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 March 31, 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 March 31, 1996
Class A Common Stock, $0.01 par value 3,718,100 shares
Class B Common Stock, $0.01 par value 14,962,500 shares
RIGHTCHOICE MANAGED CARE, INC.
First Quarter 1996 Form 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995 3
Consolidated Statements of Income for the Three Months Ended
March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities 21
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 23
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
March 31, December 31,
ASSETS 1996 1995
(unaudited)
Current assets:
Cash and cash equivalents $ 28,385 $ 21,132
Investments available for sale 258,193 263,383
Receivables from members 48,634 55,695
Receivables from related parties 17,852 24,079
Deferred income taxes 3,600 2,475
Other assets 13,354 12,144
Total current assets 370,018 378,908
Property and equipment, net 44,475 40,305
Deferred income taxes 7,359 9,311
Investments in affiliates 9,793 6,752
Goodwill and intangible assets, net 87,507 81,112
Total assets $519,152 $516,388
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims payable $ 84,669 $ 83,793
Unearned premiums 50,535 51,432
Accounts payable and accrued expenses 63,746 64,445
Payables to related parties 19,564 22,174
Obligations for employee benefits 4,583 4,414
Income taxes payable 23,730 23,102
Obligations under capital leases 4,678 4,747
Total current liabilities 251,505 254,107
Long-term debt 62,000 62,000
Obligations under capital leases 4,926 6,137
Obligations for employee benefits 21,723 20,923
Total liabilities 340,154 343,167
Shareholders' Equity:
Common Stock:
Class A, $.01 par, 125,000,000 shares
authorized, 3,737,500 shares issued,
3,718,100 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 40,939 32,714
Treasury stock, 19,400 and 18,800 Class A
shares, respectively, at cost (276) (266)
Unrealized net appreciation of
investments available for sale 5,508 7,946
Total shareholders' equity 178,998 173,221
Total liabilities and
shareholders' equity 519,152 516,388
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
March 31,
1996 1995
Revenues:
Premium $143,547 $135,629
Fees and other income 14,421 10,867
Total revenues 157,968 146,496
Operating expenses:
Health care services 106,887 100,430
Commissions 6,306 4,258
General and administrative (excludes net
intercompany charges allocated to
Blue Cross and Blue Shield of Missouri
of $3,514 and $3,036, respectively) 34,400 33,194
Total operating expenses 147,593 137,882
Operating income 10,375 8,614
Investment income:
Interest and dividends 3,451 3,616
Realized gains, net 1,068 227
Total investment income, net 4,519 3,843
Other:
Interest expense (1,329) (331)
Other expense, net (64) (354)
Total other, net (1,393) (685)
Income before provision for income taxes 13,501 11,772
Provision for income taxes 5,276 4,203
Net income $ 8,225 $ 7,569
Weighted average common
shares outstanding 18,681,000 18,690,000
Earnings per share $ .44 $ .40
See accompanying Notes to Consolidated Financial Statements.
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
For the three months ended,
March 31,
1996 1995
Cash flows from operating activities:
Net income $ 8,225 $ 7,569
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for deferred income tax benefits 2,183 58
Loss on sale of property and equipment 1
Depreciation and amortization 3,326 2,353
Undistributed losses (earnings) of affiliates 14 (55)
Gain on sale of investments (1,068) (37)
Accretion of discounts and amortization
of premiums, net 120 (101)
Decrease (increase) in certain assets:
Receivables from members 7,061 (2,256)
Receivables from related parties 6,227 2,361
Other assets (8,629) (2,278)
Increase (decrease) in certain liabilities:
Medical claims payable 876 (4,880)
Unearned premiums (897) (1,631)
Accounts payable and accrued expenses (699) 1,190
Payables to related parties (2,610) 2,825
Obligations for employee benefits 969 (555)
Income taxes payable 628 4,145
Net cash provided by operating activities 15,726 8,709
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities 3,625
Proceeds from investments sold:
Fixed maturities 123,493 21,415
Equity securities 2,183 8,935
Investments purchased:
Fixed maturities (122,700) (26,166)
Equity securities (4,001) (7,447)
Other (256) (815)
Investment in Healthcare InterChange (3,055)
Property and equipment purchased (6,472) (1,145)
Net cash used in investing activities (7,183) (5,223)
Cash flows from financing activities:
Additional expenses related to
initial public stock offering (27)
Purchase of Class A Treasury stock (10)
Payments on capital lease obligations (1,280) (1,105)
Net cash used in financing activities (1,290) (1,132)
Net increase in cash and cash equivalents 7,253 2,354
Cash and cash equivalents at
beginning of period 21,132 31,085
Cash and cash equivalents at
end of period $ 28,385 $ 33,439
Supplemental Disclosure of Cash Information:
Interest paid $ 1,341 $ 267
Income taxes paid 2,465
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. Stock Options
On January 1, 1996, the company granted stock options to purchase 231,708
shares of Class A Common Stock to certain members of management. Such
options were granted at $13.00 per share and are not exercisable until
three years from the date of grant.
3. Acquisitions / Reinsurance Agreements
Transactions with Blue Cross and Blue Shield of Kansas City (BCBSKC)
On March 27, 1996, the company's subsidiary, HealthLink, Inc. (HealthLink),
signed a definitive agreement to acquire full ownership of HealthLink HMO,
Inc. (HealthLink HMO). HealthLink has shared equal ownership of this HMO
with a subsidiary of BCBSKC. The purchase will be completed following
approval by the Missouri Department of Insurance, which is expected to
occur by June 1996. HealthLink HMO had approximately 11,000 members at
March 31, 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.
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 will pay approximately $6
million to subsidiaries of BCBSKC, the majority of which ($5.4 million) has
been paid and 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, in the
first quarter of 1996, the company recorded net reinsurance income of
$0.1 million related to these agreements which is included in fees and
other income on the 1996 Consolidated Statement of Income.
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 or Blue Cross). 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.
HealthLink, Inc.
The company completed its acquisition of HealthLink, a regional managed
healthcare organization, on August 10, 1995. The following table
summarizes the first quarter 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
postacquisition 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. First quarter 1996 actual results are included for comparative
purposes.
(unaudited) Three months ended
(Amounts in thousands, March 31,
except per share amounts) 1996 1995*
Total revenues $157,968 $152,589
Operating income $10,375 $10,451
Net income $8,225 $7,554
Earnings per share $0.44 $0.40
* First quarter 1995 does 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. 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 benefitted 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 Federal District Court and the defendants have not yet responded to
the complaint, but believe the claims are without merit and intend to
vigorously defend the action.
Conflict with DOI
The Director of the Missouri Department of Insurance (the DOI) has made
public statements that BCBSMo violated state laws when in 1994 it engaged
in the formation of the company, the transfer of assets
to the company in the reorganization and the public offering of
approximately twenty percent (20%) of the total common stock of the
company (such events are collectively referred to herein as the
Reorganization and Public Offering). To date, the DOI has not commenced any
formal administrative action or brought any litigation to compel a payment from
BCBSMo as a result of the Reorganization and Public Offering. This
Reorganization allowed BCBSMo access to public equity markets through the
company and the necessary capital for enhancing service to subscribers.
The Director claimed that BCBSMo is a public benefit corporation--with
obligations to the public--rather than a mutual benefit corporation--with
obligations solely to its subscribers. The Director further stated that
through its ownership of the company, BCBSMo is primarily engaged in a for
profit business in violation of state health services corporation laws. The
Director claimed that BCBSMo engaged in a de facto conversion to a
for-profit corporation and therefore is obligated to transfer all its
assets, including all of its RightCHOICE stock, to the State of Missouri.
BCBSMo and the company believe that the Director's public and private
statements in this regard are unfounded factually and legally. BCBSMo engaged
in the transactions with the prior written approval of the DOI.
BCBSMo engaged in extensive efforts to settle this dispute but has been
unsuccessful due to the unreasonable and unauthorized demands of the
Director. In this regard, the DOI has admitted in public statements that
only the Attorney General has the legal authority to demand such a payment
and has conceded that the Director expressly approved the
Reorganization and Public Offering without requiring a payment. The Director
had indicated a willingness to settle the dispute if BCBSMo pays in excess of
$180 million to the State of Missouri or a public charity designated by the
State of Missouri. BCBSMo believes, however, that the DOI lacks jurisdiction
and authority under Missouri law to demand any payment as a result of the
Reorganization and Public Offering and that the Director has been abusing the
powers of his office by seeking to pressure and coerce BCBSMo into making such
payment.
BCBSMo concluded that it had no administrative remedy for the Director's
illegal demands for such payment and therefore filed a petition for a
declaratory judgment and other relief on May 13, 1996 in the Circuit Court of
Cole County, Missouri 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 and to determine whether those laws require any
payment as a result of the Reorganization and Public Offering. In the
petition BCBSMo requests a declaration that (i) under Missouri law the
Director and the DOI have no authority to demand any such payment; (ii) under
Missouri law the Director and the DOI have no jurisdiction to commence an
administrative action to compel (or coerce) any such payment; (iii) under
Missouri law the Director and the DOI lack jurisdiction to amend, modify or
reverse the final administrative approval of the Reorganization and Public
Offering issued over two years ago; (iv) under Missouri law, Blue Cross 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. Blue Cross further seeks
injunctive relief to restrain and enjoin the Director and the DOI from
taking any action against Blue Cross based upon the Reorganization and
Public Offering including, (i) demanding that Blue Cross 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; or (iv) otherwise
pressuring and coercing Blue Cross 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.
Other Contingencies
The company entered a settlement agreement in the third quarter of 1995
whereby the company paid $1.5 million related to class action lawsuits
regarding claims paying practices and negotiated discounts with providers.
The Missouri Attorney General has issued a civil investigative demand for
information to review these claims paying practices and the related
settlement. At this time, management is unable to determine the impact of
this demand but believes that it will not have a material impact on the
financial position of the company.
The company and BCBSMo recently received a market conduct report from the
DOI. The company has not yet 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 Declaratory Judgment Action, 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
"Conflict with DOI." 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.
5. Subsequent event
On April 29, 1996, the company announced that, beginning January 1997, it
will move its St. Louis-based claims, customer service, billing and
provider services functions to its Springfield, Missouri facility and two
other locations to be named. The transfer program will be conducted in
stages beginning January 1997 and ending mid-1997 and will affect
approximately 380 employees. The move is expected to result in annual
salary and benefit cost savings of approximately $3 million to $4 million.
The company will incur charges to earnings estimated at $6 million to $8
million beginning in the second quarter and continuing through 1996
for costs associated with the relocation.
6. 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 month periods ended March 31, 1996 and 1995 (unaudited):
Three Months Ended
March 31,
Product Group 1996 1995
(in thousands)
PPO $ 75,400 $ 74,899
HMO 32,373 22,630
Medicare supplement 24,997 26,961
Managed indemnity 4,092 7,026
Other specialty services 6,685 4,113
Total premium revenue 143,547 135,629
ASO/Self-funded and other income 14,421 10,867
Total revenues $157,968 $146,496
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
March 31,
1996 1995
Operating revenues:
Premium revenue 90.9% 92.6%
Fees and other income 9.1% 7.4%
100.0% 100.0%
Operating expenses:
Medical loss ratio 74.5% 74.0%
Commission expense 4.0% 2.9%
General and administrative expense 21.8% 22.7%
Membership
The following table sets forth membership data and the percent change in
membership:
March 31,
Product Group 1996 1995 %
Underwritten:
PPO:
Alliance PPO 216,745 245,405 (11.7)%
AllianceChoice POS 63,839 10,036 536.1
HMO:
Commercial (includes other POS) 89,316 66,286 34.7
BlueCHOICE Senior 4,617 N/A
BlueCHOICE Medicaid (MC+) 4,195 N/A
Medicare supplement 72,249 81,906 (11.8)
Managed indemnity 12,674 21,928 (42.2)
463,635 425,561 8.9
Self-funded:
PPO 113,511 131,161 (13.5)
HMO 16,264 9,589 69.6
ASO (1996 includes HealthLink)* 1,075,883 257,110 318.5
Total Membership 1,669,293 823,421 102.7%
* does not include 474,490 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 First Quarter 1996 to First Quarter 1995
Revenues
Premium revenue increased 5.8% in the first quarter of 1996 in comparison
to the first 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 $0.5 million - - $4.4 million due to an 8.8%
increase in member months, partially offset by a $3.9 million decrease in
revenue resulting from a 7.5% 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
quarter 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. PPO membership gains are attributable to the positive
acceptance in the marketplace of the company's AllianceChoice product.
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 $9.7 million or 43.1% - - $10.9 million due
to a 37.9% increase in member months partially offset by a $1.2 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 account for approximately 28,100
underwritten members at March 31, 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 March 31, 1996, there
were approximately 4,700 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 $2.0 million in the
first quarter of 1996. Premium rates increased by 4.4%, partially offset
by an 11.2% decrease in member months. Membership declines are partially
attributable to members shifting to BlueCHOICE Senior, a Medicare-risk
program, which is more intensely managed.
Managed indemnity premium revenue decreased by $2.9 million due to a 41.7%
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 $2.6 million due primarily
to a 70.5% 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 $3.6 million. This increase is due to two
main factors. First, ASO revenues of $6.6 million were generated for the
first quarter of 1996 by HealthLink, which was acquired by the company in
August 1995. Second, offsetting HealthLink's ASO revenues is the loss of
revenues from the company's third-party administrator (TPA) subsidiaries
which were $2.5 million in the first 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 first quarter of 1996 was $0.1 million and is
included in the other expense, net, caption on the 1996 Consolidated
Statement of Income.
Operating Expenses
The overall medical loss ratio increased by 0.5% to 74.5% in the first
quarter 1996 in comparison to 74.0% in the first quarter 1995 primarily as
a result of 1) the introduction of the company's BlueCHOICE Senior product,
2) competitive HMO pricing to enhance selected enrollment growth, and 3)
higher drug utilization. The company's extensive PPO provider
recontracting and ongoing medical management efforts have enabled the
company to achieve medical cost savings. These efforts are evidenced by
fewer hospital days / 1000 members, a lower average length of stay, and
slightly lower 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.
Commission expense increased by $2.0 million or 48.1% in the first quarter
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 quarter of 1995 due to an
accounting adjustment of $0.6 million.
General and administrative expenses increased by $1.2 million, or 3.6%.
HealthLink accounted for $4.5 million of general and administrative
expenses in the first quarter of 1996. These expenses were not incurred in
the first 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. First quarter
1995 general and administrative expenses include $2.5 million of TPA
subsidiary general and administrative expenses. Factoring out the effects
of these entities, comparable first quarter 1996 general and administrative
expenses decreased by $0.8 million. This decrease is primarily
attributable to greater costs incurred for corporate investments in 1995,
primarily related to the introduction of several of the company's new
products and the establishment of feasibility for the company's information
and operations strategy (IOS) project.
Operating Income
Operating income increased $1.8 million in the first quarter 1996 in
comparison to the first quarter 1995. This increase is primarily
attributable to increased fees and other income coupled with an effective
containment of general and administrative expenses.
Net Investment Income
The first quarter 1996 net investment income of $4.5 million represents a
$0.7 million increase over the first quarter 1995, inclusive of a $0.8
million increase in net realized gains. These realized gains in the first
quarter of 1996 resulted from transactions in the ordinary course of
business relating to the company's portfolio strategy.
Provision for Income Taxes
The company's effective income tax rate was 39.1% and 35.7% for the first
quarter 1996 and the first quarter 1995, respectively. The effective rate
increased in the first quarter 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 quarter of 1995.
Net Income
The company's net income for the first of quarter 1996 was $8.2 million.
This represents an increase of $0.6 million or 8.7% compared to the net
income of $7.6 million for the first quarter of 1995.
Liquidity and Capital Resources
The company's working capital as of March 31, 1996 was $118.5 million, a
decrease of $6.3 million from December 31, 1995. The decrease is partially
attributable to a $2.4 million unrealized net depreciation of investments
available for sale during the first quarter of 1996. Additional decreases
relate to the company's $3.1 million cash purchase of a forty-four percent
interest in Healthcare InterChange, Inc., a $5.4 million cash payment to a
subsidiary of Blue Cross and Blue Shield of Kansas City relating to the
HealthLink HMO and reinsurance agreement transactions, and $6.5 million of
property and equipment purchases primarily for IOS development costs.
These working capital decreases are partially offset by the $8.2 million of
net income earned in the first quarter of 1996.
Cash generated from operations totaled $15.7 million for the three months
ended March 31, 1996. Net income, excluding depreciation of property and
equipment and amortization of intangibles, was $11.6 million. Receivables
from members decreased by $7.1 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 December 31, 1995 decreased
by $3.6 million primarily due to intercompany tax settlements pursuant to a
tax sharing agreement between the company and BCBSMo. These increases to
operating cash flows were offset by an increase in other assets of $8.6
million primarily due to the $5.4 million payment for the HealthLink HMO and
the reinsurance agreement transactions with BCBSKC.
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 quarter of 1996,
the company made capitalized expenditures of $5.4 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
On April 29, 1996, the company announced that, beginning January 1997, it
will move its St. Louis-based claims, customer service, billing and
provider services functions to its Springfield, Missouri facility and two
other locations to be named. The transfer program will be conducted in
stages beginning January 1997 and ending mid-1997 and will affect
approximately 380 employees. The move is expected to result in annual
salary and benefit cost savings of approximately $3 million to $4 million.
The company will incur charges to earnings estimated at $6 million to $8
million beginning in the second quarter and continuing through 1996 for
costs associated with the relocation.
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 benefitted 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 Federal District Court and the defendants have not yet responded to
the complaint, but believe the claims are without merit and intend to
vigorously defend the action.
Conflict with DOI
See the description under this same caption in Note 4 of the Notes to
Consolidated Financial Statements, which description is incorporated
herein by reference.
Other Contingencies
The company entered a settlement agreement in the third quarter of 1995
whereby the company paid $1.5 million related to class action
lawsuits regarding claims paying practices and negotiated discounts with
providers. The Missouri Attorney General has issued a civil investigative
demand for information to review these claims paying practices and the
related settlement. At this time, management is unable to determine the
impact of this demand but believes that it will not have a material impact
on the financial position of the company.
The company and BCBSMo recently received a market conduct report from the
DOI. The company has not yet 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 Declaratory Judgment Action, 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
"Conflict with DOI." 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.
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.
Conflict with DOI
BCBSMo has filed an action against the Director, 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 "Conflict with the DOI" in Note 4 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 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 4 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 a conflict with the Director of the Missouri Department of Insurance,
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 and 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
None.
ITEM 5. Other Information
None
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 HealthLink, Inc. and TriLink
Healthcare, Inc. dated as of March 27, 1996.
10.2 Stock Purchase Agreement By and Between Blue Cross and Blue Shield of
Missouri and RightCHOICE Managed Care, Inc. dated as of February 8,
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 March 31, 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: May 14, 1996 By: [s] JANICE C. FORSYTH
Janice C. Forsyth
Senior Vice President,
Secretary and General Counsel
Date: May 14, 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
HEALTHLINK, INC. AND
TRILINK HEALTHCARE, INC.
DATED AS OF MARCH 27, 1996
TABLE OF CONTENTS
Page
ARTICLE I - PURCHASE 1
1.1. Agreement to Sell and Purchase 1
1.2. Closing 1
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF TRILINK 2
2.1. Definition 2
2.2. Corporate Organization 2
2.3. Capitalization of HealthLink HMO 2
2.4. Corporate Authority 2
2.5. No Violation 3
2.6. Financial Statements 3
2.7. Books of Account 3
2.8. Taxes 3
2.9. No Burdensome Restrictions 3
2.10. Litigation and Proceedings 4
2.11. Consents and Approvals 4
2.12. Permits 4
2.13. Compliance with Laws 4
2.14. Transactions with Directors, Officers and Affiliates 5
2.15. Propriety of Past Payments 5
2.16. Accuracy of Information 5
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF HEALTHLINK 5
3.1. Definition 5
3.2. Corporate Organization 5
3.3. Corporate Authority 5
3.4. No Violation 5
3.5. Regulatory Consents and Approvals 6
3.6. Accuracy of Information 6
ARTICLE IV - ADDITIONAL COVENANTS 6
4.1. Indemnification 6
4.2. Consents and Approvals 7
4.3. Further Assurances 7
4.4. TriLink Actions 7
4.5. Transfer of Files and Documents 8
ARTICLE V - CONDITIONS TO OBLIGATIONS OF HEALTHLINK 8
5.1. Representations and Warranties of TriLink 8
5.2. Performance of TriLink's Obligations 8
5.3. Consents and Approvals 8
5.4. Resignations of Directors and Officers 8
5.5. No Violation of Orders 8
5.6. No Material Adverse Change; Condition of Business 8
5.7. Legal Opinion 9
5.8. Other Closing Documents 9
5.9. Termination of Agreements 9
5.10. Legal Matters 9
5.11. Termination Fee 9
5.12. Approval Denial 9
ARTICLE VI - CONDITIONS TO OBLIGATIONS OF TRILINK 10
6.1. Representations and Warranties of HealthLink 10
6.2. Cancellation of Surplus Notes 10
6.3. Performance of HealthLink's Obligations 10
6.4. Consents and Approvals 10
6.5. Legal Opinion 10
6.6. Termination of HMO Shareholder Agreement 10
6.7. Other Closing Documents 10
6.8. Legal Matters 10
6.9. Termination by TriLink 10
ARTICLE VII - MISCELLANEOUS PROVISIONS 11
7.1. Survival of Provisions 11
7.2. Publicity 11
7.3. Successors and Assigns 11
7.4. Brokers and Finders 11
7.5. Expenses 11
7.6. Notices 11
7.7. Entire Agreement 12
7.8. Waivers and Amendments 12
7.9. Severability 13
7.10. Counterparts 13
7.11. Governing Law 13
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement"), dated as of March
27, 1996, is made and entered into by and among HEALTHLINK, INC., an
Illinois corporation ("HealthLink"), and TRILINK HEALTHCARE, INC., a
Missouri corporation formerly known as INTEGRATED HEALTHSYSTEMS, INC.
("TriLink").
RECITALS:
A. TriLink is a wholly-owned subsidiary of Blue Cross and Blue Shield
of Kansas City, a health services corporation organized and existing under
the laws of the State of Missouri ("BCKC").
B. TriLink owns five (5) shares of the issued and outstanding capital
stock (the "HMO Shares") of HealthLink HMO, Inc., a Missouri corporation
("HealthLink HMO"), which represent fifty percent (50%) of the issued and
outstanding capital stock of HealthLink HMO, and HealthLink owns the other
five (5) shares of the issued and outstanding capital stock of HealthLink
HMO.
C. Subject to the terms and conditions stated herein,
TriLink desires to sell the HMO Shares to HealthLink and HealthLink desires
to purchase the HMO Shares.
AGREEMENT:
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth in this Agreement, the parties hereto
agree as follows:
ARTICLE I - PURCHASE
SECTION 1.1. Agreement to Sell and Purchase. On the Closing Date (as
defined in Section 1.2) and upon the terms and subject to the conditions
set forth in this Agreement, TriLink shall sell to HealthLink and
HealthLink shall purchase from TriLink all of TriLink's right, title and
interest in and to the HMO Shares. The purchase price to be paid by
HealthLink to TriLink for the HMO Shares is $500,000 (the "Purchase
Price"), which is payable by HealthLink to TriLink at the Closing in
immediately available funds.
SECTION 1.2. Closing. The closing of the sale and purchase (the
"Closing") shall take place at 1:00 P.M., local time, on June 14, 1996 or
at such other time and date as the parties hereto shall agree in writing
(the "Closing Date"), at the offices of Lewis, Rice & Fingersh, L.C. in the
City of St. Louis, Missouri, or at such other place as the parties hereto
shall agree in writing, provided however such date shall not be later than
the date provided in Section 5.11 herein. At the Closing TriLink shall
deliver to HealthLink stock certificates representing the HMO Shares, duly
endorsed in blank for transfer or accompanied by appropriate stock powers
duly executed in blank, and HealthLink shall deliver to TriLink the
Purchase Price.
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF TRILINK
TriLink hereby represents, warrants and agrees as follows:
SECTION 2.1. Definition.
(a) "Applicable Law" means any law, rule, regulation, order, decree
or other requirement having the force of law and, where applicable, any
interpretation thereof by any authority having jurisdiction with respect
thereto or charged with the administration thereof.
(b) "Governmental Entity" means any government of any nation,
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of
or pertaining to government.
(c) "Material Adverse Effect" means an effect that, individually
or together with one or more other effects in the
aggregate,
(i) is materially adverse to the financial condition,
business, prospects, properties or assets of HealthLink
HMO, and
(ii) involves amounts of not less than fifty thousand
dollars ($50,000).
(d) "TriLink's Knowledge" means and encompasses all facts and
information which are within the actual knowledge of individuals employed
by BCKC or its affiliates as of the date hereof who served as officers,
directors or employees of HealthLink HMO (such individuals being hereafter
referred to collectively as "TriLink's Knowledge Group").
SECTION 2.2. Corporate Organization. TriLink is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Missouri and has all requisite power and authority (corporate and
other) to own its properties and assets and to conduct its business as now
conducted.
SECTION 2.3. Capitalization of HealthLink HMO. The HMO Shares are the
sole outstanding shares of capital stock of HealthLink HMO owned by
TriLink, and except for any rights set forth in agreements listed on
Schedule 2.3 hereof, TriLink has no outstanding options, warrants,
agreements, conversion rights, preemptive rights, or other rights to
subscribe for, purchase or otherwise acquire any of the HMO Shares or any
unissued or treasury shares of capital stock of HealthLink HMO. TriLink
has, and will have at the Closing, valid and marketable title to all of the
HMO Shares, free and clear of any liens, claims, charges, security
interests or other legal or equitable encumbrances, limitations or
restrictions.
SECTION 2.4. Corporate Authority. TriLink has the corporate power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement, and the performance of TriLink's
obligations hereunder, have been duly authorized by the Board of Directors
of TriLink, and no other corporate proceedings on the part of TriLink are
necessary to authorize such execution, delivery and performance. This
Agreement has been duly executed by TriLink and is the valid and legally
binding obligation of TriLink, enforceable against TriLink in accordance
with the terms hereof.
SECTION 2.5. No Violation. Subject to those agreements set forth on
Schedule 2.5 and obtaining the consents, approvals, authorizations and
permits of, and making filings with or notifications to, any Governmental
Entities as set forth on Schedule 2.5, to TriLink's Knowledge, neither the
execution or delivery nor the performance by TriLink of this Agreement
violates or will violate any provision of law, or any order, judgment or
decree of any court or other governmental or regulatory authority, or of
the Articles of Incorporation or Bylaws of TriLink; nor violates or will
result in a breach of or constitute (with due notice or lapse of time or
both) a default or give rise to any right of termination, cancellation or
acceleration of any right or obligation of TriLink or to a loss of any
benefit to which TriLink is entitled under any contract, lease, loan
agreement, mortgage, security agreement, trust indenture or other
agreement or instrument to which TriLink is a party or by which TriLink is
bound or to which TriLink's properties or assets are subject; nor will it
result in the creation or imposition of any lien, charge or encumbrance of any
kind whatsoever upon any of the properties or assets of TriLink.
SECTION 2.6. Financial Statements. HealthLink HMO has
furnished to HealthLink copies of the audited financial statements of
HealthLink HMO's business as of December 31, 1995 and December 31, 1994
(collectively, the "Financial Statements"). To TriLink's Knowledge, the
Financial Statements (a) were prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby; (b) present fairly
the financial position, results of operations, changes in retained earnings
and cash flows of HealthLink HMO as of such dates and for the periods then
ended, (c) are complete and correct in all material respects in accordance
with the books and records of HealthLink HMO, (d) in the case of the
audited financial statements, have been audited in accordance with
generally accepted auditing standards, and (e) can be reconciled with the
Financial Statements and the financial records maintained and the
accounting methods applied by HealthLink HMO for federal income tax
purposes.
SECTION 2.7. Books of Account. To TriLink's Knowledge, (a) since
December 31, 1995, there has been no significant change in the accounting
methods or practices of HealthLink HMO, (b) HealthLink HMO has made and kept
books, records and accounts in sufficient detail to reflect accurately and
fairly its activities and transactions, and (c) HealthLink HMO has
maintained an internal accounting system sufficient to permit preparation of
the Financial Statements in accordance with GAAP.
SECTION 2.8. Taxes. HealthLink HMO has properly completed, and duly
and timely filed, all federal, state, local and foreign tax reports and
returns required to be filed by it, and all taxes and levies of every kind,
character or description shown by such reports or returns to be due and
payable, have been timely paid. Except as provided in Schedule 2.8, no
Governmental Entity is conducting an audit of HealthLink HMO nor has any
Governmental Entity asserted any claim for the assessment of any additional
tax liability or initiated any action or proceeding which could result in
such an assertion. HealthLink HMO has not (i) executed or filed with any
Governmental Entity any agreement or other document extending, or having
the effect of extending, the period for assessment or collection of any
federal, state, local or foreign tax or other imposition, (ii) agreed or
been requested to make any adjustment under section 481(a) of the Code by
reason of a change in accounting method or otherwise, (iii) obligated
itself under any written tax-sharing agreement or (iv) taken any reporting
position for which it does not have a reasonable basis. HealthLink HMO does not
anticipate any further tax liability with respect to its taxable years that
have not been closed. HealthLink HMO has not received any written notice,
nor does TriLink have any knowledge, of any proposed increase in the
assessed valuation of any of the real property or the personal property
owned by HealthLink HMO.
SECTION 2.9. No Burdensome Restrictions. To TriLink's Knowledge,
HealthLink HMO is not a party to any contractual obligation the performance
of which has any reasonable likelihood of having a Material Adverse Effect
or the performance of which by HealthLink HMO, either unconditionally or
upon the happening of an event, will result in the creation of an encumbrance
on any of HealthLink HMO's assets, nor is HealthLink HMO subject to any
charter or corporate restriction compliance with which has any reasonable
likelihood of having a Material Adverse Effect. HealthLink HMO is not, nor
to TriLink's knowledge is any other person, in default under or with
respect to any contractual obligation which default has any reasonable
likelihood of having a Material Adverse Effect, nor has any event occurred
which, with the giving of notice, lapse of time, or both, would constitute
such a default. To TriLink's Knowledge, HealthLink HMO is not subject to
any restriction or limitation on its ability to declare or make any
dividend payment or other distribution on account of any shares of any
class of its stock or on its ability to purchase, redeem or otherwise
acquire for value or make any payment in respect of any such shares or any
shareholder rights.
SECTION 2.10. Litigation and Proceedings. To TriLink's
Knowledge, there are no actions, suits, proceedings or investigations
pending or directly affecting HealthLink HMO or any of its properties or
its directors, officers or employees (in their capacities as such) before
any Governmental Entity which is reasonably likely to have a Material
Adverse Effect, nor is there any valid basis for such action, suit,
proceeding or investigation. HealthLink HMO has not been charged with, nor
to the knowledge of TriLink is under investigation with respect to, any
charge which has not been resolved concerning any violation of any
Applicable Law with respect to HealthLink HMO's assets, properties or
operations which is reasonably likely to have a Material Adverse Effect.
No judgment, order, writ, injunction, decree or assessment or other command
of any Governmental Entity affecting HealthLink HMO's assets, properties or
operations has been entered which is presently in effect. There is no
action, suit, proceeding or investigation pending which challenges the
validity of this Agreement or the transactions contemplated hereunder, or
otherwise seeks to prevent, directly or indirectly, the consummation of
such transactions, nor is there any valid basis for any such action, suit,
proceeding or investigation.
SECTION 2.11. Consents and Approvals. Except as set forth on
Schedule 2.11, no consent, approval or authorization of any entity, nor any
declaration, filing or registration with any Governmental Entity or other
entity, is required to be made or obtained by TriLink or HealthLink HMO in
connection with the execution, delivery and performance by TriLink of the
transactions contemplated to be consummated by TriLink hereunder, except
for consents which are obtained and delivered by TriLink to HealthLink on
or before the Closing Date.
SECTION 2.12. Permits. HealthLink HMO is in possession of all
franchises, grants, authorizations, licenses, permits, easements,
variances, exemptions, consents, certificates, approvals and orders
necessary for HealthLink HMO to own lease and operate its properties or to
carry on its business as it is now being conducted by HealthLink HMO,
including but not limited to, in the States of Missouri and Illinois (the
"HealthLink HMO Permits"), except for any HealthLink HMO Permits, the
absence of which would not have a Material Adverse Effect. HealthLink HMO
has not received notice of any pending or threatened suspension, revocation
or cancellation of any of the HealthLink HMO Permits. HealthLink has not
received notice that it is operating in default or violation of, (i) any
law applicable to HealthLink HMO or by which any of its properties is
bound, or (ii) any of the HealthLink HMO Permits, except for any such
defaults or violations which would not have a Material Adverse Effect.
SECTION 2.13. Compliance with Laws. HealthLink HMO is in
compliance with all Applicable Laws, except such noncompliance which will
not have a Material Adverse Effect. HealthLink HMO has received no notice
alleging any violation by HealthLink HMO of any Applicable Law, which
notice has not been fully and completely resolved as of the date of this
Agreement. To the knowledge of TriLink, no investigation with respect to
any violation of Applicable Law by HealthLink HMO is contemplated or is
being conducted by Governmental Entities or others, nor is there a valid
basis for any such investigation, other than for such investigations
conducted in the ordinary course of business of HealthLink HMO.
SECTION 2.14. Transactions with Directors, Officers and
Affiliates. To TriLink's Knowledge, there have been no transactions
outside of the ordinary course of HealthLink HMO's business between
HealthLink HMO and (i) TriLink, (ii) BCKC, or (iii) any officer or director
of TriLink or BCKC.
SECTION 2.15. Propriety of Past Payments. To TriLink's
Knowledge, except for transactions which in the aggregate would not have a
Material Adverse Effect on the business, financial condition, assets,
liabilities, results of operations, income or management of HealthLink HMO,
no funds or assets of HealthLink HMO have been used for illegal purposes
and no unrecorded fund or assets of HealthLink HMO has or have been
established for any purpose.
SECTION 2.16. Accuracy of Information. None of TriLink's
representations, warranties or statements contained in this Agreement, in
the schedules hereto, or in any other agreement, instrument or document
executed or delivered by or on behalf of TriLink in connection with the
transactions contemplated by this Agreement contains any untrue statement
of a material fact or in omits to state any material fact necessary in
order to make any of such representations, warranties or statements not
misleading.
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF HEALTHLINK
HealthLink hereby represents, warrants and agrees as follows:
SECTION 3.1. Definition. For purposes of this Article
III, the term "HealthLink's Knowledge" means and encompasses all facts and
information which are within the actual knowledge of individuals employed
by HealthLink, and its affiliates as of the date hereof who served as
officers, directors or employees of HealthLink HMO (such individuals being
hereafter referred to collectively as "HealthLink's Knowledge Group").
SECTION 3.2. Corporate Organization. HealthLink is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Illinois and has all requisite power and authority
(corporate and other) to own its properties and assets and to conduct its
business as now conducted.
SECTION 3.3. Corporate Authority. HealthLink has the
corporate power to enter into this Agreement and to carry out its
obligations hereunder. The execution and delivery of this Agreement, and
the performance of HealthLink's obligations hereunder, have been duly
authorized by the Board of Directors of HealthLink, and no other corporate
proceedings on the part of HealthLink are necessary to authorize such
execution, delivery and performance. This Agreement has been duly executed by
HealthLink and is the valid and legally binding obligation of HealthLink,
enforceable against HealthLink in accordance with the terms hereof.
SECTION 3.4. No Violation. Subject to those agreements set forth on
Schedule 3.4 and obtaining the consents, approvals, authorizations and
permits of, and making filings with or notifications to, any Governmental
Entities as set forth on Schedule 3.5, to HealthLink's Knowledge, neither
the execution or delivery nor the performance by HealthLink of this
Agreement violates or will violate any provision of law, of any order,
judgment or decree of any court or other governmental or regulatory
authority, or of the Articles of Incorporation or Bylaws of HealthLink.
SECTION 3.5. Regulatory Consents and Approvals. Except as set forth
on Schedule 3.5, no consent, waiver, authorization, or approval of any
Governmental Entities, and no declaration to or filing or registration with
any such Governmental Entity, is required in connection with the execution
and delivery of this Agreement by HealthLink or the performance by
HealthLink of its obligations hereunder.
SECTION 3.6. Accuracy of Information. None of HealthLink's
representations, warranties or statements contained in this Agreement, in
the schedules hereto, or in any other agreement, instrument or document
executed or delivered by or on behalf of HealthLink in connection with the
transactions contemplated by this Agreement contains any untrue statement
of a material fact or in omits to state any material fact necessary in
order to make any of such representations, warranties or statements not
misleading.
ARTICLE IV - ADDITIONAL COVENANTS
SECTION 4.1. Indemnification.
(a) Each party (the "Indemnifying Party") shall indemnify the
other party and the other party's past, present and future directors,
officers, stockholders, employees, agents, subsidiaries and affiliates
(hereinafter referred to collectively as the "Indemnified Parties" and
individually as an "Indemnified Party") and hold each of them harmless
against and in respect of any and all losses, liabilities, damages,
deficiencies, demands, claims, actions, judgments or causes of action,
assessments, costs or expenses (including, without limitation,
interest, penalties and reasonable attorney's fees and disbursements)
based upon, arising out of or otherwise in respect of any inaccuracy
or any breach of any representation, warranty, covenant or agreement
of Indemnifying Party made in this Agreement or in any schedule,
certificate, instrument or other document attached to or delivered
pursuant to or in connection with this Agreement. The indemnity
hereby provided for shall extend to, and the amounts indemnified
hereunder shall include, subject to the provisions of paragraph (b) of
this Section 4.1, (i) all costs and expenses incurred by any
Indemnified Party incident to any matter indemnified against
hereunder, including, without limitation, reasonable fees and expenses
of attorneys incurred in the investigation, settlement and defense (at
the trial and appellate levels and otherwise) of any claim or action
brought against any Indemnified Party based upon or alleging, any
matter that constitutes, or if sustained would constitute, a matter in
respect of which indemnification is provided for in this Section
4.1(a), and (ii) all costs and expenses (including, without
limitation, reasonable fees and expenses of attorneys) incurred by
any Indemnified Party in connection with the enforcement of its
rights under any provision of this Agreement ("Losses").
(b) Promptly after receipt by an Indemnified Party of notice of
the assertion of any claim or the commencement of any action against
him or it in respect of which indemnity or reimbursement may be sought
against Indemnifying Party hereunder (an "Assertion"), such
Indemnified Party shall notify Indemnifying Party in writing of the
Assertion. Indemnifying Party shall be entitled to participate in and,
to the extent Indemnifying Party elects by written notice to such
Indemnified Party within 30 days after receipt by Indemnifying Party
of notice of such Assertion, to assume the defense of such Assertion,
at its own expense, with counsel chosen by it and satisfactory to such
Indemnified Party. Notwithstanding that Indemnifying Party shall have
elected by such written notice to assume the defense of any Assertion,
such Indemnified Party shall have the right to participate in the
investigation and defense thereof, with separate counsel chosen by
such Indemnified Party, but in such event the fees and expenses of
such counsel shall be paid by such Indemnified Party unless (i)
Indemnifying Party shall have agreed to pay such fees and expenses, or
(ii) Indemnifying Party shall have failed to assume the defense of such
Assertion and to employ counsel satisfactory to such Indemnified
Party. Notwithstanding anything to the contrary in this Section
4.1(b), Indemnifying Party shall not, without the written consent of
such Indemnified Party, (x) settle or compromise any action or consent
to the entering of any judgment which does not include as an
unconditional term thereof the delivery by the claimant or plaintiff
to such Indemnified Party of a duly executed written release of such
Indemnified Party from all liability in respect of such Assertion,
which release shall be satisfactory in form and substance to counsel
to such Indemnified Party, or (y) settle or compromise any action in
any manner that, in the reasonable judgment of such Indemnified Party
or his or its counsel, may materially and adversely affect such
Indemnified Party other than as a result of money damages or other
money judgments.
SECTION 4.2. Consents and Approvals. Each party will
assist diligently and cooperate with the other party in preparing and
filing all documents required to be submitted by such other party to any
Governmental Entities in connection with the transactions contemplated by
this Agreement (which assistance and cooperation shall include, without
limitation, timely furnishing to the requesting party all information
concerning the responding party and HealthLink HMO which in the opinion of
counsel to the requesting party is required to be included in such
documents), and in obtaining any governmental consents, waivers,
authorizations or approvals which may be required to be obtained by either
party in connection with such transactions.
SECTION 4.3. Further Assurances. Upon the reasonable request of a
party at any time after the Closing Date, the other party will forthwith
execute and deliver such further instruments of assignment, transfer,
conveyance, endorsement, direction or authorization and other documents as
the requesting party or its counsel may reasonably request in order to
perfect title of the requesting party and its successors and assigns to the
HMO Shares, or otherwise to effectuate the purposes of this Agreement.
SECTION 4.4. TriLink Actions. In connection with TriLink's ownership
of the HealthLink HMO Shares prior to the Closing hereunder, TriLink agrees
that it shall not take any action, as owner, shareholder, officer or
director of HealthLink HMO, which would prevent HealthLink HMO from taking
any action necessary to the consummation of the transactions contemplated
hereunder. TriLink covenants and agrees that it shall not bring, any claim,
action, suit, proceeding or other action against HealthLink HMO or
HealthLink relating to any rights to which TriLink may be entitled as a
shareholder in HealthLink HMO during the period between the effective date
of this Agreement and the Closing Date, including without limitation
matters relating to the distribution of earnings. TriLink also covenants
and agrees that, prior to the Closing, TriLink will, and will consent to
any action by HealthLink HMO to: (a) cooperate with and permit HealthLink
to oversee and operate the business of HealthLink HMO in the usual and
ordinary course and consistent with past practice, including, without
limitation, the consideration and implementation of new products and
services for prospective and existing customers; (b) use all reasonable
efforts to preserve intact and expand HealthLink HMO's customer base and
maintain HealthLink HMO's rights and franchises; and (c) use all reasonable
efforts to keep in full force and effect liability insurance and bonds
comparable in amount and scope of coverage to that currently maintained by
HealthLink HMO.
SECTION 4.5. Transfer of Files and Documents. At or prior to the
Closing hereunder, TriLink shall deliver to HealthLink all records, files,
books and original documents in its possession relating to HealthLink HMO
or the HMO Shares.
ARTICLE V - CONDITIONS TO OBLIGATIONS OF HEALTHLINK
All obligations of HealthLink under this Agreement are
subject to the fulfillment, at or prior to the Closing Date, of the
following conditions, any one or more of which may be waived by HealthLink
in its sole discretion:
SECTION 5.1. Representations and Warranties of TriLink. All
representations and warranties made by TriLink in this Agreement shall be
true and correct on and as of the Closing Date as if again made by TriLink
on and as of such date, and HealthLink shall have received a certificate
dated the Closing Date and signed by the President or the Chief Financial
Officer of TriLink which is to that effect.
SECTION 5.2. Performance of TriLink's Obligations. TriLink shall have
performed in all respects all obligations required under this Agreement to
be performed by TriLink on or prior to the Closing Date, and HealthLink
shall have received a certificate dated the Closing Date and signed by the
President or the Chief Financial Officer of TriLink which is to that
effect.
SECTION 5.3. Consents and Approvals. All consents, waivers,
authorizations and approvals of any Governmental Entity, including those
listed on Schedule 2.5, and of any other person, firm or corporation,
required in connection with the execution, delivery and performance of this
Agreement shall have been duly obtained and shall be in full force and
effect on the Closing Date.
SECTION 5.4. Resignations of Directors and Officers. HealthLink shall
have received the written resignations, effective as of the Closing Date,
of such directors and officers set forth on Schedule 5.4.
SECTION 5.5. No Violation of Orders. No preliminary or permanent
injunction or other order issued by any court or governmental or regulatory
authority, nor any statute, rule, regulation, decree or executive order
promulgated or enacted by any government or governmental or regulatory
authority, which declares this Agreement invalid in any respect or prevents
the consummation of the transactions contemplated hereby, or which
materially and adversely affects the assets, properties, operations,
prospects, net income or financial condition of HealthLink HMO shall be in
effect; and no action or proceeding before any court or governmental or
regulatory authority shall have been instituted or threatened by any
government or governmental or regulatory authority, or by any other person,
firm or corporation, which seeks to prevent or delay the consummation of
the transactions contemplated by this Agreement or which challenges the
validity or enforceability of this Agreement or any term or provision
hereof.
SECTION 5.6. No Material Adverse Change; Condition of Business.
During the period from December 31, 1995 to the Closing Date, there shall
have been no material adverse change in the assets, properties, business,
operations, prospects, net income or financial condition of HealthLink HMO
attributable to the acts or omissions of TriLink or BCKC.
SECTION 5.7. Legal Opinion. HealthLink shall have received the
opinion of Seigfreid, Bingham, Levy, Selzer & Gee, counsel to TriLink,
dated as of the Closing Date and addressed to HealthLink with respect to
the matters set forth in Article II of this Agreement.
SECTION 5.8. Other Closing Documents. HealthLink shall have received
such other certificates, instruments and documents in confirmation of the
representations and warranties of TriLink or in furtherance of the
transactions contemplated by this Agreement as HealthLink or its counsel
may reasonably request.
SECTION 5.9. Termination of Agreements. TriLink and BCKC shall have
executed and delivered to HealthLink a Termination Agreement in a form
acceptable to HealthLink terminating their rights in and obligations under
(i) that certain HMO Shareholder Agreement dated July 30, 1992 by and among
HealthLink HMO, HealthLink, TriLink, and BCKC, (ii) all other agreements
restricting the ability of TriLink and HealthLink to transfer the HMO
Shares, as contemplated hereunder, and (iii) that certain Administrative
Services Agreement dated July 30, 1992, as amended, by and among BCKC,
TriLink, HealthLink and HealthLink HMO.
SECTION 5.10. Legal Matters. All certificates, instruments, opinions
and other documents required to be executed or delivered by or on behalf of
TriLink or HealthLink HMO under the provisions of this Agreement, and all
other actions and proceedings required to be taken by or on behalf of
TriLink or HealthLink HMO in furtherance of the transactions contemplated
hereby, shall be reasonably satisfactory in form and substance to counsel
for HealthLink.
SECTION 5.11. Termination Fee. If any of the foregoing conditions
are not met (i) by August 29, 1996, or (ii) such later date as may be
agreed to among the parties, which date shall in no event be later than
December 31, 1996; or if prior to such applicable date TriLink has failed
to promptly fulfill its obligations pursuant hereto, HealthLink may
terminate this Agreement upon notice to TriLink, and upon such notice
TriLink shall pay to HealthLink a termination fee of One Million Two
Hundred Thousand Dollars ($1,200,000.00) (the "Termination Fee"),
and this Agreement shall be null and void and of no further force or
effect.
Section 5.12. Approval Denial. HealthLink shall use all reasonable
efforts to file promptly, but in any event on or prior to April 15, 1996,
all regulatory applications required to be filed in order to consummate the
transactions provided for herein. HealthLink shall provide copies to and
keep TriLink fully informed of all comments from regulatory entities
regarding such applications and, to the extent such comments on the
applications relate to TriLink or its affiliates, HealthLink shall permit
TriLink and its affiliates to participate in responding to such comments.
HealthLink will use all reasonable efforts to obtain regulatory approval of
all such applications. HealthLink shall keep TriLink fully informed as to
the status of such applications and make available to TriLink, upon
reasonable request by TriLink, from time to time, copies of such
applications and any supplementally filed materials. If any regulatory
applications should be finally denied or disapproved by the respective
regulatory authority, despite HealthLink's reasonable efforts to obtain
such approval, then this Agreement thereupon shall be deemed terminated,
and TriLink shall pay to HealthLink the Termination Fee provided for in
Section 5.12.
ARTICLE VI - CONDITIONS TO OBLIGATIONS OF TRILINK
All obligations of TriLink under this Agreement are subject to the
fulfillment, at or prior to the Closing Date, of the following conditions,
any one or more of which may be waived by TriLink in its sole discretion:
SECTION 6.1. Representations and Warranties of HealthLink. All
representations and warranties made by HealthLink in this Agreement shall
be true and correct on and as of the Closing Date as if again made by
HealthLink on and as of such date, and TriLink shall have received a
certificate dated the Closing Date and signed by the Chairman of the Board,
the President or any Vice President of HealthLink which is to that effect.
SECTION 6.2. Cancellation of Surplus Notes. HealthLink HMO shall
have provided for the repayment in full and cancellation of the two Surplus
Notes dated July 28, 1993 and January 27, 1993 payable to BCKC in the
principal amounts of $1,000,000.00 and $400,000.00, respectively.
SECTION 6.3. Performance of HealthLink's Obligations. HealthLink
shall have performed in all respects all obligations required under this
Agreement to be performed by it on or prior to the Closing Date, and
TriLink shall have received a certificate dated the Closing Date and signed
by the Chairman of the Board, the President or any Vice President of
HealthLink which is to that effect.
SECTION 6.4. Consents and Approvals. All consents, waivers,
authorizations and approvals of any Governmental Entity, including those
listed on Schedule 3.5, and of any other person, firm or corporation,
required in connection with the execution, delivery and performance of this
Agreement.
SECTION 6.5. Legal Opinion. TriLink shall have received
the opinion of Lewis, Rice & Fingersh, L.C., counsel to HealthLink, dated
as of the Closing Date and addressed to TriLink with respect to the matters
set forth in Sections 3.2, 3.3 and 3.4 of this Agreement.
SECTION 6.6. Termination of HMO Shareholder Agreement.
HealthLink and HealthLink HMO shall have executed and delivered to TriLink
a Termination Agreement in a form acceptable to HealthLink hereto
terminating their rights in and obligations under (i) the HMO Shareholder
Agreement, and (ii) all other agreements restricting the ability of
HealthLink and TriLink to transfer the HMO Shares, as contemplated
hereunder.
SECTION 6.7. Other Closing Documents. TriLink shall have
received such other certificates, instruments and documents in confirmation
of the representations and warranties of HealthLink or in furtherance of
the transactions contemplated by this Agreement as TriLink or their counsel
may reasonably request.
SECTION 6.8 Legal Matters. All certificates,
instruments, opinions and other documents required to be executed or
delivered by or on behalf of HealthLink under the provisions of this
Agreement, and all other actions and proceedings required to be taken by or
on behalf of HealthLink in furtherance of the transactions contemplated
hereby, shall be reasonably satisfactory in form and substance to counsel
for TriLink.
SECTION 6.9 Termination by TriLink. If any of the
foregoing conditions are not met by the date provided in Section 5.11 (or
such later date as mutually agreed upon by the parties), TriLink may
terminate this Agreement upon notice to HealthLink, and upon such notice
this Agreement shall be terminated, provided however, that upon giving such
notice, TriLink will be obligated to pay to HealthLink the Termination Fee
as provided in Section 5.11.
ARTICLE VII - MISCELLANEOUS PROVISIONS
SECTION 7.1. Survival of Provisions. The respective
representations, warranties, covenants and agreements of each of the
parties to this Agreement (except covenants and agreements which are
expressly required to be performed and are performed in full on or prior to
the Closing Date) shall survive the Closing Date and the consummation of
the transactions contemplated by this Agreement. In the event of a breach
of any of such representations and warranties, the party to whom such
representations and warranties have been made shall have all rights and
remedies for such breach available to it under the provisions of this
Agreement or otherwise, whether at law or in equity.
SECTION 7.2. Publicity. The parties shall not make any
disclosure or issue any press release or other publication, whether oral or
written, relating to this Agreement without the prior written consent of
the other party; provided, however, each party hereto shall make such
disclosures relating to this Agreement as may be required by law or
regulation and shall promptly provide a copy of all such disclosures to the
other party.
SECTION 7.3. Successors and Assigns. This Agreement
shall inure to the benefit of, and be binding upon, the parties hereto and
their respective successors and assigns; provided, however, that neither
party shall assign or delegate this Agreement or any of the rights or
obligations created hereunder without the prior written consent of the
other party. Nothing in this Agreement shall confer upon any person, firm
or corporation not a party to this Agreement, or the legal representatives
of such person, firm or corporation, any rights or remedies of any nature
or kind whatsoever under or by reason of this Agreement.
SECTION 7.4. Brokers and Finders. TriLink and HealthLink
each represent and warrant to the other that it has not engaged any broker,
finder or investment banker in connection with the transactions
contemplated by this Agreement. TriLink and HealthLink each agree to
indemnify and hold harmless the other against any brokerage fee,
commission, finder's fee, or financial advisory fee due to any person, firm
or corporation acting on its behalf in connection with the transactions
contemplated by this Agreement.
SECTION 7.5. Expenses. Except as otherwise expressly
provided in this Agreement, all legal and other fees, costs and expenses
incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such fees, costs
or expenses.
SECTION 7.6. Notices. All notices and other
communications given or made pursuant hereto shall be in writing and shall
be deemed to have been given or made if in writing and delivered personally
or sent by registered or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses:
(a) if to TriLink, to:
TriLink Healthcare, Inc.
One Pershing Square
2301 Main Street
Kansas City, Missouri 64108-2428
Attention: President
with a copy to:
Blue Cross Blue Shield of Kansas City
One Pershing Square
2301 Main Street
Kansas City, Missouri 64108-2428
(b) if to HealthLink, to:
HealthLink, Inc.
788 Office Parkway
St. Louis, Missouri 63141
Attention: John A. O'Rourke, President
with a copy to:
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, Missouri 63103
Attention: General Counsel
or to such other persons or at such other addresses as shall be furnished
by either party by like notice to the other, and such notice or
communication shall be deemed to have been given or
made as of the date so delivered or mailed.
SECTION 7.7. Entire Agreement. This Agreement, together with the
schedules hereto, represents the entire agreement and understanding of the
parties with reference to the transactions set forth herein and no
representations or warranties have been made in connection with this
Agreement other than those expressly set forth herein or in the schedules,
certificates and other documents delivered in accordance herewith. This
Agreement supersedes all prior negotiations, discussions, correspondence,
communications, understandings and agreements between the parties relating
to the subject matter of this Agreement and all prior drafts of this
Agreement, all of which are merged into this Agreement.
SECTION 7.8. Waivers and Amendments. A party may by written notice
to the other party (a) extend the time for the performance of any of the
obligations or other actions of the other; (b) waive any inaccuracies in
the representations or warranties of the other party contained in this
Agreement; (c) waive compliance with any of the covenants of the other
party contained in this Agreement; (d) waive performance of any of the
obligations of the other party created under this Agreement, or (e) waive
fulfillment of any of the conditions to its obligations under this
Agreement. The waiver by any party hereto of a breach of any provision of
this Agreement shall not operate or be construed as a waiver of any
subsequent breach. This Agreement may be amended, modified or supplemented
only by a written instrument executed by the parties hereto.
SECTION 7.9. Severability. This Agreement shall be deemed severable,
and the invalidity or unenforceability of any term or provision hereof
shall not affect the validity or enforceability of this Agreement or of any
other term or provision hereof.
SECTION 7.10. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original and all of
which together shall be considered one and the same agreement.
SECTION 7.11. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Missouri, without
regard to principals of conflicts of laws.
IN WITNESS WHEREOF, TriLink and HealthLink have caused
this Agreement to be signed and attested by their respective officers
thereunto duly authorized, all as of the date first written above.
HealthLink:
HEALTHLINK, INC.
/s/ John A. O'Rourke
By: John A. O'Rourke
Its: President
TriLink:
TRILINK HEALTHCARE, INC.
By: /s/ Michael T. Marcotte
Its: /s/ Secretary
SCHEDULE 2.3
None.
SCHEDULE 2.5
None.
SCHEDULE 2.8
None.
SCHEDULE 2.11
None.
SCHEDULE 3.4
The HMO Shareholder Agreement by and among Blue Cross and Blue Shield
of Kansas City, TriLink Healthcare, Inc., HealthLink, Inc. and HealthLink
HMO, Inc. dated July 30, 1992 which pursuant to Section 5.9 of this
Agreement will be terminated prior to the Closing Date.
SCHEDULE 3.5
Approval of the Missouri Department of Insurance and, if necessary, of
the Illinois Department of Insurance, is required for consummation of the
transaction contemplated by this Agreement.
SCHEDULE 5.4
Larry Chastain
Karon Harris
Ken Landau
Exhibit 10.2
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is made and entered into
this 8th day of February, 1996, by and between BLUE CROSS BLUE SHIELD OF
MISSOURI, a Missouri nonprofit corporation ("Seller") and RIGHTCHOICE
MANAGED CARE, INC., a Missouri corporation ("Buyer").
RECITALS
A. Seller is the legal and beneficial owner of 35,000 shares of
Class B common stock, 5,000 shares of Class C common stock and 31,250
shares of Preferred stock of Healthcare Interchange, Inc., a Missouri
corporation ("Company") (all such shares are referred to herein
collectively, as the "Shares").
B. Seller desires to sell and Buyer desires to buy the Shares upon
the terms and subject to the conditions set forth herein.
AGREEMENT
In consideration of the foregoing, the mutual covenants herein contained
and other good and valuable consideration (the receipt, adequacy and
sufficiency of which are hereby acknowledged by the parties by their
execution hereof), the parties agree as follows:
1. Purchase and Sale. Seller agrees to sell to Buyer and Buyer
agrees to buy from Seller all of Seller's right, title and interest in and
to the Shares. The purchase price to be paid by Buyer to Seller for the
Shares is $3,054,800 (the "Purchase Price"), which is payable by Buyer to
Seller in immediately available funds.
2. Closing. The closing of the purchase contemplated herein (the
"Closing") is to occur at the offices of Buyer at 10:00 a.m. St. Louis
time on February 9, 1996 or at such other date, time or place upon which
the parties may mutually agree (the "Closing Date"). At the Closing,
Seller shall deliver to Buyer certificates evidencing the Shares, duly
endorsed in blank or with appropriate stock powers attached transferring
the Shares to Buyer, and Buyer shall pay the Purchase Price to Seller as
provided in Section 1 of this Agreement.
3. Registration of Shares on Books of Company. Upon receipt of the
certificates evidencing the Shares, Buyer shall promptly deliver such
certificates to the appropriate officers of the Company so that the
transfer of the Shares to Buyer may be registered on the books of the
Company, the transferred certificates canceled and new certificates
representing the Shares issued to Buyer.
4. Representations and Warranties of Seller. Seller hereby
represents and warrants to Buyer that Seller owns the Shares and upon
delivery of the Shares to Buyer, Buyer will be vested with full right,
title and interest in and to the Shares. The Shares have been duly
authorized and validly issued, are fully paid and non-assessable and have
not been issued in violation of any preemptive rights. There are no
existing options, warrants, calls or commitments of any character
whatsoever relating to any of the Shares. Neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will violate the terms of any contract or agreement
affecting the Shares. This Agreement has been duly and validly executed
and delivered by Seller and constitutes a legal, valid and binding
obligation of Seller, enforceable against Seller in accordance with its
terms. Notwithstanding the foregoing, Buyer and Seller acknowledge and
agree that Seller is a party to that certain Amended and Restated
Shareholder Agreement dated as of April 14, 1992 which, among other things,
governs transfers of stock of the Company.
5. Conditions Precedent to Closing. The obligations of Buyer under
this Agreement are subject to the satisfaction or waiver on or before the
Closing Date of the conditions that all representations and warranties of
Seller contained in this Agreement shall be true in all material respects as
of the date hereof and as of the Closing Date as if such representations and
warranties were made on and as of the Closing Date, and that Seller shall
have performed in all material respects all agreements, covenants and
conditions required by this Agreement to be performed by Seller on or prior
to the Closing Date. In the event any of the conditions to the obligations
of Buyer are not satisfied or waived on or prior to the Closing Date, Buyer
may terminate and cancel this Agreement by delivery of written notice of
such action to Seller on such date.
6. Successors and Assigns. All covenants, agreements, representations
and warranties of the parties contained in this Agreement are binding upon
and inure to the benefit of the parties hereto and their respective
successors and assigns.
7. Entire Agreement. This Agreement constitutes the entire
agreement among the parties pertaining to the subject matter hereof and
supersedes all prior agreements, letters of intent, understandings,
negotiations and discussions of the parties, whether oral or written.
8. Amendment and Modification. No amendment, modification,
supplement, termination, consent or waiver of any provision of this
Agreement, nor consent to any departure therefrom, will in any event be
effective unless the same is in writing and is signed by the party against
whom enforcement of the same is sought. Any waiver of any provision of
this Agreement and any consent to any departure from the terms of any
provision of this Agreement is to be effective only in the specific instance
and for the specific purpose for which given.
9. Further Assurances. The parties will execute and deliver such
further instruments and do such further acts and things as may be required
to carry out the intent and purpose of this Agreement.
10. Governing Law. This Agreement and the rights and obligations of
the parties hereunder are to be governed by and construed and interpreted in
accordance with the laws of the State of Missouri applicable to contracts
made and to be performed wholly within Missouri, without regard to choice or
conflict of laws rules.
11. Counterparts. This Agreement may be executed in several
counterparts, each of which so executed shall be deemed to be an original,
and such counterparts shall together constitute and be one and the same
instrument.
BLUE CROSS BLUE SHIELD OF MISSOURI
By /s/ Robert E. Shupe
Name /s/ Robert E. Shupe
Its /s/ Executive V.P. & COO
RIGHTCHOICE MANAGED CARE, INC.
By /s/ Brett J. McIntyre
Name /s/ Brett J. McIntyre
Its /s/ Vice President & Treasurer
<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
period ended March 31, 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> MAR-31-1996
<CASH> 28,385
<SECURITIES> 258,193
<RECEIVABLES> 48,634
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 370,018
<PP&E> 67,110
<DEPRECIATION> 22,635
<TOTAL-ASSETS> 519,152
<CURRENT-LIABILITIES> 251,505
<BONDS> 71,604
0
0
<COMMON> 187
<OTHER-SE> 178,811
<TOTAL-LIABILITY-AND-EQUITY> 519,152
<SALES> 0
<TOTAL-REVENUES> 157,968
<CGS> 0
<TOTAL-COSTS> 147,593
<OTHER-EXPENSES> 64
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,329
<INCOME-PRETAX> 13,501
<INCOME-TAX> 5,276
<INCOME-CONTINUING> 8,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,225
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
