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 September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-13248
RIGHTCHOICE MANAGED CARE, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1674052
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1831 Chestnut Street, St. Louis, Missouri 63103-2275
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (314) 923-4444
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Title of each class Outstanding at September 30, 1996
Class A Common Stock, $0.01 par value 3,714,400 shares
Class B Common Stock, $0.01 par value 14,962,500 shares
RIGHTCHOICE MANAGED CARE, INC.
Third Quarter 1996 Form 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 28
ITEM 2. Changes in Securities 28
ITEM 3. Defaults Upon Senior Securities 28
ITEM 4. Submission of Matters to a Vote of Security Holders 28
ITEM 5. Other Information 28
ITEM 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 30
PART I.FINANCIAL INFORMATION
ITEM 1.Financial Statements
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
September 30 December 31,
ASSETS 1996 1995
(unaudited)
Current assets:
Cash and cash equivalents $ 24,033 $ 21,132
Investments available for sale 261,807 263,383
Receivables from members 50,644 55,695
Receivables from related parties 11,852 24,079
Deferred income taxes 3,141 2,475
Other assets 13,637 12,144
Total current assets 365,114 378,908
Property and equipment, net 48,323 40,305
Deferred income taxes 5,800 9,311
Investments in affiliates 9,280 6,752
Goodwill and intangible assets, net 84,745 81,112
Total assets $513,262 $516,388
LIABILITIES AND SHAREHOLDERS'EQUITY
Current liabilities:
Medical claims payable $ 112,946 $ 83,793
Unearned premiums 47,155 51,432
Accounts payable and accrued expenses 60,114 64,445
Payables to related parties 11,609 22,174
Obligations for employee benefits 4,485 4,414
Income taxes payable 13,842 23,102
Obligations under capital leases 5,056 4,747
Total current liabilities 255,207 254,107
Long-term debt 62,000 62,000
Obligations under capital leases 3,134 6,137
Obligations for employee benefits 21,291 20,923
Total liabilities 341,632 343,167
Shareholders' Equity:
Common Stock:
Class A, $.01 par, 125,000,000 shares authorized,
3,737,500 shares issued, 3,714,400 and 3,718,700
shares outstanding, respectively 37 37
Class B, $.01 par, 100,000,000 shares
authorized, 14,962,500 shares issued and
outstanding 150 150
Additional paid in capital 132,640 132,640
Retained earnings 34,367 32,714
Treasury stock, 23,100 and 18,800
Class A shares, respectively, at cost (326) (266)
Unrealized net appreciation of
investments available for sale 4,762 7,946
Total shareholders' equity 171,630 173,221
Total liabilities and shareholders' equity $ 513,262 516,388
See accompanying Notes to Consolidated Financial Statements.
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except shares and per share data)
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
Revenues:
Premium $148,363 $132,873 $ 439,720 $401,487
Fees and other income 15,425 13,788 43,416 35,788
Total revenues 163,788 146,661 483,136 437,275
Operating expenses:
Health care services 133,343 101,834 359,943 300,853
Commissions 6,590 4,943 19,409 14,319
General and administrative
(excludes net intercompany
charges allocated To Blue
Cross and Blue Shield of
Missouri of $2,663, $4,233,
$9,186, and $11,428,
respectively) 37,092 35,536 106,178 101,303
Non-recurring charges 540 3,474 3,283 3,474
Total operating
expenses 177,565 145,787 488,813 419,949
Operating (loss) income (13,777) 874 (5,677) 17,326
Investment income:
Interest and dividends 3,416 3,529 10,515 10,704
Realized gains, net 135 340 3,122 1,571
Total investment income,net 3,551 3,869 13,637 12,275
Other:
Interest expense (1,556) (918) (4,153) (1,541)
Other income (expense), net 12 53 93 (301)
Total other, net (1,544) (865) (4,060) (1,842)
(Loss) income before provision
(benefit) for income taxes (11,770) 3,878 3,900 27,759
(Benefit) provision for
income taxes (3,914) 238 2,247 9,106
Net (loss) income $ (7,856) $ 3,640 $ 1,653 $ 18,653
Weighted average common
shares outstanding 18,677,000 18,690,000 18,679,000 18,690,000
(Loss) earnings per share $ (.42) $ .19 $ .09 $ 1.00
See accompanying Notes to Consolidated Financial Statements.
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the nine months ended,
September 30,
1996 1995
Cash flows from operating activities:
Net income $ 1,653 $ 18,653
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for deferred income tax benefits 4,586 1,225
Loss on sale of property and equipment 47 1
Depreciation and amortization 10,815 7,717
Undistributed earnings of affiliates 48 (159)
Gain on sale of investments (3,122) (1,554)
Accretion of discounts and amortization
of premiums, net 369 (134)
Decrease (increase) in certain assets,
net of effects from purchase of HealthLink
and HealthLink HMO:
Receivables from members 6,845 8,142
Receivables from related parties 12,227 27,781
Other assets (8,853) (811)
Increase (decrease) in certain liabilities,
net of effects from purchase of HealthLink
and HealthLink HMO:
Medical claims payable 27,099 (8,872)
Unearned premiums (4,277) (4,365)
Accounts payable and accrued expenses (6,183) 16,806
Payables to related parties (10,565) (27,043)
Obligations for employee benefits 439 (1,787)
Income taxes payable (9,260) 3,220
Net cash provided by operating activities 21,868 38,820
Cash flows from investing activities:
Proceeds from matured investments:
Fixed maturities 5,725 4,000
Proceeds from investments sold:
Fixed maturities 188,381 221,817
Equity securities 20,432 28,579
Investments purchased:
Fixed maturities (188,774) (234,331)
Equity securities (22,341) (16,296)
Other (1,596) (2,813)
Investment in Healthcare InterChange (3,055)
Additional investment in Epoch (196)
Payment for purchase of HealthLink,
net of cash acquired (88,918)
Payment for purchase of HealthLink HMO,
net of cash acquired (198)
Redemption of HealthLink affiliate 500
Proceeds from property and equipment sold 16 1
Property and equipment purchased (14,240) (5,702)
Net cash used in investing activities (15,346) (93,663)
Cash flows from financing activities:
Additional expenses related to initial
public stock offering (117)
Purchase of Class A Treasury stock (60) (119)
Borrowing under revolving credit facility 62,000
Decrease in borrowings under reverse
repurchase agreements (4,302)
Payments of long-term debt (13)
Payments of capital lease obligations (3,561) (3,231)
Net cash (used in) provided by
financing activities (3,621) 54,218
Net increase (decrease) in cash and
cash equivalents 2,901 (625)
Cash and cash equivalents at beginning of period 21,132 31,085
Cash and cash equivalents at end of period $24,033 $30,460
See accompanying Notes to Consolidated Financial Statements.
RIGHTCHOICE MANAGED CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the nine months ended,
September 30,
1996 1995
Supplemental Disclosure of Cash Information:
Interest paid $ 3,962 $ 1,065
Income taxes paid 6,602 4,660
Supplemental Schedule of Noncash
Investing and Financing Activities:
Equipment acquired through
capital leases $ 867 $ 1,236
Details of Business (HealthLink) Acquired
in Purchase Transaction:
Fair value of assets acquired,
including goodwill $98,462
Less liabilities assumed or created 8,911
Cash paid for acquisition
(including transaction costs) 89,551
Cash acquired in acquisition 633
Net cash paid for acquisition $88,918
See accompanying Notes to Consolidated Financial Statements.
RightCHOICE Managed Care, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Financial Statement Presentation
The interim consolidated financial statements included herein have
been prepared by RightCHOICE Managed Care, Inc. (the company) without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). Certain information and footnote
disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such SEC rules and regulations;
however, the management of the company believes that the disclosures
herein are adequate to make the information presented not misleading.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary to present fairly the
consolidated financial position of the company with respect to the
interim consolidated financial statements, and the consolidated
results of its operations and its cash flows for the interim periods
then ended, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the
full year.
2. Transactions with Blue Cross and Blue Shield of Kansas City (BCBSKC)
The company's subsidiary, HealthLink, Inc. (HealthLink), completed its
acquisition of HealthLink HMO, Inc. (HealthLink HMO) on May 31, 1996.
Prior to this, HealthLink had shared equal ownership of this HMO with
a subsidiary of BCBSKC. HealthLink HMO had approximately 10,000
members at September 30, 1996 and had revenues of $3.4 million and
$1.5 million in 1995 and 1994, respectively with net income (loss) of
$0.3 million and $(0.7) million for those same time periods.
HealthLink HMO had revenues of $1.5 million for the four month period
ending September 30, 1996 which are included in fees and other income
on the 1996 Consolidated Statement of Income.
On March 1, 1996, RightCHOICE announced that it had reached a network
access and financial reinsurance agreement with BCBSKC designed to
make the two companies more competitive in the Missouri market.
Through the financial reinsurance transaction, RightCHOICE now shares
underwriting risks and profits on the effected members, while reducing
administrative costs. As a result of the agreements, members of
either plan who are enrolled through statewide employers or
associations will be able to use the provider network of the Blue
Cross and Blue Shield company where they live.
In exchange for these two transactions, the company paid approximately
$5.9 million to subsidiaries of BCBSKC, the majority of which ($5.4
million) is reflected in goodwill and intangible assets, net on the
Consolidated Balance Sheet and will be amortized over three years, the
expected period covered by the reinsurance agreements. In the first
three quarters of 1996, the company recorded net reinsurance income of
$0.6 million (exclusive of amortization) related to these agreements
which is included in fees and other income on the 1996 Consolidated
Statement of Income.
In addition, HealthLink's twenty percent interest in Missouri Valley
Life and Health Insurance Company, Inc. (MVLH) was redeemed in May
1996 through a cash payment by MVLH of $0.5 million. Subsequent to
this transaction, MVLH became a wholly-owned subsidiary of BCBSKC.
HealthLink recorded a gain on this disposition of $0.4 million, which
is reflected in realized gains, net on the 1996 Consolidated Statement
of Income.
3. Acquisition of HealthLink
The company completed its acquisition of HealthLink, a regional
managed health care organization, on August 10, 1995. The following
table summarizes the unaudited pro forma consolidated results of the
company for the third quarter and first nine months of 1995 as though
the HealthLink acquisition occurred at the beginning of 1995 giving
effect to the interest income foregone, the interest expense incurred,
the amortization of the excess of the purchase price over the fair
value of the assets acquired, and the amortization of post-acquisition
agreements. The unaudited 1995 pro forma information is not
necessarily indicative of the actual consolidated results of
operations that would have occurred had the acquisition occurred at
the beginning of 1995 and is not intended to be indicative of results
which may occur in the future. Actual results for the third quarter
and first nine months of 1996 are included for comparative purposes.
(unaudited) Three months ended Nine months ended
(Amounts in thousands, September 30, September 30,
except per share amounts) 1996 1995* 1996 1995*
Total revenues $163,788 $149,377 $483,136 $452,615
Operating (loss) income $(13,777) $1,913 $(5,677) $22,437
Net (loss) income $(7,856) $3,934 $ 1,653 $19,059
(Loss) earnings per share $(0.42) $0.21 $0.09 $1.02
*Third quarter and year-to-date 1995 amounts above include non
recurring operating charges of $2.0 million ($0.07 per share) for
integration charges related to HealthLink.
4. Other Acquisitions
Cragin
The company completed its acquisition of Cragin American Assurance
Company (Cragin), currently a dormant Illinois company chartered to
underwrite health and life insurance, on November 1, 1996. The
acquisition of Cragin from LaSalle Bank, F.S.B. will give the company
a license to further its offerings of managed care products in
Illinois. The transaction included a cash payment of approximately
$3.3 million, with an additional $0.2 million of transaction fees, in
exchange for the net assets of Cragin of approximately $3.3 million,
representing primarily cash and marketable securities.
Healthcare InterChange, Inc.
On February 8, 1996, the company entered an agreement to purchase
common and preferred shares of Healthcare InterChange, Inc. (HIC) from
Blue Cross and Blue Shield of Missouri (BCBSMo). The purchase
represents approximately forty-four percent of the total outstanding
common stock of HIC and consisted of a cash payment of $3.1 million.
HIC is in the business of providing electronic health data network
services to medical care providers. HIC had revenues of $3.4 million
and $2.6 million in fiscal years 1995 and 1994 (September 30 fiscal
year end), respectively with net income of $0.2 million and $0.1
million for those same time periods.
5. Contingencies
OPM Audit
The company, through its subsidiary, BlueCHOICE, contracts with the
Office of Personnel Management (OPM) to provide or arrange health
services under the Federal Employees Health Benefits Program (FEHBP)
for federal employees. OPM is the largest commercial customer of
BlueCHOICE. OPM conducts periodic audits to, among other things,
verify that the premiums established under the OPM contract were
established in compliance with the community rating and other
requirements under the FEHBP.
On August 8, 1995, the company received a draft audit report from the
OPM regarding the audit, conducted in 1994, of the FEHBP operations of
BlueCHOICE for the years 1989 through 1994. The audit dealt primarily
with a comparison of premium rates charged to the FEHBP to rates
charged by BlueCHOICE to other similarly sized groups. The OPM draft
audit report indicates that BlueCHOICE has a potential liability of
$7.5 million to the FEHBP. The company responded to the draft report
in November of 1995 following an in-depth analysis of the issues. At
this time, management is unable to determine the final dollar amount
which may be required to resolve the audit findings; however,
management believes that it has made adequate provisions to cover the
contingency, and the final amount will not have a material impact on
the financial position of the company.
Subscriber Class Action Litigation
On March 15, 1996, a suit was filed in the Circuit Court of the City
of St. Louis, Missouri, by Anthony J. Sarkis, Sr. and James Hacking
individually and on behalf of a purported class of (i) subscribers in
individual or group health plans insured or administered by BCBSMo or
the company, and (ii) all persons and/or entities who benefited from
BCBSMo's tax-exempt status. The complaint names the company, BCBSMo,
HealthLink, and certain officers of the company as defendants.
The plaintiffs' claims relate to an alleged conversion of BCBSMo from
a not-for-profit entity to a for-profit entity and payment of
excessive compensation to management. The complaint further alleges
that certain amendments to BCBSMo's Articles of Incorporation were
improper. The complaint also alleges the purchase of HealthLink was
at an excessive price and that HealthLink operates under contracts
providing for illegal discounts by health care providers. The
plaintiffs seek restitution, compensatory damages and punitive damages
in unspecified amounts, as well as injunctive and other equitable
relief.
The company and the other defendants removed the case to the United
States District Court for the Eastern District of Missouri on May 26,
1996 and filed an answer on May 31, 1996. On August 8, 1996, the
district court granted plaintiff's motion to remand. The case remains
pending in the Circuit Court for the City of St. Louis, Missouri, and
discovery is underway. BCBSMo and the company believe the claims are
without merit and intend to vigorously defend the action.
Litigation with DOI and Attorney General
In order to access the equity capital markets to fund growth and
enhanced services, BCBSMo transferred certain assets to and engaged in
certain reinsurance transactions with the company in connection with
an offering to the public of twenty percent of the common stock of the
company (such events are referred to collectively as the
Reorganization and Public Offering). Although the Director of the
Missouri Department of Insurance (DOI), following several meetings
with BCBSMo, the submission of background documents and the filing of
an application by BCBSMo, formally approved the Reorganization and
Public Offering on April 14, 1994, the Director and DOI subsequently
made public statements that the Reorganization and Public Offering
violated state laws and constituted a de facto conversion to a for
profit corporation. The Director and the DOI claimed that BCBSMo was
therefore obligated to transfer all of its assets, including all of
its RightCHOICE stock, to the State of Missouri or a charity
designated by the State of Missouri and made various threats to, among
other things, bring legal action, seek a receivership or terminate
BCBSMo's license to operate as a health services corporation unless
BCBSMo made that transfer.
BCBSMo engaged in extensive efforts to settle this dispute but has
been unsuccessful due to the unreasonable and unauthorized demands of
the Director, including an offer by the Director to settle for a $180
million payment to the State of Missouri or to a charity designated by
the State of Missouri. BCBSMo ultimately concluded that it had no
reasonable alternative but to file a petition for declaratory judgment
and other relief on May 13, 1996 in the Circuit Court of Cole County,
Missouri (the Court) against the DOI and the Director in his official
capacity. The Missouri Attorney General was joined in this action as
a necessary party due to his sole authority to enforce the nonprofit
corporation laws at issue.
On May 22, 1996, BCBSMo obtained a temporary restraining order (TRO)
against the Director and the DOI -- which remains in effect until the
Court renders its final decision on the merits -- enjoining them from,
among other things, (i) terminating BCBSMo's Certificate of Authority
to operate as a health service corporation for reasons related to the
Reorganization and Public Offering; (ii) making any administrative
determination relating to the Reorganization and Public Offering; or
(iii) instituting any seizure, receivership, conservatorship or
similar action or proceeding against BCBSMo relating to the
Reorganization and Public Offering.
The Director and the DOI filed an answer and counterclaims on June 13,
1996. The answer sets forth several affirmative defenses, including
alleged fraud and negligent misrepresentation with respect to the
application filed by BCBSMo seeking approval of the Reorganization and
Public Offering. The answer contends that the application failed to
adequately disclose that BCBSMo intended to reinsure its Medi-gap
policies with HALIC and thus effected such reinsurance without the
necessary DOI approval. The answer further contends that the DOI's
approval was improperly obtained because BCBSMo did not file
amendments to its Articles of Incorporation adopted on April 13, 1994
with the DOI within the 20 day period specified by the health service
corporation statute (even though that period expired after the DOI's
approval had been obtained) because those amendments would have
alerted the DOI of BCBSMo's alleged wrongful de facto conversion into
a for profit corporation (or from a public benefit nonprofit
corporation to a mutual benefit nonprofit corporation even though the
Missouri nonprofit laws in effect in 1994 did not recognize that
distinction). The counterclaims also allege various violations of
certain health service corporation statutes within Chapter 354 of the
Missouri Revised Statutes (RSMo) which the DOI contends disqualify
BCBSMo from being organized and operating under Chapter 354 of RSMo,
as well as violations of various other laws by allegedly not obtaining
proper approval of the Reorganization and Public Offering and by
effecting the aforementioned de facto conversion.
The Director and the DOI seek the following relief with respect to
their counterclaims: (i) permanent injunctions restraining, among
other things, (a) BCBSMo from transferring assets to or entering into
reinsurance transactions with its subsidiaries or affiliates without
the prior express approval of the DOI, or (b) permitting the company
or any for profit subsidiary to retain profits to the exclusion of
BCBSMo's use of such profits to further nonprofit public benefit
purposes, (ii) ordering BCBSMo to cease the allegedly unauthorized
reinsurance of Medi-gap policies and to compel HALIC to return to
BCBSMo all profits earned by HALIC as a result of the allegedly
unauthorized reinsurance of BCBSMo's Medi-gap policies, (iii)
enjoining BCBSMo from transacting its business without the prior
express written consent of the Director; (iv) imposing a trust on
BCBSMo's assets for public benefit purposes, and (v) an accounting of
all asset transfers to the company, its subsidiaries or affiliates, or
their respective officers or directors, as well as all profits earned
by HALIC as a result of the allegedly unauthorized reinsurance of
BCBSMo's Medi-gap policies, including a judgment against BCBSMo and
its subsidiaries for a sum to be determined from the accounting.
The Attorney General filed an answer and counterclaim on June 20,
1996. The counterclaim alleges that the Reorganization and Public
Offering, and the continued operations through the company and its
subsidiaries, exceed BCBSMo's statutory purposes under Chapters 354
and 355 or RSMo. The Attorney General requests a declaration that
BCBSMo has exceeded its lawful authority and seeks such relief as the
Court determines to be appropriate under the circumstances.
BCBSMo filed a motion for summary judgment against the Director and
the DOI on July 1, 1996, asserting that it should prevail in this
action as a matter of law. On September 5, 1996, the Court held a
hearing on BCBSMo's motion for summary judgment against the Director
and DOI on three counts of its petition and on the Director and DOI's
prior counterclaims. Following the hearing, on September 9, 1996, the
Court issued an Order granting BCBSMo's motion for summary judgment
against the Director and DOI and issued a permanent injunction against
the Director and the DOI, which order declared that: (i) under
Missouri law the Director and the DOI have no authority to demand that
BCBSMo make a payment to the State or any other entity or person as a
result of the Reorganization and Public Offering; (ii) under
Missouri law the Director and the DOI have no jurisdiction to take any
action, the practical effect of which is to amend, modify or reverse
the Director's April 14, 1994 final administrative approval of the
Reorganization and Public Offering; (iii) under Missouri law the
Director and the DOI have no jurisdiction to take any administrative
action, including but not limited to, revoking, suspending or refusing
to renew BCBSMo's Certificate of Authority based in any way on the
Reorganization and Public Offering and the consequences thereof or
BCBSMo's refusal to make a payment as the Director and the DOI have
demanded; (iv) the Reorganization and Public Offering were
authorized under all laws applicable to nonprofit health services
corporations; (v) BCBSMo does not owe the State or any person or
entity a "toll charge," "charitable asset settlement" or any other
payment as a result of the August 1994 Reorganization and Public
Offering. The Court also rejected all of the Director
and DOI's affirmative defenses, including their allegations of fraud.
The Court Order permanently enjoined the Director and DOI from: (i)
revoking, suspending or refusing to renew BCBSMo's Certificate of
Authority based in any part upon BCBSMo's Reorganization and the
Public Offering of the company or the consequences thereof or BCBSMo's
refusal to make a payment as demanded by the Director and the DOI;
(ii) hearing, ruling or taking any action upon (a) the
"Administrative Petition" captioned Americans for Democratic Action,
et al, v. Jay Angoff which was filed on May 16, 1996 with the DOI or
(b) any other proceeding which seeks a determination of issues related
to the Reorganization and Public Offering; (iii) commencing a
valuation or other appraisal of BCBSMo's assets and subsidiaries for
the purpose of determining a valuation of assets of BCBSMo as a basis
for demanding a "toll charge," "charitable asset settlement" or any
other payment arising from the Reorganization and Public Offering;
(iv) commencing any administrative hearing or making any
administrative determination based in any part upon the Reorganization
and Public Offering, including the legal consequences thereof or
payments supposedly due and owing as a result thereof; (v)
instituting any seizure, receivership, conservatorship or similar
action or proceeding against BCBSMo based in any part upon the
Reorganization and Public Offering; and (vi) taking any other action
however denominated, against BCBSMo based in any part upon the
Reorganization and Public Offering.
On July 31, 1996, the Missouri Attorney General filed a motion for
partial summary judgment on his counterclaim. On August 28, 1996, the
Director and the DOI filed an amended answer asserting a new
counterclaim that the Reorganization and Public Offering were not
reasonably designed to serve any of BCBSMo's purposes as a health
services corporation and seeking a declaration that BCBSMo has
exceeded or abused its authority conferred upon it by law. Under this
counterclaim, the Director and DOI seek an order to rehabilitate
BCBSMo or, in the alternative, injunctive relief.
On August 29, 1996, BCBSMo filed a motion for summary judgment with
respect to the Attorney General's Counterclaim and on September 13,
1996, filed a supplemental motion for summary judgment against the
Director and the DOI on their amended counterclaim. On October 24,
1996, the Court held a hearing on the Attorney General's motion for
partial summary judgment on its counterclaim, BCBSMo's motion for
summary judgment on the Attorney General's counterclaim and BCBSMo's
supplemental motion for summary judgment on the Director and DOI's
amended counterclaim. No order has been issued by the Court, and
BCBSMo and the Attorney General's motions for summary judgment remain
pending.
On October 18, 1996, the Attorney General filed a motion for leave to
file an amended counterclaim against BCBSMo. The proposed amendment
would add a counterclaim seeking a declaration that BCBSMo is a public
benefit corporation, not a mutual benefit corporation, and requests an
order that BCBSMo amend its Articles of Incorporation accordingly. On
October 23, 1996, BCBSMo filed a response opposing the Attorney
General's motion to amend on the grounds that the Attorney General
delayed too long in moving to amend and that the Court has already
ruled that BCBSMo is a mutual benefit corporation. The Attorney
General's motion to amend remains pending.
The company believes that the remaining counterclaims of the Director,
the DOI and the Attorney General are without merit and that BCBSMo's
legal position is strong. If, however, BCBSMo is unsuccessful in
obtaining the relief it is requesting, or in defending against such
counterclaims, there could be a material adverse effect on the company
and the market for the company's stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -Factors
that May Affect Future Results of Operations, Financial Condition or
Business -- Litigation with DOI and Attorney General."
Other Contingencies
The company and BCBSMo received a market conduct report from the DOI
in April 1996. The company has formally responded to the report.
Certain of the criticisms made by the examiners involve compliance
issues which the company is currently addressing. The company
believes, and has so alleged in the action described under "Litigation
with DOI and Attorney General," that the market conduct study was not
conducted for legitimate purposes of regulatory oversight but rather
as a pretext to either revoke or refuse to renew BCBSMo's license to
operate as a health services corporation and thus to improperly
pressure and coerce BCBSMo into making the payment in the nature and
amount described above under "Litigation with DOI and Attorney
General." Although the company believes that any forfeitures
legitimately required to be paid should not be material, the company
cannot anticipate the potential actions of the DOI or their
reasonableness.
In addition to the matters described above, the company is a party to
litigation in the normal course of business, including professional
liability.
6. Transfer of Service Functions
Beginning January 1997, the company will move its St. Louis-based
claims, customer service, billing and provider services functions to
its Springfield, Missouri facility and a facility currently under
construction in Cape Girardeau, Missouri. Approximately 200 jobs will
be relocated to Cape Girardeau with an additional 100 moving to
Springfield. The transfer program will be conducted in stages
beginning January 1997 and ending mid-1997. The move is expected to
result in annual salary and benefit cost savings of approximately $3
million to $3.5 million. The company will incur charges to earnings
estimated at $7 million to $8 million beginning in the second quarter
of 1996 and continuing through 1996 and into 1997 for costs associated
with the relocation. The third quarter and year-to-date 1996 charges
for this relocation of $0.5 million and $3.3 million, respectively,
are reflected in the non-recurring charges caption on the 1996
Consolidated Statements of Income.
7. Stock Purchase Agreement
The company and BCBSMo entered into an agreement which provided for
BCBSMo to sell, and the company to purchase, 1.5 million to 2.0
million shares of the company's stock by the end of 1996 at current
market prices, subject to regulatory review and final board of
directors' approvals. On August 12, 1996, BCBSMo received
notification from the DOI denying BCBSMo's Form D, "Prior Notification
of a Transaction." Additionally, the price of the company's stock
which is traded on the New York Stock Exchange has fallen below the
minimum floor price established in the agreement.
8. Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1995 to conform with the 1996 presentation.
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT ON
FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS, FINANCIAL CONDITION OR
BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS,
FINANCIAL CONDITION OR BUSINESS, OR THE RESULTS OF OPERATIONS,
FINANCIAL CONDITION OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS,
FINANCIAL CONDITION OR BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THE COMPANY'S SEC REPORTS (INCLUDING WITHOUT LIMITATION, ITS REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995).
The following table sets forth premium revenue by product group for
the three and nine month periods ended September 30, 1996 and 1995
(unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
Product Group 1996 1995 1996 1995
(in thousands) (in thousands)
PPO:
Alliance PPO $ 55,995 $ 66,298 $177,472 $208,663
AllianceChoice POS 20,282 6,745 51,813 12,126
HMO 35,848 23,673 101,859 68,960
Medicare supplement 24,377 25,676 74,129 79,302
Managed indemnity 3,976 5,441 12,481 18,655
Other specialty services 7,885 5,040 21,966 13,781
Total premium revenue 148,363 132,873 439,720 401,487
ASO/Self-funded and
other income 15,425 13,788 43,416 35,788
Total revenues $163,788 $146,661 $483,136 $437,275
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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Operating revenues:
Premium revenue 90.6% 90.6% 91.0% 91.8%
Fees and other income 9.4% 9.4% 9.0% 8.2%
100.0% 100.0% 100.0% 100.0%
Operating expenses:
Medical loss ratio 89.9% 76.6% 81.9% 74.9%
Commission expense 4.0% 3.4% 4.0% 3.3%
General and
administrative expense 22.6% 24.2% 22.0% 23.2%
Membership
The following table sets forth membership data and the percent change
in membership:
September 30,
Product Group 1996 1995 %
Underwritten:
PPO:
Alliance PPO 201,477 232,171 (13.2)%
AllianceChoice POS 88,232 31,896 176.6
HMO:
Commercial (includes other POS) 98,311 67,492 45.7
BlueCHOICE Senior 5,292 2,986 77.2
BlueCHOICE Medicaid (MC+) 5,069
Medicare supplement 69,784 76,857 (9.2)
Managed indemnity 11,533 15,268 (24.5)
479,698 426,670 12.4
Self-funded:
PPO 112,025 130,392 (14.1)
HMO 16,484 13,048 26.3
ASO (includes HealthLink)* 1,165,507 970,849 20.1
Total Membership 1,773,714 1,540,959 15.1%
* does not include 653,203 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 Third Quarter 1996 to Third Quarter 1995
Revenues
Premium revenue increased 11.7% in the third quarter of 1996 in
comparison to the third 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 $3.2 million - - $6.7 million due to a 10.7%
increase in member months, partially offset by a $3.5 million decrease
in revenue resulting from a 5.6% 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 1996 than the prior year due to the
gradual penetration of AllianceRx throughout 1995 and 1996. Second,
the company experienced a shift in membership to AllianceChoice, a
lower cost, non-gatekeeper point-of-service (POS) product. Alliance
PPO membership decreased by 30,700 members from September 30, 1995 to
September 30, 1996 while AllianceChoice POS membership increased by
56,300 over the same time period. The company also intends to expand
its PPO offering into Illinois in the first quarter of 1997.
HMO premium revenue increased $12.2 million or 51.4% - - $13.3 million
due to a 57.2% increase in member months partially offset by a $1.1
million decrease due to a 3.7% 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 collectively
account for approximately 34,400 underwritten members at September 30,
1996, which is an increase of 23,300 over September 30, 1995 and an
increase of 2,900 over June 30, 1996. In addition, the company's
arrangement with Freeman Hospitals and Health System, beginning in
July 1995, has enabled the BlueCHOICE HMO and POS products to be
offered in the six-county area surrounding Joplin, Missouri. As of
September 30, 1996, there were approximately 6,900 members enrolled in
products sold through this arrangement with Freeman, representing an
increase of 1,000 members over June 30, 1996. The company expects
future enrollment growth in these relatively new products.
Premium revenue from Medicare supplement decreased by $1.3 million in
the third quarter of 1996. Member months decreased by 9.7% partially
offset by a 5.2% increase in premium rates. Membership declines are
partially attributable to members shifting to BlueCHOICE Senior, a
Medicare-risk program, which provides medical benefits at least as
comprehensive as Medicare benefits for persons eligible to receive
Medicare at no additional cost to the member. The company markets its
BlueCHOICE Senior product as part of its strategy to direct existing
customers to more intensely managed health care products.
Managed indemnity premium revenue decreased by $1.5 million due to a
25.5% decline in member months in keeping with the company's strategy
to move towards more highly managed care products.
Revenue from other specialty services increased $2.8 million due
primarily to a 47.3% 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. Member months
in the company's drug product increased by 53.1% in the third quarter
of 1996 as compared to the third quarter of 1995.
Fees and other income from administrative services only/self-funded and
network services increased by $1.6 million. This increase is due to
two main factors: (1) a net 1996 increase in HealthLink revenues of
$4.8 million, offset by (2) the loss of revenues from the company's
third-party administrator (TPA) subsidiaries which were $2.4 million
in the third 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.
Operating Expenses
The overall medical loss ratio increased by 13.3% to 89.9% in the
third quarter of 1996 in comparison to 76.6% in the third quarter of
1995 primarily as a result of 1) the company's lower margin BlueCHOICE
Senior and Medicaid products, 2) competitive HMO pricing to enhance
selected enrollment growth, 3) higher drug and outpatient utilization,
4) growth in regions outside of the metropolitan St. Louis area that
have less cost efficient networks, and 5) an increase in reserves to
reflect greater than previously anticipated medical cost trends and
utilization. In response to this unfavorable environment, the company
has identified and is currently working on several initiatives to
achieve medical cost savings. These initiatives include implementing
improved medical management mechanisms and network management actions,
effective July 1, 1996, which focus primarily on ambulatory services,
including outpatient precertification for certain services under new
PPO and POS business, and lower provider reimbursement rates for
selected outpatient services. The company is also focusing on
achieving more effective pharmacy benefit management (PBM) through its
PBM contractor to control both utilization and drug costs. In
addition, the company's BlueCHOICE HMO launched its Physician Group
Partners Program in the third quarter of 1996. This program provides
incentives to physicians to improve quality, patient satisfaction, and
cost savings while providing physician-participants with an appealing
incentive package. Currently, approximately 25% of BlueCHOICE's panel
of 514 primary care physicians are enrolled in the program. The
company believes that the aforementioned initiatives will help to
improve its medical loss ratio; however, there can be no assurance
that these initiatives will be effective in controlling future medical
costs.
Commission expense increased by $1.6 million or 33.3% in the third
quarter of 1996 primarily related to increased membership growth and
more aggressive commission schedules to enhance member growth and
persistency.
General and administrative expenses increased by $1.6 million, or
4.4%. Excluding the effects of HealthLink, Epoch, and a third-party
accrual, discussed below, comparable third quarter 1996 general and
administrative expenses decreased by $0.6 million. HealthLink
accounted for $5.8 million of general and administrative expenses
(inclusive of $1.0 million of HealthLink HMO expenses) in the third
quarter of 1996. HealthLink expenses incurred in the third quarter of
1995 subsequent to its August acquisition were $2.4 million. Thus,
HealthLink accounts for a net third quarter increase of $3.4 million
to general and administrative expenses. Offsetting this net 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. Third
quarter 1995 general and administrative expenses include $2.6 million
of TPA subsidiary general and administrative expenses. General and
administrative expenses in 1996 also increased due to an accrual of
$1.4 million related to a third-party contract.
Non-recurring charges in the third quarter of 1996 include $0.5
million related to costs associated with the relocation of the
company's St. Louis-based claims, customer service, billing, and
provider services functions to its Springfield, Missouri facility and
a facility currently under construction in Cape Girardeau, Missouri.
See "Recent Developments Transfer of Service Functions" for more
information related to this relocation. Non-recurring charges in the
third quarter of 1995 include $2.0 million of one-time integration
charges related to the company's acquisition of HealthLink in August
1995 and $1.5 million relating to the settlement of a class action
lawsuit. The lawsuit stemmed from the company's claims paying
practices and negotiated discounts with providers; the company agreed
to settle the lawsuit by establishing a rebate program for all
affected subscribers.
Operating Income
Operating income decreased $14.7 million in the third quarter of 1996
in comparison to the third quarter of 1995. This decrease is
primarily attributable to softer pricing in a competitive environment
and higher outpatient and pharmacy utilization trends.
Net Investment Income
The third quarter 1996 net investment income of $3.6 million
represents a $0.3 million decrease over the third quarter of 1995,
inclusive of a $0.2 million decrease in net realized gains.
Provision for Income Taxes
The company's effective income tax rate was 33.3% and 6.1% for the
third quarter of 1996 and 1995, respectively. The third quarter 1996
effective rate was lower than the adjusted 1995 rate, described below,
primarily as a result of the impact of non-deductible goodwill
amortization. The third quarter 1995 rate was positively affected by
a $1.1 million preliminary tax audit settlement with the Internal
Revenue Service relating to pension and software amortization
expenses. Excluding such adjustment, the company's third quarter 1995
tax rate was 36.9%.
Net Income
The company's net loss for the third quarter of 1996 was $7.9 million,
or ($.42) per share, compared to net income of $3.6 million, or $.19
per share for the third quarter of 1995.
Comparison of Results for the Nine Months Ended September 30, 1996 to
the Nine Months Ended September 30, 1995
Revenues
Premium revenue increased $38.2 million or 9.5% in the first three
quarters of 1996 in comparison to the first three quarters 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 $8.5 million - - $16.6 million due to a 10.1%
increase in member months, partially offset by an $8.1 million
decrease in revenue resulting from a 5.7% net decrease in premium
rates. Rates decreased due to two main factors. First, the company's
drug product, AllianceRx, which was introduced in November 1994 is
sold to members on a separate product basis; prior to this, the drug
benefit was typically included as part of the basic PPO medical
program. The resulting shift in revenue from the PPO products to
other specialty services is more pronounced in 1996 than the prior
year due to the gradual penetration of AllianceRx throughout 1995 and
1996. Second, the company experienced a shift in membership to
AllianceChoice, a lower cost, non-gatekeeper point-of-service (POS)
product. Alliance PPO membership decreased by 30,700 members from
September 30, 1995 to September 30, 1996 while AllianceChoice POS
membership increased by 56,300 over the same time period. The company
also intends to expand its PPO offering into Illinois in the first
quarter of 1997.
HMO premium revenue increased $32.9 million or 47.7% - - $38.1 million
due to a 50.0% increase in member months partially offset by a $5.2
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 collectively
gained 19,400 members in the first three quarters of 1996 and 23,300
members since September 30, 1995. In addition, the company's
arrangement with Freeman Hospitals and Health System, beginning in
July 1995, has enabled the BlueCHOICE HMO and POS products to be
offered in the six-county area surrounding Joplin, Missouri. As of
September 30, 1996, there were approximately 6,900 members enrolled in
products sold through this arrangement with Freeman, an increase of
4,700 members over September 30, 1995. The company expects future
enrollment growth in these relatively new products.
Premium revenue from Medicare supplement decreased by $5.2
million in the first three quarters of 1996. Member months decreased
by 10.8% partially offset by a 4.8% increase in premium rates.
Membership declines are partially attributable to members shifting to
BlueCHOICE Senior, a Medicare-risk program, which provides medical
benefits at least as comprehensive as Medicare benefits for persons
eligible to receive Medicare at no additional cost to the member. The
company markets its BlueCHOICE Senior product as part of its strategy
to direct existing customers to more intensely managed health care
products.
Managed indemnity premium revenue decreased by $6.2 million due to a
36.3% 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 $8.2 million due
primarily to a 60.8% 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. Member months
in the company's drug product increased by 95.4% in the first three
quarters of 1996 as compared to the first three quarters of 1995.
Fees and other income from administrative services only/self-funded and
network services increased by $7.6 million. This increase is due to
two main factors: (1) a net 1996 increase in HealthLink revenues of
$18.2 million, offset by (2) the loss of revenues from the company's
third-party administrator (TPA) subsidiaries which were $7.2 million
in the first three quarters 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.
Operating Expenses
The overall medical loss ratio increased by 7.0% to 81.9% in the first
three quarters of 1996 in comparison to 74.9% in the first three
quarters of 1995 primarily as a result of 1) the company's lower
margin BlueCHOICE Senior and Medicaid products, 2) competitive HMO
pricing to enhance selected enrollment growth, 3) higher drug and
outpatient utilization, and 4) growth in regions outside of the
metropolitan St. Louis area that have less cost efficient networks. In
response to this unfavorable environment, the company has identified
and is currently working on several initiatives to achieve medical
cost savings. These initiatives include implementing improved medical
management mechanisms and network management actions, effective July
1, 1996, which focus primarily on ambulatory services, including
outpatient precertification for certain services under new PPO and POS
business, and lower provider reimbursement rates for selected
outpatient services. The company is also focusing on achieving more
effective pharmacy benefit management (PBM) through its PBM contractor
to control both utilization and drug costs. In
addition, the company's BlueCHOICE HMO launched its Physician Group
Partners Program in the third quarter of 1996. This program provides
incentives to physicians to improve quality, patient satisfaction, and
cost savings while providing physician-participants with an appealing
incentive package. Currently, approximately 25% of BlueCHOICE's panel
of 514 primary care physicians are enrolled in the program. The
company believes that the aforementioned initiatives will help to
improve its medical loss ratio; however, there can be no assurance
that these initiatives will be effective in controlling future medical
costs.
Commission expense increased by $5.1 million or 35.5% in the first
three quarters of 1996 primarily related to increased membership
growth and more aggressive commission schedules to enhance member
growth and persistency.
General and administrative expenses increased by $4.9 million, or
4.8%. Excluding the effects of HealthLink, Epoch, and a third-party
accrual, discussed below, comparable general and administrative
expenses in the first three quarters of 1996 decreased by $0.9
million. HealthLink accounted for $15.1 million of general and
administrative expenses, inclusive of $1.4 million of HealthLink HMO
expenses, in the first three quarters of 1996. Expenses incurred in
the first three quarters of 1995, subsequent to HealthLink's
acquisition in August 1995, were $2.4 million. Thus, HealthLink
accounts for a net 1996 year-to-date increase to general and
administrative expense of $12.7 million. 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. General
and administrative expenses in 1995 include $8.3 million of TPA
subsidiary general and administrative expenses. General and
administrative expenses in 1996 also increased due to an accrual of
$1.4 million related to a third-party contract.
Non-recurring charges in the first three quarters of 1996 include $3.3
million related to costs associated with the relocation of the
company's St. Louis-based claims, customer service, billing, and
provider services functions to its Springfield, Missouri facility and
a facility currently under construction in Cape Girardeau, Missouri.
See "Recent Developments - Transfer of Service Functions" for more
information related to this relocation. Non-recurring charges in the
third quarter of 1995 include $2.0 million of one-time integration
charges related to the company's acquisition of HealthLink in August
1995 and $1.5 million relating to the settlement of a class action
lawsuit. The lawsuit stemmed from the company's claims paying
practices and negotiated discounts with providers; the company agreed
to settle the lawsuit by establishing a rebate program for all
affected subscribers.
Operating Income
Operating income decreased $23.0 million in the first three quarters
of 1996 in comparison to the first three quarters of 1995. This
decrease is primarily attributable to softer pricing in a competitive
environment and higher outpatient utilization trends in 1996.
Net Investment Income
Net investment income of $13.6 million in the first three quarters of
1996 represents a $1.4 million increase over the first three quarters
of 1995, inclusive of a $1.6 million increase in net realized gains.
Realized gains in the first three quarters of 1996 include a gain of
$0.4 million related to HealthLink's disposition of its 20 percent
interest in Missouri Valley Life and Health Insurance Company, Inc.,
net realized gains of $1.7 million incurred when the company converted
one of its equity portfolios from an active to a more passive
investment strategy, and additional net realized gains that resulted
from investment transactions in the ordinary course of business.
Approximately $1.0 million in net realized gains in the first three
quarters of 1995 were the result of the company's sale of $14.0
million in equity securities pursuant to the restructuring of the
company's investment portfolio to be weighted more heavily in fixed
income securities to comply with regulatory limitations.
Provision for Income Taxes
The company's effective income tax rate was 57.6% and 32.8% for the
first three quarters of 1996 and 1995, respectively. The 1996
effective rate was higher than the adjusted 1995 rate, discussed
below, primarily 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 three quarters of 1995. The 1995 rate
was positively affected by a $1.1 million preliminary tax audit
settlement with the Internal Revenue Service relating to pension and
software amortization expenses. Excluding such adjustment, the
company's 1995 tax rate was 37.1%.
Net Income
The company's net income for the first three quarters of 1996 was $1.7
million, or $.09 per share, representing a decrease of $17.0 million
compared to the net income of $18.7 million, or $1.00 per share, for
the first three quarters of 1995.
Liquidity and Capital Resources
The company's working capital as of September 30, 1996 was $109.9
million, a decrease of $14.9 million from December 31, 1995. The
decrease is partially attributable to a $3.2 million unrealized net
depreciation of investments available for sale during the first three
quarters of 1996. Additional decreases relate to the company's $3.1
million cash purchase of a forty-four percent interest in Healthcare
InterChange, Inc. in the first quarter of 1996, net cash payments of
$5.4 million to a subsidiary of Blue Cross and Blue Shield of Kansas
City (BCBSKC) relating to a reinsurance agreement transaction, and
$14.2 million of property and equipment purchases primarily for IOS
development costs. See "Recent Developments - Information Strategies"
for more information related to IOS. These working capital decreases
are partially offset by the $12.5 million of 1996 earnings before
depreciation and amortization.
Cash generated from operations totaled $21.9 million for the nine
months ended September 30, 1996. Net income was $1.7 million while
depreciation and amortization was $10.8 million. Receivables from
members decreased by $6.8 million partially due to the large volume of
annual direct pay billings that took place in December 1995. The
company's net related party receivable at September 30, 1996 decreased
by $1.7 million. In addition, medical claims payable increased by
$27.1 million due to higher utilization and medical cost trends in
1996. These increases to operating cash flows were partially offset by
an increase in other assets of $8.9 million, a decrease in accounts
payable and accrued expenses of $6.2 million, and a decrease in income
taxes payable of $9.3 million. The increase in other assets is
primarily due to the $5.4 million payment related to a reinsurance
agreement transaction with BCBSKC. The decrease in payables relates
to settlements of legal liabilities and decreases in various other
accruals, partially offset by the accruals for relocation costs as
described under "Recent Developments - Transfer of Service Functions."
The decrease in income taxes payable is primarily due to $6.6 million
of tax payments during 1996.
Subsequent to the second quarter of 1996, the company requested that
its reducing revolving credit facility agreement (the Credit Facility)
be amended (1) to exclude from a covenant calculation the one-time
expenses up to $7 million related to the relocation of the service
center (as described in "Recent Developments - Transfer of Service
Functions") during fiscal 1996 and 1997 (2) to reduce the level of a
required covenant ratio during this same time period, and (3) to
permit the company to purchase up to 2 million shares of its common
stock from BCBSMo as described in Note 7 of the Notes to Consolidated
Financial Statements.
Subsequent to the third quarter of 1996, the company requested and
received a waiver of two financial covenants for the period from
September 30, 1996 to February 15, 1997. In exchange for these
waivers, the $62 million of borrowings under the Credit Facility will
bear interest at 1.125% above the three month floating London
Interbank Offered Rate (LIBOR) through the waiver period. The company
has agreed that it will not borrow additional funds through the Credit
Facility for the remainder of the waiver period. In addition, the
company has the intent and ability to restructure its Credit Facility
by mid-February 1997.
The company and BCBSMo entered into an agreement which provided for
BCBSMo to sell, and the company to purchase, 1.5 million to 2.0
million shares of the company's stock by the end of 1996 at current
market prices, subject to regulatory review and final board of
directors' approvals. On August 12, 1996, BCBSMo received
notification from the DOI denying BCBSMo's Form D, "Prior Notification
of a Transaction." Additionally, the price of the company's stock
which is traded on the New York Stock Exchange has fallen below the
minimum floor price established in the agreement.
Recent Developments
Information Strategies
In 1995, the company implemented a comprehensive information and
operations strategy (IOS) to assist in implementing the company's
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 three quarters of 1996, the company incurred
capitalized expenditures of $12.2 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 possibly as early as 1997. There can be no assurance that the
ultimate impact of this IOS project will contribute to earnings per
share or reduce medical costs.
Transfer of Service Functions
Beginning January 1997, the company will move its St. Louis-based
claims, customer service, billing and provider services functions to
its Springfield, Missouri facility and a facility currently under
construction in Cape Girardeau, Missouri. Approximately 200 jobs will
be relocated to Cape Girardeau with an additional 100 moving to
Springfield. The transfer program will be conducted in stages
beginning January 1997 and ending mid-1997. The move is expected to
result in annual salary and benefit cost savings of approximately $3
million to $3.5 million. The company will incur charges to earnings
estimated at $7 million to $8 million beginning in the second quarter
of 1996 and continuing through 1996 and into 1997 for costs associated
with the relocation. The third quarter and year-to-date 1996 charges
for this relocation of $0.5 million and $3.3 million, respectively,
are reflected in the non-recurring charges caption on the 1996
Consolidated Statements of Income.
Southern Illinois Expansion
The company completed its acquisition of Cragin American Assurance
Company (Cragin), currently a dormant Illinois company chartered to
underwrite health and life insurance, on November 1, 1996. The
acquisition of Cragin from LaSalle Bank, F.S.B. will give the company
a license to further its offerings of managed care products in
Illinois. The transaction, included a cash payment of approximately
$3.3 million, with an additional $0.2 million of transaction fees, in
exchange for the net assets of Cragin of approximately $3.3 million,
representing primarily cash and marketable securities. The company
already owns a southern Illinois provider network through its
HealthLink subsidiary and the company plans to offer group and
individual PPO coverage to the approximately one million residents in
this region by early 1997.
Recent Legislation
The Health Insurance Portability and Accountability Act of 1996
requires private health insurance coverage to be "portable" by
employees from job to job and eliminates coverage limitations for pre
existing health conditions. Additionally, the State of Missouri has
recently passed legislation which mandates various lengths of stay for
maternity patients. Although the impact of the provisions of this
recent legislation cannot be fully predicted at this time, management
of the company believes that the ultimate outcome will not have a
material adverse effect on the company.
Operating Outlook
The following statements are based on initial indications of fourth
quarter activity and short-term expectations. The statements are
forward-looking and actual results may differ materially.
The mix of underwritten membership continued to improve through the
October enrollment period, with AllianceChoice POS membership
increasing by 7 percent during the month, to 94,500 members. The
company is targeting overall underwritten enrollment growth of 8
percent to 10 percent for 1997. Included in this growth is new
business expected to be generated by new PPO offerings in Illinois and
HMO offerings in southern Missouri.
Premium increases effective as of October 1, 1996, ranged from 8
percent to 10 percent. Premium levels are targeted to increase, on
average, from 7 to 9 percent as of January 1997, when approximately 50
percent of the company's underwritten HMO members and 25 percent of
its PPO members are eligible to re-enroll.
The company's focus on its pharmacy benefits management (PBM) program
is targeted at reducing drug cost trends by approximately 3 to 5
percent in 1997. PBM improvements, and other medical management
strategies aimed at enhancing oversight of certain outpatient
procedures and improving utilization and reimbursement rates,
initiated in the second half of 1996, target an average medical loss
ratio in the low eighties by the end of 1997.
During the fourth quarter of 1996, the company expects to incur an
additional $1.4 million in expenses to relocate its customer service
center to satellite offices, a move that is expected to result in
annual salary and benefit cost savings of $3.0 million to $3.5
million.
Corporate initiatives, such as IOS, will incur expenses of
approximately $3 million in the fourth quarter of 1996 and $6 million
to $7 million during 1997. Additionally, the company anticipates IOS
depreciation expense of approximately $5 million to $6 million during
1997.
Contingencies
See the description under the same caption in Note 5 of the Notes to
Consolidated Financial Statements, which description is incorporated
herein by reference.
Factors that May Affect Future Results of Operations, Financial
Condition or Business
In order to take advantage of the safe harbor provisions for forward
looking statements contained in Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, added to those Acts by the Private Securities
Litigation Reform Act of 1995, the company is identifying important
risks and uncertainties that could cause the company's actual results
of operations, financial condition or business to differ materially
from its historical results of operations, financial condition or
business, or the results of operations, financial condition or
business contemplated by forward-looking statements made herein or
elsewhere orally or in writing. Factors that could cause or
contribute to such differences include, but are not limited to, those
factors described below.
Litigation with DOI and Attorney General
BCBSMo has filed an action against the Missouri Department of
Insurance (DOI), the Director of the DOI, and the Attorney General
seeking a declaratory judgment and other relief (the Declaratory
Judgment Action) with respect to the Reorganization and Public
Offering, as described under the same caption in Note 5 of the Notes
to Consolidated Financial Statements. The Court has issued a
permanent injunction disqualifying the Director and the DOI 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 their hostility, bias and prejudgment of the merits of this
dispute. Other issues remain in the case including the claims of the
Attorney General, the Director and the DOI that the Reorganization and
Public Offering were inconsistent with BCBSMo's purposes as a health
services corporation. If they prevail on these claims, 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 on all remaining claims, that BCBSMo will be
able to obtain a stay of any adverse ruling by lower courts pending
appeal, that the DOI will not pursue administrative 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 such
as the recently adopted mandatory length of stay for maternity
patients will not have a material adverse effect on the company's
business or results of operations 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. Other relevant factors affecting the company's
ability to control health care costs include higher outpatient and
drug utilization and growth of business in regions with less cost
efficient networks.
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 some components of 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 certain
individual products or by an increase in the medical loss ratio for
individuals enrolled in those products. 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
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
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
(i) BCBSMo does not maintain its license with BCBSA, (ii) BCBSMo and
any other Blue Cross Blue Shield plan controls less than 51% of the
total voting power of the company, (iii) the company does not maintain
certain quality control standards, (iv) the DOI assumes control of the
company, or (v) an action is instituted against the company seeking
its dissolution or liquidation or seeking the appointment of a
trustee, receiver or custodian which is not dismissed within 60 days
of being instituted. In the event that the license of BCBSMo or the
company is terminated, BCBSMo and the company will be jointly liable
to BCBSA for an amount equal to $25 times the number of licensed
enrollees of the terminated entity and its licensed controlled
affiliates. The company believes that the exclusive right to use the
Blue Cross and Blue Shield names, trademarks and service marks
provides it with a significant marketing advantage in its licensed
service area, the loss of which would have a material adverse effect
on its business and results of operations. However, to the extent
that the company continues to use these names, trademarks and service
marks in marketing its network-based plans, there can be no assurance
that negative publicity concerning BCBSA and other BCBSA licensees
will not adversely impact the sales of the company's network-based
plans and the company's operations.
Dependence on Key Management
The company depends to a significant extent on key management members.
The loss of these management members could have a material adverse
effect on the company's results of operations, financial condition and
business.
Variability of Quarterly Operating Results and Stock Price
The company's quarterly results of operations could be adversely
affected by the timing of new product and service introductions,
competitive pricing pressures, contract renegotiations with customers
and providers, fluctuations in the medical loss ratio (due to changes
in utilization, timing of submission of claims presented for payment
in the period and the unpredictability of unusually large claims),
increases in commission expenses and general and administrative
expenses, changes in interest rates, acquisitions, governmental and
regulatory actions, overall market conditions, and other factors. The
company's stock price may experience significant price and volume
fluctuations in response to these and other internal and external
factors which cause variations in its quarterly results of operations
and the stock markets.
Credit Agreement Restrictions
The company's revolving credit agreement with its existing lenders
contains certain restrictions on the company, including requirements
as to the maintenance of net worth and certain financial ratios,
restrictions on payment of cash dividends or purchases of stock,
restrictions on acquisitions, dispositions and mergers and
restrictions on additional indebtedness and liens and certain other
matters. There can be no assurance that the company will be able to
achieve and maintain compliance with the prescribed financial ratio
tests or other requirements of the revolving credit agreement. The
failure to obtain any waivers or amendments that might be needed to
remain in compliance with such requirements would reduce the company's
flexibility to respond to adverse industry conditions and could have a
material adverse effect on the company's results of operations,
financial condition or business.
Additional Factors
Additional risk and uncertainties that may affect future results of
operations, financial condition or business of the company include,
but are not limited to: demand for and market acceptance of the
company's products and services; the effect of economic and industry
conditions on prices for the company's products and services and its
cost structure; the ability to develop and deliver new products and
services and adapt existing products and services to meet customer
needs and expectations; the ability to keep pace with technological
change including developing and implementing technological advances
timely and cost-effectively in order to lower its cost structure, to
provide better service and remain competitive; adverse publicity, news
coverage by the media, or negative reports by brokerage firms,
industry and financial analysts regarding the company, its parent or
BCBSA or their products or services which may have the effect of
reducing the reputation, goodwill or customer demand for, or
confidence in, the company's products or services; the ability to
attract and retain capital for growth and operations on competitive
terms; and changes in accounting policies and practices.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Note 5 to the Consolidated Financial Statements in Part I, Item 1
contains a description of various pending and threatened claims,
including a description of the subscriber class action lawsuit filed
on March 15, 1996 and litigation with the Missouri Department of
Insurance (DOI), the Director of the DOI, and the Missouri Attorney
General, which descriptions are incorporated by reference herein.
Also, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors that May Affect Future Results of
Operations, Financial Condition or Business."
ITEM 2. Change in Securities
a) Not applicable
b) Not applicable
ITEM 3. Defaults Upon Senior Securities
a) Not applicable
b) Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
Note 7 to the Consolidated Financial Statements in Part I, Item 1
contains a description of the status of the company's agreement to
purchase stock held by BCBSMo, which description is incorporated by
reference herein.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
3.1 Articles of Incorporation of the
Registrant - Incorporated by reference - previously filed as
Exhibit 3.1 to Registration Statement on Form S-1 under the
Securities Act of 1933 filed by the Registrant. Registration
Statement No. 33-77798.*
3.1.1 Amendment to Articles of Incorporation of the Registrant -
Incorporated by reference - previously filed as Exhibit
3.1.1 to Registration Statement on Form S-1 under the
Securities Act of 1933 filed by the Registrant. Registration
Statement No. 33-77798.*
3.2 Amended and Restated Bylaws of the
Registrant Incorporated by reference - previously filed as
Exhibit 3.2 to the company's Form 10-K for the period ending
December 31, 1995.*
10.1 Amended Intercompany Services Agreement
By and Between RightCHOICE Managed Care, Inc. and the
following subsidiaries: Healthy Alliance Life Insurance
Company, Diversified Life Insurance Agency of Missouri,
Inc., Pension Associates, Incorporated, and HMO Missouri,
Inc.
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 September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
RIGHTCHOICE MANAGED CARE, INC.
Registrant
Date: November 12, 1996 By: [s] JANICE FORSYTH
Janice C. Forsyth
Senior Vice President,
Secretary and General Counsel
Date: November 12, 1996 By: [s] SANDRA VAN TREASE
Sandra Van Trease
Senior Vice President and Chief
Financial Officer
7
INTERCOMPANY SERVICES AGREEMENT
This amended Intercompany Services Agreement ("Agreement"),
an amendment, continuation and ratification of that Agreement
dated August 8, 1994 ("Effective Date"), which was a part of the
reorganization of Blue Cross Blue Shield of Missouri and its
subsidiaries, approved by the Missouri Director of Insurance on
April 14, 1994, is entered into by and between RIGHTCHOICE
MANAGED CARE, INC, a Missouri corporation (the "Company"), d/b/a
ALLIANCE BLUE CROSS/BLUE SHIELD and a licensed Missouri third
party administrator, and the following subsidiaries: HEALTHY
ALLIANCE LIFE INSURANCE COMPANY, a Missouri corporation
("HALIC"); DIVERSIFIED LIFE INSURANCE AGENCY OF MISSOURI, INC., a
Missouri corporation ("DLIAM"); PENSION ASSOCIATES, INCORPORATED,
a Missouri corporation ("PAI"); and HMO MISSOURI, INC., d/b/a
BLUECHOICE, a Missouri corporation ("BlueCHOICE"); (collectively,
the "Subsidiaries").
WITNESSETH
WHEREAS, it is in the interest of economy, efficiency and
sound business practice for the parties hereto to provide
services in the areas of their expertise for each other;
WHEREAS, the parties hereto seek to formalize their business
relationships;
NOW, THEREFORE, in consideration of the foregoing premises
and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS AND CONSTRUCTION
SECTION 1.01. Definitions. Capitalized words and terms
used herein and not otherwise defined shall have the meanings
assigned to such words in the Reorganization Agreement. In
addition, the following words and terms shall have the following
meanings:
"Agreement" means this Intercompany Services Agreement,
effective August 8, 1994, by and between the Company and the
Subsidiaries, together with all duly authorized amendments
hereto.
"Person" means a partnership, a joint venture, a
corporation, a trust, a limited liability company, an
unincorporated organization or a government or any department or
agency thereof.
SECTION 1.02. Construction. In this Agreement, unless the
context otherwise requires:
(a) Articles and Sections referred to by number
shall mean the corresponding Articles and Sections of
this Agreement.
(b) The terms "hereby," "hereof," "hereto,"
"herein," "hereunder," and any similar terms, as used
in this Agreement refer to this Agreement, and the term
"hereafter" shall mean after, and the term "heretofore"
shall mean before the date of execution of this
Agreement.
(c) Words of the masculine gender shall be deemed
and construed to include correlative words of the
feminine and neuter genders. Words importing the
singular number shall include the plural number and
vice versa, and words importing persons shall include
corporations and associations, including public bodies,
as well as natural persons.
ARTICLE II
PROVISION OF SERVICES
SECTION 2.01. Services. The Company may provide the
following services to the Subsidiaries with respect to, and upon
the request of any of them, the Company will perform, the
following functions, as well as others, as necessary or
appropriate:
a) Medical claims benefits administration,
b) Payroll services,
c) Electronic data processing services,
d) Community affairs and public relations services,
e) Preparation of financial and other accounting reports,
f) Banking services, cash management and investment
administration,
g) Advertising, sales promotion and publication of
reports,
h) Employee benefits administration,
i) Services related to employment and discharge of
personnel,
j) Preparation of tax returns,
k) Purchase and delivery of supplies,
l) Mail service,
m) Telecommunications consulting,
n) Computer support and central data base maintenance,
o) Actuarial services,
p) Marketing services for the various products offered by
the Subsidiaries, including underwriting and policyholder
services,
q) Utilization management services,
r) Medical claims review,
s) Regulatory agency services,
t) Billing and collection of premiums and/or fees; and
u) Planned performance reporting.
SECTION 2.02. Payment For Services. Each subsidiary will
pay for the cost of any services rendered to such Subsidiary by
employees of the Company as discussed more fully in Article III
below.
ARTICLE III
COMPENSATION FOR SERVICES
SECTION 3.01. Amount. Each Subsidiary shall reimburse the
Company for the direct and indirect costs and expenses (including
overhead expenses) incurred by the Company in furnishing or
obtaining any of the services provided for under Article II
hereof. Costs and expenses directly traceable shall be passed
through at cost. Indirect expenses (including overhead) shall be
passed through based upon the Company's internal cost accounting
procedures and methodologies, consistently applied. A reasonable
profit shall be included in overhead allocation.
SECTION 3.02. Payment Dates. Invoices for services rendered
to the Subsidiaries shall be rendered by the Company at least
quarterly but not more often than monthly. Any amounts due the
Company shall be paid, or shall be satisfied by the Subsidiaries
by way of offset against any obligation of the Company to such
Subsidiaries, within thirty (30) days after receipt of the
applicable invoices.
ARTICLE IV
TERMINATION
SECTION 4.01. Termination Date. This Agreement shall have
an initial term of three years, commencing August 8, 1994, which
may be extended by mutual agreement of the parties hereto. After
the initial term, the Company may terminate this Agreement with
any of the Subsidiaries by giving such Subsidiaries six month's
prior written notice of termination. Likewise, after the initial
term, any of the Subsidiaries may terminate this Agreement with
the Company by giving the Company six month's prior written
notice of termination. Termination of this Agreement pursuant to
this Article IV with respect to one or more of the parties shall
not serve to terminate this Agreement with respect to the
remaining parties.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. Relationship Between Parties. (a) The parties
hereto are independent contractors and are not, and shall not be
deemed for any purpose to be, joint venturers. None of the
parties shall hold itself out as the partner or agent of any of
the other parties or make representations or warranties on behalf
of any of the other parties, except as otherwise expressly agreed
to.
(b) None of the parties shall be obligated to make,
and shall not make, any payments to employees of any of the other
parties for services rendered by them as employees of such other
parties. Employees of one party shall not be considered as
having employee status with any of the other parties or as being
entitled to the benefits of any employee of any of the other
parties, including, without limitation, workers' compensation,
vacation pay, or participation any plans, arrangements or
distributions by any of the other parties pertaining to or in
connection with any pension, stock, bonus, insurance, profit
sharing or similar benefit plan.
SECTION 5.02. Notices. All notices, requests, consents and
other communications hereunder shall be in writing and shall be
deemed to have been duly given or delivered if delivered
personally or mailed by registered or certified mail return
receipt requested with first class postage prepaid as follows:
If to the Company:
RightCHOICE Managed Care, Inc.
1831 Chestnut Street
St. Louis, Missouri 63103
If to HALIC:
Healthy Alliance Life Insurance Company
1831 Chestnut Street
St. Louis, Missouri 63103
If to DLIAM:
Diversified Life Insurance Agency of Missouri, Inc.
1831 Chestnut Street
St. Louis, Missouri 63103
If to PAI:
Pension Associates Incorporated
1831 Chestnut Street
St. Louis, Missouri 63103
If to BlueCHOICE:
HMO Missouri, Inc., d/b/a BlueCHOICE
1831 Chestnut Street
St. Louis, Missouri 63103
or such other address as any person may request by notice given
as aforesaid. Notices sent as provided herein shall be deemed to
have been delivered on the fifth business day following the date
on which such notices are so mailed.
SECTION 5.03. GOVERNING LAW. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF MISSOURI
WITHOUT REGARD TO SUCH STATE'S PROVISIONS PERTAINING TO CHOICE OF
LAW.
SECTION 5.04. Amendment. This agreement, including the
Exhibits hereto and all other agreements and documents executed
in connection herewith, constitutes the entire agreement among
the parties hereto with respect to the subject hereof and no
amendment, alteration or modification of this Agreement shall be
valid unless in each instance such amendment, alteration or
modification is expressed in written instrument duly executed by
each party hereto.
SECTION 5.05. Headings. The headings contained in this
Agreement have been inserted for the convenience of reference
only and shall in no way restrict or modify any of the terms or
provisions hereof.
SECTION 5.06. No Third Party Beneficiaries. Each of the
provisions of this Agreement is for the sole and exclusive
benefit of the parties hereto, respectively, as their interests
shall appear, and shall not be deemed to be for the benefit of
any other person or entity or group of persons or entities.
SECTION 5.07. Successors and Assigns. This Agreement shall
bind and inure to the benefit of each party hereto, and to each
party's successors, assigns, agents and representatives.
SECTION 5.08. Partial Invalidity. In the event that any
term or provision of this Agreement shall to any extent be held
by a court of proper jurisdiction to be invalid or unenforceable
for any reason, the remainder of this Agreement shall not be
affected thereby, and the remaining terms and provisions hereof
shall remain in full force and effect. The invalid or
unenforceable provisions shall, to the extent permitted by law,
be deemed amended and given such interpretation as will achieve
the intent of this Agreement.
SECTION 5.09. Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed to be
an original, but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have entered into this
Agreement as of the date hereinabove written.
RIGHTCHOICE MANAGED CARE, INC.
By: [s] Janice C. Forsyth
Name: Janice C. Forsyth
Title: Senior Vice President
HEALTHY ALLIANCE LIFE INSURANCE COMPANY
By: [s] Janice C. Forsyth
Name: Janice C. Forsyth
Title: Secretary
DIVERSIFIED LIFE INSURANCE AGENCY OF
MISSOURI, INC.
By: [s] Richard S. Smith
Name: Richard S. Smith
Title: President
PENSION ASSOCIATES INCORPORATED
By: [s] Thomas A. Sax
Name: Thomas A. Sax
Title: President
HMO MISSOURI INC. d/b/a BLUECHOICE
By: [s] Janice C. Forsyth
Name: Janice C. Forsyth
Title: Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in the RightCHOICE Managed Care, Inc. Form 10-Q for the
quarterly period ended September 30, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 24,033
<SECURITIES> 261,807
<RECEIVABLES> 50,644
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 365,114
<PP&E> 75,549
<DEPRECIATION> 27,226
<TOTAL-ASSETS> 513,262
<CURRENT-LIABILITIES> 255,207
<BONDS> 70,190
0
0
<COMMON> 187
<OTHER-SE> 171,443
<TOTAL-LIABILITY-AND-EQUITY> 513,262
<SALES> 0
<TOTAL-REVENUES> 483,136
<CGS> 0
<TOTAL-COSTS> 488,813
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,153
<INCOME-PRETAX> 3,900
<INCOME-TAX> 2,247
<INCOME-CONTINUING> 1,653
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<NET-INCOME> 1,653
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
