regarding the company, its parent or
BCBSA or their products or services which may have the effect of reducing
the reputation, goodwill or customer demand for, or confidence in, the
company's products or services; the ability to attract and retain capital
for growth and operations on competitive terms; and changes in accounting
policies and practices.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Note 5 to the Consolidated Financial Statements in Part I, Item 1 contains
a description of various pending and threatened claims, including a
description of the subscriber class action lawsuit filed on March 15, 1996
and litigation with the Missouri Department of Insurance (DOI), the
Director of the DOI, and the Missouri Attorney General, which descriptions
are incorporated by reference herein. Also, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Factors
that May Affect Future Results of Operations, Financial Condition or
Business."
ITEM 2. Change in Securities
a) Not applicable
b) Not applicable
ITEM 3. Defaults Upon Senior Securities
a) Not applicable
b) Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
a) The Annual meeting of Shareholders of the company was held on May
14, 1996.
b) Three class II directors of the company were elected for
three year terms by the shareholders at the annual meeting. The
three newly elected directors are:
Nominee Number of Votes
Frederic C. Brussee 152,423,470
Ronald G. Evens, M.D. 152,426,147
Edward C. Gomes, Jr. 152,425,152
The following directors terms continued in effect after the meeting:
Norman J. Tice
William H. T. Bush
Roy R. Heimburger
Earle H. Harbison, Jr.
Roger B. Porter
Gloria W. White
c) The following matter was voted by the shareholders at the annual
meeting:
Approval of a proposal to increase the total number of shares of
RightCHOICE Class A Common Stock issued under the 1994 Equity Incentive
Plan.
For Against Abstentions
Votes cast: 151,855,733 92,223 5,356
ITEM 5. Other Information
Note 7 to the Consolidated Financial Statements in Part I, Item 1 contains
a description of the company's plan to purchase stock held by BCBSMo,
which description is incorporated by reference herein.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
3.1 Articles of Incorporation of the Registrant -
Incorporated by reference - previously filed as Exhibit 3.1 to
Registration Statement on Form S-1 under the Securities Act of
1933 filed by the Registrant. Registration Statement No. 33-
77798.*
3.1.1 Amendment to Articles of Incorporation of the
Registrant - Incorporated by reference - previously filed as
Exhibit 3.1.1 to Registration Statement on Form S-1 under the
Securities Act of 1933 filed by the Registrant. Registration
Statement No. 33-77798.*
3.2 Amended and Restated Bylaws of the Registrant -
Incorporated by reference - previously filed as Exhibit 3.2 to
the company's Form 10-K for the period ending December 31, 1995.*
10.1 Stock Purchase Agreement By and Between RightCHOICE
Managed Care, Inc. and LaSalle Bank, F.S.B. dated as of June 7,
1996.
10.2 Third Amendment to the Credit Agreement.
10.3 Stock Purchase Agreement By and Between Blue Cross and Blue Shield
of Missouri and RightCHOICE Managed Care, Inc. dated as of
July 19, 1996.
27 Financial Data Schedule (Electronic Filing Only).
* Document has previously been filed with the Securities and Exchange
Commission and is incorporated by reference and made a part hereof.
b) Reports on Form 8-K:
None filed during the three months ended June 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
RIGHTCHOICE MANAGED CARE, INC.
Registrant
Date: August 13, 1996 By: [s] JANICE C. FORSYTH
Janice C. Forsyth
Senior Vice President,
Secretary and General Counsel
Date: August 13, 1996 By: [s] SANDRA VAN TREASE
Sandra Van Trease
Senior Vice President and
Chief Financial Officer
Exhibit 10.1
Stock Purchase Agreement
By and Between
RightCHOICE Managed Care, Inc.
and
La Salle Bank, F.S.B.
Dated June ___, 1996
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement"), is dated
June 6, 1996, by, between and among RightCHOICE Managed
Care, Inc., a Missouri corporation ("Buyer") and LA SALLE
BANK, F.S.B. ("Seller").
W I T N E S S E T H:
WHEREAS, the authorized capitalization of Cragin
American Assurance Company, an Illinois corporation (the
"Company"), consists of 2,000,000 shares of voting stock,
$1.00 par value, of which 1,000,000 shares are issued and
outstanding and which constitute all of the issued and
outstanding shares of the Company (the "Shares"); and
WHEREAS, Buyer wishes to acquire the Shares, and Seller
is willing to sell the same to Buyer on the terms and
provisions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and
the mutual covenants and agreements herein contained, the
parties hereto, intending to be legally bound, agree as
follows:
1. Sale and Purchase.
1.1. Shares. Subject to the terms and conditions
of this Agreement, at the Closing, as defined in Section
2.2, Seller shall sell and transfer the Shares to Buyer, and
Buyer shall purchase the Shares from Seller.
1.2. Purchase Price. The purchase price for the
Shares shall be equal to the value of the Net Assets
reflected on the Closing Financial Statement, as defined in
Section 3.10, plus Forty Thousand Dollars ($40,000) (the
"Purchase Price"). The Purchase Price may later be adjusted
pursuant to the Adjusted Closing Financial Statement, as
defined in Section 3.10.
2. Closing and Deliveries.
2.1. Execution. This Agreement shall be executed
on any mutually agreeable date provided such date is on or
before June 5, 1996 (the "Execution Date") and may be
executed in two or more counterparts, each of which shall be
deemed an original, but all of such counterparts together
shall be deemed to be one and the same instrument. It shall
not be necessary in making proof of this Agreement or any
counterpart hereof to produce or account for any of the
other counterparts.
2.2. Closing. The purchase and sale (the
"Closing") provided for in this Agreement shall be at the
offices of La Salle Bank, F.S.B., 135 South LaSalle Street,
9th Floor, Chicago, Illinois, at 10:00 a.m., C.D.T., on such
date as the parties may agree, which date shall be within
thirty (30) days of Buyer's receipt of an order (the "Form A
Order") from the Illinois Insurance Department (the
"Department") approving Buyer's purchase of the Shares from
Seller (the "Closing Date"). In no event shall the Closing
take place later than July 15, 1996. If the Closing does
not take place on or before July 15, 1996, then the
Termination provision of this Agreement, as set forth in
Section 8 shall be applicable.
2.3. Deliveries. At the Closing, (a) Seller shall
deliver to Buyer certificates representing record ownership
of the Shares, duly endorsed and in proper form for
transfer, free and clear of all encumbrances; (b) Buyer
shall deliver to Seller the Purchase Price; and (c) the
parties shall deliver such other documents as are required
pursuant to this Agreement to be then executed and
delivered, or shall previously have been, executed and
delivered, including the written resignations of all of the
officers and directors of the Company which shall be
effective as of the Closing Date.
3. Representations and Warranties of Seller. As of
the Execution Date and as of the Closing Date, Seller
represents and warrants to Buyer as follows:
3.1. Organization, Powers and Qualifications. The
Company is duly organized, validly existing and in good
standing under the Illinois Insurance Code and is duly
qualified to do business in Illinois, with all requisite
power and authority to own and operate its properties and
assets and transact its business and perform its obligations
as set forth herein. The Company is duly licensed and
authorized by the Department to conduct the business of a
life and health insurance company as prescribed by Chapter
215 of the Illinois Insurance Code 5/24. The Company has
such other licenses, franchises, and certificates of
authority necessary for the conduct of its business. The
Company does not own any interest, directly or indirectly,
in any corporation, partnership, proprietorship,
association, trust, or other business or entity.
3.2. Capital Stock. The Company has authorized
capital stock consisting of 2,000,000 shares of stock, $1.00
par value, of which 1,000,000 shares are issued and
outstanding, which constitute all of the issued and
outstanding shares of the Company, all of which are owned of
record by Seller. Except as set forth in Schedule 3.2,
the Shares are duly authorized, validly
issued and outstanding, fully paid and nonassessable, and
were not issued in violation of pre-emptive or other
statutory or contractual rights.
3.3. Stock Options, Warrants, Etc. The Company
does not have outstanding any options, warrants, calls,
convertible securities, rights, agreements, or obligations
to purchase, redeem, issue, sell, distribute, dividend, or
otherwise acquire or dispose of any shares of its stock.
3.4. Articles of Incorporation, By-Laws, Minute
Book and Stock Book. To the best of Seller's knowledge, the
Articles of Incorporation and all amendments thereto and the
By-Laws, as amended, of the Company which have been made
available to Buyer for its inspection are true, correct and
complete, and such Articles and By-Laws shall be the
Articles and By-Laws in effect at the Closing. To the best
of Seller's knowledge, the minute books of the Company which
have been made available to Buyer for its inspection contain
accurate minutes of all meetings and accurate consents in
lieu of meetings of the Board of Directors (and any
committee thereof) and of the stockholders of the Company
since its incorporation, and accurately reflect all
transactions referred to in such minutes and consents in
lieu of meetings during the periods reflected therein. To
the best of Seller's knowledge, except as reflected in such
minute books, there are no minutes of meetings or consents
in lieu of meetings of the Board of Directors (or any
committee thereof) or of the shareholders of the Company,
except for minutes or consents which may be missing but
which would evidence actions that have been consented to by
the shareholders and Directors and which reflect
transactions that are not material to the Company. The
stock ledgers of the Company, which have been made available
to Buyer for its inspection, contain accurate records of all
issuances and transfers of record of the capital stock of
the Company since its date of incorporation.
3.5. Authority; No Violation, Etc. Except as
reflected in Schedule 3.5, the execution and
delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of Seller,
including approval of the board of directors of Seller, and
this Agreement is a valid and binding obligation of Seller,
enforceable in accordance with its terms, except as may be
limited by general principles of equity as to the
enforcement of remedies or applicable bankruptcy,
reorganization, insolvency, moratorium and similar laws
affecting creditors' rights generally, now or hereafter in
effect. Neither the execution and delivery by Seller of
this Agreement nor the consummation by Seller of the
transactions contemplated hereby will violate or cause a
default (or give rise to any right or termination,
cancellation or acceleration) under (a) any of the terms,
conditions or provisions of any agreement, instrument or
obligation to which Seller or the Company is a party, or by
which any of them or any of their respective properties or
assets may be bound, except for such conflict, breach or
default as to which requisite waivers or consents shall have
been obtained prior to the Closing (all of which are
identified in Schedule 3.5); or (b) the required
licenses or approvals of the state regulatory authorities
referred to in Section 7.5 hereof.
3.6. Books and Records. The books and records of
the Company fairly reflect the transactions to which it is a
party or by which its properties are subject or bound, and
such books and records have been kept and maintained
accurately and in sufficient detail to permit the
preparation of periodic financial statements in accordance
with statutory insurance accounting principles.
3.7. Licenses, Permits, Etc. Schedule 3.7
contains a complete and accurate list of each license and
permit held by the Company (collectively the "Licenses"),
and Seller has delivered or made available to Buyer true and
complete copies of the Licenses, each of which is properly
and validly issued, and in full force and effect, including,
in particular, that certain license to conduct the business
of a life and health insurance company issued to the Company
by the Department (the "Illinois License"), and each of
which permits the operation of the Company's business as now
and in the past conducted, except where the failure to
secure such a license or permit would not have a materially
adverse effect on the Company's business or operations.
3.8. Compliance with Law. To the best of Seller's
knowledge, the Company and its use and occupancy of its
assets and properties wherever located is in full compliance
with all federal, state, local or other laws, ordinances,
statutes or treaties and any order, rule or regulation of
any federal, state, local or other governmental agency or
body, except where the failure to comply, individually or in
the aggregate, would not have a materially adverse effect on
its business or operations. Company is, and at all times
has been, in full compliance with all of the terms and
requirements of the Licenses, including, in particular, the
Illinois License. No event has occurred or circumstance
exists that may constitute or result directly or indirectly
in a violation of or failure to comply with, or the
revocation, withdrawal, suspension, cancellation, or
termination of, or any modification to, any term or
requirement of the Licenses, including, in particular, the
Illinois License. The Company has not received any notice
or other communication (whether oral or written) from any
federal, state, local or other governmental agency or body
or any other person regarding any actual, alleged, possible,
or potential revocation, withdrawal, suspension,
cancellation, termination of, or modification to any of the
Licenses, including, in particular, the Illinois License.
All applications required to have been filed for the renewal
of the Licenses have been duly filed on a timely basis, and
all other filings required to have been made with respect to
the Licenses have been duly made on a timely basis.
3.9. Balance Sheets. Seller has delivered to
Buyer true and complete copies of the unaudited balance
sheets of the Company as of and for the fiscal year ended
December 31, 1995. Seller has also delivered to Buyer true
and complete copies of the unaudited balance sheets of the
Company as of and for the three months ended March 31, 1996.
All such balance sheets (the "Balance Sheets") and
information, including the related notes, have been prepared
in accordance with generally accepted accounting principles
and fairly present the Company's financial condition,
results of operations, changes in financial position at the
dates and for the periods indicated, and contain and
reflect, as applicable, adequate reserves for losses,
premiums, and other liabilities.
3.10. Closing Balance Sheet. Seller shall
deliver to Buyer at Closing a financial statement of the
Company dated as of the date of the Closing ("Closing
Balance Sheet") which Seller represents and warrants shall
reflect all assets and liabilities of the Company on the
date of the Closing. The Closing Balance Sheet shall be
certified by the Treasurer of the Company as fairly
presenting the financial position of the Company in
accordance with generally accepted accounting principles,
applied on a consistent basis. The assets and liabilities
reflected on the Closing Balance Sheet shall be valued in
accordance with the methodology described in Exhibit "A" as
of the close of business on the fifth (5th) business day
prior to the date of Closing. Within thirty (30) days
following the date of Closing, Seller shall deliver to Buyer
the "Adjusted Closing Balance Sheet" which Seller represents
and warrants shall reflect the adjusted value, if any, of
all assets and liabilities of the Company as compared to the
values reflected on the Closing Balance Sheet. The Adjusted
Closing Balance Sheet shall be certified by the Treasurer or
other financial officer of the Seller as fairly presenting
the financial position of the Company in accordance with
generally accepted accounting principles, applied on a
consistent basis. All assets and liabilities reflected in
the Adjusted Closing Balance Sheet shall be valued in
accordance with the methodology described in Exhibit "A" as
of 5:00 p.m. on the date of Closing. The difference between
the market value of the Net Assets reflected in the Closing
Balance Sheet and the market value of the Net Assets
reflected on the Adjusted Closing Balance Sheet shall be
payable by Buyer to Seller or by Seller to Buyer, as the
case may be, by certified or bank cashier's check or by wire
transfer of federal funds, not more than fifteen (15) days
after the delivery of the Adjusted Closing Balance Sheet.
Seller shall pay Buyer if the market value of the Net Assets
reflected on the Closing Balance Sheet is greater than the
market value of the Net Assets reflected on the Adjusted
Closing Balance Sheet. Buyer shall pay Seller if the market
value of the Net Assets reflected on the Closing Balance
Sheet is less than the market value of the Net Assets
reflected on the Adjusted Closing Balance Sheet. The term
"Net Assets" used herein shall mean all assets of the
Company less all liabilities of the Company as reflected on
the financial statements described herein.
3.11. Convention Statement. Copies of the Company's
annual National Association of Insurance Commissioners ("NAIC")
convention form statements as filed with the Department for each
of the years 1993 through 1995 are attached as Schedule 3.11. Said
NAIC convention statements present fairly the financial
position of the Company as of the respective dates and for
the respective periods and have been prepared in accordance
with statutory accounting principles prescribed or permitted
by the Department, applied on a consistent basis.
3.12. Liabilities and Obligations. Except as
described in Schedule 3.12 and except for
federal and state income tax liabilities provided for
separately in Section 6 herein, the Company has no material
liability or obligation (direct or indirect, contingent or
fixed, matured or unmatured) of any nature, whether arising
out of contract, tort, statute or otherwise, except
liabilities and obligations in the amounts and categories
reflected, reserved against or given effect to in the
Balance Sheets, and liabilities subsequently incurred in the
ordinary course of business consistent with past practice.
3.13. Absence of Adverse Changes or Events.
Since December 31, 1995, the Company has been operated in
all material respects in the ordinary course of its business
consistent with past practice in prior periods and has not
materially changed or altered its past practices.
3.14. Dividends and Stock Purchases. Except as
indicated in Schedule 3.14, since
December 31, 1995, the Company has not declared, set aside
or made payment of any dividend or other distribution in
respect of any shares of its capital stock, repurchased,
redeemed or otherwise acquired any shares of its capital
stock.
3.15. Title to Assets; Operating Authorities.
Except as disclosed in Schedule 3.15,
the Company has good and marketable title to all of its
properties and assets material to the operation of its
business and reflected in the Balance Sheets and those
acquired by the Company thereafter as disclosed on the
Closing Balance Sheet and the Adjusted Closing Balance
Sheet, except properties and assets sold or otherwise
disposed of in the ordinary course of business consistent
with past practice in prior periods, free and clear of all
mortgages, liens, pledges, charges or encumbrances or other
third party interests of any nature whatsoever, except (a)
as reflected or reserved for in the Balance Sheets, or (b)
the lien of current taxes not yet due and payable
(collectively "Permitted Liens").
3.16. Contracts. All written contracts,
agreements leases, mortgages or commitments, excluding such
as involve payments for less than $1,000 on an annualized
basis or such as are terminable by the Company without
penalty on 30 days or less written notice, to which the
Company is a party or may be bound or to which its assets
are subject, including, in particular, that certain
Agreement of Assumption by and between Company and Life
Insurance Company of Illinois, an Illinois corporation,
dated June 30, 1994, (the "Reinsurance Contract"), are
listed on Schedule 3.16 (collectively the "Contracts"). All
Contracts, including the Reinsurance Contract, are valid,
binding on the parties to them, and in full force and effect
on the date hereof, and the Company has not violated any
provision of, or committed or failed to perform any act
which with notice, lapse of time or both would constitute a
material default under the provisions of any Contract.
Copies of all Contracts disclosed on Schedule 3.16 have been
made available to Buyer for inspection. Schedule 3.16 also
separately identifies all Contracts otherwise required to be
listed thereon which require the consent or approval of
third parties to the execution and delivery of this
Agreement or to the consummation and performance of the
transactions contemplated hereby, and Seller agrees to use
its best efforts to obtain prior to the Closing all such
consents or approvals.
3.17. Litigation. No claim, action, suit,
arbitration, investigation or other proceeding, whether
civil or criminal in nature, is pending against the Company
or any of its properties or with respect to the transactions
pursuant to this Agreement before any court, governmental
agency, authority or commission, arbitrator or mediator.
There are no judgments, consent decrees, injunctions, or any
other judicial or administrative or other mandates
outstanding against or which might be expected to adversely
affect the Company or its assets, liabilities, income,
financial condition, results of operations or business
prospects or its right to conduct its business as presently
conducted.
3.18. Contracts for Personal Services;
Employees. The Company is not a party to or bound by any
contract, agreement, or undertaking with any person for or
related to personal services rendered or to be rendered by
any person. There are, or will be on the Closing Date, no
employees of the Company nor any liabilities or obligations
of the Company or the Seller of any nature, whether
absolute, accrued, contingent or otherwise and whether due
or to become due, arising out of any claims by any present
or former employees of the Company.
3.19. Commission Fees. In connection with the
transactions contemplated by this Agreement, no broker,
finder or similar agent has been employed by or on behalf of
Seller or the Company, and no person with which any of them
has had dealings or communications of any kind is entitled
to a commission or other compensation for which Buyer may be
liable.
3.20. Disclosure. No representation or
warranty herein, including the Schedules hereto prepared by
Seller, nor any information contained in the Balance Sheets,
the Exhibits to this Agreement or any certificate,
statement, or other document delivered by Seller or the
Company, contains any untrue statement of material fact or
omits to state a material fact necessary in order to make
the statements contained therein or herein, in light of the
circumstances under which they were made, not misleading.
3.21. Related Party Transactions.
Except as disclosed in Schedule 3.21, the Company
is not a party to or bound by any oral or written contract,
agreement or understanding (a) with or affecting Seller or
any Affiliate (as hereinafter defined); (b) with or
affecting any Affiliate where such contract, agreement or
understanding is related to the sharing of employees,
services, or facilities or other assets; (c) with any person
or entity related to expense sharing or the provision of
management services; (d) whereby it guarantees or otherwise
assumes a contingent obligation in respect of the obligation
of another; or (e) whereby it is co-debtor, co-insured or
shares joint or common ownership of property with another.
For purposes of this Section 3.21, an Affiliate is one who
controls, is controlled by, or is under common control with
the Company.
3.22. Employee Welfare and Pension Benefit Plans.
(a) Plans. The Company does not now have
and has never maintained or participated in any plan, fund
or program which constitute an "Employee Welfare Benefit
Plan" or "Employee Pension Benefit Plan" within the meaning
of Sections 3(1) and 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
(b) No Multi Employer Plans and No Plans for
Retirees. The Company is not now and in the preceding six
(6) years has not been obligated to contribute to a multi
employer pension plan as defined in Section 37(A) and ERISA,
and has not incurred any liability on account of a "partial
withdrawal" or a "complete withdrawal" (within the meaning
of Sections 4203 and 4205, respectively, of ERISA) with
respect to any multi employer plan.
4. Representations and Warranties of Buyer. As of
the Execution Date and as of the Closing Date, Buyer
represents and warrants to Seller as follows:
4.1. Organization, Powers and Qualifications.
Buyer is duly organized, validly existing and in good
standing under the laws of the State of Missouri and has all
requisite corporate power and authority to own its
properties and assets and carry on its business as now
conducted.
4.2. Authority; No Violation, Etc. The execution
and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of Buyer, and
this Agreement is a valid and binding obligation of Buyer,
enforceable in accordance with its terms (except as may be
limited by general principles of equity to the enforcement
of remedies or applicable bankruptcy, reorganization,
insolvency, moratorium and similar laws affecting creditors'
rights generally now or hereafter in effect). Neither the
execution and delivery by Buyer of this Agreement nor the
consummation by it of the transactions contemplated hereby
will violate, cause a default (or give rise to any right or
termination, cancellation or acceleration) under or require
any consent, approval, notice or filing, pursuant to (a) any
of the terms, conditions or provisions of any agreement,
instrument or obligation to which Buyer is a party, or by
which it or any of its respective properties or assets may
be bound, or (b) the Articles or Bylaws of Buyer.
4.3. Commission Fees. Other than as disclosed on
Schedule 4.3 for which Buyer shall be solely responsible,
there is no broker, finder or similar agent which has been
employed by or on behalf of Buyer, and no person with which
Buyer has had any dealings or communications of any kind is
entitled to any brokerage commission, finder's fee or any
similar compensation for which Seller would be liable.
4.4. Disclosure. No representation or warranty
herein, including the Schedules hereto prepared by Buyer,
nor any information contained in the Exhibits to this Agreement or
any certificate, statement, or other document delivered by
Buyer hereunder, contains any untrue
statement of material fact or omits to state a material fact
necessary in order to make the statements contained therein
or herein, in light of the circumstances under which they
were made, not misleading.
4.5. Litigation. There are no actions, suits,
claims, demands, or other proceedings or investigations of
which Buyer is aware, either judicial or administrative,
pending against Buyer which, if adversely determined, would
materially affect the ability of Buyer to consummate the
transaction contemplated herein.
5. Covenants of Seller and Buyer. Seller and Buyer
covenant and agree to and with each other as follows:
5.1. Update of Information. Between the date
hereof and the Closing, Seller will promptly disclose to
Buyer in writing, and Buyer will promptly disclose to Seller
in writing, information of which they have knowledge (a)
concerning any event that would render any representation or
warranty of Seller or Buyer, respectively, untrue if made as
of the date of such event, (b) which renders any information
set forth in the Exhibits or Schedules to be no longer
correct in all material respects or (c) which is known to
arise after the date hereof and which would have been
required to be included in the Exhibits and Schedules if
such information had existed on the date hereof.
5.2. Access to Business and Records. Between the
date hereof and the Closing and upon reasonable advance
notice, Buyer and its officers, employees, attorneys,
accountants and agents shall have full access to and the
right to inspect, audit and copy the books, records,
contracts, properties, and assets of the Company, and to
consult with officers, employees, attorneys, accountants and
agents of the Company.
5.3. Efforts to Consummate. Subject to the terms
and provisions of this Agreement, each of the parties shall
use its best efforts to take or cause to be taken all action
and to do or cause to be done all things necessary, proper
or advisable under applicable laws and regulations to
consummate and make effective, on or before July 15, 1996
the transactions contemplated hereby, including, without
limitation, the obtaining of all consents, authorizations,
orders and approvals of any third party, whether private or
governmental, including the Form A Order of the Department
approving the sale and purchase of the Shares by Seller to
Buyer, which are required or appropriate in connection with
such parties' performance of such transactions, and each of
the parties hereto shall cooperate with the others in all of
the foregoing. If the parties are unable to consummate this
transaction on or before July 15, 1996 neither party shall
be obligated to pursue or close this transaction beyond such
date.
5.4. Public Announcement. Either prior to or
after the Closing, either party shall be able to make any
public announcement regarding the transaction contemplated
hereby without the prior written consent of the other party
hereto.
5.5. Accreditation, Due Diligence and
Sophistication Matters.
(a) Buyer has been provided an opportunity
to ask questions of, and Buyer has received answers thereto
satisfactory to it from Seller and its representatives
regarding the terms and conditions of this Agreement and
other matters pertaining to this transaction, and Buyer has
obtained all additional information requested of Seller and
its representatives. Buyer has investigated and is familiar
with the affairs, financial condition and prospects of the
Company and has been given sufficient access to and has
acquired sufficient information including the Schedules to
this Agreement and all other information and documents as
requested by Buyer including but not limited to financial
information, corporate records, tax returns, contracts,
forms, leases and premium finance contracts and related
documents about the Company to reach an informed and
knowledgeable decision to acquire the Shares.
(b) Buyer is acquiring the Shares pursuant
to this Agreement for its own account and not with a view to
or for sale in connection with any distribution of all or
any part of the Shares. Buyer acknowledges Seller's
understanding that the sale of the Securities hereunder are
intended to be exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act").
6. Tax Matters.
6.1. Definitions. For purposes of this Section 6,
the following definitions shall apply:
(a) Adverse Consequences: shall mean allocations,
suits, proceedings, hearings, investigations, charges,
complaints, claims, demands, injunctions, judgments, orders,
decrees, rulings, damages, dues, penalties, fines, costs
(reasonable amounts paid in settlement), liabilities,
obligations, taxes, liens, losses, expenses, and fees,
including court costs and (reasonable) attorney's fees and
expenses.
(b) Tax: shall mean any federal, state or local
income, sales, use, premium or franchise tax including any
interest, penalty or addition thereto, whether disputed or
not.
(c) Tax Return: means any return, declaration,
report, claim for refund, or information return or
statement, relating to any Tax, including any schedule or
attachment thereto, and including such amendments thereof.
6.2. Filed Tax Returns. Seller represents and
warrants that Company has filed all Tax Returns that it was
or is required to file. All such Tax Returns were correct
and complete in all material respects. All Taxes owed by
the Company for any and all Tax years ending prior to the
Closing Date, including the Tax year ending December 31,
1995 (whether or not shown on any Tax Return) have been
paid. Company is currently the beneficiary of an extension
of time within which to file its 1995 Federal and Illinois
Income Tax Returns and such Tax Returns shall be filed by
the Seller on or before October 15, 1996.
6.3. No Material Claims. Seller represents and
warrants that there is no material dispute or claim
concerning any Tax liability of the Company either (a)
claimed or raised by any authority in writing or (b) as to
which the Seller and/or the directors and officers of
Company has knowledge based upon personal contact with any
agent of such authority.
6.4. Tax Audits. Seller represents and warrants
that no audits have been conducted or requested with respect
to any Tax liabilities of the Company for any Tax year that
is open under any applicable statute of limitations or a
written agreement to extend a statute of limitations with
any Tax authority.
6.5. Section 338(h)(10) Election. Seller and
Buyer agree to join in an election under IRC 338(h)(10) of
the Code (and any other corresponding elections under state
or local tax law) with respect to the purchase and sale of
the Shares of the Company. Seller will pay any Tax,
including any liability of the Company for Tax resulting
from the application to it of Treasury Regulation
1.338(h)(10)-1(f)(5), attributable to the making of the
Section 338(h)(10) election and will hold harmless and
indemnify Buyer and the Company against any Adverse
Consequences arising from any failure to pay such Tax, as
more fully set forth in Section 12 of this Agreement. All
required forms necessary to effect such election will be
completed and signed at Closing by each party hereto.
6.6 Tax Periods Ending on or Before the Closing
Date. Except for federal, state or local income Tax Returns
with respect to periods for which a consolidated, unitary or
combined income Tax Return of Seller will include the
operations of the Company, Buyer shall cause the Company to
prepare (or cause to be prepared) and file (or cause to be
filed) all other Tax Returns for the Company for all periods
ending on or before the Closing Date which are to be filed
after the Closing Date. Buyer will cause the Company to
permit Seller to review and comment on such Tax Returns
described in the preceding sentence prior to filing and
shall make such revisions to such Tax Returns as are
reasonably requested by Seller. Pursuant to Section 12 of
this Agreement, Seller shall hold harmless and indemnify
Buyer and the Company and shall reimburse Buyer or the
Company, as the case may be, for Taxes with respect to such
Tax Returns, within fifteen (15) days after payment by Buyer
or the Company of such Taxes to the extent that such Taxes
are not accrued on the Closing Balance Sheet. Seller shall
make available all records needed to file said returns
within ten (10) days from the date Buyer requests such
records.
6.7. Tax Periods Ending After the Closing Date.
Buyer shall cause the Company to prepare (or cause to be
prepared) and file (or cause to be filed) any and all Tax
Returns of the Company for Tax periods which end after the
Closing Date. Pursuant to Section 12 of this Agreement, in
the event said Tax Return covers a Tax period which begins
prior to the Closing Date, then Seller shall hold harmless
and indemnify Buyer and the Company and shall pay to the
Company or Buyer, as the case may be, within fifteen (15)
days after the date on which Taxes are paid with respect to
such Tax periods, an amount equal to the portion of such
Taxes which relates to the portion of such Tax period ending
on the Closing Date to the extent that such Taxes are not
accrued on the Closing Balance Sheet. For purposes of this
Section, in the case of any Taxes that are imposed on a
periodic basis and are payable for a Tax period that
includes (but does not end on) the Closing Date, the portion
of such Tax which relates to the portion of such Tax period
ending on or before the Closing Date shall (A) in the case
of any Taxes other than Taxes based on or related to income
or receipts, be deemed to be the amount of such Tax for the
entire Tax period multiplied by a fraction, the numerator of
which is the number of days in the Tax period ending on the
Closing Date and the denominator of which is the number of
days in the entire Tax period, and (B) in the case of any
Tax based upon, or related to, income or receipts, be deemed
equal to the amount which would be payable if the relevant
Tax period ended on the Closing Date. Any credits relating
to the Tax period that begins before and ends after the
Closing Date shall be taken into account as though the
relevant Taxable period ends on the Closing Date. All
determinations necessary to give effect to the foregoing
allocations shall be made in a manner consistent with prior
practice of the Company. Seller shall make available all
records needed to file said returns within ten (10) days
from the date Seller requests such records.
6.8. Refunds and Tax Benefits. Any tax refunds
that are received by the Company and any amounts credited
against Tax to which the Company becomes entitled, that
relate to the Company's Tax periods or portions thereof
ending on or before the Closing Date shall be for the
account of the Seller, and Buyer shall cause the Company to
pay over to the Seller any such refund or an amount of any
such credit within fifteen (15) days after receipt of
entitlement thereto. In addition, to the extent that a
claim for refund or proceeding results in a payment or
credit against Tax by a taxing authority to the Company of
any amount accrued on the Closing Balance Sheet, Buyers
shall cause the Company to pay such amount to Seller within
fifteen (15) days after receipt or entitlement thereto.
6.9. Cooperation on Tax Matters. Buyer, and Buyer
shall cause the Company, and the Seller shall cooperate
fully, as and to the extent reasonably requested by the
other party, in connection with the filing of Tax Returns
pursuant to this Section and any audit, litigation or other
proceeding with respect to Taxes. Such cooperation shall
include the retention and (upon the other party's request)
the provision of records and information which are
reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually
convenient basis to provide additional information and
explanation of any material provided hereunder.
6.10. Tax Sharing Agreements. Seller represents
and warrants the Company has not been a party to any tax
sharing agreements prior to January 1, 1995. Effective for
the tax year ended December 31, 1995 the Company became a
member of the Seller's consolidated return group and a
participant in the Seller's tax sharing agreement. Seller
further represents and warrants that all tax sharing
agreements or similar agreements with respect to or
involving the Company shall be terminated as of the Closing
Date and, after the Closing Date, the Company shall not be
bound thereby or have any liability thereunder.
6.11. Affiliated Group Liability. Pursuant to
Section 12 of this Agreement, Seller shall indemnify and
hold harmless Buyer and the Company against any and all
liability for or with respect to federal, state and local
income and franchise taxes of Seller or any member of any
affiliated group of which Seller is a member (other than the
Company) assessed against the Company for any Tax period
ending on or before the Closing Date by reason of its being
severally liable for the entire tax of any such affiliated
group pursuant to Income Tax Regulations 1.1502-6 or any
analogous state or local tax provision. Any indemnity
payable by Seller to the Company or Buyer, as the case may
be, pursuant to Section 12 of this Agreement and this
Section 6.11 shall be paid on or before the later of ten
(10) days after Buyer's request thereof or ten (10) days
prior to the date on which the liability upon which the
indemnity is based is required to be satisfied by Buyer or
the Company.
6.12. Taxes Resulting from This Agreement. All
transfer, documentary, sales, use, stamp, registration and
other such Taxes and fees (including any penalties and
interest) incurred in connection with carrying out the terms
of this Agreement shall be paid by the Seller when due, and
Seller will, at its own expense, file all necessary Tax
Returns and other documentation with respect to all such
transfer, documentary, sales, use, stamp, registration and
other such Taxes and fees, and if required by applicable
law, Buyer will cause the Company and its affiliates to join
in the execution of any such Tax Returns and other
documentation.
7. Conditions to Obligations of Buyer to Consummate
Acquisition. The obligations of Buyer to consummate the
transactions provided for in this Agreement shall be subject
to satisfaction, on or before the Closing, of the following
conditions:
7.1. Representations and Warranties True at
Closing. All representations and warranties of Seller shall
be true on and as of the Closing as though such
representations and warranties were made at and as of such
date, except as otherwise expressly stated herein.
7.2. Corporate Action. All action necessary to
authorize the execution, delivery and performance hereof by
the Seller and the consummation of the transactions
contemplated hereby shall have been duly and validly taken
by the Board of Directors of the Seller; the Seller shall
have furnished Buyer with a certified copy of all
resolutions adopted by the Board of Directors of the Seller
in connection with such actions, together with copies of
such other instruments and documents as Buyer shall have
reasonably requested in writing.
7.3. Review of Business and Financial Condition of
Company. Buyer shall have completed a review of the
corporate records, licenses, authorities, business and
financial condition of the Company and shall be satisfied
with the results of its review in its sole discretion.
7.4. Opinion of Counsel for Seller. Buyer shall
have received an opinion of counsel for Seller reasonably
satisfactory to Buyer and its counsel.
7.5. Licenses, Permits, Etc. Each state or other
governmental unit identified on Schedule 7.5 by which the Company,
as of the date hereof, is licensed to conduct its business, and which
shall require, as a condition of such license, prior notice or
approval of the transactions contemplated hereby, shall be
so notified or such approval shall be obtained prior to the
Closing, and, in particular, Buyer shall have received the
Form A Order from the Department approving the transaction
contemplated by this Agreement as required under Chapter
215, Act 5, Section 131.4 of the Illinois Statutes.
7.6. Documents Satisfactory. The status of all
legal matters referred to herein shall be acceptable to
Buyer. Buyer shall have received all exhibits required
under this Agreement by the Closing, together with all other
documents that it may have requested in connection with the
transactions contemplated. Such exhibits and documents
shall in all material respects be acceptable to Buyer.
7.7. Performance of Covenants. Seller shall have
performed each and every obligation to be performed by it
hereunder at or before the Closing.
7.8. Amendment of Reinsurance Contract. On or
before the Closing, the Company and the Life Insurance
Company of Illinois shall have amended the Reinsurance
Contract in form and substance satisfactory to Buyer with
respect to the liabilities of the Company transferred and
ceded to the Life Insurance Company of Illinois.
7.9. Other Obligations at Closing. In addition to
the items identified in this Section 7, at the Closing,
Seller will deliver to Buyer the following items against
delivery of items specified in Section 8 below:
(a) Certificates for the Shares duly endorsed in
blank or together with stock powers duly endorsed in blank;
(b) The written and signed resignations of all
directors and elected officers of the Company which shall be
dated as of, and take effect on, the Closing Date;
(c) The Closing Balance Sheet;
(d) A Schedule setting forth the name of each
bank, trust company, safe deposit company, broker and dealer
in or which the Company has an account or safe deposit box;
Seller shall provide Buyer with the names of all persons
authorized to draw on said accounts, give instructions with
respect thereto, or have access thereto on or prior to the
Closing Date;
(e) Any financial statement or other document
which Seller is required to deliver to Buyer under this
Agreement; and
(f) Seller will also have assembled and ready at
Closing for delivery to Buyer all corporate records,
licenses, minute books, stock books, seals, examination
reports, annual statements, income tax returns, contracts
and other documents of the Company.
8. Conditions to Obligation of Seller to Consummate
the Acquisition. The obligation of Seller to consummate
this transaction shall be subject to satisfaction, on or
prior to the Closing, of the following conditions:
8.1. Representations and Warranties True at
Closing. The representations and warranties of Buyer shall
be true on and as of the Closing, as though such
representations and warranties were made at and as of such
date, except as is otherwise expressly contemplated herein.
8.2. Corporate Action. All action necessary to
authorize the execution, delivery and performance hereof by
Buyer and the consummation of the transactions contemplated
hereby shall have been duly and validly taken by the Board
of Directors of Buyer; Buyer shall have furnished the Seller
with a certified copy of all resolutions adopted by the
Board of Directors of Buyer in connection with such actions,
together with copies of such other instruments and documents
as the Seller shall have reasonably requested in writing.
8.3. Opinion of Counsel for Buyer. Seller shall
have received an opinion of counsel for Buyer reasonably
satisfactory to Seller and its counsel.
8.4 Documents Satisfactory. The status of all
legal matters referred to herein shall be acceptable to the
Seller. The Seller shall have received all documents that
it may have requested in connection with the transactions
contemplated hereby in form and substance satisfactory to
it.
8.5. Performance of Covenants. Buyer shall have
performed each and every obligation to be performed by it
hereunder at or before the Closing.
8.6. Other Obligations at Closing. In addition to
the items identified in this Section 8, at the Closing Buyer
will deliver to Seller the following items against delivery
of the items specified in Section 7 above:
(a) Cash or certified or bank cashier's check or
wire transfer of federal funds for the full amount of the
Purchase Price set forth in Section 1.2 above, subject to
any adjustments to said Purchase Price as provided for in
this Agreement; and
(b) Any other document which Buyer is required to
deliver to Seller under this Agreement.
9. Offer Pending Approval of the Department.
Notwithstanding anything to the contrary, this Agreement,
even though executed by both parties, shall nonetheless
constitute, and shall be deemed to only be considered, an
offer by Buyer until such time as the Department has issued
the Form A Order approving Buyer's purchase of the Shares
from Seller.
10. Termination. On or prior to Closing:
10.1. Seller's Right to Terminate. Seller, by
written notice to Buyer, may terminate this Agreement in the
event that any of the conditions precedent contained in
Section 8 hereof to the performance of its obligations which
are to be performed at or prior to such date shall not have
been fulfilled prior to and cannot be fulfilled concurrent
with the Closing and shall not have been waived by Seller,
which termination shall not prejudice any claim for damages
or other relief which Seller may have at law or in equity
against Buyer; and
10.2. Buyer's Right to Terminate. Buyer, by
written notice to Seller, may terminate this Agreement in
the event that any of the conditions precedent contained in
Section 6 hereof to the performance of Buyer's obligations
shall not have been fulfilled prior to and cannot be
fulfilled concurrent with the Closing and shall not have
been waived by Buyer, which termination shall not prejudice
any claim for damages or other relief which Buyer may have
at law or in equity against Seller.
10.3. Expenses. Except as otherwise provided
herein, each of the parties to this Agreement shall pay all
of its or his expenses incurred in connection with this
Agreement and the transactions contemplated hereby,
including without limitation the expenses of lawyers,
accountants, investment bankers, appraisers, and other
advisors.
10.4. July 15, 1996 Termination Date.
Either party may terminate this Agreement if the transaction
contemplated herein does not close on or before July 15,
1996.
11. Contents of Agreement, Parties in Interest,
Assignment, Etc. This Agreement and the Exhibits and
Schedules which are attached hereto and are incorporated
herein set forth the entire understanding of the parties
with respect to the subject matter hereof. Any previous
agreements or understandings between the parties regarding
the subject matter hereof are merged into and superseded by
this Agreement. This Agreement may not be assigned without
the written consent of the parties. All representations,
warranties, covenants, terms and conditions of this
Agreement shall be binding upon and inure to the benefit of
and be enforceable by the respective successors and
permitted assigns of the parties hereto. Nothing herein
express or implied is intended or shall be construed to
confer upon or to give any person, other than the parties
and their respective successors and permitted assigns, any
rights or remedies under or by reason of this Agreement.
12. Indemnification.
12.1. Breach of Warranties and Covenants by Buyer
and Seller. Except to the extent modified by Section 6 of
this Agreement relating to Taxes, in the event that Buyer,
the Company or the Seller shall suffer any damages
whatsoever as a result of any inaccuracy in any
representation or warranty made herein by the other party or
upon any schedules or exhibits which constitute part of this
Agreement by either party which is relied upon in the
consummation of the transactions contemplated hereby, or any
breach of or failure by Buyer, Company or the Seller to
perform any obligation or to comply with any covenant
specified in this Agreement, then the party causing said
damages shall indemnify and hold harmless Buyer, Company or
the Seller, as the case may be, its successors or assigns,
upon Buyer's, the Company's or Seller's demand, for the full
amount of all damages and liabilities suffered, and all
expenses with respect thereto. Such damage shall include,
but shall not be limited to, any losses, liabilities,
expenses or costs incurred including reasonable attorneys'
fees. For purposes of this indemnification, Buyer, the
Company and the Seller have relied upon all representations,
warranties and covenants contained in this Agreement.
12.2. Indemnification of Buyer and the Company by
Seller for Pre-Closing Events. Except for the debts,
liabilities or obligations reflected in the Closing Balance
Sheet and the Adjusted Closing Balance Sheet which remain in
the Company on the Closing Date and which may have resulted
in an adjustment to the Purchase Price, Seller agrees to
indemnify and hold harmless Buyer and the Company, their
successors and assigns, with respect to any and all claims,
demands, actions, suits, proceedings, or judgments (the
"Claim(s)") and with respect to any and all debts,
obligations, liabilities, fines, penalties, assessments,
charges, levies, premiums, surcharges or taxes (the
"Obligation(s)") including but not limited to any and all Claims or
Obligations of the Company which were transferred or ceded
by the Company pursuant to the Reinsurance Contract; whether
accrued, absolute, contingent or otherwise, arising out of
any insurance policy, contract, transaction, act, event,
occurrence, litigation, the operation of business by the Company
or state of facts involving the Company which was entered into,
occurs or exists prior to or on the Closing Date or relates to
the conduct of the Company's business prior to or on such
Closing Date, including all Claims and Obligations incident
to any of the foregoing.
12.3. Indemnification of Seller for Post-
Closing Events. Buyer agrees to indemnify and hold harmless
the Seller, its successors and assigns, in respect of all
Claims or Obligations arising out of any transaction, act,
event, occurrence, litigation or state of facts involving
the Company which relates solely and directly to the conduct
of the Company's business after the Closing Date, including
all Claims and Obligations incident to any of the foregoing;
provided that this provision shall not apply to liabilities
arising out of the Buyer's failure to maintain the Licenses
in good standing following the Closing Date.
12.4. Claims Procedure. Claims for
indemnification hereunder shall be made as follows:
(a) Third Party Claims. In the event that
any Claim or Obligation for which any party hereto, which
for purposes of this Section 12, shall include the Company,
would be entitled to indemnification under this Agreement is
asserted or sought to be collected by a third party, the
party seeking indemnity shall give a Claim Notice (as
described in Section 12.5 hereof) to the party from whom
indemnity is sought. The party from whom indemnity is
sought shall have thirty (30) days from the date of delivery
of the Claim Notice (the "Notice Period") to notify the
party seeking indemnity whether or not the right to
indemnity for the Claim is disputed and, if disputed, the
reasons therefor.
(i) If the right to indemnity is not
disputed by the party from whom indemnity is sought, such
party shall assume the control and defense and/or settlement
of such Claim, and the amount of any settlement or judgment
and the costs and expenses of such defense shall be paid by
such party. If the party seeking indemnity shall desire to
participate in any such defense, such party may do so at its
sole cost and expense, in which event no settlement of any
Claim which would adversely affect the rights of the party
seeking indemnity may be made without the written consent of
such party, which consent may not be unreasonably withheld.
Without limiting the generality of the foregoing, it shall
not be deemed unreasonable to withhold consent to a
settlement involving injunctive or other relief against the
party seeking indemnity or their respective assets,
employees or businesses. The party from whom indemnity is
sought shall use its best efforts to keep the party seeking
indemnity fully informed of the status of any such Claim at
all stages thereof, regardless of whether or not they
participate in any such defense.
(ii) If the right to indemnity is
disputed by the party from whom indemnity is sought or if
such party shall fail to respond within the Notice Period,
the party seeking indemnity shall have the right to control
the defense and/or settlement of the Claim, and the amount
of any settlement or judgment and the costs and expenses of
such defense (including, without limitation, attorneys' fees
incurred in connection therewith) may be the subject of a
claim for indemnification under Section 12.4(b) hereof.
Nothing herein contained shall prohibit or limit the right
of the party seeking indemnity hereunder to pursue such
legal remedies as may be available to it or them to enforce
such right of indemnity prior to or after the resolution of
the third party's Claim.
(iii) The party seeking indemnity shall
make available to the party from whom indemnity is sought
and their attorneys and accountants all books and records of
the party seeking indemnity relating to any Claim and the
parties agree to render each other such assistance as they
may reasonably require in order to ensure the proper and
adequate defense of any Claim.
(b) Non-Third Party and Other Claims.
Except to the extent modified by Section 6 of this Agreement
relating to Taxes, in the event of a Claim for which any
party hereto which, for purposes of this Section 12 of this
Agreement, shall include the Company, would be entitled to
indemnification under this Agreement which does not involve
a Claim being asserted or sought to be collected by a third
party, the party seeking indemnity shall give a Claim
Notice, or in the case of Claims which have proceeded in the
manner described in Section 12.4(a)(ii), a second Claim
Notice, with respect to the Claim to the party from whom
indemnity is sought. Unless disputed by the party from whom
indemnity is sought by written notice within thirty (30)
days of receipt of the Claim Notice to the party seeking
indemnity stating the reasons therefor, each Claim under
this Section 12.4(b) shall be paid within forty-five (45)
days after the date of receipt of the Claim Notice therefor.
If any Claim under this Section 12.4(b) shall not be paid
within such forty-five (45) day period, or if the party from
whom indemnity is sought disputes the Claim by written
notices within such thirty (30) day period to the party
seeking indemnity stating the reasons therefor, the party
seeking indemnity shall have the right to commence legal
proceedings for the enforcement of its rights hereunder, and
shall be entitled to recover interest thereon at the rate of
ten percent (10%) per year.
12.5. Timing of Claim Notice. Each Claim
Notice shall be given by the party seeking indemnity as
promptly as practicable after such party becomes aware of
the Claim and the facts indicating that a Claim for
indemnification in respect of the same may be warranted;
provided, however, that no Claim notice may be sent after
the expiration of the time period provided in Section 12.6
herein. Each Claim Notice shall specify the nature of the
Claim, the applicable provision(s) of this Agreement or
other instrument under which the Claim for indemnity arising
and the amount or the estimated amount thereof. No failure
or delay in giving a Claim Notice and no failure to include
any specific information or any reference to the provisions
of this Agreement or other instrument under which the Claim
for indemnification arises shall affect the obligation of
the party from whom indemnification is sought, except to the
extent that such failure or delay shall adversely affect the
ability of such party to defend, settle or satisfy the
Claim.
12.6. Indemnity Claims. With the exception of
any Claims against Seller with respect to any Obligations of
the Company which were transferred or ceded by the Company
pursuant to the Reinsurance Contract, all Claims against
Seller under this Article 12 with respect to Representation
and Warranty Claims, must be asserted in writing by Buyer
within five (5) years from the Closing Date. All Claims
against Seller under this Article 12 arising out of any act,
occurrence, litigation or state of facts involving the
Reinsurance Contract may be asserted in writing by Buyer
until such time as any and all liabilities transferred or
ceded by the Company pursuant to the Reinsurance Contract
have been paid.
13. Notices. Any notices or other communications
required or permitted hereunder shall be deemed to have been
given when sent by certified or registered mail, postage
prepaid, addressed as follows:
if to Buyer, to: Janice Forsyth, Esq.
Senior Vice President, General
Counsel and Secretary
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, MO 63103
with a copy to: Frank J. Ross, Esq.
Polsinelli, White, Vardeman
& Shalton
700 W. 47th Street, Suite 1000
Kansas City, MO 64112
and if to Seller: Paula McKay, Esq.
ABN-AMRO North America, Inc.
135 S. LaSalle Street, Suite 925
Chicago, IL 60603
or to such other persons and addresses as have been
furnished by either party to the other in writing. No
notice, waiver, consent or approval required or permitted
hereunder shall be deemed effective unless given in writing.
14. Governing Law. This Agreement shall be construed
and interpreted in accordance with the laws of the State of
Illinois without reference or regard to the conflicts of
laws and rules of said state.
[This space intentionally left blank.]
[This page intentionally left blank.]
IN WITNESS WHEREOF, this Agreement has been executed on
the day and year first above written.
RightCHOICE Managed Care, Inc.
By: [s] Frederic C. Brussee
Its: President and Chief Operating Officer
ATTEST:
____________________
Secretary
LA SALLE BANK, F.S.B.
By: [s] Robert J. Taylor
Its: Senior Vice President and Chief
Financial Officer
ATTEST:
[s] Carol L. Tenyan
Secretary
Exhibit 10.2
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT ("Amendment"),
dated as of August 9, 1996, is entered into by and among
RIGHTCHOICE MANAGED CARE, INC. (the "Company"), the
several financial institutions party to the Credit
Agreement (collectively, the "Banks"), BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, as administrative
agent for itself and the Banks (the "Administrative
Agent") and THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, as
co-agent for the Banks (the "Co-Agent").
RECITALS
A. The Company, Banks, the Co-Agent and
Administrative Agent are parties to a Credit Agreement dated as of
August 10, 1995 (as amended, the "Credit Agreement") pursuant to
which the Administrative Agent, the Co-Agent and the Banks
have extended certain credit facilities to the Company.
B. The Company has requested that the Credit
Agreement be amended to (i) revise the EBITDA definition, (ii)
revise the Fixed Charge covenant in Section 7.1(d), and
(iii) revise the Restricted Payments covenant in Section
7.12.
C. The Banks are willing to amend the Credit
Agreement, subject to the terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties
hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings, if
any, assigned to them in the Credit Agreement.
2. Amendments to Credit Agreement.
(a) The definition of "EBITDA" in Section 1.1
of the Credit Agreement is hereby deleted and the following
is inserted in lieu thereof:
"EBITDA" means, with respect to the Company and
its Subsidiaries for any applicable period, Net
Income for such period, plus, to the extent deducted
in determining Net Income for such period, the
aggregate amount of (i) Interest Expense, (ii)
federal, state, local and foreign income taxes, (iii)
depletion, depreciation and amortization of tangible
and intangible assets, and (iv) solely with respect
to the Company's fiscal years ending December 31,
1996 and 1997, up to an aggregate of $7,000,000 of
one-time expenses incurred in connection with the
relocation of the Company's service center; it being
understood that, to the extent that "EBITDA" is
calculated for any period preceding the Closing Date,
each component of such calculation shall be determined
as if the Merger had been consummated on the day immediately
preceding the commencement of such period. (Used in definitions
of "Debt to EBITDA Ratio" and "Fixed Charge Coverage Ratio")
(b) Section 7.1(d) of the Credit Agreement is
amended to read in its entirety, as follows:
"(d) As of the end of any fiscal quarter of the
Company, its Fixed Charge Coverage Ratio to be less
than 3.0:1.0 except for its fiscal quarters ending
June 30, 1996 through December 31, 1997 for which the
Company shall not permit its Fixed Charge Coverage
Ratio to be less than 2.5:1.0."
(c) Section 7.12 of the Credit Agreement is
amended to read in its entirety, as follows:
7.12 Restricted Payments. The Company shall
not, and shall not suffer or permit any Subsidiary
to, declare or make any dividend payment or other
distribution of assets, properties, cash, rights,
obligations or securities on account of any shares of
any class of its capital stock, or purchase, redeem
or otherwise acquire for value any shares of its
capital stock or any warrants, rights or options to
acquire such shares, now or hereafter outstanding, or
make or permit to be made any deposit for purposes of
any of the foregoing; except that the Company and any
Wholly-Owned Subsidiary may:
(a) declare and make dividend payments or other
distributions payable solely in its common stock;
(b) purchase, redeem or otherwise acquire shares
of its common stock or warrants or options to acquire
any such shares with the proceeds received from the
substantially concurrent issue of new shares of its
common stock; and
(c) except as otherwise required under Section 6.14,
declare or pay cash dividends to its stockholders and
purchase, redeem or otherwise acquire shares of its
capital stock or warrants, rights or options to acquire
any such shares for cash in an aggregate amount for all
such payments, purchases, redemptions and other
acquisitions not to exceed the sum of (a) 25% of the Net
Income of the Company and its Subsidiaries arising after
the Closing Date and computed on a cumulative consolidated
basis (or 100% of such Net Income if it is a deficit for
such period) plus (b) 50% of the Net Cash Proceeds of any
Equity Issuance occurring after the Closing Date (other
than an Equity Issuance consummated in connection with a
merger or acquisition); provided, that, both before and
immediately after giving effect to such proposed action,
no Default or Event of Default shall exist; and
(d) the Company may purchase up to 2,000,000 shares of
its common stock from Blue Cross Blue Shield of Missouri,
provided that the purchase price shall not exceed $16.00
per share nor be less than $11.00 per share, and further
provided that both before and after giving effect to any
such proposed purchase, no Default or Event of Default
shall exist.
3. Representations and Warranties. The Company hereby
represents and warrants to the Administrative Agent and the
Banks as follows:
(a) Subject to the effectiveness of the amendments
contemplated hereby, no Default or Event of Default has
occurred and is continuing.
(b) The execution, delivery and performance by the
Company of this Amendment have been duly authorized by all
necessary corporate and other action and do not and will not
require any registration with, consent or approval of, notice
to or action by, any Person (including any Governmental
Authority) in order to be effective and enforceable. The
Credit Agreement as amended by this Amendment constitutes the
legal, valid and binding obligation of the Company, enforceable
against it in accordance with its respective terms, without
defense, counterclaim or offset.
(c) Subject to the effectiveness of the amendments
contemplated hereby, all representations and warranties of the
Company contained in the Credit Agreement are true and correct.
(d) The Company is entering into this Amendment on the
basis of its own investigation and for its own reasons, without
reliance upon the Administrative Agent and the Banks or any
other Person.
4. Effective Date. This Amendment will become effective
on the date the Administrative Agent has received from the
Company and the Majority Banks the following: (a) a duly
executed original (or, if elected by the Administrative Agent,
an executed facsimile copy) of this Amendment, and (b) payment
from the Company, for the benefit of each of the Banks for
which the Administrative Agent or its counsel shall have
received on or before 5:00 p.m. (Pacific Time) August 12, 1996,
an executed counterpart hereof (including by fax), of a non-
refundable amendment fee equal to 0.05% of the combined
Commitments; which fee the Company hereby agrees to pay on
demand to the Administrative Agent for the pro rata benefit of
each of such executing Banks.
5. Reservation of Rights. The Company acknowledges and
agrees that the execution and delivery by the Administrative
Agent and the Banks of this Amendment, shall not be deemed to
create a course of dealing or otherwise obligate the
Administrative Agent or the Banks to forbear or execute similar
amendments under the same or similar circumstances in the
future.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms,
covenants and provisions of the Credit Agreement are and shall
remain in full force and effect and all references therein to
such Credit Agreement shall henceforth refer to the Credit
Agreement as amended by this Amendment. This Amendment shall
be deemed incorporated into, and a part of, the Credit
Agreement.
(b) This Amendment shall be binding upon and inure to
the benefit of the parties hereto and thereto and their
respective successors and assigns. No third party
beneficiaries are intended in connection with this Amendment.
(c) THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS; PROVIDED
THAT THE ADMINISTRATIVE AGENT AND THE BANKS SHALL RETAIN ALL
RIGHTS ARISING UNDER FEDERAL LAW.
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but
all such counterparts together shall constitute but one and the
same instrument. Each of the parties hereto understands and
agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the
form of an executed original or an executed original sent by
facsimile transmission to be followed promptly by mailing of a
hard copy original, and that receipt by the Administrative
Agent of a facsimile transmitted document purportedly bearing
the signature of a Bank or the Company shall bind such Bank or
the Company, respectively, with the same force and effect as
the delivery of a hard copy original. Any failure by the
Administrative Agent to receive the hard copy executed original
of such document shall not diminish the binding effect of
receipt of the facsimile transmitted executed original of such
document of the party whose hard copy page was not received by
the Administrative Agent.
(e) This Amendment, together with the Credit Agreement,
contains the entire and exclusive agreement of the parties
hereto with reference to the matters discussed herein and
therein. This Amendment supersedes all prior drafts and
communications with respect thereto. This Amendment may not be
amended except in accordance with the provisions of Section
10.1 of the Credit Agreement.
(f) If any term or provision of this Amendment shall be
deemed prohibited by or invalid under any applicable law, such
provision shall be invalidated without affecting the remaining
provisions of this Amendment or the Credit Agreement,
respectively.
(g) The Company covenants to pay to or reimburse the
Administrative Agent and the Banks, upon demand, for all costs
and expenses (including allocated costs of in-house counsel)
incurred in connection with the development, preparation,
negotiation, execution and delivery of this Amendment,
including without limitation appraisal, audit, search and
filing fees incurred in connection therewith.
IN WITNESS WHEREOF, the parties hereto have
executed and delivered this Amendment as of the date first
above written.
RIGHTCHOICE MANAGED CARE, INC.
By: [s] Sandra Van Trease
Title: Senior Vice President and CFO
By: [s] Brett J. McIntyre
Title: Vice President and
Treasurer
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Administrative Agent
By: [s] Wyatt R. Ritchie
Title: Managing Director
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a Bank
By: [s] Wyatt R. Ritchie
Title: Managing Director
THE BOATMEN'S NATIONAL BANK OF
ST. LOUIS, as Co-Agent and as a Bank
By: [s] Stephen J. Sainz
Title: Corporate Banking Officer
THE BANK OF NOVA SCOTIA
By: [s] Carolyn A. Lopez
Title: Relationship Manager
MERCANTILE BANK OF ST. LOUIS, N.A.
By: [s] Ann L. Vazquez
Title: Vice President
BANK OF MONTREAL
By: [s] Irene M. Geller
Title: Director
Exhibit 10.3
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 19th day of
July, 1996, by and between Blue Cross and Blue Shield of
Missouri, a Missouri corporation ("BCBSMo") and RightCHOICE
Managed Care, Inc., a Missouri corporation ("RIT"), with
reference to the following recitals.
R E C I T A L S
A. The capital stock of RIT consists of (1) Class A Common
Stock, par value $.01 per share (the "Class A Stock"), and (2)
Class B Common Stock, par value $.01 per share (the "Class B
Stock").
B. BCBSMo owns all of the outstanding 14,962,500 shares of
the Class B Stock of RIT.
C. Each share of Class B Stock is convertible into one
share of Class A Stock at the option of the holder at any time.
D. RIT wishes to acquire not less than 1,500,000 and up to
2,000,000 shares of Class A Stock from BCBSMo.
E. BCBSMo is willing to sell to RIT not less than
1,500,000 shares of its Class B Stock (and, at the option of RIT,
as hereinafter provided, up to 2,000,000 shares) at the "Closing"
(as hereinafter defined) against payment of the "Purchase Price"
(as hereinafter defined) and upon the other terms, provisions and
conditions set forth herein.
A G R E E M E N T
NOW, THEREFORE, in consideration of the recitals and of the
respective representations, warranties and agreements herein
contained, the parties hereto agree as follows:
ARTICLE I
Purchase and Sale of Subject Shares
1.1 Agreement to Purchase and Sell. At the Closing
hereunder, BCBSMo shall sell, convey, assign, transfer and
deliver to RIT, upon and subject to the terms and conditions of
this Agreement, and RIT shall purchase from BCBSMo, the "Subject
Shares" (as hereinafter defined).
1.2 Purchase Price. The purchase price ("Purchase Price")
for the Subject Shares shall be an amount equal to the product
obtained by multiplying the "Average Closing Sale Price" of the
Class A Stock by the number of Subject Shares (expressed in
dollars). As used herein, the term "Average Closing Sale Price"
shall mean the average of the closing prices per share of the
Class A Stock as reported on the New York Stock Exchange
Composite Tape on each of the last five trading days ending on
the second trading day prior to the Closing Date.
1.3 Payment and Form of the Purchase Price. On the Closing
Date, RIT shall pay to BCBSMo an amount equal to the Purchase
Price by assignment and delivery of the "Bush O'Donnell
Portfolio" (as hereinafter defined) and the remainder (i.e., the
Purchase Price minus the value of the Bush O'Donnell Portfolio at
time of Closing, as determined below) in cash. As used herein,
the term "Bush O'Donnell Portfolio" means that portfolio of
securities and cash managed by Bush O'Donnell & Co., 101 S.
Hanley, St. Louis, MO 63105 for RIT. Attached as Exhibit A is a
list of the securities in the Bush O'Donnell Portfolio showing in
the case of each security the name of the security, the number of
shares, the date of purchase, the cost of each such security and
the market value of each security as of the close of trading on
July 17, 1996. In computing payment of the Purchase Price, the
Bush O'Donnell Portfolio shall be valued as of the close of
trading on the last business day preceding Closing. RIT's
interest in the Bush O'Donnell Portfolio shall be assigned to
BCBSMo at the Closing. The cash portion of the Purchase Price
shall be paid by wire transfer of immediately available funds to
such bank account as shall be specified by BCBSMo.
1.4 Number of Subject Shares. RIT shall have the option,
exercisable at any time on or before the close of business on the
second business day preceding the Closing Date, to increase (but
not decrease) the number of shares of Class A Stock to be
delivered by BCBSMo hereunder from 1,500,000 shares to an amount
not in excess of 2,000,000 shares, provided, however, that in any
event RIT shall purchase a number of shares which will result in
a Purchase Price equal to or greater than the value of the Bush
O'Donnell Portfolio valued for Closing as specified in Section
1.3 hereof. RIT may exercise the option provided for in this
Section 1.4 by the timely personal delivery to the Executive Vice
President of BCBSMo of written notice thereof. If such notice is
not received by BCBSMo as provided in the immediately preceding
sentence, the number of shares to be delivered by BCBSMo pursuant
to Section 2.2(a) hereof shall be 1,500,000. The number of
shares to be delivered by BCBSMo at the Closing pursuant to this
Section 1.4 is referred to herein as the "Subject Shares."
ARTICLE II
The Closing
2.1 Closing. The consummation of the sale and purchase of
the Subject Shares (the "Closing") shall take place at 10:00
a.m., local time, on August 30, 1996, at the offices of BCBSMo,
or on such other date and/or place as may be mutually agreed upon
in writing by the parties hereto. Notwithstanding the foregoing,
if by August 28, 1996, all regulatory approvals required in
connection with the purchase and sale of the Subject Shares have
not been obtained, and/or all notices have not been given or the
applicable waiting periods have not expired (collectively, the
"Regulatory Requirements"), and if all Regulatory Requirements
not then satisfied are being pursued in good faith by the
appropriate party or parties, then the Closing Date shall be a
date occurring within five (5) business days from the
satisfaction of all Regulatory Requirements, as selected by
BCBSMo. The date of the Closing is referred to herein as the
"Closing" or the "Closing Date."
2.2 Items to be Delivered at Closing. At the Closing, and
subject to the terms and conditions herein contained:
(a) BCBSMo shall deliver to RIT the Subject Shares,
free and clear of all restrictions on transfer, liens,
encumbrances, security interests and claims whatsoever, and
in proper form for transfer (as described in Section 5.2(c)
hereof), and RIT shall deliver to BCBSMo the Purchase Price;
and
(b) At or prior to the Closing, the parties hereto
shall also deliver to each other the agreements,
certificates and other instruments referred to in Article V
hereof.
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of BCBSMo. BCBSMo
hereby represents and warrants to RIT as follows:
(a) BCBSMo is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Missouri;
(b) BCBSMo has the corporate power, authority and
legal right to execute, deliver and perform this Agreement;
(c) the execution, delivery and performance of this
Agreement have been duly authorized by all necessary
corporate action, this Agreement has been duly executed and
delivered by BCBSMo, and constitutes the legal, valid and
binding obligation of BCBSMo, enforceable against it in
accordance with its terms;
(d) the execution, delivery and, upon compliance with
"Missouri Notification Act" (as hereinafter defined) and all
other Regulatory Requirements (if any), performance of this
Agreement by BCBSMo does not and will not violate, conflict
with or result in any breach of any term, condition or
provision of, or require the consent of any other person
under (i) any judgment, order, writ, injunction or decree of
any court, arbitrator or governmental or regulatory
official, body or authority which is applicable to BCBSMo,
(ii) the charter documents or bylaws of BCBSMo, or (iii) any
mortgage, indenture, agreement, contract or other
instrument, document or understanding, oral or written, to
which BCBSMo is now a party or by which BCBSMo is otherwise
bound; and
(e) BCBSMo is the lawful owner of the shares of Class
B Stock which, when delivered as provided in Section 2.2(a)
hereof, will constitute the Subject Shares, and on the
Closing Date will have good and clear title to the Subject
Shares, free of all restrictions on transfer, liens,
encumbrances, security interests and claims whatsoever.
3.2 Representations and Warranties of RIT. RIT represents
and warrants to BCBSMo as follows:
(a) RIT is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Missouri;
(b) RIT has the corporate power, authority and legal
right to execute, deliver and perform this Agreement;
(c) the execution, delivery and performance of this
Agreement have been duly authorized by all necessary
corporate action, and this Agreement has been duly executed
and delivered by RIT, and constitutes the legal, valid and
binding obligation of RIT, enforceable against it in
accordance with its terms; and
(d) the execution, delivery and, upon compliance with
the Missouri Notification Act and all other Regulatory
Requirements (if any), performance of this Agreement by RIT
does not and will not violate, conflict with or result in
any breach of any term, condition or provision of, or
require the consent of any other person under (i) any
judgment, order, writ, injunction or decree of any court,
arbitrator or governmental regulatory official, body or
authority which is applicable to RIT, (ii) the charter
documents or bylaws of RIT, or (iii) except as set forth on
Schedule 3.2(d) hereto, any mortgage, indenture, agreement,
contract, or other instrument, document or understanding,
oral or written, to which RIT is now a party or by which RIT
is otherwise bound.
ARTICLE IV
Covenants and Agreements of the Parties
4.1 Consents and Approvals. Each of BCBSMo and RIT shall
use all reasonable efforts to satisfy all Regulatory Requirements
for the performance of its obligations under this Agreement and
the purchase and sale of the Subject Shares hereunder. Each such
party shall make all filings, applications, statements and
reports to all federal and state government agencies or entities
which are required to be made prior to the Closing Dates pursuant
to any applicable statute, rule or regulation in connection with
this Agreement or such purchase and sale, including, without
limitation, the notification required under Section 382.195 RSMo
(the "Missouri Notification Act"). RIT shall use all reasonable
efforts to obtain the consents from those parties listed on
Schedule 3.2(d) hereto to RIT's purchase of the Subject Shares
hereunder.
4.2 Ownership and Delivery of the Subject Shares. BCBSMo
will continue to own at least 2,000,000 shares of Class B Stock
until the Closing. It is the understanding of the parties that
the transfer of shares of Class B Stock by BCBSMo to any party
(including RIT) will automatically cause the conversion of such
shares to a like number of Class A Stock. Notwithstanding such
automatic conversion, BCBSMo, at the request of RIT, will
promptly take all further required action, if any, to effect or
further perfect the conversion of the Class B Stock to be
delivered by BCBSMo at the Closing to a like number of shares of
Class A Stock.
4.3 Execution and Delivery of Amendatory Agreement. Each
of BCBSMo and RIT shall enter into and deliver at Closing an
amendment to the Tax Allocation Agreement dated August 8, 1994
between BCBSMo and RIT (the "Amendatory Agreement") in
substantially the form attached hereto as Exhibit B.
ARTICLE V
Conditions to Closing
5.1 Conditions to Obligations of BCBSMo. The obligations
of BCBSMo to consummate the sale of the Subject Shares
contemplated by this Agreement shall be subject to fulfillment at
or prior to Closing of the following conditions (which may be
waived in whole or in part by BCBSMo):
(a) the representations and warranties of RIT
contained in this Agreement shall be true in all material
respects on or as of the Closing Date, with the same effect
as though made on and as of the Closing Date, and there
shall be delivered to BCBSMo on the Closing Date a
certificate, in form and substance reasonably satisfactory
to BCBSMo and its counsel, duly signed by an executive
officer of RIT, to that effect;
(b) the agreements and covenants of RIT to be
performed by RIT under Article IV hereof (including, without
limitation, the execution and delivery of the Amendatory
Agreement) shall have been performed in all material
respects;
(c) RIT shall have delivered the Purchase Price
pursuant to Section 1.3 hereof;
(d) the applicable waiting period under the Missouri
Notification Act shall have expired or terminated without
action by the Missouri Director of Insurance seeking to
prevent consummation of this Agreement, and all other
Regulatory Requirements, if any, shall have been satisfied;
(e) the Average Closing Sale Price of the Class A
Stock shall be not less than $11.00;
(f) No action or proceeding by any governmental agency
shall have been instituted or threatened, and no court order
shall have been entered in any action or proceeding
instituted by any party which enjoins, restrains or
prohibits this Agreement or the complete consummation of the
purchase and sale of the Subject Shares as contemplated
hereunder;
(g) the Board of Directors of BCBSMo shall have
authorized the execution, delivery and performance of this
Agreement by and on behalf of BCBSMo and shall have approved
the transactions provided for herein;
(h) all proceedings taken in connection with the
Closing and all documents related thereto shall be
reasonably satisfactory to BCBSMo and its counsel; and
(i) BCBSMo shall have received a written opinion from
a nationally recognized investment banking firm dated the
date of the BCBSMo Board of Directors meeting whereat this
Agreement is approved by such Board, in form and substance
reasonably satisfactory to BCBSMo, to the effect that the
sale of Subject Shares hereunder is fair, from a financial
point of view, to BCBSMo, and such opinion shall not have
been modified or withdrawn.
5.2 Conditions to Obligations of RIT. The obligations of
RIT to consummate the purchase of the Subject Shares contemplated
by the Agreement shall be subject to fulfillment at or prior to
Closing of the following conditions (which may be waived in whole
or in part by RIT):
(a) the representation of warranties of BCBSMo
contained in this Agreement shall be true in all material
respects on or as of the Closing Date, with the same effect
as though made on or as of the Closing Date, and there shall
be delivered to RIT on the Closing Date a certificate, in
form and substance reasonably satisfactory to RIT and its
counsel, duly signed by an executive officer of BCBSMo, to
that effect;
(b) the agreements and covenants of BCBSMo to be
performed by BCBSMo under Article IV hereof (including,
without limitation, the execution and delivery of the
Amendatory Agreement) shall have been performed in all
material respects;
(c) BCBSMo shall have delivered a certificate or
certificates representing all of the Subject Shares free and
clear of all liens, claims and encumbrances, duly endorsed
in blank or accompanied by stock power or appropriate
instrument of assignment duly executed in blank;
(d) the applicable waiting period under the Missouri
Notification Act shall have expired or terminated without
action by the Missouri Director of Insurance seeking to
prevent consummation of this Agreement, and all other
Regulatory Requirements, if any, shall have been satisfied;
(e) the Average Closing Sale Price of the Class A
Stock shall be not more than $16.00;
(f) no action or proceeding by any governmental agency
shall have been instituted or threatened, and no court order
shall have been entered in any action or proceeding
instituted by any party which enjoins, restrains or
prohibits this Agreement or the complete consummation of the
purchase and sale of the Subject Shares as contemplated
hereunder;
(g) the Board of Directors of RIT shall have
authorized the execution, delivery and performance of this
Agreement by and on behalf of RIT, and shall have approved
the transactions provided for herein;
(h) the appropriate consents from those parties listed
in Schedule 3.2(d) hereto shall have been obtained; and
(i) all proceedings taken in connection with the
Closing and all documents related thereto shall be
reasonably satisfactory to RIT and its counsel.
ARTICLE VI
Miscellaneous
6.1 Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that no assignment
shall be made on or prior to the Closing Date. No assignment
shall release BCBSMo or RIT, as the case may be, from its
obligations hereunder.
6.2 Entire Agreement. This Agreement may not be amended,
supplemented or otherwise modified except by an instrument in
writing signed by all of the parties hereto. This Agreement
contains the entire agreement of the parties hereto with respect
to the transaction covered hereby, superseding all prior
negotiations, prior discussions and preliminary agreements made
prior to the date hereof.
6.3 Waiver. The failure of any party to enforce any
condition or part of this Agreement at any time shall not be
construed as a waiver of that condition or part, nor shall it
forfeit any rights to future enforcement thereof.
6.4 Governing Law. This Agreement shall be construed and
enforced in accordance with and governed by the laws of the state
of Missouri without regard to the conflicts of laws provisions
thereof.
6.5 Headings. The headings of the sections and subsections
of this Agreement are inserted for convenience only and shall not
be deemed to constitute a part hereof.
6.6 Notices. All communications, notices and consents
provided for herein shall be in writing and shall be given in
person or by means of telex, telecopy or other wire transmission
(with request for assurance of receipt in a manner typical with
respect to communications of that type) or by mail, and shall
become effective (a) on delivery if given in person, (b) on the
date of transmission if sent by telex, telecopy or other wire
transmission, or (c) four business days after being deposited in
the mail, with proper postage for first class registered or
certified mail, prepaid.
Notices shall be addressed as follows:
If to BCBSMo, to:
Blue Cross and Blue Shield of Missouri
1831 Chestnut Street
St. Louis, MO 63101-2275
Attention: Executive Vice President
Telecopy No. (314) 923-5151
With a copy to:
Gallop, Johnson & Neuman, L.C.
101 South Hanley, Suite 1600
St. Louis, MO 63105
Attention: Marvin O. Young, Esq.
Telecopy No. (314) 862-1219
If to RIT, to:
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, MO 63103-2275
Attention: President
Telecopy No. (314) 923-6245
With a copy to,
Janice C. Forsyth, Esq.
Senior Vice President and General Counsel
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, MO 63103-2275
Telecopy No. (314)923-8958
provided, however, that if either party shall have designated a
different address by notice to the other, then to the last
address so designated.
6.7 Termination. If the Closing has not occurred by
December 31, 1996, then either party may terminate this Agreement
at any time thereafter by giving not less than five (5) days
prior notice in writing to the other party of such termination,
specifying therein the date of termination, which date shall not
be less than five (5) days from the date upon which such notice
is given nor more than thirty (30) days from such date.
6.8 Non-Survivability. None of the representations,
warranties, covenants and agreements set forth in this Agreement
shall survive the Closing.
6.9 Expenses. All costs and expenses incurred in
connection with this Agreement or any of the transactions
contemplated hereby (including, but not limited to, accounting,
consulting and attorneys' fees and expenses) shall be paid by the
party incurring such expense.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by a duly authorized officer as of the
date first above written.
Blue Cross and Blue Shield of
Missouri
By: [s] Robert E. Shupe
Title: Executive Vice President and
Chief Operating Officer
RightCHOICE Managed Care, Inc.
By: Janice C. Forsyth
Title: Senior Vice President, General
Counsel and Corporate Secretary
Exhibit A
<TABLE>
Bush O'Donnell Portfolio as of July 17, 1996
<CAPTION>
Date # of Market Price Market Value
CUSIP Description Acquired Shares Cost as of 7/17/96 as of 7/17/96
<S> <C> <C> <C> <C> <C> <C>
110122108 Bristol Myers Squibb 5/1/91 600 45,885.00 85.375 51,225.00
110122108 Bristol Myers Squibb 7/16/91 200 16,473.34 85.375 17,075.00
110122108 Bristol Myers Squibb 7/16/91 2,800 230,626.76 85.375 239,050.00
110122108 Bristol Myers Squibb 11/26/91 1,300 101,205.00 85.375 110,987.50
110122108 Bristol Myers Squibb 3/31/92 1,000 76,350.00 85.375 85,375.00
110122108 Bristol Myers Squibb 6/2/92 1,000 66,225.00 85.375 85,375.00
110122108 Bristol Myers Squibb 12/2/92 1,500 101,587.50 85.375 128,062.50
110122108 Bristol Myers Squibb 2/2/93 1,000 58,850.00 85.375 85,375.00
110122108 Bristol Myers Squibb 6/22/93 2,000 117,700.00 85.375 170,750.00
Totals 11,400 814,902.60 85.375 973,275.00
194162103 Colgate Palmolive 6/10/93 3,000 161,550.00 81.125 243,375.00
194162103 Colgate Palmolive 8/26/93 3,500 178,850.00 81.125 283,937.50
194162103 Colgate Palmolive 8/17/94 14,000 780,150.00 81.125 1,135,750.00
Totals 20,500 1,120,550.00 81.125 1,663,062.50
291011104 Emerson Electric 10/4/95 7,500 536,062.50 83.750 628,125.00
291011104 Emerson Electric 10/5/95 10,000 707,250.00 83.750 837,500.00
Totals 17,500 1,243,312.50 83.750 1,465,625.00
375766102 Gillette 6/29/91 800 14,840.00 59.125 47,300.00
375766102 Gillette 6/10/93 8,000 197,400.00 59.125 473,000.00
375766102 Gillette 5/3/95 4,000 166,950.00 59.125 236,500.00
375766102 Gillette 7/21/95 6,000 256,350.00 59.125 354,750.00
375766102 Gillette 1/30/96 4,000 213,400.00 59.125 236,500.00
Totals 22,800 848,940.00 59.125 1,348,050.00
478160104 Johnson & Johnson 2/1/96 14,000 669,200.00 47.500 665,000.00
55262C100 MBIA 8/19/94 7,300 435,048.40 74.250 542,025.00
55262C100 MBIA 8/22/94 3,000 179,175.00 74.250 222,750.00
55262C100 MBIA 8/23/94 1,700 103,106.70 74.250 126,225.00
55262C100 MBIA 9/19/94 5,000 298,625.00 74.250 371,250.00
55262C100 MBIA 10/25/94 1,800 98,955.00 74.250 133,650.00
55262C100 MBIA 12/7/94 2,000 99,575.00 74.250 148,500.00
55262C100 MBIA 2/28/95 500 31,505.00 74.250 37,125.00
Totals 21,300 1,245,990.10 74.250 1,581,525.00
580135101 McDonalds Corporation 8/23/94 18,000 474,300.00 44.250 796,500.00
580135101 McDonalds Corporation 8/23/94 5,000 131,750.00 44.250 221,250.00
580135101 McDonalds Corporation 8/23/94 10,000 262,250.00 44.250 442,500.00
580135101 McDonalds Corporation 8/23/94 5,000 131,610.00 44.250 221,250.00
Totals 38,000 999,910.00 44.250 1,681,500.00
</TABLE>
Page 1 of 2
Exhibit A
<TABLE>
Bush O'Donnell Portfolio as of July 17, 1996
<CAPTION>
Date # of Market Price Market Value
CUSIP Description Acquired Shares Cost as of 7/17/96 as of 7/17/96
<S> <C> <C> <C> <C> <C> <C>
620076109 Motorola 6/13/95 14,500 884,137.50 54.625 792,062.50
620076109 Motorola 6/20/95 2,000 128,950.00 54.625 109,250.00
620076109 Motorola 10/10/95 2,500 156,812.50 54.625 136,562.50
620076109 Motorola 12/14/95 1,900 111,102.50 54.625 103,787.50
620076109 Motorola 12/15/95 2,000 114,700.00 54.625 109,250.00
Totals 22,900 1,395,702.50 54.625 1,250,912.50
589331107 Merck & Company 10/12/92 10,000 419,750.00 62.750 627,500.00
589331107 Merck & Company 10/12/92 3,000 125,550.00 62.750 188,250.00
589331107 Merck & Company 12/2/92 2,000 91,700.00 62.750 125,500.00
Totals 15,000 637,000.00 62.750 941,250.00
713448108 Pepsico Inc. 11/6/90 16,000 199,800.00 31.250 500,000.00
713448108 Pepsico Inc. 3/7/91 5,400 87,345.00 31.250 168,750.00
713448108 Pepsico Inc. 3/8/91 10,600 174,080.09 31.250 331,250.00
713448108 Pepsico Inc. 3/21/91 4,000 68,200.00 31.250 125,000.00
713448108 Pepsico Inc. 10/6/91 4,000 58,200.00 31.250 125,000.00
713448108 Pepsico Inc. 6/17/93 22,000 402,600.00 31.250 687,500.00
Totals 62,000 990,225.09 31.250 1,937,500.00
803111103 Sara Lee Corporation 7/27/92 12,000 314,100.00 31.125 373,500.00
803111103 Sara Lee Corporation 12/2/92 6,000 181,050.00 31.125 186,750.00
803111103 Sara Lee Corporation 2/9/93 1,500 43,275.00 31.125 46,687.50
803111103 Sara Lee Corporation 5/5/93 5,000 126,750.00 31.125 155,625.00
803111103 Sara Lee Corporation 6/22/93 8,000 198,800.00 31.125 249,000.00
803111103 Sara Lee Corporation 8/25/93 5,000 131,750.00 31.125 155,625.00
803111103 Sara Lee Corporation 9/21/93 4,000 93,900.00 31.125 124,500.00
803111103 Sara Lee Corporation 12/21/93 3,000 79,050.00 31.125 93,375.00
803111103 Sara Lee Corporation 2/1/95 4,000 105,400.00 31.125 124,500.00
803111103 Sara Lee Corporation 2/28/95 2,000 52,450.00 31.125 62,250.00
Totals 50,500 1,326,525.00 31.125 1,571,812.50
931142103 Walmart Stores Inc. 8/17/94 20,000 489,500.00 24.250 485,000.00
931142103 Walmart Stores Inc. 8/17/94 12,000 293,700.00 24.250 291,000.00
931142103 Walmart Stores Inc. 11/21/94 4,400 101,640.00 24.250 106,700.00
Totals 36,400 884,840.00 24.250 882,700.00
7215464A4 Pilot Short-Term U.S. Treas. various 829,022.71 829,022.71 1.000 829,022.71
Total Bush O'Donnell Portfolio 13,006,120.50 16,791,235.21
</TABLE>
Page 2 of 2
Exhibit B
AMENDMENT TO TAX ALLOCATION AGREEMENT
THIS AMENDMENT TO TAX ALLOCATION AGREEMENT ("Amendatory
Agreement") is made and entered into this _____ day of August,
1996, by and between BLUE CROSS AND BLUE SHIELD OF MISSOURI
("Parent") and RIGHTCHOICE MANAGED CARE, INC. ("Subsidiary"),
with reference to the following recitals.
R E C I T A L S
A. Pursuant to the reorganization of Parent (the
"Reorganization") which occurred in August, 1994, Parent
transferred a significant portion of its business to Subsidiary
which had been established for such purpose.
B. Upon the effectiveness of the Reorganization, Parent
and Subsidiary became, and have continued to be, members of an
affiliated group of corporations within the meaning of Section
1504(a)(1) of the Internal Revenue Code of 1986, as amended (the
"Code"), for which Parent is the parent corporation (the
"Affiliated Group").
C. Contemporaneously with the Reorganization, Parent and
Subsidiary entered into a Tax Allocation Agreement dated as of
August 8, 1994 ("Tax Allocation Agreement"), as supplemented by a
Special Tax Allocation Agreement dated as of August 8, 1994,
collectively providing for the allocation and payment of
consolidated Federal income tax liabilities between Parent and
Subsidiary.
D. Simultaneously with the execution hereof, Subsidiary is
purchasing from Parent not less than 1,500,000 or more than
2,000,000 shares of Subsidiary's Class A Common Stock pursuant to
a Stock Purchase Agreement dated July 19, 1996.
E. Following the purchase of shares referred to in Recital
D, Parent will own less than eighty percent of the total value of
the equity of Subsidiary, thereby rendering Subsidiary and each
of its subsidiaries ineligible to continue to be a member of the
Affiliated Group.
F. Parent and Subsidiary have agreed with respect to,
among other things, (I) the effect of tax liability adjustments
occurring subsequent to the date hereof relating to a taxable
year in which a consolidated federal income tax return of the
"Consolidated Group" (as defined in the Tax Allocation Agreement)
had been filed by Parent, and (II) the allocation of certain
deductions or credits heretofore utilized by the Affiliated
Group, which have been disallowed or are being challenged by the
Internal Revenue Service (the "IRS").
A G R E E M E N T
In consideration of the above recitals, and for other good
and valuable consideration, the receipt and sufficiency of which
is acknowledged by the parties hereto, it is hereby agreed as
follows:
1. Except as expressly set forth herein, the Tax
Allocation Agreement and Special Tax Allocation Agreement are
hereby terminated with respect to all taxable years beginning on
or after the date hereof; provided, however, that nothing
contained herein shall affect payments to or by the Subsidiary
that would have been required under paragraph V of the Tax
Allocation Agreement or the rights and other obligations
thereunder of the parties hereto with respect to taxable years
beginning prior to the date hereof, which payments shall continue
to be made as though Subsidiary had continued to be included in
the Affiliated Group.
2. With reference to the alternative minimum tax credit
(the "AMT Credit") resulting from deductions taken by Parent on
its federal income tax return (both before and after the
Reorganization) and the controversy with the IRS that currently
exists with respect to the calculation of the AMT Credit, Parent
and Subsidiary each agree that to the extent that the ultimate
resolution of such controversy with the IRS results in the
preservation of all or any portion of the AMT Credit in question
(the "Usable AMT Credit"), then 87.2 percent of the Usable AMT
Credit shall be allocated to Subsidiary. If, however, the IRS
takes the position that the Usable AMT Credit can not be
allocated to the Subsidiary and such position of the IRS prevails
(whether or not litigation is commenced), then Parent will pay to
Subsidiary 87.2 percent of all amounts of Usable AMT Credit
utilized by Parent, and such payment shall be made with respect
to each taxable year in which such Usable AMT Credit is utilized
by Parent within five business days following the filing by
Parent of its federal income tax return for such taxable year.
3. Parent and Subsidiary shall consult and shall furnish
each other with information required to prepare, in accordance
with prior practice, (i) the consolidated federal income tax
return of the Affiliated Group for the taxable years in which
Subsidiary has been included therein, and (ii) the tax return for
all taxable years thereafter of the Parent and Subsidiary,
respectively, in which the tax liability of either may be
affected by their former affiliation. Parent and Subsidiary also
shall consult and furnish each other with information concerning
the status of any tax audit or tax refund claim relating to a
taxable year in which a payment to or by Subsidiary hereunder may
result or otherwise be affected.
4. The provisions and terms of this Amendatory Agreement
shall be binding upon and inure to the benefit of each party
hereto and its respective successors and assigns.
5. All notices and other communications shall be in
writing and shall be given in person or by means of telex,
telecopy or other wire transmission (with request for assurance
of receipt in manner typical with respect to communications of
that type) or by mail, and shall become effective (a) on delivery
if given in person, (b) on the date of transmission if sent by
telex, telecopy or other wire transmission, or (c) four business
days after being deposited in the mail, with proper postage for
first class, registered or certified mail, prepaid.
Notices shall be addressed as follows:
If to Parent to:
Blue Cross and Blue Shield of Missouri
1831 Chestnut Street
St. Louis, MO 63101-2275
Attn: Executive Vice President
Telecopy No.: (314) 923-5151
If to Subsidiary to:
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, MO 63101-2275
Attn: President
Telecopy No.: (314) 923-6245
provided, however, that if either party shall have designated a
different address by notice to the other, then the last address
so designated.
6. This Amendatory Agreement shall be construed and
enforced in accordance with and governed by the laws of the State
of Missouri.
IN WITNESS WHEREOF, the parities hereto have caused this
Amendatory Agreement to be executed by a duly authorized officer
as of the date first above written.
Blue Cross and Blue Shield of
Missouri
By:
Title:
RightCHOICE Managed Care, Inc.
By:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in the RightCHOICE Managed Care, Inc. Form 10-Q for the
quarterly period ended June 30, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 21,032
<SECURITIES> 258,746
<RECEIVABLES> 51,370
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 363,150
<PP&E> 70,777
<DEPRECIATION> 24,822
<TOTAL-ASSETS> 510,558
<CURRENT-LIABILITIES> 244,153
<BONDS> 70,498
0
0
<COMMON> 187
<OTHER-SE> 179,133
<TOTAL-LIABILITY-AND-EQUITY> 510,558
<SALES> 0
<TOTAL-REVENUES> 161,380
<CGS> 0
<TOTAL-COSTS> 163,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,268
<INCOME-PRETAX> 2,169
<INCOME-TAX> 885
<INCOME-CONTINUING> 1,284
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,284
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
